With Sanctions Lifting, What's in Store for Iran's Economy?

Following the landmark nuclear deal with Iran, plans for the lifting of economic sanctions are moving forward with "Implementation Day" planned as soon as late 2015 or early 2016. Not only is this move important for the United States for geopolitical reasons, observers say, but removing trade embargoes should boost Iran's economy.

Called the Joint Comprehensive Plan of Action (JCPOA), the agreement between Iran and six countries (the U.S., the U.K., Germany, France, Russia and China), clears the way for Iran to sell oil, trade other goods and engage in financial services once again. While the U.S. has upheld sanctions against Iran for the last 35 years, Europe's have been in effect only since 2012.

Wharton legal studies and business ethics professor Philip M. Nichols notes that the reopening of trade links is more like picking up where they left off after a "two-year hiatus from Europe's perspective. For the U.S., it's obviously a substantially more dramatic, hard resumption of trade," but only in limited ways.

Iran's Potential

Iran is the second-largest economy in the MENA (Middle East and North Africa) region after Saudi Arabia, and the 18th biggest in the world, according to the World Bank. With a population close to 80 million people, it's the second-most populous nation in the area, with 60% of its people under the age of 30. But youth unemployment is very high (17.9% for men and 39% for women), and that is one area the government wants to tackle. Its aim: Create 8.5 million jobs in the next two years, and fresh foreign investment should help.

Iran's economy shrunk by 6.8% in 2012 and 1.2% in 2013, with sanctions blamed for a loss of $17.1 billion in export revenue in 2012-2014 -- a 13.5% decrease, according to the World Bank. Since President Hassan Rouhani took office in July 2013, he has pulled the country out of recession and inflation is now down to 17% after skyrocketing to 40% two years ago, according to The Economist. When trade resumes, Iran's GDP may rise to 5% from the current 2.8% rate, the World Bank forecasts.

Since the U.S. embassy in Tehran was stormed in 1979 and 52 hostages were held for 444 days, diplomatic ties between the two countries have been severed. The Americans still have not reopened the U.S. embassy in Iran. The American government froze Iranian assets, most of which have remained inaccessible -- until the sanctions free up the funds.

American companies still have to be careful of how to tread into Iran since there are still sanctions related to human rights abuses and support for terrorism. Iran does not recognize Israel and has been accused of supporting Hamas and Hezbollah. Nichols says, "There are special reputational concerns in dealing with Iran. Iran is quite the punching bag for U.S. politicians. A firm deadline directly with Iran is walking into the teeth of political rhetoric. It's not aimed at those [American] firms, but aimed at President Obama. And that's difficult."

The Oil Card

However, for the American consumer, the biggest impact might be a lighter bill at the gas pump. When Iran begins selling its oil more freely again, global oil prices may drop 14% by 2016. Bloomberg reported that Iran has already started producing 2.8 million barrels a day. Oil importers like the U.S. and Europe will benefit from lower energy prices while OPEC members, like Saudi Arabia, and other oil producers will lose out. Iran has the fourth-largest oil reserve in the world and the country's oil revenues could rise $15 billion in the first year.

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