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The Cost of Business with Iran: Weighing the Risks and Rewards By Kashif Mirza


Apr 26, 2024

The writer is an

economist, anchor,

analyst and the

President of All

 Pakistan Private

Schools’ Federation



The recent state visit of Iranian President Ebrahim Raisi to Pakistan has sparked renewed interest in the economic ties between the two nations. As the United States warns Pakistan of potential sanctions risks for doing business with Iran, it is essential to analyze the cost of business with Iran and the far-reaching positive impact of this state visit. Iran’s President Ebrahim Raisi visited Pakistan as the neighbours seek to mend ties after tit-for-tat military strikes this year. President Raisi and Pakistan’s Prime Minister Shehbaz Sharif vowed to boost trade between the neighbouring nations to $10 billion a year. Meeting with army chief in a meeting President Raisi discussed regional stability and border security with Chief of Army Staff Gen Asim Munir. According to an ISPR statement, both sides concurred on the necessity to bolster bilateral cooperation while jointly striving for regional stability and economic prosperity. Gen Munir emphasized the need to improve coordination along the border to prevent terrorists from jeopardizing the longstanding relations between the two neighboring countries, ISPR said. The first Iranian president to visit the South Asian country in eight years, Raisi concluded his three-day trip as the neighbouring countries said they would increase bilateral trade to $10bn a year over the next five years, from the current $2b. Pakistan’s foreign office said the two sides additionally agreed to cooperate in the energy sector including trade in electricity, power transmission lines and the Iran-Pakistan gas pipeline project. The gas pipeline project has languished for more than a decade because of political turmoil and international sanctions. The pipeline was to stretch more than 1,900km (1,180 miles) from Iran’s South Pars gas field to Pakistan to meet Pakistan’s rising energy needs. Iran said it has already invested $2bn to construct the pipeline on its side of the border, making it ready to export. A $7.5 billion Iran-Pakistan gas pipeline intended to feed Pakistani power plants was inaugurated with great fanfare in March 2013. However, the project immediately stagnated following international sanctions on Iran. Tehran has built its own section of the 1,800-kilometre pipeline, which should eventually link its South Pars gas fields to Nawabshah. In February, the outgoing caretaker government in Pakistan approved the construction of an 80km section of the pipeline, primarily to avoid the payment of billions of dollars in penalties to Iran due to years of delays. However, the project is yet to take off from the Pakistani side due to fears of US sanctions. Pakistan indicated last month that it will try and seek a waiver from the US to construct the pipeline on its territory. The US and the United Kingdom this month imposed a new round of sanctions on Iran after its counter attack on Israel, but the punitive measures were limited in scope and there have been questions over how effective the sanctions regime has been overall. Islamabad is cognisant of these constraints and both sides have been exploring ‘out-of-the-box’ solutions for expanding bilateral trade through barter system and border markets with the involvement of local chambers of commerce. The United States threats of sanctions are merely meant to dissuade Pakistan and increase the cost of doing business with Iran. Any expansion of formal trade and banking activity between the two nations will be slow, as Pakistani banks are reluctant to do direct business with Iranian banks. A wide-ranging list of business-related activities with Iran can trigger US sanctions, and the regulations also bar business dealings with Iranian financial institutions. Pakistan and Iran signed eight accords on varying subjects to enhance cooperation in the different fields including trade, science technology, agriculture, health, culture, and judicial matters. The two sides will have a wide-ranging agenda to further strengthen Pakistan-Iran ties and enhance cooperation in diverse fields including trade, connectivity, energy, agriculture, and people-to-people contacts. The visit came as the two countries try to repair their frayed relationship following heightened tensions in January when Iran launched attacks on Pakistani territory on what it said were bases of armed group Jaish al-Adl. In less than 48 hours, the Pakistani military carried out strikes in Iran on what it said were hideouts used by terrorist organisations.

