With respect to the aspect of preserving its new-found place in the global economy, Iran made progress this week.
In what is the first to be finalized since U.S. President Donald Trump took office, threatening to abandon the 2015 deal that rolled back a decade of sanctions on Iran, French energy giant Total SA and German carmaker Volkswagen AG announced agreements to plow money into the Islamic republic.
In recent months, there had been growing concerns about western companies being scared away from taking bets on the Middle East’s fastest-growing economy by America’s shifting foreign policy and the investments ended months of such speculation. Even as the White House reviews the nuclear accord he helped engineer, the widening rift between Trump and European allies, who back President Hassan Rouhani, was also highlighted by investments.
“People were waiting for the sign to see which direction things will go,” said Homayoun Falakshahi, a senior research analyst for Middle East and North African upstream at Wood Mackenzie consultancy in London. “Clearly the direction is that the likelihood of it being scrapped is not that big” was meant by Total’s plan to invest $1 billion developing Iranian natural gas fields in particular.
The less inclined it will be to backtrack on relations with Rouhani, who is keen to open the country to foreign investment, the more business Europe has at stake in Iran. Iran is home to 80 million consumers starved of most Western products for years under international sanctions and boasts the world’s largest natural gas reserves.
Since China is developing the Iranian field alongside Total and local firms and Russia is a key Iranian ally, therefore if Trump wants to desert the deal, he’d need to convince both the countries.
Life for companies seeking funding for their projects could be made difficult by Trump’s antagonism toward Iran even if Washington can’t overturn the accord. Still, a restriction that extends to European counterparts with significant American exposure, sanctions still bar U.S. banks from doing business in Iran.
William Breeze, a partner at Herbert Smith Freehills LLP in London specializing in energy, natural resources and infrastructure finance, says that investments in Iran “can’t be done with dollars or using U.S. banks.” Therefore, securing funding from Asia or mid-sized European lenders would be required by companies.
Total will eventually inject $4.8 billion into Iran and for the company, the risks are worth the potential rewards of signing a 20-year agreement. “I will come back to Iran again because this contract is the first of many,” Total Chief Executive Officer Patrick Pouyanne said on July 4.
And also taking their chances are carmakers, aircraft and drug producers. A deal with a local importer to offer the Passat family car and Tiguan compact SUVs at dealerships in and around Tehran was signed by Volkswagen, which last sold cars in Iran 17 years ago. The first carmaker to re-enter the country last year was France’s Peugeot SA.
With investment agreements in the next year, another four or five energy companies will follow, Falakshahi predicts. Already in talks on developing local fields are Royal Dutch Shell Plc and Eni SpA. He said that the Total deal was “the contract that the oil industry was watching closely and everyone was waiting for.”
(Adapted from Bloomberg)