Previous Quarterly Editions
Expropriation Risk: 56 58 60 64 Political Violence Risk: 40 42 44 46 Terrorism Risk: 56 54 52 54 Exchange Transfer and Trade Sanction Risk: 72 74 76 82 Sovereign Default Risk: 74 74 74 74
TREND ▲ OUTLOOK ▲
Iran looks set for a bleak year in 2019. The Trump administration’s policy goals for dealing with Tehran are both expansive and vague, suggesting that Iran will face stringent US sanctions indefinitely. The EU continues to support the Joint Comprehensive Plan of Action (JCPOA), the 2015 deal over Iran’s nuclear programme that initially saw most multilateral and some US sanctions lifted, but it has taken no effective steps to allow European businesses to continue operating in Iran. In November, Washington granted temporary waivers to eight European and Asian countries to continue importing limited amounts of oil from Iran for a further 180 days, but it is unclear whether these will be renewed. As Washington hoped, the US re-imposition of sanctions has already done significant damage to the Iranian economy. Before the US withdrawal from JCPOA was announced in May, the IMF was projecting 4% growth for Iran in both 2018 and 2019. Instead, in October the Fund said that Iran had gone into recession and in November the World Bank projected that Iran’s GDP would contract by 1.6% and 3.7% in the next two years. Inflation is close to 30%, according to the IMF, and likely to spike further during 2019. This rise would wipe out one of Rouhani’s signature achievements, which was to wrestle down inflation from above 40% when he took office. Iran’s own economic problems, particularly widespread corruption and a weak banking sector, are also dampening the chances of recovery. As the economy falters, the government and ruling elite will face increasing pressure, with regular protests over the cost of living and the condition of public services increasingly likely. However, there are no indications so far that opposition groups in Iran have the capability to overthrow the regime. If anything, Washington’s stance has strengthened anti-democratic hard-liners who have long warned against negotiating with the United States. Iran continues to abide by the JCPOA in the hope that this still affords it some credibility with key countries in Europe and Asia, but if economic and political pressure worsens significantly, the risk of Iran itself abandoning the JCPOA’s terms would rise, as would the possibility of Iranian action. In December, Rouhani warned that, if Iran is unable to export its oil, it could retaliate by closing the Strait of Hormuz to tanker traffic from other markets. To emphasise the point, the Iranian navy held a major exercise near the Strait in February.
Total was the first to sign a deal under Tehran’s new oil contracting process and pledged to remain in the country even if sanctions were re-instated. However, the French company is now pulling out of the South Pars gas field because of the international consequences of remaining in Iran. This is a significant blow to the country’s oil and gas sector, which needs updated technology and expertise, and Tehran is likely to become increasingly reliant on China and Russia for investment and assistance. Meanwhile, there is renewed political emphasis on the ‘resistance economy’ approach and the need to reduce reliance on global trade and business.
Protests focused on economic conditions and corruption are likely to become more common across Iran in 2019, especially in urban areas that are hardest hit by increases in the cost of living. So far, most economic protests have been relatively small and non-violent. But as crowd sizes rise, so does the risk of a heavy-handed response by the security forces that could trigger more protests. During 2018, Tehran began a gradual but growing campaign of arresting activists on national security charges and businesspeople for corruption and currency manipulation.
TREND ▲ OUTLOOK ►
As the suicide attack in February that killed 27 Revolutionary Guards near the south-east border showed, there is an ongoing risk of Sunni extremist terrorism in Iran, with border areas and areas with large minority groups at greater risk. The September 22 attack in Ahvaz during a military parade, in which at least 25 people were killed, was claimed by both an Arab separatist group and the Islamic State group. In December, several people were killed and many wounded in an attack in Chabahar. However, terrorist attacks in Tehran and most other parts of Iran remain rare. The coordinated attack on the parliamentary building and the tomb of Ayatollah Khomeini in 2017 by the Islamic State group was the first significant terrorist incident in the capital for years and has not been repeated.
After leaving the JPCOA in May 2018, Washington re-imposed previously lifted sanctions in two tranches in August and November. It now imposes a range of extraterritorial sanctions, as well as sanctions on US firms and individuals doing business in Iran. EU member states have done little to help their companies stay in Iran in the face of sanctions, and most Europe-based multinational companies have stopped operating there. The rial was already in decline before May but tumbled thereafter, as much because of the government’s failed effort in April to forcibly introduce a unified exchange rate as because of the sanctions situation. The currency lost around 60% of its value against the dollar in 2018. Inflation has risen sharply to nearly 30%, and in early January the central bank proposed cutting four zeros off the rial. The Financial Action Task Force, an international organisation that combats money laundering and terrorist financing, is preparing to impose penalties on Iran that would further limit its access to the global financial system.
TREND ► OUTLOOK ▲
Foreign reserves remain strong but capital outflows are increasing as the currency weakens. In December, Rouhani presented a draft budget for the 2019-20 fiscal year that starts with the Iranian new year in March. While it appears to be an increase from the current budget, once inflation and the currency crisis are factored in then spending is down significantly. The proposed budget, which must be reviewed by parliament and the Guardian Council, assumes a fairly conservative oil price of 50-55 dollars and accounts for the reduction in Iran’s oil exports. The budget includes some measures to help Iranians who are hit hard by the economic situation, but inflation will diminish their impact.
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