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Iran’s finance

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Iran’s leadership is not satisfied with the pace and the way in which international sanctions are about to be lifted definitively. On the one hand, Iran still has many difficulties in having access to global financial markets by using standard procedures; on the other hand there are significant shortcomings and delays in the domestic banking system.

The current yearly inflation rate is 11.9%; the maximum interest rate has fallen from 24% to 22% while, as announced by President Rowhani, the trade surplus is now positive for the first time after 37 years.

At the end of March 2016, the oil and non-oil exports were 41 billion and 42 billion Us dollars, respectively, with an expected annual growth of 0.7% only.

The exports of the free economic zone of Anzali, in the Northern province of Gilan, are growing to an impressive level of 40 million US dollars as against the 20 million US dollars of last year.

Iran’s economy clearly needs to quickly reduce its dependence on oil sales, while the Bandar Abbas refinery will be doubled in terms of extraction and condensation of natural gas, with capital and equipment largely of Iranian origin.

Here the real problem is cultural and political: the Iranian banking system has been segregated for many years with respect to international flows and now the country’s financial leaders do not know how to handle the new, inevitable globalization of the Shiite Iran.

In the research centres of European financial companies there are those who maintain that the Iranian banking system is so badly run, and with such a dominance of political and sectarian mortmain, that the structural crisis of the sector is supposed to break out in three years, at the maximum.

Furthermore the Finance Minister, Ali Tayyebna, has long been maintaining that the government should refinance banks due to the losses resulting from the fall in international oil prices, while the Iranian Central Bank states that the government debt to banks is 33 billion US dollars or even more.

The cases of economic and financial corruption are commonplace and the Iranian banking institutions are accustomed to obscure, personal and ambiguous operations and transactions, partially because of the old closure to international markets.

An international Forum of Iranian banks is scheduled in Berlin in mid-May.

While, as is likely, a global recession will take place in the coming months, due to the fact that the US banks are not convinced of the effectiveness and solvency of the new loans and of the possible 2% inflation rate, the US bankers believe that, with the current North American growth pace, recovery will occur in 2020.

If these are the US forecasts, we can imagine Iran’s geoeconomic difficulties, especially in a much more fragmented, competitive, non-OPEC oil market than the one which has characterized the religious Welfare State since 1979.

After the end of sanctions, however, Iran’s real problem is the lack of productive investment and the weakness of internal technologies for extraction and diversification.

Either they buy them abroad, but banks are mistrustful, or they produce them inside, with higher costs and less effective technological efficacy.

Here the book by the economist Arghiri Emmanuel comes to our mind, namely the Unequal Exchange, which takes place when the economic exchange between the First and the Third World stabilizes at an internationally equalized average rate of profit.

Thus it happens that the third world country’s terms of trade always tend to decrease in real terms.

Hence a similar phenomenon happens, though in a geopolitical context very different from the one of the 1960s, when Emmanuel wrote.

Iran’s average income tends to decrease even at exchange rate parity.

Considering their low quality in terms of certifications against money laundering, Iranian banks’ debts cannot be “internationalized” and contribute to increase, up to reaching exorbitant usury rates, the interest rate for domestic loans. Or they contribute to make banks themselves go bankrupt and hence move State money which could be better used elsewhere.

Obviously, in this case, the prevailing link is the one between creditors and politicians, or between government institutions, that get money anyway, and individuals, who basically remain outside the credit market.

The non-performing loans (NPL) account for at least 20% of the total loans granted by the Iranian banks. Hence, if international finance does not trust the Iranian banking market – and rightfully so – at least 37% of the capital needed in the short term to renew and diversify Iran’s productive structure would be lacking.

If this did not happen, in three-four years, at the maximum, the Iranian banking crisis would be followed by the resumption of a free rider behaviour by Iran, which would have no reason to reduce its points of strategic friction and attrition: Yemen, the Shiite networks in the Emirates, Iraq, the Golan border, Syria and, in the future, Central Asia.

The International Monetary Fund predicts a fall in GDP by 3 to 0.5% over the next two years, which will be crucial.

As we have seen, inflation tends to decline, but it is a cyclical effect of the lower prices of food and other basic commodities.

Optimistically the IMF has forecast that, after the end of sanctions, the GDP should rise to a yearly 5-6% rate but – as another economist of the Emmanuel’s Marxist tradition, James O’Connor, said – the real problem is Iran’s fiscal crisis.

