Previous Quarterly Editions
Expropriation Risk: 72 73 73 73 ►Political Violence Risk:66 67 68 68 ►Terrorism Risk:46 48 50 50 ▲Exchange Transfer and Trade Sanction Risk: 73 73 73 73 ►Sovereign Default Risk:75 75 75 74 ►
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Iran has long sought to balance its relations with major powers to maintain its own independence. Before the 1979 revolution, the Shah pursued partnerships with the U.S. and Germany, to counter Russian and U.K. involvement in Iran. Post-1979, the new government embraced the slogan, “Neither East nor West” but soon realised Iran needed a foreign power’s support. Since then, the government’s orientation has shifted between East and West depending on Iran’s leadership and the country’s relationship with Washington.
From 2013 to 2021, then-President Hassan Rouhani pursued re-engagement with the West. He represented the views of Iran’s educated, urban middle class, which is reliably Western-oriented. Iran was facing intense international sanctions, led by the U.S. with European support and reluctant buy-in from Russia and China. Western and Eastern powers did not want Iran to develop nuclear weapons. The combination of united pressure on Iran and a Western-oriented Iranian president led to a nuclear deal, officially, known as the Joint Comprehensive Plan of Action (JCPOA’) in 2015.
Initially, Iran tentatively leaned towards the West, as some sanctions were lifted under the nuclear deal. Many European companies tried to develop business in Iran. However, Washington maintained some key sanctions. These and other factors undermined Europeans’ ability and desire to invest in Iran. In 2018, then-U.S. President Donald Trump unilaterally withdrew from the JCPOA and re-imposed sanctions. This decision damaged relations with Iran, and Tehran also was deeply disappointed in the Europeans’ failure to ensure continued economic benefits for Iran.
Today, Iran is tilting East. The JCPOA collapse badly undermined Rouhani and other Western-oriented policymakers in Iran. In February 2018, before Trump left the JCPOA but when it looked likely, Supreme Leader Ali Khamenei explicitly stated Iran preferred “the East to the West” adding that U.S. dominance was weakening. He reiterated that Iran “should not be dependent on foreign countries” and should pursue the idea of “resistance economy” to lessen its reliance on outside economic ties. President Ebrahim Raisi, who came to the office in 2021, shares Khamenei’s Eastern orientation and has deepened relations with Russia and China. Conservatives, who lean toward the East, now are dominant in internal Iranian politics.
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Iran has political, economic, and military ties with the East. China and Russia often – though not always – use their veto at the United Nations to support Iran. Russian President Vladimir Putin visited Iran in July for a summit as part of the Astana Process, which Iran, Russia, and Turkey launched in 2017 as an alternative forum for resolving the Syrian war. Immediately following the Russia/Ukraine crisis beginning in February 2022, Iran abstained from a March UN vote condemning the invasion, but, in July, Khamenei expressed support for Russia’s actions. In September 2022, Raisi attended a summit of the Shanghai Cooperation Organisation, where Iran signed an agreement to become a full member of the body, with accession likely in 2023. At
the summit, Raisi noted Iran and Russia’s shared experience as the targets of Western sanctions helps to unite them.
While sanctions and other political risks are less likely to deter Chinese and Russian companies than European ones, international sanctions and U.S. secondary sanctions still dampen trade with, and investment in, Iran. Still, economic links have been increasing. China is Iran’s most important trade partner and a major purchaser of Iranian oil. Additionally, Iran plays an important role in China’s Belt and Road Initiative global infrastructure and investment initiative.
Raisi strongly supports the 25-year agreement Iran signed with China last year, which includes plans for Chinese investment in energy, infrastructure and more. Iran’s trade with Russia is much smaller, but economic links have grown significantly in the last five years. In July, Putin signed an agreement to move forward with negotiations for a free-trade agreement between Iran and the Eurasian Economic Union. Also in July, Russian energy major Gazprom and the National Iranian Oil Company signed a USD40 billion investment deal, though few details are available. Russia also has played an important role in Iran’s nuclear power programme.
