Previous Quarterly Editions
Expropriation Risk: 66 68 66 66 Political Violence Risk: 48 54 50 52 Terrorism Risk: 54 51 48 46 Exchange Transfer and Trade Sanction Risk: 85 87 89 90 Sovereign Default Risk: 76 77 82 82
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An explosion at Iran’s Natanz nuclear enrichment facility at the start of July 2020 was just one in a series of unexplained fires, explosions, and power outages across the country around the same time. The Natanz event, which seems to have destroyed a new above-ground centrifuge production facility, followed a large fire in late June 2020 at the Parchin military complex used by the country’s ballistic missile programme. It was followed by fires at a power plant and a petrochemical plant in Khuzestan, a fire on a cargo ship in Bushehr port, and explosions and a power cut in western Tehran. All these are undermining confidence in a government that is struggling to cope with the global and domestic impacts of the COVID-19 pandemic, on top of a punishing sanctions regime. The IMF expects the economy to contract by at least 6% this year, although it can offer little help as Washington continues to block Iran’s unprecedented request to the Fund for a loan of five billion USD. Iran’s currency reached new lows against the US dollar at mid-year 2020, with the rate against the US dollar significantly lower than in February 2020, reflecting the impacts of COVID-19 and the decline in oil prices. The World Bank expects inflation to continue falling in the second half of 2020 but to remain above 20%. COVID-19 has hit Iran early and hard, and by mid-July 2020 it had registered 275,000 cases and some 14,500 deaths. The government has been widely criticised for its reluctance to impose significant quarantine and mandatory social distancing measures, and it is clear that many Iranians have not taken the voluntary recommendations seriously. It is also the case, however, that many others cannot afford to stay home or to buy masks and gloves. The country saw a major spike in cases in early April 2020 that was followed by a decline before a second spike extended from late May into June 2020. The original outbreaks hit Tehran and Qom hardest, but COVID-19 has now spread throughout most of the country, with Khuzestan suffering particularly badly. With sanctions now severely limiting outlets for its crude oil production, Tehran began sending oil to Venezuela in April 2020, more to solve the problem of its own storage capacity filling up than in expectation of significant revenue. Iran remains under intense US sanctions that have suppressed its ability to trade and conduct financial transactions with other countries. In its latest move, Washington has threatened to activate snapback sanctions, something allowed for in the original nuclear deal or JCPOA. However, Russia and China argue that the United States no longer has the right to activate snapback sanctions because it withdrew from the JCPOA in 2018. Although increasingly concerned about Iranian behaviour, European countries do not support the new US move either. Meanwhile, IAEA inspections in Iran continue but a new row may follow the agency’s decision made in June 2020 to press its demand for access to two sites, which has so far been denied. The original European signatories to the JCPOA are unhappy about some Iranian violations of the JCPOA but are still working to save the deal, at least until the US presidential election in November 2020.
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Although the tension seen last year over tit-for-tat ship seizures appears to have subsided, it created a new level of risk for tangible assets engaged in shipping through the Persian Gulf and the Strait of Hormuz. Meanwhile, most Western 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 clearly intends to engineer clashes with the relative pragmatism of President Rouhani. The latest has been over the rapid depreciation of the exchange rate as the rial lost 20% of its value during May and June 2020, and the tension between the legislature and the president will add to existing uncertainty over the direction of Iranian economic policy.
Despite the deteriorating economic conditions, a combination of the violent government crackdown late last year (2021) and, less significantly, the threat of COVID-19, have combined to discourage large-scale protests in recent months. But public disillusionment with the government, already high, has been growing with recent missteps and failings such as the inept attempt to coverup the shooting down of a Ukrainian airliner in January 2020, the deliberate subversion of the parliamentary elections held in February 2020 by ensuring that only conservatives were on the ballot, and the inadequate response to the pandemic. There is a significant risk that new protests could break out later in the year, and these could prompt the military to play a more overt role in government.
TREND ▼ OUTLOOK ►
Terrorist attacks in Tehran and most other parts of Iran remain rare. The 2017 attack by Islamic State 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. Low-scale incidents also occur along Iran’s border with the Kurdistan Region of Iraq, and there have recently been reports of low-level incidents involving Iranian or Turkish forces and Kurdish militias near the Iranian-Turkish border.
The Trump administration continues its “maximum pressure” campaign, sanctioning multiple entities in June 2020 in an effort to target Iran’s metals sector. While Washington has said that it will not target Iranian manufacturers of medicine and of personal protective equipment that are essential in fighting COVID-19, the financial sanctions that have dissuaded many foreign firms from trading with Iran remain in place. The rial, which has struggled since Washington re-imposed sanctions in 2018, dropped to new lows in June 2020. In May 2020, the parliament approved a bill to cut four zeros from the rial and replace it with the toman, which will be worth 10,000 rials. Assuming that this is approved by the Guardian Council, the central bank will have two years to implement the change.
The weak rial is just one of the factors that is making government borrowing costly and difficult and, even before COVID-19 had hit Iran, the IMF expected its foreign exchange reserves to decline from 86 billion USD to 70 billion USD during 2020. 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 reluctantly made, remain likely.
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