Trade and Investment

Tehran struggles to deliver on its promises

12 July 2010 Hits: 147

The extension of trade and investment ties has been a constant theme behind Iran's pursuit of a stronger relationship with Latin America as a region. Though at best a mid-ranking economic power, with a GDP the size of Florida's, Tehran has sought to deploy whatever economic clout it possesses to shore up its diplomatic initiatives from Managua to Buenos Aires.

Virtually every diplomatic sortie mounted by Tehran has sought legitimacy with some form of economic investment. For Latin American governments seeking to explain to skeptical constituencies why they should be doing business with a pariah state, the prospect of Iranian investment across a range of industries and the opening up of a potential massive export market of 65m people, boasting petrodollars to splash out on commodity and manufactured goods imports, can help to close the deal.

Newly released trade figures suggest a picture of rapidly rising commerce between Iran and regional economies. Trade between Iran and Latin America grew 209% in 2008, reaching a total of US$2.86bn last year, according to the IMF International Financial Statistics (IFS) figures. Neither Brazil nor Iran has published detailed figures of their bilateral trade, but the IFS figures reveal that bilateral trade with Brazil grew to US$1.26bn in 2008, up 88% over 2007. Trade with Argentina increased massively to US$1.12bn, from just US$30m in 2007. Overall, Latin America maintains a large trade surplus with Iran, reaching US$2.53bn in 2008.

In contrast to the close political relationship between Tehran and Caracas, Venezuela is a relatively insignificant trade partner for Iran, though trade volumes are growing. In 2008, bilateral trade grew 31% to just US$52m. Ecuador has replaced Peru as the largest importer of Iranian goods in Latin America, and only Ecuador runs a trade deficit with Iran; its trade with Iran reached US$168m in 2008, a significant increase on the US$6m reported in 2007.

While Iran's export capability is limited, it can offer foreign direct investment into Latin America. Venezuela has assiduously tapped Iran for investment in a range of infrastructure and industrial projects.

From Tehran's point of view, the provision of investment in key strategic sectors is intended to counterbalance the financial pressure exerted by international sanctions relating to its nuclear programme. Venezuela has been identified as an outlet for Iran to move money, obtain high-tech equipment and access the global financial system - just as, closer to home, Dubai acts as the “lungs" for Iran's economy within the Middle East.

In lockstep with its diplomatic advance, Tehran has therefore sought to endow its political relationships with sometimes tantalising investment projects, ranging from a US$350m deepwater seaport off Nicaragua's Atlantic coast to public housing construction in Venezuela and automotive assembly plants. Yet the economic linkages generally fall far short of the rhetoric of close economic partnership. These projects' significance is primarily political: to undergird the political partnership with the fabric of commerce.

Tehran has accompanied its investments with promises of aid. Nicaragua has received Iranian aid pledges for a hydro-electric dam and milk-processing plants, while Bolivia has received funds for two public health clinics, as well as a US$230m investment in two cement plants. In July 2009, Iran agreed to provide US$280m in low-interest loans to La Paz.

Ahmadinejad's eagerness to strike economic cooperation deals with Latin American states has proved controversial back home. The US$280m loan offer to Bolivia came in for criticism by Iranian MPs in August, after claims that the government had failed to follow constitutional guidelines requiring parliamentary approval for such loans. Furthermore, Iranian decision-making, mediated by a byzantine network of interest groups, is inimical to effective follow-through on promises of financial disbursements. Ahmadinejad's' capacity to deliver on promises is compromised by domestic and international pressures.

Many of the economic agreements struck between Iran and Venezuela were announced in the midst of the plus US$100 per barrel oil prices, when Tehran had easy access to petrodollars to recycle into strategic economic projects. The past year has removed the economic comfort zone that underwrote Tehran's largesse; in Iran's case, the need to circumnavigate an extensive array of financial sanctions has made it more difficult to apply the healing balm of its aid and investment.

The frequency of MoUs (Memorandum of Understanding) is still matched by patchy delivery. Tehran has yet to overcome a credibility gap between the lofty rhetoric of anti-imperialist economic cooperation and the reality that it simply does not have access to an unlimited treasure chest to burnish its political objectives with hard cash.

