Iran Country Risk Report (June 2019)

After some months of implementation, the re-imposed US sanctions against Iran are seriously affecting Iranian economy and forcing disputed political and even military reactions. The present report attempts to provide an analysis of Iran by addressing: the consequences of sanctions, the current and future state of its energy sector, the internal situation of the country, and the future prospect of the Iran-US relations.

C. Asiáin, M. Morrás, I. Urbasos

Report [pdf. 14,1MB]

EXECUTIVE SUMMARY

The US unilateral withdrawal from the JCPOA on May 8, 2018, reshaped the Iranian domestic and international reality. On the one hand, the JCPOA enabled Iran to increase its GDP above 7% in the period of 2016-2018, more than double its oil exports and maintained President Rouhani in office after the 2017 elections. On the other hand, the US reimposition of the previously lifted sanctions demonstrated the deep vulnerabilities of the Iranian economy and its huge diplomatic isolation.

US sanctions will affect the whole of Iran’s foreign relations due to its extraterritorial nature. The EU will try to avoid its effect through legal protection of its companies and citizens with mechanisms such as the SPV, whose scope and effectivity is yet to be proved. China, as it is less exposed to the US financial and political influence, will be able to better circumvent sanctions but still far from being totally unaffected. Other countries such as India, Turkey or Russia will find difficulties to handle secondary sanctions, but will be able to maintain a certain degree of trade with the Islamic Republic. Japan or South Korea will have to follow US demands because of its strategic alliance in the Asia-Pacific region and resume energy imports and investments.

The Iranian economy is expected to enter into recession during 2019, GDP growth is expected to be -4.5% and unemployment rate will increase to the 15.4%. This economic hardship will concentrate the political debate in the 2020 legislative and 2021 presidential elections, whose result will determine if a moderate or hardliner political faction seizes power. Social unrest from ethnic minorities and opposition is expected to rise if the economic conditions do not improve, challenging the current political equilibrium of the country.

The energy sector will be deeply affected by US sanctions as it banned all countries from investing and purchasing Iran’s energy products. Sanctions are expected to reduce Iran oil exports to 1million barrels a day from the 2017 levels of 2.4 mbdp, decreasing governmental revenues drastically and freezing most foreign investments. The lack of FDI and technology will aggravate the problems of the Iranian energy sector with possible irreversible effects depending on the sanctions duration.

US-Iran relations are expected to worsen at least until the US 2020 Presidential elections, when a more dialoguing candidate could substitute the hawkish Trump administration. The United States is expected to maintain its current strategic alliances with Saudi Arabia and Israel, whose common goal of pressuring Iran can have unexpected consequences for the Middle East. Domestic politics in Iran, US, Israel and Saudi Arabia will play a major role in the evolution of the events.

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.

REPORT / Jokin de Carlos Sola

Simplicity is the best word to describe this Baltic country. Its flag represents the main landscape of the country; a white land covered in snow, a black forest, and a blue light sky. And so is its economy, politics and  taxation. What a minimalistic artwork is Estonia.

Estonia is the smallest of the three Baltic countries, with the smallest population and a quite big border with Russia, concretely 294 km long. Even so, Estonia has a bigger GDP per capita (17,727.5 USD in 2016 according to World Bank) than the other two Baltic states: Latvia and Lithuania. It has a bigger presence in the markets and a bigger quality of life according to the OECD in a study done it in 2017.

Technology is a very important part of Estonia's  economy. According to the World Bank, 15% of Estonia's  GDP are high tech industries. Following the example of Finland, Estonia has made technology the most important aspect  of  their economy and society. But not just that, with the eyes faced towards the future, or as the Estonians call it “Tulevik”, this former part of the Soviet Union of 1,3 million inhabitants  has become the most modernized state in Europe.

The 24th of February of 2018 Estonia celebrated the 100th anniversary of the its independence, so it is interesting to see how the evolution of this small country is and will continue to be.

All this has been possible because of different figures  like Laar, Ilves, Ansip, and Kotka.

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