Our next newsletter (Issue 81) will be published next month.
Published: August 2018
In this issue:
- One week after the US sanctions snapped back into place, there is an unfortunately familiar sense of economic crisis in the air. With the rial plummeting, food prices spiking, the prospects are grim.
- More businesses have joined the roll-call of European pull-outs, citing commercial practicalities. Major car makers, airlines, railway companies and shipping firms have pulled out in the past week.
- The European Union has vowed to counter US sanctions and fight to preserve the JCPOA. But when it comes to oil sanctions, European governments are limited in what they can do.
- Iran’s policy makers may lament not having achieved a more stable footing in the short window of economic recovery the JCPOA allowed. Iran recouped much of its overseas financial assets but spent profligately on military capabilities and regional conflicts, which itself provoked US hawks into pulling out of the deal.
- The ordinary Iranian household has little financial buffer to protect itself in this new period of renewed austerity.
- From the perspective of Iranian businesses, the best strategy is to ride out the pressure and continue to make the case for sanctions removal. In the meantime, it will be important for the Iranian authorities to avoid the pitfalls of bad governance and the abuse of power.
- “Impulsive, unlawful and provocative” is how Iranian Foreign Minister Zarif described the US withdrawal from the nuclear deal in a letter to the remaining signatory nations. Iran’s case has met with broad international agreement, but Iranian businesses will need to see tangible measures to maintain international financial links quickly.
- Iran has set out in no uncertain terms what it demands from European partners to keep the deal alive. The primary ask is to block US sanctions within the European jurisdiction.
- The progress of a small group of major European companies active in Iran, such as Total and Peugeot, will be crucial. Firms are already beginning to turn away from joint venture commitments.
- Iran has also demanded guarantees that its oil exports and banking relations endure.
- In addition, the Supreme Leader insisted that the Iran’s missile defence and presence in the region’s countries was not up for negotiation.
- Unfortunately, the good will required to maintain the JCPOA will largely depend on Iran’s military posture. The EU3 will need to negotiate concessions and agreements with US counterparts to trace a sustainable path forward, and provocative Iranian announcements about the nuclear programme, missile defence and regional military activity will stifle those talks.
- Nevertheless, a post-US version of the JCPOA is at this stage still a cause worth fighting for. A return to economic isolation could depress the economy and reverse the progress made in recent years in stabilising the macroeconomic environment and financial sector.
- The United States has chosen to pull out of the JCPOA nuclear deal, thus reimposing financial sanctions against Iranian entities.
- In Iran, the authorities had already begun planning for a post-US era for the JCPOA and what it will mean for its banks and external trading relationships. Severe damage had already been done to the trust and momentum required to sustain the deal on its original terms.
- But there is life after death for the JCPOA – European and other signatories want to continue its implementation despite the US reversal.
- Iran’s best interests are served by maintaining the course: compliance on the nuclear programme and economic reform.
- Iran will expect Europe and other parties to do more to guarantee that goods and money continue to flow – in return, Europe and others will require Iran’s continued compliance in order to negotiate terms with US sanctioning authorities.
- Iran must continue to improve the resilience and stability of its economy, in order to attract much needed foreign investment and improve living standards in this new context.
- The recent crackdown on the foreign currency market is indicative of the battle taking place in the administration between hardliners, looking to turn inwards, and the liberally minded looking to enhance Iran’s competitiveness in the global economy. Mr Trump’s decision risks tipping the balance in favour of the hardliners.
- President Rouhani ushered in the Norwuz celebrations with a self-congratulatory speech, in which he identified “trust” as the key to Iran’s success over the coming years.
- His comments could be seen as a thinly-veiled critique of the excessive involvement of the IRGC and other military actors in the economy. Corruption, nepotism, skewed investments and inefficiency stifle the government’s economic policy.
- The IRGC Quds Force unabashed role in the counterfeiting of hundreds of millions of dollars’ worth of Yemeni bank notes is a case in point. Such deceptive, criminal behaviour right under the nose of European regulators poisons the reputation of legitimate Iranian businesses overseas.
- The Central Bank of Iran (CBI) has announced plans to merge Iran’s “military banks” by next Norwuz. Whether this reduces the military dominance of the Iranian financial services sector will depend on how well the new entities are regulated and policed.
- In the context of a hardening US stance on the JCPOA, which is influencing the European posture towards Iran, the banks are the battleground for Iran’s economic survival. Transparency in the sector will be the difference between delivering short-lived returns and long-lasting profits.
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