Iran has some military ties with China but more with Russia. Tehran and Moscow have been allies in propping up the Assad regime in Syria, with Iran providing critical ground forces and Russia providing essential air power. In Syria, Russia and Iran are both partners and competitors; despite some tensions, the war overall has increased their ties. Iran buys arms from Russia and China. In July, a senior U.S. official said Russian officials were considering buying military drones from Iran. Additionally, Iran and Russia have conducted joint naval exercises in the Caspian, including last year. Iran, Russia, and China have held several joint naval exercises in the northern Indian Ocean, including in early 2022.
Most Western companies affected by the sanctions on Iran have left the country, leaving Tehran increasingly reliant on China for investment and oil exports.
The government has been pushing a draft Cyberspace Protection Bill that would hit international social media companies and many foreign and Iranian companies that rely on the internet. The legislation would ban Iranians from distributing virtual private networks, create new requirements for foreign-owned companies, increase governmental control, and much more.
However, the bill is unpopular, and is stalled in parliament. While the likelihood of passage now appears much lower, the government has moved ahead with implementing parts of the law anyway, including appointing members to the Supreme Regulatory Commission, which has broad authority to regulate the internet. Iranians have reported slower internet connections and more disruptions.
On September 16, the New York Times reported that Khamenei was “gravely ill” but on September 17, Khamenei reportedly appeared in public for an event. At 83, Khamenei’s health is an ongoing political uncertainty, given his role as the most powerful figure in Iran. There is widespread speculation Raisi might replace him; Iran has an established system for succession, but the risk of political instability would rise significantly if Khamenei dies or is incapacitated.
Iran experiences regular protests of varying size, prompted by economic problems, labour demands, human rights abuses, and intensifying environmental concerns, underlined by general disillusionment with the government. In May, security forces violently put down widespread protests in western Iran over food prices and a deadly building collapse. In August, hundreds of people in central and western Iran protested over severe water cuts, the latest in a series of environmental protests, as most of Iran is experiencing drought and record-breaking heat. In September, there were small protests in Tehran over the increasing number of executions.
September also saw expanding protests in Tehran and in Kurdistan after a young Kurdish woman, Mahsa Amini, died in police custody following arrest for clothing that failed to meet the officers’ standards. Her death has attracted international attention. Protests over the death have spread throughout much of the country and appear to be the largest protests since 2019. Authorities have responded with violent force and shutting down internet service in many areas. Seven deaths have been reported so far, a figure is likely to rise.
TREND ▲
Terrorist attacks in 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, with the area near the Pakistan border being the most vulnerable. The international coalition’s 2021 withdrawal from Afghanistan increased the risks of instability along the Afghan-Iran border.
The future of sanctions on Iran depends on the JCPOA negotiations. Hopes rose in recent months that a new deal was close but in September, Iran demanded the The International Atomic Energy Agency IAEA) close an investigation into the sources of uranium traces at three locations in Iran. European powers responded negatively and suggested the demand raised questions about Iran’s intentions to reach a deal. Talks now are likely stalled until at least after the U.S. midterm elections in November. Meanwhile, Washington has imposed additional sanctions, including on Iranian companies allegedly involved in producing or transporting drones.
In June, the central bank reversed a 2018 ban on private currency exchanges, now allowing licensed exchange offices again to buy and sell foreign currency. In August, Iran began using crypto currencies for some trade deals. The central bank has increased interest rates several times in recent weeks, hoping to counter inflation. Headline inflation decreased slightly to 35.4% year-on-year in February 2022, the World Bank notes.
In April, the World Bank reported Iran’s economy was continuing its “gradual recovery”. However, the fiscal deficit is growing. While oil revenues increased significantly in late 2021 and early 2022, they remain far below the revenues before the U.S. re-imposed sanctions in 2018 and 2019.
The government largely relied on bond issuance to finance the budget deficit, which in recent months hit 6.8% of GDP, according to the World Bank. Iran’s fiscal health depends on multiple factors, but it will rely heavily on oil sales and remain deeply vulnerable to sanctions.
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