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Iran Country Risk Report, May 2019

Iran Country Risk Report (May 2019)

The sanctions that the United States is implementing against the Islamic Republic of Iran since November 2018 are the toughest sanctions ever imposed on Iran. They threaten to cut off foreign countries and companies dealing with Iran from the US financial system in order to deter business with Iran so to curtail the impact of proxy groups on the Middle East’s security and stability. The aim of this country report is to provide the most recent analysis of the Iran's economic and political situation, and estimate its evolution in the short and medium term. It presents an overlook of specific clues about matters related to political risk, as well as the effect that sanctions may have on the Iranian economy, and the prospects for political stability all over the region.

Alona Sainetska

 

Report [pdf. 13,5MB]

 

EXECUTIVE SUMMARY

Effects of sanctions

The re-imposition of US sanctions will maintain the Iranian economy in recession during the remaining months of 2019. Notwithstanding the foregoing, the economic meltdown will be very unlikely to happen, as the volume of oil exports is still significant, crude prices are going to continue to rise and other major powers´ opinion will still differ from the US´s. The multinational companies dependent on US financial system will continue leaving the Iranian market, partially leading to declining of the foreign investment, but SMEs will be almost unaffected and new forms of trading are likely to emerge soon.

Iran is likely to build stronger economic and political ties with India, China and Russia, thus giving them more power and openness to new trading opportunities, basically due to lack of any other possible partner on the horizon in the mid-term.

The prices are likely to keep growing up in the following months reaching the average inflation of 31.2% in 2019-20; still the risk of hyperinflation is discarded due to the fact that Iran is able to meet a significant share of local demand through local production. 

Backed by support from the EU, Iran is promised to obtain in the mid-term a special mechanism of payments  (Special Purpose Vehicle) for its oil and other exports (possibly through a barter system) in order to conduct trading outside of the competence of the US sanctions. This is likely to create some tensions between Europe and the US but they will not be powerful enough to split the long-lasting alliance between the two.

Oil and gas

The Iran´s production of oil will probably continue to decrease affecting the world´s oil price.

Five from the eight initial major buyers (Italy, Greece and Taiwan have already stopped their purchases from Iran) are and will be buying Iranian oil now that the waivers have been extended for the following 90 days. Thereby, the Iranian oil will still remain in demand during the following years, and Iran´s government is likely to find solutions for its selling and exportation, even though illegally, in the mid and long-term. Thus, the United States is unlikely to meet its earlier target of driving Iranian oil exports to zero.

Iraq will continue to buy natural gas from Iran in order to use it in the production of electricity, becoming the second largest customer. Taking into account the fact that there is a sort of competence between US and Iran for the influence over Iraq, it can fuel a further deterioration of their relations. It is also plausible that more buyers will emerge if some new forms of trading, which do not rely on dollar, appear soon.

Even though the modest production growth is likely to continue, Iran won´t be able to unilaterally monetize its natural gas resources due to lack of financial partners and the investment, especially from the West. However, it will be able to fulfil its domestic demand and sustain trade with Turkey.

Iran’s ability to increase production and exports of natural gas will be almost improbable, unless the relations with the United States are improved or support from international partners in defiance of sanctions is reinforced. Nevertheless, if Iran manages to accomplish current development projects, its export pipeline capacity will increase from 46.4 bcm/year in 2018, to 119.7 bcm/year to the regional and global markets in a long run. China, India and Pakistan will play a significant role in Iran´s natural gas sector.

The domestic scene

Iran will continue demonstrating considerable resilience in coping with US sanctions, and is likely to continue to fully implement the commitments of JCPOA as long as China, Russia, or countries which are non-members of the deal, such as India, continue to trade with it, and if EU continues maintaining its constructive attitude. In this case, even a greater international support and United Nations diplomatic intervention is expected in the mid-term. However, on a longer run, the JCPOA future will depend upon the economic situation and complex political battles between moderates and hardliners in Tehran.

The current deterioration of the economic conditions in Iran, the rial devaluation and growing inflation, together with already-high unemployment will provoke a further popular discontent which is likely to maintain the protests but without any considerable probability to threaten the Iranian political stability or lead to leadership´s rupture during the upcoming years.

The sanctions are likely to produce some adverse effects on the political local scene over the longer term, as Iranian hardliners may take advantage of them and the popular frustration and obtain the victory in the coming 2020 parliamentary elections and the 2021 presidential poll. As a result, any possibility for future cooperation with US will equal zero.