In Nicaragua, Ahmadinejad has promised some US$1bn in aid and investments, funds to be used to develop energy and agricultural sectors, infrastructure, and water purification projects in Nicaragua. Yet evidence of this promised funding is elusive. Pointedly, Iran has so far refused to forgive Nicaragua's US$152m debt.

Key Iranian investments in Latin America

* Bolivia. Iranian investment in industrial projects in Bolivia includes dairy factories and agriculture mining and hydroelectric dams, and scholarships funding study in Iran for Bolivian students. An office of the National Iranian Oil Company (NIOC) opened in Santa Cruz in 2009, to follow up and implement joint Iran-Bolivia energy projects.

* Ecuador. Iran is assisting in the building of two 10 MW and 15 MW power plants and has provided US$40m in loans for business development.

* Nicaragua. Iran will loan Managua US$230m to build a dam and a hydroelectric plant over the next five years. The Export Guarantee Fund-backed of Iran loan is due to be repaid in 22 installments within 10 years at a 5% interest rate.

* Cuba. With a US$200m credit line from the Export Development Bank of Iran, Iran's Pars Wagon Company is providing Cuba's EIGT with 550 freight wagons and 220 passenger carriages.

Venezuela: Tehran lays down economic roots

12 July 2010 Hits: 266

When Chávez visited Iran in September 2009, the two governments signed more than 200 agreements for cooperation in the fields of food and health, housing, trade and uranium prospecting. The centrepiece is a commitment to invest US$760m in each other's energy sectors.

Venezuela's state-run energy company Petróleos de Venezuela (Pdvsa) is to invest US$760m in the development of phase 12 of Iran's giant South Pars natural gas field in the Persian Gulf. Iran has, for its part, pledged to invest an equivalent US$760m in the development of the Venezuelan oilfield Dobokubi, as well as the development of Block 7 of the Ayacucho heavy oilfield.

Energy forms a natural crux for the two countries' economic relationship. In October 2009, the two countries announced the establishment of a new oil company, Beniroug, which would make investments and activities in third countries, including Cuba, Sudan, China and Bolivia.

A more tangible sign of Iran's investment clout is the recent handing over of some 4,000 three-bedroom apartments to low-income Venezuelans. The project, implemented by the Iranian construction firm Kayson Group, is building a 10,000 unit public housing development for the Ministry of Housing, following a deal signed in 2006. Kayson is also responsible for building auxiliary facilities for each township, including schools, kindergartens, libraries, parking facilities, with a floor area of over 16,000 square metres.

Kayson, a mass producer of housing, claims to be able to build one housing unit per hour. For Iran, the project will also enable it to boost exports with some 6,000 tones of manufactured building products shipped to Venezuela, as well increased job opportunities and non-oil revenues.

That deal, realised in bricks and mortar, contrasts with opaque investment projects in other sectors. The Banco Internacional de Desarollo (BID), a subsidiary of Iran's Export Development Bank, was founded in 2007 in an office building in the Caracas financial district. Yet its direct impact is limited.
The objective of the bank is to provide banking services under a universal licence, and it quickly aroused the suspicions of US authorities. In October 2008, the Treasury Department's Office of Foreign Assets Control imposed economic sanctions against both banks for providing financial support to the military organisations responsible for Iran's nuclear programme.

The BID is one of three joint Iranian-Venezuelan financial institutions - part of a strategy to form a new financial architecture between the two countries, according to Chávez . It supports small- and medium-sized enterprises in both countries, as well as strengthening its financial intermediation capacities for big businesses through its credit and loan facilities. In an interview with Latin American Newsletters, a bank official said the bank was a “normal bank engaged in normal lending. We just do commercial banking - you can have savings accounts, current accounts, car loans - we're just an ordinary local bank." However, the BID claims only 300 customers. The suspicion remains that this entity is of purely symbolic significance.

