Previous Quarterly Editions
Expropriation Risk: 56 56 58 60 Political Violence Risk: 40 40 42 44 Terrorism Risk: 53 56 54 52 Exchange Transfer and Trade Sanction Risk: 68 72 74 76 Sovereign Default Risk: 74 74 74 74
TREND ► OUTLOOK ▲
In August the Trump administration re-imposed a first tranche of sanctions on Iran as it follows up on its decision in May to pull out of the Joint Comprehensive Plan of Action (JCPOA). This is the deal reached in 2015 under which Iran accepted significant restrictions on its nuclear programme in exchange for the lifting of most multilateral and some US sanctions. The next tranche, expected in November, will include secondary sanctions targeting foreign firms with business interests in the United States that conduct business in Iran. Although the EU has tried to protect European firms from these sanctions, it is in a weak position and significant European companies have already suspended their operations in Iran. Washington’s demand that countries which import Iranian oil and gas must wind down those imports to zero by November, while unrealistic, has already hurt Iranian exports and lowered forecasts of economic growth for 2018 from 4% to 3%. The value of the rial, which was already under pressure before May, plunged following the US withdrawal from the JCPOA, driving inflation and fuelling protests about economic conditions. President Rouhani’s economic reform agenda, which has strengthened the economy and brought inflation down from 40% when he took office, is now at serious risk as he faces pressure to push up government spending to cushion the impact of sanctions despite the effect on inflation. Fighting corruption has been one of Rouhani’s priorities, and it remains a major issue for Iranians. However, despite a new attempt to tackle corruption in August with a special court system, its effects are likely to grow as sanctions reinforce the role of the military-security establishment in the economy. Rouhani is caught between hard-line conservatives and reformists as relations with Washington and the economic situation undermine his influence. However, at least for now, the political mood in Tehran is one of unity in the face of adversity and a preference for having Rouhani as the face of a government that must deal with economic hardship. The JCPOA technically remains in force, and Iran is likely to abide by the agreement as long as doing so secures support from Europe and elsewhere, but this position is not guaranteed. Much will depend on the extent to which the United States can intimidate other countries into making significant cuts to their oil and gas imports from Iran in November. If it does, then the risks to Iran’s political and economic stability will increase significantly. At the same time, a sharp drop in Iranian oil and gas exports increases the risk of conflict in the Straits of Hormuz and even the Bab al-Mandab Strait.
TREND ▲ OUTLOOK ▲
French company Total was the first to sign a deal under Tehran’s new oil contracting process that replaces its previous, unloved buy-back scheme but, despite initial pledges that it would stay, Total is now pulling out of the South Pars gas field due to impending sanctions. This is a significant blow to Iran’s oil and gas production, which needs updated technology and expertise, and Tehran is likely to become increasingly reliant on China and Russia for investment and assistance with its oil and gas sector. Meanwhile, as the country braces for the impacts of sanctions, there is renewed political emphasis on the 'resistance economy' approach and the need to reduce reliance on global trade and business.
Iran has experienced intermittent protests about the economic situation in recent months. While relatively small, they have been evident in many parts of the country. They are likely to be a regular feature of Iranian politics for the foreseeable future, with an added focus on corruption. More protests have been small and non-violent, but as they get larger in response to a rise in prices linked to the falling currency, the risk of violence from both demonstrators and the security forces will increase. However, despite hopes in Washington that popular unrest will produce regime change, this remains extremely unlikely. As conservative factions become more active, women’s rights will become an increasingly contested area.
TREND ▼ OUTLOOK ►
While the Islamic State group has lost most of its territory and resources in Syria, there is an ongoing risk of Sunni extremist terrorism in Iran. That said, terrorist attacks remain rare in most parts of Iran. The coordinated attack on parliamentary building and the tomb of Ayatollah Khomeini in 2017 by the Islamic State group, for which eight people were executed in July, was the first significant terrorist incident in the capital for years. However, clashes have recently intensified in parts of the north-western border provinces between the security forces and the Kurdish community there, and a renewed crackdown is likely.
The US sanctions due in November target Iran’s oil and gas sector and its ports while adding additional financial sanctions. They apply to US businesses and any foreign business with interests in the United States, and the Trump administration intends to interpret the latter point as broadly as possible as part of strict enforcement. The rial, already in decline, lost half its value against the dollar between April and August following the sanctions announcement, although part of the loss was related to the government’s failed effort to forcibly introduce a unified exchange rate.
The growing political pressure to increase public spending is threating Rouhani’s effort to control fiscal policy. In July he lost an ally when the governor of the central bank departed after being blacklisted by the Trump administration, and further changes to his economic team are likely. Sanctions will undermine badly needed reforms in the banking sector, which is in serious need of recapitalising. Foreign reserves remain strong but capital outflows are increasing as the currency weakens.
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