Previous Quarterly Editions
Expropriation Risk: 58 60 64 66 Political Violence Risk: 42 44 46 48 Terrorism Risk: 54 52 54 54 Exchange Transfer and Trade Sanction Risk: 74 76 82 84 Sovereign Default Risk: 74 74 74 76
TREND ▲ OUTLOOK ▲
Although recent US rhetoric has suggested intensifying security risks for Iran, the state of the economy remains the overriding concern in Tehran. An IMF report in April projects a 6% contraction for 2019, with growth of just 0.2% in 2020. The forecast was released before the Trump administration announced later in the month that it would not renew the waivers expiring in May that had enabled eight countries to continue importing Iranian oil without facing US sanctions. It is unclear to what extent the decision will affect Iranian oil exports as several of the countries involved had already reduced their Iranian purchases, but it represented another blow to Iran’s struggling economy. Adding to Iran’s challenges has been the worst flooding in decades across much of the country in March and April. The floods have caused close to five billion dollars in damage and displaced 366,000 people, according to the UN. The agricultural sector has been hardest hit at a time when Iranians are increasingly concerned about high food prices, in addition to lack of economic opportunity, entrenched corruption, and government incompetence. The government has promised some relief, including compensation for flood losses, a salary increase for public sector workers, and a potential increase in the minimum wage, but it is unclear if the funds are available for all the promised payments, and any benefit they would bring will be blunted by inflation. However, while discontent in Iran is high, there are no indications that a revolution is likely. Meanwhile, the Trump administration is starting to run out of economic tools to pressurise Iran and may be turning to other means to continue its “maximum pressure” campaign. In April, Washington designated the Islamic Revolutionary Guard Corps (IRGC) as a Foreign Terrorist Organization, the first time the United States has applied that designation to a government entity. Recent statements from senior US officials suggest a willingness to consider attacking Iran in the future. In May, the administration moved up the planned deployment of an aircraft carrier group to the Middle East, saying that it did so in response to an Iranian threat, although officials did not specify what the threat was. The White House is demanding changes from Tehran that go far beyond ending Iran’s nuclear programme and now include fundamental shifts to its foreign policy and domestic governance. The Iranian government’s patience with abiding by the terms of the Joint Comprehensive Plan of Action (JCPOA), better known as the nuclear deal, without benefiting from sanctions relief is running short. In May, Iran announced a limited scaling back of its JCPOA commitments in a move that reflects an escalation in tensions between moderates associated with President Rouhani and conservatives claiming the backing of Supreme Leader Ali Khamenei.
Reports in May that four oil tankers, two from Saudi Arabia, had been “sabotaged” off the coast of the UAE produced a flurry of speculation about who might be responsible. They also underlined once again the potential for commercial disruption if passage through the Strait of Hormuz is curtailed. Most companies affected by sanctions have now left Iran, with Total’s reluctant withdrawal from the crucial South Pars gas field a significant blow to the country’s oil and gas sector. Tehran is likely to become increasingly reliant on China for investment and assistance in this area. Meanwhile, there is renewed political emphasis on the “resistance economy” approach and the need to reduce reliance on global trade and business.
Demonstrations focused on economic conditions and corruption are likely to become more common across Iran in the second half of 2019. There have been some protests about slow government response to the floods, especially in the already restive province of Khuzestan, although most have been relatively small and non-violent. But protests focused on economic conditions and corruption are likely to become more common as shortages increase, and this in turn increases the risk of a heavy-handed response by the security forces. The IMF expected inflation to be close to 40% this year, leaving many Iranians struggling to afford food and other basic items. Authorities regularly arrest and imprison activists.
TREND ► OUTLOOK ▲
As the suicide attack in February in which 27 Revolutionary Guards were killed near the south-east border showed, there is an ongoing risk of Sunni extremist terrorism in Iran. The Iran-Pakistan border is particularly prone to terrorist incidents, especially in Iran’s Sistan-Baluchistan province. In April, Iran and Pakistan discussed creating a joint border force to combat terrorism, and a Pakistani official has talked about building a fence along the border. Khuzestan is another vulnerable province, as highlighted by the attack in September on a military parade. However, 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.
Washington’s ending of sanctions waivers on oil sales to eight countries that include China, India and Turkey will deepen Iran’s economic crisis. In May, Washington added new sanctions on industrial metals, a major Iranian export. European trade and investment have largely stopped, and the EU has not yet made operational the Instrument in Support of Trade Exchanges (INSTEX) that is meant to facilitate some limited European trade with Iran. The major Russian oil companies have also pulled out. The Financial Action Task Force, an international organisation that combats money laundering and terrorist financing, has given Iran until June to adopt reforms or face penalties that would further limit its access to the global financial system.
Iran reported a huge budget deficit from the first nine months of its fiscal year 2018-19, reflecting a drop in non-oil revenues that was far larger than expected. While the 2019-20 budget is conservative, sanctions, inflation, and other problems make more deficits likely. At the same time, flood damage to Iran’s agricultural sector as well as sanctions will force the government to make expensive purchases abroad. As a result, the government may well need to tap the country’s sovereign wealth fund to meet its immediate needs.
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