Why are European Countries Investing in Iran?
Post-sanctions, Iran may prove to be an emerging market for European Investors.
On July 3, France’s biggest oil and gas company, Total, signed a multibillion-dollar deal to expand the development of Iran’s South Pars gas field, one of the largest in the world. This agreement is the first major oil and gas deal between a Western company and Iran since the removal of sanctions in January 2016. The deal indicates a strong interest amongst European companies to reengage with and invest in Iran after sanctions were lifted as part of the deal on Iran’s nuclear program. Major European companies are now turning their eyes toward investing in what could become one of the fastest growing economies in the world. Despite known political and economic risks, this great European bet on Iran, a country with a wealth of natural and human resources, could provide lucrative returns for risk-friendly European investors.
For companies looking to distribute products or outsource labor to cheaper sources, Iran possesses attractive demographics, with a large population and a skilled, yet cheap, workforce. The country is the second largest market in the Middle East with a population of more than 78 million people, and is better educated than other countries in the region with large populations (like Egypt and Iraq). It has a culture that embraces innovation, education, and scientific research, even in an environment of limited freedoms and government control.
Although sanctions have crippled the economy, Iranians have refused to let the situation hinder investment in research & development, science, and technological innovation. In 2010, Iran led the world in terms of scientific growth, (measured by growth in the number of scientific research publications,) and Maryam Mirzakhani, a female Iranian professor, won the prestigious Field Medal for mathematics in 2014
Within the realm of technology, entrepreneurs have successfully developed a number of apps that copy the business model of American companies, like Amazon and Groupon, as well as smartphone apps. For example, the app “RadiTo” mimics existing podcast applications in the West, and allows users to stream programs that are banned in Iran, such as the BBC. This innovation provides impetus for Western investors to put their sights on Iran, as investing in a country with an already educated workforce could cost less than bringing in expatriate workers or providing large-scale training programs (see: Saudi Arabia).
The highly-educated population and steady growth of what could be dubbed as an Iranian “knowledge economy” are far from the only reasons that European countries have decided to invest in the country. Iran possesses the fourth largest oil reserves and second largest natural gas reserves in the world. Additionally, it has established its own automotive manufacturing industry with companies like Iran Khodro, including joint ventures with foreign car manufacturers like Toyota and Renault. Traditional Iranian agricultural and textile industries also provide high-demand products for global consumers, including world-class textiles (Persian rugs) and agricultural products (some of the best pomegranates and pistachios in the world).
Yet, despite these unique benefits and traditional competitive advantages, one cannot ignore the obvious risks of investing in a country that, for example, is often referred to as “the biggest state sponsor of terrorism in the world.” Iran is fraught with political and social risks that may turn most risk-averse investors away. The country resides in a very tumultuous region, facing the threat of terrorism from groups like ISIS from within, and deteriorated relations with neighboring Arab countries like Saudi Arabia and the United Arab Emirates. Nevertheless, profit-seeking European companies continue to sign major business agreements in the country. European businesses have long had interests in investing in Iran’s economy. A French car manufacturer, Renault, eyed the Iranian market to take advantage of the cheap, relatively highly skilled labor. Following negotiations with IDRO, an Iranian industrial conglomerate, an agreement was signed to produce over 150,000 cars in the country.
One of the first, and most controversial, business deals to be signed post-sanctions was between Airbus, a German-French aerospace company, and a number of different Iranian airlines for the purchase of one hundred passenger aircraft. Such business deals demonstrate the opportunity that European companies have in seeking business with Iran, especially when most American companies are blocked out as competition because of ongoing sanctions.
If – and this is a big if – Iranian relations with Europe and neighboring countries were to improve, the Iranian economy, currently frozen in 1979 with a severe lack of foreign investment, could flourish and experience major growth and investment. Despite the negative press Iran receives due to the government’s nefarious activities around the region, Iran appears desperate to once again become a great economic world power, not through regional hegemony, bloodshed, and religious authoritarianism, but through economic growth, scientific advancement, and innovation.