International banks are asking to the Iranian financial holdings and the Shiite government to pursue strong disinflation (which also increases the debt duration) and greater autonomy for the Central Bank, which is still a direct expression of the Supreme Leader.

There is also the problem – shared by many oil-producing countries in the Middle East – of the subsidies to fuel consumption, but the Iranian organization distributing them has reached the break even point since 2015.

So far Iran’s crude oil exports have risen by about one fifth earlier this year, up to 1.5 million barrels per day.

Both for geological and technological reasons, the real production cost of the oil barrel is particularly low, even 1.5 US dollars per barrel.

During the sanctions the production cost per barrel was 5 US dollars. Today oil overproduction is 2%, but Iran wants to get to 500 billion barrels per year, which account for 0.5% of world production, so as to spread its credit weaknesses on a large mass of exports and acquire “easy money.”

It is true, however, that many calculate the break even point of the Iranian oil barrel at a much higher price, namely 136 dollars per barrel, but we must not forget that, in this case, the costs also include the FOB marketing expenses, transportation costs and taxes.

Iran, however, has a break even point which is lower than Nigeria’s and Venezuela’s (which is the most expensive oil barrel in the world in terms of extraction costs), but much higher than Bahrain’s, where there are many Shiites, and Saudi Arabia’s (93.1 US dollars) where the followers of Imam Ali are the majority precisely among oil workers and in the extraction areas.

With the money from large oil sales, Iran wants to renew its infrastructure, support economic diversification and, above all, expand its domestic market.

But will it be an operation without dangers? It is too early to say so, as Zhou Enlai said to Kissinger, when he asked him what the Chinese Communists thought of the French Revolution of 1789.

But the net cost for supporting the Iranian ruling classes is such as to make it difficult to reach these goals.

Ali Khamenei, the Supreme Guide, the Rahbar, has a personal business empire of 95 billion US dollars.

Other members of the Shiite nomenklatura manage similar assets.

As is happening in Italy and in other Western countries, we are faced with the ruling classes’ corruption, which becomes the main impediment to economic growth.

Nevertheless only Venezuela, Saudi Arabia and Canada have larger oil reserves than Iran.

Iran has more oil than Iraq, Kuwait and Libya put together.

Therefore, on the basis of these data and statistics, some geopolitical options can be inferred: the contrast with Saudi Arabia is bound to increase, while Iran will have every interest in limiting the Sunni expansion in Libya and Kuwait, as a Shiite minority survives in the latter.

Hence an oil geopolitics uniting all the followers of Imam Ali under Iran’s guidance and leadership, for a clash with Saudi Arabia which will be not only military, but also financial.

However, will Iran succeed in having capital available in the short to medium term, which will be used for oil production expansion without limiting the growth of the internal market, which is the key to its political stability?

If the “power circles” step aside, and Iranian banks’ efficiency improves, something positive could happen.

Conversely, if political and private corruption increases or remain stable, either the investments for the oil upgrade or the internal market’s growth, which could trigger off many and unpredictable mass revolts, will be negatively affected.

Nevertheless, if the ruling class’ liquidity decreases, also the right and left electoral base of a large part of the regime shrinks – an electoral base that is often patronage-based

At strategic level, whatever happens to the Iranian banking issue, the end of sanctions will bring Iran closer to the United States, which will probably not fail to support some sectoral investments of the Shiite regime.

While, in this new scenario, Saudi Arabia will play some of its cards as free rider in the Middle East, by funding – despite its financial crisis which is more severe than Iran’s – some proxy wars in the Gulf, in the Maghreb region and, possibly, even in Central Asia.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Economy

Role of WTO in Regularization of International Trade

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International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.

Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.

The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.

One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.

One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.

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Economy

Russia and France to strengthen economic cooperation

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On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.

Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.

Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.

Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.

The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.

French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”

Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.

“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.

He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.

Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.

Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.

Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.

Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.

Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.

In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.

Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.

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Economy

Iran’s Economic Diplomacy through CPEC

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U.S. sanctions against Iran are characterized by strategic flexibility and adaptability. They are designed to have maximum negative and deterrent effect on Iran’s military, economic and diplomatic growth.  Tehran is exploring ways to counter these sanctions most probably by economic engagements with the regional countries. Iran’s perception of CPEC lends some credit to this argument.

