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Expropriation Risk: 64 66 66 68 Political Violence Risk: 46 48 48 54 Terrorism Risk: 54 54 54 51 Exchange Transfer and Trade Sanction Risk: 82 84 85 87 Sovereign Default Risk: 74 76 76 77
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Iran experienced its most serious anti-government protests for a decade at the end of 2019. Peaceful protests against a sudden increase of 50% in petrol prices quickly spiralled into larger protests across the country denouncing the government’s handling of the economy. These produced some riots that met with a heavy response; semi-official figures suggest more than 100 deaths and many injuries, but the numbers may well be higher. The government shut off internet access for five days in hopes of preventing news of the protests spreading both at home and abroad. Although it is not clear how effective this was, the protests were too decentralised to seriously threaten the regime, which responded with an unexpected display of unity and proved able to shut down the most significant protests within a week. However, the protests demonstrated the extent to which many people are ready to take to the streets on economic issues as years of international sanctions take their toll on an economy at breaking point. In mid-2019, the World Bank projected a contraction of 4.5% for 2019, but just three months later it revised that to a contraction of 8.7%. Inflation is again back up to an annualised rate above 40% and will rise further during 2020, undoing one of President Rouhani’s main achievements. US sanctions, particularly on oil exports, are the primary factor affecting the economy. These are not going to change anytime soon, especially as Iran itself continues to move away from the JCPOA nuclear deal that Washington has already repudiated. In November, Tehran announced that it would reactivate its centrifuges for uranium enrichment after imposing new limits on international inspections of its nuclear facilities. From Tehran’s perspective, its remaining JCPOA partners, especially in Europe, have failed to meet its most minimal demands for remaining within the JCPOA after Washington re-imposed sanctions. Geopolitical tensions remain high, especially following the September attack on two Saudi oil production sites, which Riyadh and Washington quickly blamed on Iran rather than the Yemeni Houthis who claimed responsibility. Washington reportedly responded with cyber strikes against Iranian targets rather than a physical military strike. However, it has sent an additional 14,000 troops to the Gulf region since the spring of 2019, and the United Kingdom, Australia, Bahrain, the UAE and Saudi Arabia have joined a US-led naval coalition to patrol the Persian Gulf. While this is intended to deter Iranian action, it also raises the risk of intentional or unintentional military escalation. Going into 2020, the fundamental drivers of risk in the region remain a US administration pursuing a policy of ‘maximum pressure’ on Iran but reluctant to engage in a major confrontation in an election year, and a regime in Tehran that is trying to find a way out of the sanctions box and is willing to take calculated risks to do so.
TREND ▼ OUTLOOK ▲
The tensions over commercial ship seizures in the Gulf region subsided after Iran released a UK-flagged tanker in September. However, despite the US-led naval coalition now operating in the region, the incidents have left 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 authorities continue to emphasise the need for a “resistance economy” approach that reduces reliance on imports, but the speed with which the November protests spread was a sharp reminder that patience is wearing thin. However, what this will mean in terms of government policy in 2020 is not clear as reformists and conservatives diverge again after briefly uniting to condemn the November protests, which were blamed on foreign agitators.
The November protests were the biggest and most serious seen since 2009. Reports suggest that more than 100 people died, with many more injured and the number of arrests likely to be substantially higher than the official figure of 1,000. There was also extensive damage to property. The last two years have seen regular, frequent protests across most of the country, but, until recently, they were mostly peaceful, and the regime generally allowed limited demonstrations as a form of venting public frustration. That has now changed, and there is a new readiness in government to use the full range of repressive tools that it has available. While the government will try to forestall any confrontation before the parliamentary elections due in February, more anti-government protests are likely when a new round of cuts in subsidies for electricity, gas and petrol are due during the new fiscal year that starts in March.
TREND ▼ OUTLOOK ►
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 a suicide attack on a south-east border post early in 2019 that killed 27 Revolutionary Guards, 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.
Washington imposed new sanctions on almost a monthly basis during the second half of 2019. Targets included an Iranian shipping line in September, the construction sector in October, several senior political figures in November, and Iran’s largest airline in December. It also targeted the central bank and the sovereign wealth fund. Meanwhile, Tehran was given an extension until February by the global Financial Action Task Force to adopt key banking standards before facing countermeasures that could further damage the economy. The EU itself may have no choice but to take action against Tehran if its violations of the nuclear deal continue during 2020.
Revised IMF projections from November show a fiscal deficit of 4.5% for 2019 and 5.1% for 2020 as the government continues to grapple with a steep drop in both oil and non-oil revenues. The government move to cut petrol subsidies in November, resulting in the 50% price increase, was mainly intended to address its fiscal problems but the resulting protests show how little room it has for manoeuvre.
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