Previous Quarterly Editions
Expropriation Risk: 71 72 72 72 ► Political Violence Risk: 67 67 67 66 ▼ Terrorism Risk: 48 46 46 48 ▲ Exchange Transfer and Trade Sanction Risk: 82 82 82 73 ▼ Sovereign Default Risk: 75 75 66 75 ▲
TREND ►
Ebrahim Raisi won the presidential election in June and took office on August 5. A hard-line conservative and head of Iran’s judiciary, Raisi is closely linked to Supreme Leader Ali Khamenei. Many Iranians saw Raisi’s election as preordained, contributing to a low voter turn-out of 48.8%. Conservatives now control all parts of Iran’s government, and parliament has approved most of Raisi’s proposed ministers.
Raisi’s election is likely to complicate relations with the United States, but he says that he supports negotiations to return to the 2015 Iran nuclear deal (the Joint Comprehensive Plan of Action or ‘JCPOA’). The United States withdrew from the deal in 2018 and re-imposed related sanctions on Iran, prompting Iran to take steps that violated the deal’s restrictions on its nuclear programme.
After US President Joe Biden took office, indirect JCPOA talks began in April and ended in June. The various parties involved plan to hold a new round of talks, but a date has not been announced. Significant disagreements remain, including a US expectation that Iran would agree to future talks on its ballistic missile programme and other foreign policy issues, and an Iranian demand for a guarantee that a future US president would not be able simply to re-impose sanctions.
Iran’s regional environment is shifting -- the Taliban takeover in Afghanistan in August presents challenges. While Tehran has improved relations with the Taliban over recent years, distrust remains significant. Afghanistan is likely to receive less Western aid, which would have negative consequences for trade between the two countries, and instability in Afghanistan increases the risk of more refugee flows into Iran and of increased drug trafficking across the border. Iran also began talks with Saudi Arabia, hosted in Baghdad, in April, which have raised hopes of de-escalating regional tensions.
Addressing Iran’s dire economic situation will be one of Raisi’s top priorities. Inflation remains a major problem -- the International Monetary Fund (IMF) puts the figure at 39%, with other sources saying much higher or slightly lower. In June, the World Bank reported that Iran’s economy experienced 2.2% Gross Domestic Product growth (GDP) in the second half of 2020, after over two years of recession. The IMF has projected 2.5% GDP growth for 2021.
However, this improvement still leaves the Iranian economy far behind its performance prior to the US withdrawal from the JCPOA -- the deal contained economic benefits for Iran. Economic growth through the rest of the year will depend heavily on US sanctions, the pandemic and global oil prices. Furthermore, Iran suffered widespread water and power shortages this summer, partly due to a prolonged drought. This brought domestic protests.
COVID-19 continues to exact a heavy toll: Iran’s official death toll, widely seen as an undercount, recently passed 100,000, making Iran the worst-hit Middle Eastern country. The government has continued with limited measures, including temporary, partial closures. Iran’s vaccination programme has been slow and limited to less-proven vaccines.
Most Western companies affected by the sanctions on Iran have left the country, leaving Tehran increasingly reliant on China for investment and oil exports. Now that both parliament and the president are heavily conservative, there is likely to be less disagreement about economic policy but also more restrictions.
Parliament is considering legislation that would further restrict Internet use in Iran in ways that would complicate the ability of companies to provide online services. The 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.
Tensions have remained high in the Persian Gulf. While last year’s peak of tit-for-tat ship seizures has decreased, there are still occasional incidents involving allegations of Iran seizing ships, which has raised the level of risk for tangible assets engaged in shipping through the Persian Gulf and the Strait of Hormuz. Much will depend on the direction of US-Iran ties and the efforts towards Saudi Arabian-United Arab Emirates-Iranian rapprochement.
TREND ▼
Public disillusionment with the government, already high, grew further as authorities subverted electoral processes to ensure conservative dominance in government and as the economy continued to struggle and COVID-19 overwhelmed the healthcare system. These factors, combined with water and power shortages, sparked multiple protests in several cities in July, which sometimes met with a violent reaction from authorities.
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-Balochistan province being the most vulnerable.
The international coalition’s withdrawal from Afghanistan this August increases the risks of instability along the Afghan-Iran border and could increase the risk of attacks on Iran from the Islamic State branch in Afghanistan. Low-scale incidents also occur along Iran’s border with the Kurdistan Region of Iraq, as well as near the Iranian-Turkish border.
The future of sanctions on Iran depends on the JCPOA negotiations. The last round ended in June, with no clear date for resuming them yet. If they resume, the parties will be working with an Iranian team reporting to Raisi. The governments in Washington and Tehran say they want to continue negotiations, but there are major areas of disagreement, and Iran has continued nuclear developments that violate the JCPOA’s terms.
The Biden administration lifted sanctions on three Iranian individuals and two companies in June but also has imposed a few additional sanctions on others. Media reports suggest that Biden might impose new sanctions on shipping related to Iranian oil exports, particularly to China, if JCPOA talks fail.
Inflation and a weak currency remain major problems. The World Bank reported in June that limited foreign exchange reserves, partly due to sanctions, are contributing to inflation. While inflation is likely to come down, the World Bank forecasts that it will remain above 20% over the medium term. If Western funds stop flowing into Afghanistan due to the Taliban takeover, it likely would further restrict Iran’s access to foreign currency, which partly has flowed in from Afghanistan.
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. Unless oil revenues increase, the deficit is likely to remain high.
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 reported that Iran’s international reserves were at USD7bn 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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