Since the initiation of CPEC, the regional perception has already started to change as many countries have begun to see the project within the domain of their national interests. Iran has expressed its long-standing interests to join the CPEC viewing the corridor as a cornerstone for the country economic prosperity and regional connectivity.

Iran solely focuses more on the economic aspect of CPEC. Regional connectivity through CPEC can boost Iran’s stake in the global output. In 2015, on the sidelines of the United Nation General Assembly (UNGA) address, Iran’s President Hassan Rouhani expressed a desire to be the part of CPEC. He emphasized the importance of connectivity projects for the region. Iran’s initial reluctance to CPEC was transformative in nature and heavily came down with the unfolding of new geoeconomic realities.

Iran’s inclination for the CPEC project even becomes the part of official discourse. Iran’s ambassador to Pakistan Mehdi Monardost showed keen interest to participate in the CPEC and named it as one of the greatest projects in the history of the region. He envisioned a great boost to bilateral trade between Pakistan and Iran under the framework of this regional connectivity corridor. In 2017, Iran’s economy minister Ali Tayyebnia participated in the New Silk Road summit. He praised the New Silk Road concept for regional connectivity.

Iran’s economy is already clutched due to the international sanctions invoked by the Trump administration after pulling back from the Iranian Nuclear Agreement formally known as the Joint Comprehensive Plan of Action (JCPOA) in May 2018.Downplaying the perception of geopolitical competition between Gwadar and Chabahar, Iran higher officials negated the impression of competition falsely exaggerated by International and India media and insisted on the complementary nature of two ports.

In 2016,Iran and India signed an agreement for the development of Chabahar port and it was view as the counterweight to Gwadar port. Without explicitly mentioning India by name, Iran’s ambassador to Pakistan Syed Mohammad Ali Hoseeni defended the decision of his country to drop out India from the project in Chabahar by stating “when some foreign governments found reluctant in their relations with Iran and need other’s permission for even their normal interactions, for sure they would not be capable of planning and implementing such long-term cooperation contracts”.

The same rhetoric appears in the views of Chinese leadership. Brushing aside the allegations of Iran’s perceived resistance to CPEC and Gwadar port, Iran’s foreign minister Jawad Zarif dismissed the allegations and supported growth and development anywhere in Pakistan.

Chabahar is often seen as a rival to Gwadar port. However, Indian discourse has got an altogether different lease of life in the media compared to the Iranian one. Iran’s ambassador to Pakistan Mehdi honardoost utterly disregarded the narrative of competition of two ports. He invited both Pakistan and China to closely work in Chabahar port.

China considers Iran as an important country for its energy security, BRI and in the larger context of global competition with USA. China dual role both in Gwadar and Chabahar, according to the analysts, will likely reduce the impression of competition between two ports. Chinese stance on the Chabahar port also complement the Iran’s position on Chabahar. Chinese premier Le Keqiang rejected the notion that Chabahar port is in competition with the Gwadar. He is convinced with the idea that both ports have the potential to complement each other.

Tehran global status goes upward with the emerging financial and diplomatic backing of China. Beijing openly backs Tehran in the face of U.S. might.  On March 26, 2021, China and Iran signed an agreement expressing a desire to increase cooperation and trade relations over the next 25 years. Wang Yi, Chinese foreign minister, said that USA should rescind the sanctions against Iran. The 25 years deal is considered as part of the Belt and Road Initiative (BRI). According to Tehran Times analysts Peyman Hassani and Ammar Hossein Arabpour, this deal is considered a relief to Iran’s gas and oil sector against USA sanctions.

USA sanctions forcefully bar the countries from purchasing oil from Iran. The US Department of Defense’s report notes that China Pakistan Economic Corridor (CPEC) focus on pipelines and port construction. Pakistan’s reluctance to follow the Iran-Pakistan gas pipeline which is stalled due to American pressure can be reviewed, too much sigh of relief for Tehran’s energy export.

Triangular relations of China, Pakistan and Iran will likely put Iran on the strong footing. Richard Caplan, a professor of international relations at the university of Oxford, notes, “The agreement which predates Biden, undercuts U.S. efforts to isolate Iran economically and, to some extent, diplomatically.

Diplomatic and economic isolation remain at the center of Iran’s foreign policy under the severe U.S. sanctions. Iran’s perceptions of CPEC revolves around the same fact that through regional engagements under CPEC and BRI, it can tackle its global problems to some extent.

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