February 23, 2015 | Monograph
Sanctions Relief under the JPOA
The White House insists that sanctions relief has provided Iran with less of a windfall than Tehran had hoped. The administration claims, that in the first half of last year, Iran’s direct revenues in cash and non-oil exports were over $2 billion less than Washington had predicted – $4.6 billion rather than $7 billion.
Under the Joint Plan of Action (JPOA) interim nuclear agreement signed on November 24, 2013, sanctions against Iran’s oil exports were suspended and selected direct cash transfers from Iranian-owned overseas accounts were allowed. Additionally, the P5+1 negotiators agreed to suspend U.S. sanctions on Iran’s auto industry and exports of petrochemical products.
This paper examines the extent to which Iran’s automotive and petrochemical sectors have benefited from sanctions relief beyond what is acknowledged by the Obama administration. Current official assessments undervalue the indirect benefits – particularly the higher investment and consumption associated with stronger consumer confidence and reduced inflation – which Iran has received from sanctions relief.
Moreover, current figures do not include the nearly $8 billion in oil revenue released from escrow accounts since November 2013, the additional $3.5 billion in oil revenue to be released as part of the JPOA’s extension, and the increased oil revenues derived from the suspension of U.S. oil sanctions. Most of those revenues remain partially restricted in escrow accounts and only available for bilateral trade with Iran’s major oil buyers or humanitarian trade. However, it should be noted that Iran’s oil exports after the JPOA have been significantly above 1 million barrels per day (bpd). “Imports by Iran’s four biggest buyers – China, India, Japan and South Korea – averaged 1.12 million barrels per day (bpd) in 2014,” Reuters reported.
The Automotive Sector
For decades, Iranian policymakers have declared (here and here) their intention to make Iran’s automotive industry a key source of export earnings. However, domestic sales have traditionally represented the bulk of Iran’s auto revenue, and are thus not included in the U.S. administration’s growth figures.
Vehicle manufacturers Iran Khodro and Saipa control a combined 86 percent of the market share for personal cars in the country. During the first six months of the current Persian year 1393 (March 21, 2014 to October 21, 2014), Khodro’s revenue increased by 225 percent year-on-year, while Saipa’s revenue increased by 64 percent during the same period.
Taking into account currency fluctuation, the combined revenue for Khodro and Saipa during the first 6 months of the current Persian year rose to $5 billion, compared to $1.7 billion in the same period of the previous year. These figures show Iran’s two largest automotive manufacturers enjoyed a revenue increase of at least $3.3 billion:
|Company||Revenue March 21, 2014 to October 21, 2014||Revenue March 21, 2013 to October 21, 2013||Increase In Revenue||Growth In Revenue|
In 2014, Iran Khodro doubled production at the ZSC Company plant in Iskandarya, Iraq – its largest production facility outside the Islamic Republic – as a result of better access to inputs and spare parts. As for Saipa, its vice president for export says it experienced a 30 percent increase in exports in the first 6 months of the current Persian year.
Across the entire automotive industry, 2014 statistics show an increase in production of 40 percent (some 488,000 vehicles) year-on-year for the April 1 to June 30, 2014 period. According to Iran’s IRNA news agency, in the first 7 months of the current Persian year the country’s automotive industry grew 71 percent year-on-year (625,000 vehicles).
Finally, companies owned or controlled by Iran’s Islamic Revolutionary Guard Corps (IRGC) control several automotive firms. The IRGC, designated for its participation in both terrorism and weapons proliferation activities, controls broad swathes of Iran’s economy, enriching itself at the expense of the Iranian public. Sanctions relief is thus indirectly giving the IRGC a share of the benefits accrued from increased production, sales, and after-sale services.
IRGC-Owned Automotive Sector Companies
Listed on the Tehran Stock Exchange Main Market
|Iran Tractor Manufacturing|
|Iran Tractor Foundry Company|
|Motorsazan Diesel and Gas Engines|
|Iran Casting Industries|
The Petrochemical Sector
Over the first seven months of the current Persian year (beginning March 21, 2014), Iran reported it had exported $7.6 billion in petrochemicals – an 18 percent increase over the previous year. At the same time, Iran exported $7.5 billion in natural-gas condensates, a 63 percent rise compared with the year before. Altogether, Iran increased its petrochemical exports by $4 billion from March 2014 to October 2014 compared with same period during the prior year.
Iran’s petrochemical industry is also expected to receive renewed infrastructure investment. On October 26, Iran’s deputy oil minister, Abbas Sheri Moghaddam, told Mehr News that China had agreed to finance 20 petrochemical projects in the Islamic Republic. According to Moghaddam, Iran currently has 67 unfinished petrochemical projects due to a lack of foreign investment and access to technology – both caused by sanctions. Now, however, China is opening new lines of credit (LCs) to finance those projects. The LCs are understood to be a way to settle some of China’s unpaid debts from past oil sales to Tehran.
On November 9, 2014, Fars News reported that Chinese financiers had promised credit lines for two petrochemical units (the Masjed Soleiman Petrochemical Complex and the Sabalan Methanol Unit), each with a value of €350 to €400 million.
On December 3, 2014, Moghaddam announced the opening of China’s first official line of credit for the Gachsaran petrochemical plant, and said an additional $2 billion line of credit would soon be opened for four more projects.
Technically, sanctions relief to Iran’s petrochemical sector under the JPOA is limited to “Iran’s petrochemical exports, as well as sanctions on associated services.” The JPOA does not, however, provide sanctions relief to investment in Iran’s energy sector. Nevertheless, China’s decision to extend new lines of credit to Iran for energy sector’s infrastructure projects have so far encountered no objection from the P5+1.
Chinese finance is now the cornerstone of Iran’s plan to expand its petrochemical industry, reduce Iran’s dependence on crude oil exports, and sell more of its oil output as petrochemicals – which sanctions relief allows.
The overall value of the sanctions relief the JPOA provided to Iran through November 2014 should be fully calculated to include indirect benefits to the Iranian economy. A fuller account of Iran’s economic windfall reveals that the value of sanctions relief is dramatically higher than the $7 billion that the U.S. administration had initially anticipated.
Emanuele Ottolenghi and Saeed Ghasseminejad are respectively Senior Fellow and Associate Fellow at the Foundation for Defense of Democracies and its Center on Sanctions and Illicit Finance.