Introduction
Many Eurasian countries have emerged as important regional actors over the past few decades—not only due to their political influence but also due to their status top trading partners, energy suppliers, or large neighbouring markets for the European and Asian producers. Global trade patterns have changed tremendously for several reasons. First, developing countries’ share in world total exports grew due to changes in patterns of specialisation across the world. Second, global value chains allow developing countries to adopt new technologies and to increase their production capacity, thus increasing competition in high value-added activities where European industries have previously had a comparative advantage. Writing conclusions on a future EU industrial policy strategy, the Council of the EU highlighted importance of “a holistic industrial policy approach based on integrated value chains, inter-clustering linkages and activities,” which should include “sectorial initiatives for sectors facing economic change and high growth potential sectors” (Council of the EU 2017). In this rapidly changing context, it is important to understand the external economic factors that affect competitiveness, outreach, and outreach of the European member economies. Finally, the new levels of economic integration—through various forms of trade agreements, regional associations, economic and customs unions, and international investment projects—mean that the reality of Trans-Europe creates much tighter links among the countries than their national policies and domestic economies are ready to handle. Extensive and often unpredictable economic spillovers in this space rapidly change the whole landscape, so that economic situation in one country affects many others, including changing partners in trade and investment flows, sanctions imposition, volatility of national currencies, and financial policies. This chapter looks at some of the economic challenges that the Trans-European countries are facing, including their domestic development and the patterns of their trade with major economic partners, such as the EU, Russia, and China.
Middle East: Iran, Saudi Arabia, and Turkey
In 2016–2017, Iran attempted to regain its status as a regional leader using partially its geostrategic position between the West and the East. The lifting of international sanctions as a result of nuclear deal was met with universal praise and great expectations, but the real business environment and investment opportunities in Iran did not live (yet) to the hype. The gap between the expected and the real economic outcomes not only fuels political tensions between the Iranian government and the opposition but also undermines the hegemon role of Iran vis-à-vis other countries of the Middle East.1
The EU was the top trading partner for Iran before the sanctions imposition (22 per cent of total Iran’s trade in goods in 2009), but its share in Iran’s total goods trade fell down to 5 per cent in 2013–2015. The United Arab Emirates (23 per cent of total trade in 2015), China (22 per cent), and Turkey (6 per cent) became the main trading partners for Iran during the period of Western sanctions (see Table 1). After the adoption of the JCPOA, the EU lifted its bans on Iranian oil and gas imports and trade in other sectors. EU imports from Iran grew in 3.5 times in 2016 compared to 2015, propelled by the 15-fold growth in fuel trade—the EU was still interested mainly in Iranian oil, which made up 77 per cent of total exports (European Commission Directorate-General for Trade 2018).
Table 1
Middle East trade flows with the European Union and China, million Euro
Country | EU | China | ||||
|---|---|---|---|---|---|---|
2009 | 2010 | 2016 | 2009 | 2010 | 2016 | |
Iran | 11,558 | 11,816 | 8,920 | 5,685 | 7,801 | 17,227 |
Share in the country’s total trade, per cent | 12.2 | 9.5 | 7.8 | 6.0 | 6.3 | 15.1 |
Saudi Arabia | 21,198 | 24,153 | 31,413 | 9,344 | 12,005 | 20,761 |
Share in the country’s total trade, per cent | 10.4 | 9.1 | 10.3 | 4.6 | 4.5 | 6.8 |
Turkey | 75,044 | 95,160 | 131,785 | 10,237 | 14,647 | 25,091 |
Share in the country’s total trade, per cent | 43.1 | 42.2 | 42.8 | 5.9 | 6.5 | 8.1 |
Experts claim that an increase in production and export of petrochemicals is the major positive consequence of the Iranian deal. The International Energy Agency has estimated that Iran could expand its crude oil production by 400,000 barrels per day to 4.15 million barrels per day by 2022 (Upadhyay 2017). According to official sources, Iran produces around 45 million tons a year—at roughly 80 per cent of its total production capacity. Such a dramatic increase highlights that oil export is still an important part of government revenues and a stimulus for further investment into the petrochemical industry. But more important is the fact that Iran’s economy is one of the most diverse in the Middle East—partly because the sanctions have forced it to diversify in order to survive. The Iranian economy is no longer dominated by oil and gas (oil export accounts for only 12 per cent of GDP), although there are still many issues that need to be solved before the non-oil sectors would become major parts of Iranian trade flows—including improvements to Iran’s export competitiveness, finding ways to attract foreign direct investments, and reducing barriers to trade (International Monetary Fund 2018).
Unsurprisingly, therefore, positive developments for the oil production sector did not mean the overall revival of the Iranian economy. In particular, Iranian financial and banking sector keeps suffering from both structural reasons, such as state dominance and ineffective regulations, and international pressure, such as the remaining sanctions. In order to achieve both stable domestic development and stable economic deals with its neighbours, Iran still has to implement major reforms in business practices, reduce red tape, and moderate the burden of its current regulations. The Economist Intelligence Unit forecasted Iranian economic growth at an average rate of 5.5 per cent annually in 2017–2021 (EIU 2017). Yet, to achieve this growth, the Iranian economy will require a massive inflow of foreign direct investment (with official estimates varying from 77 billion to 200 billion US dollars only for the petrochemical sector). Recognising that, the Iranian government seeks to close several major deals with European, Russian, and Chinese companies. Newly signed deals with multinational companies after the sanctions were lifted included contracts with Boeing (20 billion US dollars), Airbus (25 billion pounds), and Total (4.8 billion US dollars) (Peel et al. 2017). Some of those deals, however, may or may not live up to their full economic potential for Iran if political tensions are not fully resolved and if regulatory reforms are not implemented.
A major actor, challenging Iran’s role in the region and affecting its foreign policy, is Saudi Arabia. The relationships between the two countries remain tense, despite attempts to restore strategic dialogue from both sides. One such recent attempt was an OPEC deal in December 2016, when Saudi Arabia as the OPEC’s biggest producer agreed to reduce its oil production, allowing Iran to intensify oil exports to the pre-sanction levels. Yet, numerous regional and global factors prevent Saudi Arabia and Iran from alleviating some of the tensions: Saudi Arabia is particularly concerned about the influence of Iran in the Middle East, as well as about its involvement in the Syrian conflict and contacts with Russia.
Saudi Arabia itself faces several domestic economic challenges. The above-mentioned OPEC deal to temporarily res...