Tehran and Islamabad agreed to expeditiously finalise a Free Trade Agreement (FTA), a joint statement said as Iranian President Ebrahim Raisi concluded his three-day official visit to Pakistan. Both the countries agreed to cooperate in developing joint approaches to confront common challenges including the threat of terrorism. Pakistan and Iran have had a history of rocky relations despite a number of commercial pacts, with Islamabad being historically closer to Saudi Arabia and the United States. Despite facing possible contract breach penalties running into the billions of dollars, Islamabad recently gave the go-ahead for construction of an 80-km (50-mile) stretch of the pipeline. Both neighbours also agreed to enhance mutual interaction through regular exchange of high-level visits. Pakistan and Iran also agreed to facilitate a regular exchange of economic and technical experts, as well as delegations from Chambers of Commerce from both countries to intensify economic cooperation. The declaration of the Reemdan border point as an international border crossing point under the TIR Convention and the opening of the remaining two border sustenance markets was also agreed upon. Both the countries affirmed their commitment to transform their common border from ‘border of peace’ to a ‘border of prosperity’ through joint development-oriented economic projects, including setting up of joint border markets, economic free zones, and new border openings. They also reiterated the importance of cooperation in the energy domain, including trade in electricity, power transmission lines and Iran-Pakistan Gas Pipeline Project, recalling their aim to increase bilateral tradevolume to $10 billion dollars over the next five years. There was consensus to fully operationalise barter trade mechanisms between the two sides to facilitate economic and commercial activity. Iran and Pakistan expressed satisfaction at the close and cooperative relations between the two countries in all mechanisms of the Shanghai Cooperation Organisation (SCO), underscoring the importance of early resumption of the activities of the SCO-Afghanistan Contact Group. The two sides also called for active cooperation among the regional countries within the framework of the Economic Cooperation Organisation (ECO). Iran and Pakistan also agreed on a number of steps aimed at combating terrorism. Tehran has played down the apparent Israeli attack and indicated it had no plans for retaliation, a response that appeared gauged towards keeping the conflict in Gaza from expan­ding to a regionwide conflict. Pakistan has called on all parties in the Middle East to exercise utmost restraint and move towards de-escalation. Recognising that terrorism posed a common threat to regional peace and stability and presented a major impediment to the development of the region, the neighbours agreed to adopt a collaborative approach to confront this menace while fully upholding the principles of the UN Charter. Both sides reaffirmed their commitment to the development of Afghanistan as a peaceful, united, sovereign and independent state, free from the threats of terrorism and drug trafficking, the two countries reaffirmed their willingness to enhance cooperation on counter-terrorism and security and to develop a united front against terrorism. Noting the relevance of coordinating regional and international efforts to ensure security and stability in the region, Pakistan and Iran recognised that increasing participation of all strata of Afghans in basic decision-making will lead to the strengthening of peace and stability in this country. Both the sides stressed the importance of peaceful settlement of disputes through dialogue and diplomacy. Iran and Pakistan also condemned rising incidents of Islamophobia, desecration of the Holy Quran and sacred symbols in some countries. They welcomed the adoption of the United Nations General Assembly resolution titled “Measures to Combat Islamophobia”. On the Gaza conflict, Pakistan and Iran expressed their strong and unequivocal condemnation of the ongoing Israeli regime’s aggression and atrocities against the Palestinian people. They called for an immediate and unconditional ceasefire in Gaza, as well as ensuring accountability of the crimes being committed by the Israeli regime. The two sides strongly condemned the attack on the consular section of the Iranian Embassy in Syria’s Damascus, calling it a violation of international law and the UN Charter. Recognising that the irresponsible act of the Israeli regime forces was a major escalation in an already volatile region, both sides called on the UN Security Council to prevent Israeli regime from its adventurism in the region and its illegal acts attacking its neighbours and targeting foreign diplomatic facilities. Both neighbours also highlighted the need to resolve the issue of India-occupied Kashmir through dialogue and peaceful means based on the will of the people of that region and in accordance with international law.

