Written evidence to Foreign Affairs Committee inquiry into UK Policy towards Iran submitted by Mr Mal Craghill (IRN0006)

Executive Summary

• The interim agreement between Iran and the P5+1 nations does not yet provide a solid basis for the UK to open up trade with Iran.
• The UK Government would be wise to establish a framework for opening up trade with Iran assuming successful negotiations for a comprehensive solution to Iran’s nuclear programme.
• The UK and Iran share strategically important relations with India, Turkey and Oman which should be considered alongside any trade negotiations with Iran.
• The recent cancellation of an expected Eurofighter Typhoon sale to the UAE highlights the balance the UK must strike between increasing trade with Iran and maintaining strong relations with GCC nations.

The author is an MA Applied Security Strategy student at the University of Exeter’s Strategy and Security Institute. Submission of evidence is in support of a module of the course involving deep strategic study of one particular country. A syndicate of 5 students is studying Iran with an aim of formulating UK policy options. This evidence will deal with trade issues linked to: UK / Iran bilateral relations; and Iran’s regional foreign policy.

Detail

1.              There is no doubt that the sanctions imposed on Iran by members of the international community have had a serious impact, not just on the economy of Iran but on the economies of its trading partners too. Iran’s own figures showed a 5.4% decline in its economy between 2010 and 2012 and inflation running at 45%[1], with oil production believed to have dropped by two-thirds in seven years to around 1million barrels per day (bpd) currently. UK exports to Iran fell by 37% in 2011 and, according to Eurostat, across the Eurozone trade with Iran dropped by 51% in the first 9 months of 2013 compared with the same period two years earlier[2].

2.              Most EU imports from Iran are energy related, with exports coming primarily from the machinery, transport equipment and chemicals industries. The interim agreement between Iran and the P5+1 nations, scheduled to come into force on 20th Jan 2014, temporarily stops any further pressure on Iranian oil exports, suspends sanctions on the automotive sector, petrochemicals and precious metals and allows for humanitarian aid in the form of food, agricultural products, and medical and pharmaceutical supplies. This would remain in force for one year whilst negotiations take place to agree a comprehensive solution to Iran’s nuclear programme, and thus no major new trade agreements are likely with Iran until the nature of sanctions removal under the comprehensive agreement becomes apparent.

3.              A UK parliamentary delegation visited Iran between 7th and 10th January, led by the MP and former Foreign Secretary Jack Straw. He was accompanied by, amongst others, Lord Lamont, former Chancellor of the Exchequer and now Chairman of the British Iranian Chamber of Commerce. The trip follows similar delegations from several European nations including Austria, Ireland, Italy and Sweden. Delegations from Romania and France are scheduled to visit later this month, although France’s role as perceived “spoiler” in the Geneva talks[3], and President Hollande’s recent focus on boosting trade with GCC nations[4], may make it difficult for France to make significant progress with Iranian trade. Assuming a comprehensive deal on Iran’s nuclear programme is reached, it is highly likely that other European nations will have established framework agreements for trade with Iran, and it would be wise for the UK to adopt a similar approach or face losing out on potentially lucrative trade deals as relations with Iran normalize.

4.              Opportunities now arise for some UK companies to increase trade with Iran under the interim deal, notably GlaxoSmithKline and AstraZeneca which export medicine and medical equipment[5], and could therefore benefit under the humanitarian aid strand of the interim agreement. During the recent parliamentary visit Iran called for increased trade in the industrial and mining sectors[6], and according to the British Iranian Chamber of Commerce, other opportunities are likely to lie in telecommunications and IT, joint manufacturing ventures (particularly in vehicle manufacturing), water and waste water projects and banking sector reform[7]. Iran’s oil and natural gas industry is also in need of investment, and the Iranian oil minister Bijan Zanganeh stated recently that Iran could boost oil production to 4 million barrels per day (from the current 1.2 million) within a year of sanctions being lifted if international companies were willing to work with Iran. Zanganeh named seven oil companies that Iran would like to do business with, including British Petroleum[8]. Given the temporary nature of sanctions relief these companies remain cautious over opening up business with Iran, but several companies (including Shell and Italy’s Eni) have already held talks with Zanganeh at December’s OPEC meeting[9]. This is likely to be a sector slow to develop, but with strong possibilities for BP in the coming years. It would be wise for UKTI to work closely with the British Iranian Chamber of Commerce to identify suitable opportunities for future trade with Iran, and establish a framework which could be readily implemented assuming successful negotiations between Iran and the P5+1 nations over implementing a comprehensive nuclear agreement.

