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The Iranian thaw
The lifting of sanctions from Iran can benefit Asia
The historic agreement reached by 14 between Iran and the six major powers on easing the sanctions regime in exchange for limiting the Iranian nuclear program portends a new era, with mixed consequences for the rest of the world.
American conservatives warned that the deal would "encourage" Iran and other rogue states, such as North Korea. The US Congress will have 60 days, during which it will be able to decide whether to ratify the treaty or not, but President Barack Obama has already stated that he will veto any attempt to block the document.
Analysis of the broader impact of the agreement with Iran to date has mainly focused on the country's relations with the West. However, easing sanctions against Iran will lead to significant benefits for Asian countries.
China, in particular, will continue to promote its rapidly growing interests in Iran, while India and Japan, no doubt, will be active in order to achieve benefits for themselves. In general, the Asian economy will be ready to profit from increased investment opportunities and Iran’s high hydrocarbon production.
Ultimately, weakened sanctions will allow Iran to increase its oil and gas exports. This is a very important factor for Asia, as it is the region that consumes the most oil in the world. Only the combined needs of China, Japan, India and South Korea account for one fifth of the global oil demand. Despite the slowdown in economic growth, China remains the second largest oil consumer in the world after the United States. In addition, as China strives to reduce greenhouse gas emissions, the demand for natural gas will also increase.
Iran is an important supplier that can meet Asia’s growing demand for oil and gas. Iran ranks first in the world in natural gas reserves, and also has large oil reserves. Despite the detrimental sanctions that have lasted for more than one year, Iran is the seventh largest in the world in terms of oil production, according to the US Energy Information Agency.
Thanks to the agreement agreed with the so-called "PNNUMX + 5" - the top five permanent members of the UN Security Council and Germany, Iran hopes to attract vital foreign investments in order to increase hydrocarbon production. Iran has stated that its energy industry needs an investment of 1 billion dollars for modernization. When the sanctions are relaxed, Iran will be able to attract the investments needed to increase the production of petroleum products by a third at the initial stage, which will be 200 million barrels per day, according to estimates provided by the state.
In the past, Asian countries willingly bought Iranian fuel, periodically ignoring potential negative consequences. For example, in July, 2014, the United States was forced to extend exceptions to the sanctions to China, India and South Korea, which refused to stop importing Iranian oil.
A thaw in relations with the West will also make it easier for Asian businessmen to invest in Iran. For countries such as Japan, which are looking for opportunities for external growth, Iran with its cheap but educated labor force can be an ideal investment option.
Asian investment in Iran will also be stimulated by the emerging competition between Japan, China and India for influence in the Middle East.
In preparation for the nuclear agreement, all three countries intensified the struggle for influence in Iran. So, in April China confirmed that it was going to finance the construction of a pipeline for natural gas connecting Iran with India’s adversary, Pakistan.
In turn, India signed an agreement in May, under which it pledges to develop the port of Chabahar on the southeast coast of Iran. In the same month, Japanese authorities told Iranian media that Japanese companies were exploring investment opportunities in Iran, and also visited a petrochemical plant and a shipyard near Chabahar.
These investment plans reflect a struggle for power and influence between the three Asian powers. China has already pulled ahead - as Iran's main trading partner. In numerical terms - a quarter of Iran's trade turnover in 2014, which totals 144 billion dollars, was trade with China.
Chinese companies will also have a definite advantage over Western companies, which will still be forced to deal with the barriers associated with sanctions. The remaining sanctions on Iran related to human rights violations and the sponsorship of world terrorism will continue to operate. They are aimed at preventing the actions of Western companies that are considering investing in Iran.
It is also worth noting that Chinese companies are more at ease with the legal risks in foreign jurisdiction than Western businessmen who face even more serious restrictions in their own countries. Western companies are under serious pressure, which forces them to avoid interacting with individuals who play a role in the policies of those countries that are subject to sanctions.
For example, international companies have avoided major investment in Myanmar, despite the weakening of many of the Western sanctions over the past few years, for fear of inadvertently becoming associated with people from the so-called “black list” of the US Treasury, which includes people suspected of crimes as well as those who, according to various statements, were engaged in business, being connected with the former military junta. These legal risks do not concern China, which dominates investing in Myanmar.
A similar scenario may arise in Iran, since at the moment, Western companies are still not quite ready to take full advantage of the market opportunities. For example, one of the risk factors is the IRGC (Islamic Revolution Guards Corps), a military organization with broad business interests, which gained control over many state-owned enterprises during the privatization program launched by former President Mahmoud Ahmadinejad. Companies subordinate to the Corps will be difficult to ignore, primarily because of their ubiquitous presence.
Reintegration of Iran into the world economy will not happen instantly. It will be years before the country can normalize its economic relations with world colleagues. Asian countries can help in this process - and shake the fruits of Iran's return to the community of nations.