Our next newsletter (Issue 68) will be published in April 2017.
In this issue:
- When President Rouhani makes his pitch to the Iranian electorate for a second term in office, he will be judged not just on his striking of the JCPOA deal, but also his administration’s ability to capitalise on it: on the latter his scorecard is mixed. Mr Rouhani has delivered a “return to tranquillity” with solid economic policy making and a return to international oil markets, but the gains are not widespread and unemployment is very high.
- Mr Rouhani promised to flush corruption out of Iranian institutions and privatise the Iranian economy: his failure on this account creates a strong feedback loop into the underperforming economy. The lack of reform will continue to hold back government ambitions for productivity improvements.
- More often than not it is the state-owned sector which is the international face of Iranian enterprise and this acts as a drag on foreign investment. It is inefficient, delays productive reform, attracts corruption and makes foreign companies nervous about sanctions exposure. Foreign investors want to see a healthy, thriving private sector in Iran and if they see that, they will invest in it.
- In President Rouhani’s Norwuz address, he referred to the “pathway” he has laid out for the Iranian economy and argued for patience with long-term policies to make it a success. This is true to a large extent, and if in the next four years involves genuine reform in the state-sector and banking, it could begin to bear fruit.
- In other developments, Russia and Iran have been in talks over a 100kbpd oil supply agreement and development partnerships for 11 Iranian fields worth over $20bn. Russia and China’s economic influence in Iran is growing from strength to strength: China now accounts for 36% of Iran’s exports, compared to only 12% ten years ago.
- Iranian Ballistic missile tests have sparked international controversy, leading to an urgent UN Security Council meeting and a set of targeted sanctions from the US.
- The Iranian reaction to the new sanctions, which they regard as breaching the spirit of the JCPOA, has been relatively sanguine with no further escalation at this stage.
- Iranian business leaders are accustomed to taking the long-view on US relations and foreign investments. Every US president over the last 40 years has imposed sanctions on Iran and the new administration has not yet strayed far from the historical trend. Businesses feel Iran's economic prospects will depend on its ability to convince the rest of the world it is adhering to the JCPOA and open for business.
- Iran's 6th five-year development plan was released last month, based on a highly ambitious projected inflow of $22bn per year of foreign direct investment. A breakdown of the origin of Iran's inward investment flows reveals the importance of the non-US members of the P5+1, who negotiated the JCPOA with Iran, to realising those targets.
- The Tehran stock exchange registered significant losses in January but this is not ostensibly driven by rising tensions with the US. Meanwhile the rial has strengthened over the past month, following a dramatic deterioration in November and December.
- Central Bank Governor Seif warned that the enormous, and rising, share of bad loans in the banking system continues to pose a substantial macroeconomic risk.
- The fate of the JCPOA in the “Trump era” is not yet known but there are signs that even if the US chooses to change course, Iran might adequately rely on its relationship with the rest of the world to continue the path of economic integration.
- Foreign investors remain cautious about Iran on the whole, but some big players are sending a clear message that regardless of the politics, they want to do business. Boeing, Shell, Total, CNPC and Gazprom have signed deals in the last month.
- It is telling that whilst many agreements are signed in principle, few if any are finalised, and the five month run-in to the Iranian election will be a crucial test.
- Regardless of the US position, Iran’s sympathetic business partners are waiting to see if it is committed to the path of the JCPOA and integration into the global economy or poised to revert to the path of isolationism.
- In the meantime, the Rouhani administration continues to focus on the economy, with an optimistic and expansionary budget for 1396.
In this issue:
- Despite the hype of the campaign, our central expectation is that the election of Donald Trump will not undo the JCPOA deal or reverse Iran’s reintegration into the global economy.
- The nuclear agreement initiated something that is very difficult for a new US administration to put back in the bottle. International firms from around the world have revived relationships with Iranian firms and will not be easily deterred from making them a success.
- The US President-elect’s position on Iran may become more nuanced after fuller intelligence and policy briefings on Iran and the wider regional context.
- The agreement itself is multilateral, underpinned by a UN Security Council resolution and is seen as a success in each of the other signatory countries. Russian and Chinese authorities are highly reluctant to undo it, European leaders feel the same way.
- Nevertheless, the downside risks for the Iranian economy are certainly heightened since the US election, especially if postures harden in Tehran and Washington over the future of the relationship.
- But the main challenges that faced the Iran’s economy on the 8th November remain the same today: reform, diversification and the fight against corruption. Iran must be careful to adhere to the JCPOA terms so as not to divert from those priorities.
Further issues available via the Archive tab at the top of the page.