Previous Quarterly Editions
Expropriation Risk: 71 71 72 72 Political Violence Risk: 67 67 67 67 Terrorism Risk: 48 48 46 46 Exchange Transfer and Trade Sanction Risk: 82 82 82 82 Sovereign Default Risk: 75 75 75 66
TREND ▼
US President Joe Biden’s inauguration (January 2021) has offered hope that the United States might re-join the 2015 Iran nuclear deal (the Joint Comprehensive Plan of Action, JCPOA) and lift many sanctions on Iran. Biden’s administration includes several high-profile figures who helped negotiate the JCPOA under the Obama administration (in which Biden was Vice-President), and officials in Tehran expressed an interest in reviving the deal.
However, Iranian leaders believe that, since Washington unilaterally left the deal in 2018 under now-former President Donald Trump, it is up to Washington first to lift the many sanctions Trump imposed. Biden’s team has insisted that Iran must first roll back its violations of the JCPOA, which it began in retaliation for US sanctions, and that the two sides should coordinate steps back into compliance with the deal.
After an initial stalemate, on April 6 2021, the JCPOA party countries facilitated communication between the Iranians and United States, leading to an agreement to establish two working groups to help coordinate lifting related US sanctions and reversing Iranian nuclear steps. The agreement does not represent an immediate return to the deal, but it is a start. As of mid-May 2021, talks continued, but it was unclear how much progress had been made. Reports suggest that US negotiators want a return to the JCPOA to be an initial step to broader Iranian concessions on other issues while Iranian negotiators want to maintain some of the progress Iran has made in its nuclear programme. In April 2021, Iran enriched uranium to 60%- a major advance that complicated discussions in Vienna.
Domestically, Iran is scheduled to hold elections, including for President and a few members of parliament, on June 18 2021. If sanctions are lifted beforehand, or Iranians are hopeful of a major economic improvement soon following a return to the JCPOA, it would likely benefit potential moderate successors to President Hassan Rouhani. However, several factors, including expected low turnout and widespread disillusionment with the government, are likely to benefit more conservative candidates; this might provide an incentive for Supreme Leader Ali Khamenei to delay progress in JCPOA negotiations.
Iran’s struggling economy will be a key electoral issue. Multiple factors, including US sanctions and COVID-19, have badly damaged the economy. In April 2021, an International Monetary Fund (IMF) estimate projected 2.5% gross domestic product (GDP) growth in 2021, up from 1.5% growth in 2020. This follows years of recession since 2017, high inflation and a currency crisis.
The Trump administration’s ‘maximum pressure’ campaign failed to force Iran to comply with US demands, and Iran’s government continues to pursue policies in the Middle East that risk conflict with adversaries. For instance, Iran and Israel have engaged in a quiet war of damaging each other’s ships since around 2019. Minor incidents involving Iranian and US ships near the Strait of Hormuz also increased in April and May.
Meanwhile, Iran has continued to struggle to combat COVID-19, which has killed over 63,500 Iranians with a total of nearly two million cases. Iran began some vaccinations in February 2021 but has had a slow start to its vaccination programme. It has purchased some doses from countries such as Russia and China, and through the COVID-19 Vaccine Global Access (COVAX) programme. Iran is also working on domestic vaccine production.
TREND ►
Although the tension seen in 2020 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.
Iran’s currently heavily conservative parliament alongside a moderate President result in significant economic policy disagreements. Iran’s future policies will depend on the outcome of JCPOA negotiations and the June 2021 elections.
Despite the deteriorating economic conditions, a combination of the violent government crackdown in late 2019 and the threat of COVID-19 have combined to discourage large protests in recent months. However, smaller protests have continued in various places in Iran, often centred around labour and economic issues.
Public disillusionment with the government, already high, has been growing, such as the deliberate subversion of the February 2020 parliamentary elections (by ensuring that only conservatives were on the ballot) and the inadequate response to COVID-19 and ongoing economic woes. Larger-scale protests are possible, potentially around the election and particularly if economic conditions remain difficult. These could prompt the military to play a more overt role in government.
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. Low-scale incidents also occur along Iran’s border with the Kurdistan Region of Iraq, as well as near the Iranian-Turkish border. Tensions between Turkey and Iran over Kurdish activities in northern Iraq are increasing.
The Trump administration continued to impose new sanctions on Iran until Biden took office. The sanctions deterred most international companies from working with Iran and badly damaged Iran’s economy, but failed to obtain Iranian political concessions. The Biden administration has said it wants to return to the JCPOA and is willing to lift many of the sanctions. Biden rescinded Trump’s demand at the United Nations to invoke ‘snapback sanctions’ under the JCPOA’s terms.
However, Washington and Tehran have disagreed about the next steps. Negotiations in Vienna led to the creation of the two JCPOA working groups to discuss how to roll back US sanctions and Iranian nuclear steps, but it is unclear when Washington will lift sanctions, or which ones. In late March 2021, the European Union reportedly decided to sanction eight Iranian individuals and three entities for human rights violations related to November 2019 protests, the first EU human rights sanctions on Iran in several years.
In May 2020, Iran’s parliament approved a bill to cut four zeros from the rial and replace it with the toman, which will be worth 10,000 rials. The central bank has two years to implement the change. Iran’s currency had plummeted since April 2020, reflecting US sanctions, but recovered somewhat after the November 2020 US election. The IMF in April 2021 projected annual consumer price inflation for the year to be 39%, slightly worse than in 2020 (36.5%).
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; it is currently estimated to be more than 6% of GDP. Government revenues for the last three quarters of 2020 were 55% of the year’s budget.
Iran’s access to its foreign reserves depends on US sanctions and the potential to unfreeze overseas escrow accounts. Iran’s central bank began foreign exchange auctions in September 2020; the IMF recently reported that Iran’s international reserves were at USD7bn in February 2021, which likely reflects available reserves.
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