Previous Quarterly Editions
Expropriation Risk: 72 72 72 73 ► Political Violence Risk: 67 67 66 67 ► Terrorism Risk: 46 46 48 50 ▲ Exchange Transfer and Trade Sanction Risk: 82 73 73 73 ► Sovereign Default Risk: 66 66 75 75 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Iran is one the most vulnerable countries to the impacts of climate change. Much of the country is already arid, and climate change will intensify aridity and heat. A combination of water mismanagement and drought, exacerbated by climate change, has had enormous consequences. Iran has experienced a cycle of extreme droughts since the late 1990s, which contributed to soil erosion, dust storms, and desertification. Several lakes and rivers are shrinking; most famously, Lake Urmia, once one of the world’s largest saltwater lakes, shrank to less than 10% of its previous size, with little improvement since.
Heat waves are becoming more frequent. Models show that parts of Iran along the Persian Gulf could experience wet-bulb temperatures above the level humans can survive (35 degrees Celsius). Changing rainfall patterns combined with loss of vegetation is leading to more frequent and severe flooding, including a particularly disastrous flooding event in 2019 that affected much of the country.
These climate effects are having major impacts. Iran has lost significant agricultural land, and many farming families have abandoned farms and migrated to cities in search of work and water; Khuzestan, Isfahan, and Sistan and Baluchistan are particularly hard-hit regions. Iran’s habitable land may decrease. Water shortages and floods- and government mismanagement of these crises- has sparked multiple protests in different parts of the country.
The government acknowledges these problems and recognises the challenges of climate change. However, it has taken limited actions on adaptation while addressing the causes of climate change is not a priority. Although
the country is one of the world’s top ten emitters of carbon dioxide, the ruling elites prioritise economic development over addressing climate change.
Top officials regularly express the view that developed economies in the West are responsible for addressing climate change. The government has called on developed nations to fund Iranian energy transition and emission-cutting efforts. There is a general scepticism towards Western concerns and a desire to prioritise Iranian development, in which fossil fuels play an essential role.
The sanctions on Iran do further complicate climate change action. Sanctions play a major role in Iran’s fiscal deficits, and Tehran would struggle to pay for renewable energy programmes and other climate-friendly policies. Iran’s nuclear energy programme is a source of international concern. Iran has signed but not ratified the Paris climate agreement, and the government states that ratification is conditioned on a full lifting of sanctions.
In 2015, Iran developed Intended Nationally Determined Contributions (INDCs) as part of the Paris climate agreement process, but its targets were not specific and were conditional on international funding and other support. Part of the targets are dependent on sanctions relief, as noted. The Climate Action Tracker labels Iran’s INDCs as “critically insufficient”, saying that they “reflect minimal to no action and are not at all consistent with the Paris Agreement”. While Iran has pursued a few steps, such as development of renewable energy, the combination of sanctions and lack of prioritisation has slowed the efforts.
President Ebrahim Raisi did not attend the COP26 climate meetings last November in the United Kingdom. Iran sent several climate experts to the summit, who called on countries to lift sanctions. In another indication of priorities, the head of Iran’s Environmental Protection Organisation was one of the last officials that Raisi appointed; on October 3, he appointed Ali Salajegheh, a specialist in watershed management.
Most Western companies affected by the sanctions on Iran have left the country, leaving Tehran increasingly reliant on China for investment and oil exports.
Parliament has been drafting legislation that would further restrict internet use in Iran in ways that would complicate the ability for companies to provide online services. While not all the details are clear, earlier draft legislation would ban Iranians from distributing virtual private networks (often called ‘VPNs’), put the military in charge of overseeing the internet in Iran, and require foreign companies to submit to Iranian rules about data ownership and other requirements. The bill would effectively prevent some foreign companies, such as Instagram, which is popular in Iran, from operating in the country. The legislation hit some snags in the parliamentary process in February but is likely to proceed.
Attacks on shipping and ship seizures involving Iran in the Persian Gulf diminished in the latter part of 2021 and early 2022. The easing tensions likely reflected hope for progress in the 2015 Iran nuclear deal talks (of Joint Comprehensive Plan of Action, ‘JCPOA’) - which aim to get Tehran and Washington back into the deal- and other efforts at de-escalation between Iran, Saudi Arabia and the United Arab Emirates. Much depends on the outcome of the nuclear deal talks, which were indefinitely postponed on March 11.
Public disillusionment with the government, already high, grew last year when authorities subverted electoral processes to ensure conservative dominance in government. Meanwhile, the economy continued to struggle, COVID-19 overwhelmed the healthcare system, and some areas experienced water and power shortages.
Various protests have continued, including a teachers’ protest in multiple cities in February and other labour-related protests. There were also small protests in reaction to the government’s efforts to avoid blaming Russia for the conflict in Ukraine in February 2022. Recent protests have been relatively small and easily shut down by security forces, but they remain a regular part of life in Iran.
TREND ▲
Terrorist attacks in Tehran and most other parts of Iran remain relatively rare. The 2017 Islamic State attack 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 remains a concern, with the area near the Pakistan border in Sistan-Baluchistan province being the most vulnerable.
The international coalition’s withdrawal from Afghanistan last August increased the risks of instability along the Afghan-Iran border; thousands of Afghans fleeing economic and political deterioration have fled across the border into Iran each day, enriching smugglers and intensifying security and humanitarian concerns on the border.
The future of sanctions on Iran depends on the JCPOA negotiations. Multiple reports suggested that the various sides were very close to a deal, but talks were indefinitely put on “pause” on March 11. After the onset of conflict in Ukraine, Russia had inserted new terms into the negotiations, demanding that Russia’s trade with Iran would be exempt from any sanctions on Russia. The new demands led to a breakdown in discussions. Talks could resume, but the future is now very uncertain.
Parliament has approved the budget for the fiscal year and debated government proposals to eliminate the subsidised exchange rate, but the change was not approved.
The combination of government spending to address COVID-19 and its economic impacts, plus the impact of sanctions and other economic factors, has sent Iran’s fiscal deficit skyrocketing. In October, the World Bank noted that Iran’s deficit had increased to 6.9% of gross domestic product.
Efforts to finance the deficit through bond auctions were disappointing, but the World Bank said that bond issuances and sale of public assets is likely to continue. Unless oil revenues increase, the deficit is likely to remain high. In October, the World Bank noted that deficit monetisation has contributed to inflation. Iran’s budget for the coming fiscal year projects higher oil revenues. However, while high global oil prices can help, Iran’s ability to export remains constrained by US sanctions.
Iran’s access to its foreign reserves depends on US sanctions and the potential to unfreeze overseas escrow accounts. The International Monetary Fund reported that Iran’s international reserves were at USD7 billion in February 2021, which likely reflects available reserves. The Taliban takeover in Afghanistan threatens one source of foreign currency for Iran.
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