Our next newsletter (Issue 82) will be published next month.
Published: December 2018
A positive future trajectory depends on follow-through from Iran’s external counterparts, including the EU with its Special Purpose Vehicle and other partners proposing an alternative to the SWIFT financial messaging system.
The government will have to make difficult choices on spending. The opportunity cost of expensive overseas military adventures will grow and grow as the needs of Iranian households become ever more stark in the coming years.
Published: October 2018
In spite of growing pressures on the Iranian economy, the Tehran Stock Exchange (TSE) has hit historic highs in recent weeks. But the market highs do not reflect economic realities. The principle driver is liquidity caused by rapid depreciation of rial.
Nevertheless, confidence was boosted by the announcement of a new European Special Purpose Vehicle (SPV) for circumventing US financial sanctions. The mechanism will facilitate payments between European and Iranian entities in a way that avoids contact with the US dollar markets and the SWIFT payment system
The SPV is a significant step forward in establishing the new parameters for Iran’s trade with the world under a post-US JCPOA agreement, but it is no panacea for Iran’s economic woes and the technical details are yet to be ironed out.
After a highly volatile three months in the currency market, the authorities appear to have successfully brought the rial under some control, and have extended authority to the Central Bank of Iran to deal promptly with speculators guilty of fuelling market volatility.
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.
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