5.              The UK and Iran share strong regional links with several countries, notably India, Turkey and Oman. The UK will wish to track developments between Iran and these three nations, where the following developments have already taken place:

a.              India.  India has a long-standing trade relationship with Iran, and since 2002 has been heavily involved in building Iran’s first deep-water port at Chabahar in the Gulf of Oman. For India this opens up the potential for direct trade access to Iran and Central Asia, whilst for Iran it provides a port which can handle modern container shipping. At present ports like Bandar Abbas are limited to 100,000 ton cargo ships, with the more common 250,000 ton ships having to dock in the UAE and transfer goods for onward shipping to Iran[10]. Chabahar has an additional strategic importance for India though – it will be in direct competition with the Chinese-financed deep-water port at Gwadar, in Pakistan, which sits just 44 miles east of Chabahar. Oman, Kuwait and the UAE have all expressed an interest in investing in a proposed free trade zone to be established around Chabahar[11]. India is also investing in improved transport infrastructure between Chabahar and Afghanistan, which may prove useful to the UK in the future given past problems with the overland transport routes through Iran to Afghanistan.

b.              Turkey.  Iran and Turkey have long been trading partners, and although annual trade fell from $22Bn in 2012 to $16Bn in 2013, the two countries have set a long-term goal of achieving $100Bn in annual trade, with an interim goal of $30Bn by 2015, according to Turkey’s Ambassador to Tehran[12]. It is, however, the nature of Turkey’s current trade with Iran which has caused most concern recently, with a “gold for oil” scheme emerging as one of the key corruption issues currently being investigated as part of wide-ranging graft accusations[13]. The Turkish government’s response to the corruption crisis, seeking to tighten controls over the police, judiciary and internet access, is at odds with EU norms and may severely damage Turkey’s EU accession desires[14]. At the same time, Turkey’s warm relations with its Arab neighbours have withered as unrest swept the region, leaving Turkey seeking to shape an alternative strategic regional role. The recent rapprochement with Iran may have provided such a role, as interlocutor between Iran and Europe[15], but care must now be exercised to ensure that EU criticism of Turkey does not push it closer to Iran to the detriment of the sanctions regime. Diplomatic engagement by the UK could play a key role here, and if successful could pave the way for closer bilateral relations with both Turkey and Iran.

c.              Oman.  Oman has maintained strong trade and diplomatic relations with Iran, and played a major role in facilitating the “back-channel” talks between Iran and the USA which preceded the P5+1 talks[16]. It was also significant that Oman refused to support moves to upgrade the GCC to a military alliance at the GCC meeting in Bahrain in December 2013, fearing that such an alliance would be focused primarily against Iran and thus harm Oman’s relations with Tehran[17]. Oman also expects a thaw in international relations with Iran to boost its exports, both to Iran and onwards into the wider central Asian markets, as well as opening up a supply of natural gas from Iran which it needs to fuel its domestic manufacturing industry[18]. Oman is likely to be the strongest regional supporter of the UK opening up relations with Iran, and may prove to be an extremely useful ally in the region to act as interlocutor both with Iran and with the GCC nations.

6.              Elsewhere regionally, Iran and Pakistan have been seeking closer trade ties, with a recently agreed deal for Iran to supply power to Pakistan from a newly constructed power station in Iran to Quetta via a new transmission line[19]. Discussions are also ongoing over a proposed gas pipeline from Iran to Pakistan[20]. Additionally, Russia and Iran are currently said to be negotiating a trade deal under which Russia would purchase up to half a million barrels of Iranian oil per day in return for Russian equipment and goods[21]. The deal, worth around $1.5Bn per month, could undermine the existing sanctions against Iran, ease pressure on Tehran to comply with an interim nuclear agreement and put Russia in conflict with UN Security Council Resolutions.

Recommendations for Consideration

7.              UKTI should be tasked with establishing a framework for future trade opportunities with Iran.

8.              The UK Government should pursue a twin-track foreign policy in the region, balancing the maintenance of strong relations with our GCC partners (including Oman) whilst strengthening relations with India, Turkey and Oman as conduits for improved trade and diplomatic relations with Iran.

9.              The Committee should consider inviting Lord Lamont (President of the British Iranian Chamber of Commerce) to give evidence on UK trade opportunities with Iran.

January 2014