Previous Quarterly Editions
Expropriation Risk: 60 64 66 70 Political Violence Risk: 44 46 48 48 Terrorism Risk: 52 54 54 54 Exchange Transfer and Trade Sanction Risk: 76 82 84 85 Sovereign Default Risk: 74 74 76 76
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Although the risk of military conflict has risen significantly in recent months, the country’s dire economic situation remains the main concern for most Iranians as they struggle with inflation, shortages, and rising unemployment. In June, the World Bank downgraded its forecast for 2019 to a contraction of 4.5% rather than 3.8% and put annual inflation at 37%, although price increases for some staples appear to be running much higher. Iran’s oil exports have dropped significantly since May, when Washington ended the waivers that had allowed several key countries to continue buying Iranian oil without facing US sanctions. Iran abided by the terms of the Joint Comprehensive Plan of Action (JCPOA) for a year after the Trump administration pulled out of the deal, but, since May, it has begun to increase pressure on JCPOA partners Europe and China to take greater steps to allow Iran to trade. In July, Tehran announced that it has started enriching uranium at 4.5%, which is above the cap allowed under the JCPOA, and warned that similar moves are likely without more support from JCPOA partner countries. When several ships in the Gulf of Oman were damaged in apparent acts of sabotage in May and June, Washington was quick to blame Iran. In July, Iran seized the British-flagged Stena Impero as it passed through the Strait of Hormuz, apparently in response to the British detention of an Iranian tanker near Gibraltar earlier in the month on suspicion of breaking sanctions against Syria. Iranian forces also briefly detained another ship in July and seized a foreign tanker, reportedly an Iraqi ship, in August. These actions have raised fears of a direct military confrontation, either due to intentional actions by hawkish officials in Washington and Tehran or as the result of an unintended escalation of events. When Iran shot down a large US military drone in June, claiming it violated Iranian airspace, statements from President Trump and media reports suggested that US forces were very close to a significant retaliatory strike against Iranian territory before the action was called off. A strike of that nature would have left Tehran with little choice but to respond. The fundamental drivers of bilateral tension have not changed, even with John Bolton’s departure as national security adviser. The Trump administration appears determined to continue its ‘maximum pressure’ campaign against Iran unless Iran makes major concessions that go far beyond the JCPOA’s terms, while also hoping to provoke Tehran into taking actions that will make the JCPOA meaningless. In July, Foreign Minister Javad Zarif indicated that Iran would accept intrusive international nuclear inspections in exchange for the lifting of US sanctions, and subsequently made an appearance at the G7 summit, but the US position remains unchanged.
Reports that several ships in the area around the Gulf of Oman had been ‘sabotaged’ were followed by Iran’s seizure of three commercial ships in July and August. These incidents highlighted a new level of risk to tangible assets engaged in shipping through the Persian Gulf and the Strait of Hormuz, increasing the likelihood that further Iranian moves may trigger retaliatory action. In August, the increase in risk prompted the United Kingdom to cooperate with the United States in joint efforts to protect shipping in the region. There will little impact within Iran, however, as most companies affected by sanctions have now left the country. The reluctant withdrawal by Total, one of the last to leave, from its investment in the crucial South Pars gas field is a significant blow to the development of Iran’s oil and gas sector. As a result, Tehran is likely to become increasingly reliant on China for investment and assistance in this area. Meanwhile, there is renewed political emphasis on the ‘resistance economy’ approach and the need to reduce reliance on global trade and business.
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Rising frustration at economic conditions and continuing corruption continue to trigger demonstrations across the country. Most are non-violent and are tolerated by the government as something of a safety valve. However, Tehran is aware of the need to understand when the venting of frustration crosses over into opposition to the regime, on which it continues to crack down harshly.
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The risk of a rise in Sunni extremist terrorism inside Iran was underlined by the suicide attack on a south-east border post in February that killed 27 Revolutionary Guards. The border area with Pakistan in Iran’s Sistan-Baluchistan province has been the main focus of such attacks. In April, Iran and Pakistan discussed creating a joint border force to combat terrorism, and Pakistan is reportedly extending a fence along the border. Low-scale incidents also occur along Iran’s border with the Kurdistan Region of Iraq. However, terrorist attacks in Tehran and most other parts of Iran remain rare. The 2017 attack by the Islamic State group was the first significant terrorist incident in the capital for years and has not been repeated.
Washington followed the ending of waivers to the oil sales ban with new sanctions against industrial metals exports in May and the country’s largest petrochemical group in June. It also increased the number of individuals targeted by sanctions, adding Foreign Minister Javad Zarif in July. The European response to US sanctions, the long awaited INSTEX effort led by France, Germany and the UK that enables Iran to purchase food and medicine from Europe, became operational in June but its limited nature is unlikely to be sufficient to keep Iran in the JCPOA. In July, central bank head Abdolnaser Hemmati said that the rial had stabilised thanks to measures the bank had put in place, but in August plans for a unified foreign currency exchange market were again postponed.
Iran continues to grapple with a huge budget deficit that is due in large part to an unexpected drop in non-oil revenues. While the 2019-20 budget is conservative, sanctions, inflation, unprecedented spring floods and other problems make more deficits likely. However, the government insists that its foreign exchange reserves are still strong and that the National Development Fund can help to cover deficits.
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