While there are potential sanctions risks, the economic benefits of engaging with Iran cannot be ignored. Pakistan’s economic interests and regional dynamics necessitate a pragmatic approach, balancing the need for economic cooperation with the need to comply with international regulations.

There is much talk in Pakistan’s power corridors, business community, and political circles about rearranging national security and geopolitical priorities. The buzzword in new conversations is geo-economics, which also lays the foundation of the China-Pakistan Economic Corridor (CPEC). Pakistan’s trade is the lowest in the region compared to other countries and this is not lost on those who wish to revive the economy running on borrowed time from the International Monetary Fund. While Pakistan is attempting to enhance China’s investment in big-ticket infrastructure projects with a longer view of geopolitics and geoeconomics, and now apparently with Iran, it may not withstand the pressures from its conventional allies. Pakistan’s export markets, sources of loans and economic assistance, and most remarkably, the remittances that contribute more than its total export of commodities and services may not be happy if the ambitious agenda of the economic and security cooperation between Iran and Pakistan outlined in the joint communique is implemented. One of the significant benefits of doing business with Iran is access to its vast energy resources. Pakistan has been struggling with energy shortages, and Iran’s natural gas and oil reserves can help bridge this gap. The Iran-Pakistan gas pipeline project, though delayed, has the potential to meet Pakistan’s growing energy demands. Moreover, Iran’s energy resources can also help Pakistan reduce its reliance on costly imported fuels, thereby saving precious foreign exchange. Another advantage of economic engagement with Iran is the potential for regional integration. Pakistan and Iran are both members of the Economic Cooperation Organization (ECO), which aims to promote economic cooperation and integration among member states. Strengthening economic ties with Iran can help Pakistan tap into the larger regional market, increasing its trade and investment opportunities. During the visit, the State Department sent an open warning, alerting Pakistan about possible sanctions if it went ahead with forging deeper cooperation with Iran. Pakistan may not be going ahead until the broader context of geopolitics in the region changes, particularly the softening or lifting of the sanctions against Iran. Pakistan’s domestic, regional, and international challenges represent a difficult juggling act of balancing too many conflictive interests, pressures, and plans to sail through smoothly in the rough seas of regional geopolitics. Raisi’s visit to Pakistan has laid the groundwork for enhanced cooperation and economic ties between the two nations. As they navigate common challenges and opportunities, the collaboration between Pakistan and Iran is poised to yield significant benefits on economic, political, and diplomatic fronts in the days to come. His visit will have far reaching positive impact on entire region and contribute toward development and prosperity of whole region. Yet, the implied threat of US sanctions comes at a challenging time for Pakistan, which is mired in economic woes and is seeking financial help from its allies, including the US. Pakistan cannot afford to get caught in the middle of a conflict between the US and Iran. Despite the US warnings, Pakistan has shown resilience in maintaining its economic ties with Iran. The recent state visit of President Raisi has further strengthened the bond between the two nations, with agreements signed in various sectors, including energy, trade, and infrastructure development. This cooperation has the potential to boost Pakistan’s economy, create jobs, and enhance energy security. The US wants to contain Iran and the tools it has are sanctions. To mitigate these risks, Pakistan must adopt a cautious approach. It is essential to ensure that any economic engagement with Iran complies with international sanctions and regulations. Pakistan must also diversify its trade and investment partners to minimize dependence on any one country. The cost of business with Iran is a complex issue, with both risks and rewards. While there are potential sanctions risks, the economic benefits of engaging with Iran cannot be ignored. Pakistan’s economic interests and regional dynamics necessitate a pragmatic approach, balancing the need for economic cooperation with the need to comply with international regulations. The recent state visit of President Raisi has set a positive tone for Pakistan-Iran relations, and it is now up to both nations to translate this goodwill into tangible economic gains. Now, Pakistan must identify what’s best for its national interest if it is to successfully juggle its relationships with Iran and the US and maintain engagement with both, but it should focus on expanding trade and energy cooperation with Iran. The future of the Pakistan-Iran relationship depends on Pakistan’s ability to use its limited leverage.

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