Starting over from Teheran!

31 May, 2016

The lifting of sanctions opens a new chapter in the commercial relations of Iran with the West. For Italy it is a case of going back to the successes of a not-too-distant past.


“Out beyond ideas of wrongdoing and rightdoing there is a field. I'll meet you there”[1] . The words of Jalāl al-Dīn Rūmī, the 13th century Persian poet, tell of a feasible convergence, regardless of the many criticalities. Likewise today, amid one thousand contradictions, the nuclear agreement and the lifting of sanctions towards Iran open a new chapter in the relations with Italy and the overall international community. Although operational challenges remain[2], commercial trade data in the first months of the year show encouraging signs. In fact, in the January-March period, the trend growth in EUR of the three key European exporters was equal to 7% for Germany, 10% for Italy and 13% for France respectively. 

Hence, a feasible confluence between the Italian industry and the Iranian market, that however is better defined as a reunion. Turning back the clock of history by a decade, thus going back to a time prior to the first resolutions of the United Nations Security Council in 2006, the levels of foreign trade, but also those associated with infrastructural projects and investments in the country were indicative of a particularly intense relationship between the two countries. Also by virtue of a deeply rooted political attention (for instance, in 1998 the visit of the Italian Prime Minister was the first made by a European leader since the Islamic Revolution), in 2005 Italy was the third international supplier of Iran (after Germany and surpassed precisely in that year by China), just as it represented its third export destination (after Japan and China). 

Instead, ten years later, extent and structure of the interchange of the country display all the scars of the recent geopolitical history. The relative degree of openness of Iran (the sum total of exports and imports in percentage of GDP) indicates that the country is suffering from an increasing marginalisation. The indicator dropped from 56% in 2005, therefore higher by three points as compared to the global average in the same period, to 43% today, lower by almost 15 points compared to the average. If we then look at the map of the countries involved in the interchange with Iran, an actual shift towards the East of the strategic barycentre emerges. China has become the prime commercial reference point, generating 42% of imports (4 times the levels of 2005) and absorbing 50% of its exports (from 15% in 2005), clearly focused on the energy sector due to the embargo imposed by the West. India's gain is more contained but equally strategic, as it currently generates 7% of imports and is the destination of 20% of exports. Italy and the whole of Europe have symmetrically lost positions and not only in relative terms (the Italian share has fallen from 9% to 3% of Iran's imports from the world). Also in terms of absolute extent of Italian exports, the starting point of a desired new chapter today is equivalent to 60% of what was sold in Iran ten years ago, at constant prices.

Specifically, among the various sectors, the historical Italian leadership in mechanical supplies has eroded. In 2005, Italian enterprises generated 23.8% of Iranian imports from the world, outdistancing Germany. Nowadays this share has been practically halved. Part of the decline is somewhat more statistical than real in that connected to the alternative routes of Italian goods following the sanctions (for instance, triangulation via the United Arab Emirates and Turkey has been very frequent). Nevertheless, the concomitant rise of China as leading exporter in the mechanical industry risks acting as a brake on the potential of Italian enterprises at a time of market recovery. According to estimates drawn up by Prometeia, the effective come back of Iranian crude oil on foreign markets is subject to technological investments able to increase by at least 1 million barrels daily the productive capacity of the extractive industry. This sector historically represents one of the main outlets of Italian supplies in the country. More generally speaking, weighing the prospective expectations for Iranian imports from the world over the next two years[3]  with the Italian share before the sanctions, opportunities for enterprises specialising in the technological industries (thus in the mechanical industry, but also electrical engineering and transport) would reach 900 million EUR per annum. 

The same scenario applies to the sectors correlated to infrastructure, an area in which Italy boasts a long tradition of collaboration with the country. On the basis of a model devised by Prometeia for calculating the medium-term infrastructural potential, Iran, with almost 70 billion USD in estimated needs for the next 5 years, represents, among the emerging countries, the 10th market in the world in terms of potential turnover. In the light of their average share in international tenders in Iran before 2006, for Italian design and construction enterprises these investment flows may result in at least 200 million contracts. To these the so-called induced effects for all correlated sectors should be added (intermediate products and technology). 

The normalisation of the relations held with the West also rests on a convergence in terms of customs, life styles and hence also in terms of models and consumer products. Despite manifest signs of deep cultural divergences, socio-demographic aspects place Iran among the most attractive markets, especially if compared to the standards in the region. The absolute size of the population and its young average age (almost 80 million and 28 years respectively), the rates of literacy and urbanisation (85% and 70%, thus both above the regional average), the presence of a numerous and increasing affluent class (over 10 million in 2015 according to the estimates of the Confindustria Study Centre and Prometeia) are all favourable factors for developing the made in Italy brand on the market. These socio-demographic indicators place Iran among the most interesting markets based on an improvement of the quality of consumption. However, also in terms of quantity, economic prospects remain among the most brilliant in the Middle-East. In terms of growth of GDP, Iran is expected to outclass countries such as the United Arab Emirates, Qatar and Saudi Arabia over the next two years. To this a probable rebound effect should be added for a demand that, after being restricted during years of sanctions, will finally be free to unlock its true potential. In order to provide a scope for these opportunities, it suffices to consider that by bringing the Italian positioning to the levels existing prior to the sanctions, exports in the consumer sectors would attain 400 million EUR, specifically involving the fashion, furniture and food sectors. It is precisely in this latter sector that the Italian share has already experienced consolidation in the past decade. Although restrained, from 0.4% in 2005 to 0.6% in 2015, the actual gains of market share, more than their entity, represent the significant and promising factor for the future; in fact they indicate an attractiveness of the Italian offer for Iranian consumers that has already succeeded in overcoming the artificial closures of the market in these past few years or, in the words of Rumi, in going beyond ideas of wrongdoing and rightdoing.

Figure 1 -  Top sources for Iranian import by country:  2005 and 2015 data (market share on import value)
Figura 2 - Italian market share on Iranian import by industry (percentage)

[1] This article is inspired by a recent research study conducted by Prometeia on the opportunities for Italian enterprises on the Iranian market presented as part of the seminar on The new era of commercial relations between Italy and Iran organised by the International Chamber of Commerce.
[2]  For instance, criticalities include difficulties in the transactions settled in dollars involving intermediaries or subsidiaries on US soil. In fact, many European banks continue to be prudent in granting commercial credit instruments so as to avoid incurring the so-called primary sanctions still in force imposed by the US towards Iran.
[3] These forecasts uses the MOPICE model for foreign trade, through which Prometeia relies upon accurate forecasts on the evolution of global imports for 72 countries and 124 sectors.