Saturday, May 5, 2018

JCPOA's Uncertainty Exacerbates Iran's Worsening Economic Problems

The Joint Comprehensive Plan of Action (JCPOA) agreement between Iran and the P5+1 was, at the time, widely believed to be a turning point for the Iranian economy, but this has not borne out. Even though it is just one piece of a complex iranian economic situation, the JCPOA is so significant that uncertainty over the fate of the deal has curtailed potential progress. With the shale oil boom keeping the price of petroleum significantly below previous highs, and even minimum budgetary breakeven expectations, Iran’s leading industry is on unsteady ground. The French oil company Total signed a significant oil deal with Iran, but many other firms in the oil industry, and in other sectors, remain hesitant. Boeing and Airbus have committed to major deals, but despite this, Iran’s economic outlook has not improved as expected. Much was made of the stream of foreign trade delegations in Iran following the implementation of the JCPOA, but there has not been a rush to invest in Iran. Substantial geopolitical risks, in addition to pre-existing issues, remain unaddressed, in large part due to uncertainty over the fate of the JCPOA, which faces a considerable test next month.

In May, President Trump will decide whether he wishes to certify Iran’s compliance with the JCPOA under the Iran Nuclear Agreement Review Act, or to refuse to certify, and to withdraw the United States from the accord. He has attempted to be the “anti-Obama” whenever possible - at least rhetorically - but is often hamstrung by either a failure to act decisively, or by the various distractions and domestic and foreign political dilemmas. With pressure on Trump building as the Mueller investigation continues, he will feel increasingly cornered and is likely to lash out in some manner. This is just as likely to be in the form of an angry Twitter rant as in anything substantive, but leaving the Iran Deal remains a realistic possibility. Trump has demonstrated a stubborn persistence on several issues, and the relative ease of an executive decision means there are fewer barriers between him and nullifying the United States’ involvement in the JCPOA, as much for domestic appeasement as over legitimate grievances with the deal.

The Iranian economy has faced a series of hardships in recent years; many self-made. Iran’s ongoing economic mismanagement has led to significant protests - most recently this past winter when nationwide demonstrations rocked the country - but so far such events have lacked any momentum and do not present a serious threat to the government. On April 9th, the Iranian government took a bold - and perhaps desperate - step to halt the slide of the Iranian rial by setting a new “official” exchange rate with the American dollar. At the same time, the government also outlawed the use of any other (black market) rate. Following the 35% drop in value in a week, any further instability would be dangerous for a regime facing an already restive populace.

While alluring as a potentially large and lucrative market, Iran remains as risky, if not more so, than other developing countries. Much of this is due to the uncertainty as to what President Trump may do in May, but other domestic and regional issues, including the IRGC’s influence in important commercial sectors, and the ongoing conflict in Syria, are also important. For firms wishing to invest in Iran’s potentially lucrative modernization, the decision over the JCPOA’s fate will signal either a cautious yellow light, if the deal is upheld, or a steadier red light, if President Trump yet again refuses to certify the accord. Refusal to certify the deal for a third time makes not only American firms, but also European and Asian ones, much more wary of doing business in a country that exposes them to American censure. Congress would be likely to further sanction Iran, increasing barriers to trade and business. Further prolonged uncertainty over the fate of the deal and the implications for the Iranian economy and populace puts additional pressure on an already strained Iranian financial system.

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