Previous Quarterly Editions
Expropriation Risk: 66 66 68 66 Political Violence Risk: 48 48 54 50 Terrorism Risk: 54 54 51 48 Exchange Transfer and Trade Sanction Risk: 84 85 87 89 Sovereign Default Risk: 76 76 77 82
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Already suffering from US sanctions, Iran is now dealing with one of the world’s worst COVID-19 outbreaks and the simultaneous collapse of oil prices due to falling global demand. For weeks, Iranian leaders refused to take measures to contain the spread of the virus, and Iran became the primary focus for its spread to other Middle Eastern states. Many Iranians ignored advice to avoid travel for Nowruz, the Iranian new year celebration. The government began imposing some restrictions afterwards, but these came weeks behind the spread of the virus. Iranian health workers have reported shortages of key supplies, and some health officials publicly warned that the lack of preparedness means that COVID-19 fatalities in Iran could reach the millions. Iran’s supreme leader has responded to the situation by falsely asserting that the virus was custom-made by the United States to infect people with Iranian DNA. In addition to the government’s reluctance to act, Iran’s ability to respond to COVID-19 remains hampered by US sanctions, which had already taken a toll on the country’s healthcare system and its ability to acquire humanitarian items, including various categories of medical equipment that are technically exempt from sanctions. The latest challenge has been the oil price war between Russia and Saudi Arabia that, combined with a drop-off in demand, drove oil prices below 25 USD per barrel in late March before settling closer to 35 USD in early April 2020. While Iran’s ability to produce and export oil has been hard hit by sanctions, it continues to sell to China and any sustained drop in the global price will have a significant impact on government finances. In March 2020, Tehran asked the IMF for a loan of around five billion USD to help respond to the COVID-19 outbreak. The EU has said it will support Iran’s request, but Washington is strongly opposed. The economic crisis resulting from this combination of factors comes as many Iranians are deeply disillusioned by their government. After nationwide protests in November 2019 that had been triggered by an increase of 50% in petrol prices were put down with an unexpected level of violence, the regime put much importance on voter turnout in the February 2020 parliamentary elections as indicating support for the regime. However, turnout was officially 43%, the lowest ever in the Islamic Republic. The low turnout reflected several factors, including concern about COVID-19, but a major cause was the elimination by the authorities of all reformist and most moderate candidates. As a result, the new parliament is predominantly conservative, which is likely to create significant problems for President Hassan Rouhani. Meanwhile, US-Iranian tensions reached a new level in January 2020 when a US strike killed General Qasem Soleimani, who led the external action arm of the Revolutionary Guards and was also a senior political figure.
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Last year’s tensions over commercial ship seizures appear to have subsided but they indicated Iranian readiness to risk a move against tanker traffic if US pressure becomes too great. They also created a new level of risk to tangible assets engaged in shipping through the Persian Gulf and the Strait of Hormuz. Meanwhile, most companies affected by the sanctions on Iran have now left the country, leaving Tehran increasingly reliant on China for investment and oil exports. The heavily conservative new parliament is likely to clash more heavily with the relative pragmatism of President Rouhani, creating greater uncertainty over the direction of Iranian economic policy.
The intimidating impact of the violent government crackdown late last year has combined with fears of COVID-19 to prevent a recurrence of large-scale protests, at least in the short term. However, public disillusionment with the government is very high, with anger at its management of the economy, the incompetence reflected in the military’s shooting down of a Ukrainian airliner in January 2020 and the initial attempt at coverup, and the deliberate subversion of the parliamentary elections by ensuring that only conservatives can stand. The closure of parliament because of the virus removes one of the last channels for remaining moderate voices to be heard, leaving street protests as the only option. Once the immediate crisis is over, the risks of significant protests and unrest will be high and may reach the point at which the military chooses to play a more overt role..
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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. However, the risk of Sunni extremist terrorism inside Iran was underlined by last year’s suicide attack on a south-east border post that killed 27 Revolutionary Guards, with the area near the Pakistan border in Sistan-Baluchestan province being the most vulnerable. Low-scale incidents also occur along Iran’s border with the Kurdistan Region of Iraq.
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The Trump administration has made it clear that it will not ease sanctions to help Tehran cope with the impact of the virus. Indeed, in late March 2020, Washington sanctioned multiple entities and individuals involved in the construction and maritime services sectors in Iran. In January 2020, the JCPOA’s European partners triggered the deal’s dispute mechanism in response to Iran ending its compliance with the agreement which in turn was in response to the US withdrawal from the deal in 2018. The move increases the risk that UN Security Council sanctions will be re-imposed on Iran, but, for now, the European actors are postponing the mechanism’s time limits. In February 2020, after multiple postponements, the Financial Action Task Force imposed restrictions on Iran’s financial system due to the country’s refusal to enact counter-terrorism financing measures; the task force’s action further isolates Iran’s already heavily restricted financial system. At the start of April 2020, Europe made its first exports to Iran under INSTEX, a new financial channel set up last year to facilitate trade in humanitarian equipment by offering a means to bypass US sanctions. The transaction involved medical equipment from Germany worth around half a million USD.
Iran has taken several steps to try to mitigate the economic damage for the most vulnerable Iranians, but the battered state of its economy means that its stimulus measures are far below those of other countries in the region in terms of GDP. Before the outbreak, the IMF had estimated that the country’s foreign exchange reserves would decline from 86 billion USD to 70 billion USD during 2020. The weak rial, among other factors, makes government borrowing costly and difficult. At the end of March 2020, Rouhani requested and received permission from Supreme Leader Ali Khamenei to withdraw one billion euros from the National Development Fund to help pay for the COVID-19 response. Further drawdowns, however reluctant, are likely.
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