Iran is persisting with financial sector cooperation. A separate joint development bank was announced in April 2009, to be based in Tehran and which is to have US$1.2bn available in initial investment funds and finance projects in areas such as infrastructure, housing and technology. Ahmedinejad's late-November visit to Caracas saw the inauguration of a new binational development fund, capitalised at US$200m and due to receive another US$200m to fund joint projects.

The attempt beyond pure politics to cooperate at the economic level will be hamstrung by inadequate implementation and follow-through. While on paper some of the deals look massive, the reality is less impressive. Iran's efforts to establish an automotive manufacturing presence in Venezuela is typical. The joint venture, Venirauto, started assemblage of the Samand saloon car made by Iran-Khodro Company - badged as the Centauro in Venezuela - and the hatchback, the Turpial, in 2006, and has sold 5,000 vehicles so far. The aim is to increase production to 26,000 units, and establish a body and paint shop to go with the assembly plant.

The project is struggling to meet this ambition. Delivery of parts from the Khodro plant in Iran is way behind schedule and the plant has been plagued by poor industrial relations. In December 2008, workers went on strike over the company's refusal to negotiate a collective contract, amid complaints over low pay and poor safety. The plant is producing well below its capacity and lacks a dealer network to market the vehicles.

Scepticism about the depth of Iran's economic relations with Venezuela appears confirmed by reports that the weekly flight between Caracas and Tehran via Damascus, operated since 2007 by the Venezuelan state-controlled airline Conviasa and Iran's national carrier, Iran Air, are mostly empty by the time they reach Tehran. A report in Spain's El País newspaper in November 2009 said the flight's 286 seats are usually half empty, and that most of the passengers disembark at Damascus, rather than Tehran. Cargo loads are also too low to justify the flight.

Brazil: Petrobras pulls back

12 July 2010 Hits: 187

Brazil's interest in Iran's economy is mainly as an export market for its commodities, notably sugar and beef. The trade imbalance is stark, with Iranian exports to Brazil standing at just US$54m in 2008-2009.

However, after Presidents Ahmadinejad and Lula met in November 2009, plans were announced for an expansion in economic cooperation between the two countries in all fields, focused on industry, trade, energy and technology, with a target for a US$25bn annual trade volume goal for the next five years.

Iran is looking to Brazil's state-owned oil company, Petroleo Brasileiro (Petrobras), to extend its footprint in Iranian hydrocarbon projects. Yet Petrobras is increasingly leery of Iran, and recent news flow from the state oil company suggests that Iran has slipped down its list of overseas priorities.

In late 2009 Brazilian press reports suggested Petrobras might abandon its operations in Iran, after a largely fruitless five years of drilling in the offshore Tusan block in the Persian Gulf. The company has already begun the process to rescind its concession rights. Petrobras sources informed reporters that the decision was “technical" and not the result of continuing political pressures from US authorities - despite reports that US pension funds had targeted Petrobras over its Iranian investments.

Petrobras International director Jorge Zelada said in an interview with a news agency in July 2009 that the Tusan block was geologically unappealing. "Our expectation is for a sub-commercial reserve," said Zelada. "It is a small reserve ... we have not yet finished the report, but the expectation is that it does not have commercial possibilities."

Petrobras' other Iranian concession in the Iranian Caspian Sea looks equally uninviting. Plans were announced only in early 2009 to invest US$250m in initial drilling to develop the Caspian acreage followed the signing of a landmark “risk contract" - analogous to a traditional production sharing deals, rather than the buyback service contracts that Iran normally offers - with National Iranian Oil Company. In July, it announced it would not proceed on a second Caspian bloc, because it contained gas rather than oil. “There is no Petrobras exploration activity in the Caspian Sea. There was an opportunity that Petrobras reviewed and decided not to continue with," he said.

The Iranians' attempts to tap Petrobras' deepwater expertise in the geologically difficult Caspian play now looks doomed to end in failure. In July 2009, it was reported that Iran's state-run Khazar Oil Company was to develop the oil and gas plays in the area on its own. This appears to spell the end of Petrobras' interest in the Caspian, and possibly in Iran, for the foreseeable future.

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