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POLICY BRIEF

March 2, 2016

Indonesia and Iran: Strengthening Ties in Hard Times

By Ceilla Ayu Putri Hasri

Background

Diplomatic relations between Indonesia and Iran officially began in 1951. As two of the most populous Islamic countries, Indonesia and Iran have been enjoying high-level political relations. They have been important trading partners for each other especially in energy and infrastructure sectors. Iran put Indonesia as top priority trading partner in the name of Islamic unity and brotherhood. However, the sanctions on Iran in 2012 made bilateral trade with Indonesia difficult. The value of trade between Indonesia and Iran in the past three years experienced a sharp correction from USD 1.856 billion in 2011 to USD 448 million in 2014. i The sanctions against Iran are set to be lifted as early as spring 2016, and the co-operation between Indonesia and Iran can continue and grow. The deal to enhance relations between two countries had been agreed by Indonesia’s president Joko Widodo and Iran’s president Hassan Rouhani at the Asia-Africa Conference in April 2015. This optimist visions are then challenged by the geopolitics situation in Middle East. A number of countries led by Saudi Arabia have joined diplomatic action against Iran in January 2016 after the Saudi embassy in Tehran was attacked over the execution of a Shia Muslim cleric. ii Those countries include Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman that are also Indonesia’s vital trading partners. Responding to this, Indonesia remains neutral and attempts to mediate the conflict. However, there are pressures in order Indonesia to sever diplomatic relations from particular side. In this respect, this study aims to analyze bilateral relations between Indonesia and Iran and thus considers the relations to be strengthened.

Benefits of Strengthening Diplomatic Relations

There are at least two benefits Indonesia can attain from strengthening diplomatic relations with Iran.

1. Iran is ready to offer huge untapped potentials once the last major frontier market is

opening up to the outside world. Analysts predict that Iran will potentially be the "Germany of the Middle East” Its Officials are ready

to increase oil production immediately by about 500,000 barrels per day. They also plan to make access to up to $150 billion of frozen assets for rebuilding economy. Iran has 7% of the world's mineral reserves, valued conservatively at about $750 billion. Zinc, copper, iron ore, uranium and lead top the list. The country is the second biggest player in Middle East region after Saudi Arabia with 157 billion barrels of oil or 9% of the world's proven reserves. It is also noted that World Bank and the Institute of International Finance believe Iran's economy can grow by 6% or more for years now sanctions are lifted. iii

2. Iran promises to build infrastructure sectors in Indonesia

The head of Iran's presidential office, Mohammad Nahavandian, stated in February 2014 that expanding ties with Islamic countries was a top priority in the country's foreign policy, adding that Indonesia, as a major economic player in the Islamic world, had special status in Iran's foreign relations. iv The ties will later be focused on oil and gas as well as infrastructure sectors. It is parallel with the opportunities Indonesia possessed in oil, gas, and petrochemical industries. Iran claims to have the expertise and the technical ability to complete development projects with competitive prices. Iranian companies have experience in construction and are eager to join the

POLICY BRIEF

March 2, 2016

Indonesian government’s massive infrastructure expansion plan. Iran also supports Indonesia to achieve energy security by exporting oil and gas to the country, in addition to importing from Indonesia. v

Recommendations for Indonesian Policymakers

Based on the two advantages above, the study further provides three recommendations for Indonesia policymakers.

First, Indonesia must maintain the commitment in diplomatic relation with Iran. Cutting economic ties means reneging on commitments. Indonesia under President Yudhoyono had made strong commitments to establish good economic relations with Iran. Spoil the relations in the new government will result in distrust issue that will ruin Indonesian images and credibility. On the contrary, keeping a commitment by establishing a good relationship can attract other countries to join Iran investment in Indonesia. Trust issue is important since foreign direct investment is vulnerable to expropriation, and multinational corporations, on the other side, seek credible commitments from leaders to try and ensure that their investments will not be threatened.

Second, Indonesia must expand the economic cooperation and take advantage on Iranian sanctions’ lifting. Indonesia must establish a serious cooperation in various economic fields not only oil and gas or infrastructure but also investment, trade, research, agriculture, tourism and sports. Indonesia also needs to utilize Iran expertise and the technical ability. Indonesia's development planning under President Joko Widodo basically focuses on infrastructural projects. In the next five years, Indonesia needs 35,000 megawatts of electricity. Besides that, Indonesia has plans to build freeways in other islands of the country as well as construction of one million small houses for the low-income people. Thus, Iranian sanctions’ lifting can be seen as the opportunity for Indonesia to fulfill the development plans as well as energy sectors.

Third, Indonesia should remain neutral and mediate the Saudi-Iran conflicts. Neutrality is the only way for Indonesia to take advantage on potentials in two countries at once. Indonesia’s economic interests in Saudi are as huge as in Iran. Besides economy, Indonesia needs a good relation to Saudi regarding the implementation of the Hajj. Nevertheless, as the leader of the world's biggest Muslim country, Indonesia has the responsibility to ease relations between Saudi Arabia and Iran. Stability and peace in Middle East region is important for Indonesia since it will affect economy and security globally.

i Ministry of Foreign Affairs Republic of Indonesia, “Iran Trade Promotion Organization: Kami menjadikan Indonesia

ii BBC, “Saudi Arabia's allies Bahrain, Sudan and UAE act against Iran,” January 4, 2016 in http://www.bbc.com/news/world-middle-east-35222365 accessed March 1, 2016. iii John Defterios, “Iran emerges from the shadows with huge untapped potential,” CNN Money, January 18, 2016 in http://money.cnn.com/2016/01/18/news/economy/iran-sanctions-economy-opportunity/ accessed March 1, 2016.

iv The Jakarta Post, “Iran wants to expand ties with Indonesia,” February 4, 2014 in http://www.thejakartapost.com/news/2014/02/04/iran-wants-expand-ties-with- indonesia.html accessed March 1, 2016.

v Based on the interview with Valiollah Mohammadi Nasrabadii, Iranian ambassador to Indonesia Embassy of Iran, January 4, 2016 in http://www.theoilandgasyear.com/interviews/trade-between-iran-and-indonesia/ accessed March 2,

2016