Iran Nuclear Deal: Tehran Looks to Mitigate Effects of US Withdrawal

Image by Yeowatzup

The withdrawal of the Trump Administration from the Iran nuclear deal was a long time coming. Concluded in 2015 after months of negotiations between Iran and the P5+1 countries (United States, France, United Kingdom, Russia, China and Germany), the agreement seemingly provided a win-win outcome both in terms of the international community’s desire to rein in Iran’s nuclear ambitions, and to address Tehran’s economic growth needs. Apart from driving a wedge between the United States and the international community, the possible collapse of the JCPOA (the official name of the Iran nuclear deal) also threatens Iran’s fragile economic situation. Iran’s economy has deteriorated since the beginning of last year, with Trump’s rhetoric greatly exacerbating the situation. Here, I look at some of the possible consequences for the Iranian economy now that the United States has announced its withdrawal from the JCPOA.

Iran’s ability to secure foreign investment was one of the main challenges addressed in the nuclear deal. The easing of sanctions which followed the deal sparked renewed interest from multinational companies wishing to invest in Iran, boosting FDI. Iran’s trade minister, Mohammad Shariatmadari, recently announced that Iran had attracted the equivalent of $9.7 billion in investment agreements during the post-JCPOA period. However, the Iranian financial sector has not benefited that much from the deal, and the agreement’s collapse would likely make matters even worse. The possibility that the US may penalise banks that continue to deal with Iran may further frustrate Tehran’s ability to access international finance and revive its financial sector.

There is no doubt that the Iranian energy sector benefits the most from the nuclear deal. Ali Kardor, managing director of the National Iranian Oil Company, said that under the current deal these projections represent a doubling of output compared to Iran’s pre-JCPOA performance and would be difficult for Tehran to achieve if sanctions were to be reinstated.

Despite these risks, Iran’s energy sector may be more resilient to US pressure than it might first appear. As most of Iran’s oil exports go to Asia, including India, China and South Korea, for a US oil embargo to pose any serious threat to the Iranian energy sector a ban on Iranian oil tankers’ insurance would have to follow. Alex Beard, head of Glencore’s oil operations, agrees that the Iranian energy sector is not dependent on US-Iranian relations: “I don’t think the Europeans will go with him [Trump], so probably the impact will be limited.” Statements so far from European capitals indicate that Germany, France, and Britain hope to preserve the agreement. However, with European companies signaling their anxiety about continuing to invest in Iran under the threat of US sanctions, Iran may decide that the deal is no longer in its interests.

Although the Iranian economic crisis is not as severe as it was before the nuclear deal, banks are paralyzed by an increase in bad debt and data from the Central Bank of Iran shows that the rate of unemployment during the third quarter of 2017-2018 increased to 25% for those of working age above 15 years and to 28.4% for those aged between 15 and 29 years. In addition, this demonstrates that Hassan Rouhani, who was first elected in 2013, has proved unable to address rising unemployment throughout the country. The imposition of new sanctions could further increase food prices, as well as increase the already enormous wage gapThe most recent economic data put the income share held by the wealthiest ten percent of the population at 29.8% and that held by the poorest ten percent at 2.4 %. The same data puts Iran’s GINI index, which represents the gap between social classes, at 38.8, indicating a particularly sharp divide between socioeconomic classes

The picture is not entirely bleak, however. Over the past few years Iran has rekindled alliances that could be crucial to the country’s ability to deal with the repercussions of the US withdrawal from the JSPOA. Before the nuclear deal, Tehran’s Chinese and Russian alliances were vital to economic productivity. More recently, it seems Iran’s alliances with Turkey and Qatar could provide an equally useful safety net for its economy if the nuclear agreement were to collapse entirely. Turkish-Iranian relations have become increasingly strong in recent years and it seems that this relationship will continue to grow, especially after Turkish President Tayyip Erdogan’s visit to Tehran at the end of 2017.

Furthermore, the recent Gulf crisis has provided Tehran with a golden opportunity to strengthen its beneficial trading relationship with Qatar. Due to the breakdown in its relationship with Saudi Arabia as a result of the crisis Qatar lost its Saudi–and only–land border, and through which most of its food imports are transported. Since cargo destined for Qatar can no longer be shipped through ports in the UAE, trade routes through Iran have become Doha’s best option. Mohammad Lahouti, head of Iran’s Export Confederation, expressed his belief that Qatar will also become an alternative market for a variety of Iranian exports, making this relationship crucial if Iran is to minimize the impact of President Trump’s decision to pull the plug on US involvement in the JCPOA.

The withdrawal of the United States from the nuclear deal and the reinstatement of sanctions threatens the improved but uncertain economic growth that Iran has enjoyed in recent years. The Iranian economy remains subject to potential shocks linked to both internal imbalances and to the country’s high exposure to persistent geopolitical tensions with its Arab neighbors and with Western powers. In a recent note, Iranian economist Djavad Salehi-Isfahani warned that President Rouhani’s efforts to be economically open could be interrupted and give way to an economy of resistance tightly controlled by authorities. The extreme measures taken in recent weeks, including rationing and exchange control, as well as limitation of certain imports all point in that direction.

Image courtesy of yeowatzup (own work). [CC BY-SA 4.0 via Flickr]

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About Sarra Ben Salem

Sarra holds a BSc in Economics and a first-class MSc in investment analysis from the University of Stirling, United Kingdom. She is currently employed at the ministry of investment development and international cooperation, Tunisia where she is working on developing new investment approaches to create economic and social change.

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