As sanctions impede business, where next for Iran-Italy relations?

Bourse and Bazaar | Giacomo Bogo: Iran-Italy relations, which date back to the time of the Roman and Persian empires, are marked by important affinities. Historical and cultural traditions as well as commercial and economic connections have deeply shaped mutual perceptions. Unlike the other major EU countries, Italy is not seen as a former colonial power still trying to “dominate” relations with Iran, but rather is appreciated as a partner willing to expand tied based on mutual respect.

The legacy of Iran-Italy commercial ties begins in earnest with Enrico Mattei and Italian state oil company ENI. Mattei’s excellent leadership in the 1950s and 1960s strengthened Iran-Italy ties through energy cooperation. Mattei’s approach still influences the way most Italian companies engage their Iranian counterparts—with great respect and consideration. Iranian companies are inclined to deal with Italian companies because they talk a similar business language.

Back in 2003, the positive perception of Italy among European nations led Iran to insist that Italy join the European group pursuing the first nuclear talks. Despite the fact that the Italian government did not participate so as not to strain relations with the US already stressed by disagreements over the Iraq war, Iran’s point of view did not change. Rouhani’s choice of Rome as the first European capital to visit following the implementation of the JCPOA nuclear deal is indicative. More recently, Italy was asked by the E3 nations of France, Germany, and the United Kingdom to become a member of the new E4 group driving negotiations with Iran on Yemen.

Despite these strong relations, President Trump’s withdrawal from the JCPOA and his reimposition of economic sanctions, has introduced significant challenges for Italian enterprises. As with other European companies, Italian firms are unwilling to jeopardize their presence in the US market for the sake of opportunities in Iran.

While some firms have opted to remain—shipbuilder Fincantieri, railways company Ferrovie Dello Stato, and power giant Ansaldo among them—other companies have announced their activities are on pause. Italian oil giant has stated “We have no presence in the country” and Gruppo Ventura affirmed, “We were expecting to expand to Iran, build rails there. We are no longer going to proceed.” The state-owned vehicle intended to finance Italian projects in Iran, Invitalia, announced “the “project is on pause” and that the company is “waiting for the situation between the United States, Europe and Iran to be clarified.” One estimate suggests US sanctions have impacted EUR 30 billion of planned Iran-Italy trade and investment.

The US government’s decision to grant an oil waiver to Italy will probably mean little. There is no indication that Italy intends to use the waiver. In any case, major banks in Italy are still reluctant to facilitate trade.

Yet, Italy and Europe have every interest to see that Iran continues to be an important trading partner and a supplier of energy. Iran can be a source of stability in the region if positive commercial ties, help dissuade expansionist tendencies.  In order to maintain trade relations with Tehran despite US sanctions, different proposals emerged, including using Russia and other third countries as a trade intermediary as well as joining the special purpose vehicle (SPV) being developed by France, Germany, and the UK.  This is undoubtedly a very delicate set of challenges, as they involve the Italian government and its international alliances.

Italy is a particularly important partner for the development of Iran’s industry and infrastructure. Italy delivers high quality manufacturing technology and infrastructural works. The “made in Italy” concept has burnished the value of Italian exports. Italy exported over EUR 1 billion in machinery and transportation equipment to Iran in 2017.

However, given the current political situation, many commercial relationships with Iran have come to a momentary halt. The entrepreneurs and consultants I have interviewed have confirmed that at least since February 2018 commercial ties with Iran have weakened—banks lack the willingness to support exporters. Furthermore, the deterioration of Iran’s economy, including high inflation, points to insecurity in the investment environment. Tecon, a manufacturer of equipment for the footwear and leather goods industry, is but one example; due to the devaluation of the Rial, their products have become too expensive for Iranian buyers.

Today, the question is how Italy-Iran relations will develop. The Tehran-Rome axis remains mutually beneficial: to Italy for its important exports flow, to Iran for the economic and political advantage of being a partner of a Western country that can act as a mediator. This was clear during Iranian foreign minister Javad Zarif’s contribution during the Mediterranean Dialogues conference sponsored by the Italian Ministry of Foreign Affairs.

Hope for the future lies in the two populations’ intrinsic will to continue their mutual relations despite today’s uncertain and confusing scenario of international relations.