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Iran’s Economy Under Stress

The 180-days wind-down period between Trump’s 8th of May announcement that the United States were unilaterally withdrawing from the Joint Comprehensive Plan of Action (JCPOA), has now officially ended. That means that the sanctions suspended by the Iran deal are now being fully reimposed and risk being intensified should the Islamic Republic fail to “change its behaviour and act like a normal country”, as Secretary of State Michael Pompeo claimed on the 5th of November. Looking at the six previous months in this news analysis, Castlereagh Associates provide you with an account of why American sanctions matter and what they mean for the future of the Iranian economy.

First and foremost, American sanctions might be unilateral, but their being secondary makes them extremely powerful. They do not only apply to Iranian entities, but hold the threat of cutting any third party doing business with Iran from the US market and imposing hefty fines on it, a risk that no major business entity is ready to take. The sectors targeted by such sanctions are vital for Iran’s economy as they include its financial, industrial, aeronautic, monetary and energy sectors among others.

Second, sanctions on Iran’s energy sector have already been effective. The country’s clients of crude oil have gradually cut down on their imports, so much that there is a difference of 1.1 million bpd between April and October export levels. Indeed, the country used to ship around 2.7 million bpd the month prior to Trump’s JCPOA withdrawal. Now, this amount has dropped to 1.6 million bpd for the month of October according to Tankertrackers.com. Despite the likely issuance of waivers for 8 buyers of Iranian crude  -an American strategy that allows customers and the oil market to readjust to sanctions- oil intakes from Iran are likely to drop closer to 1 million bpd in the coming months, especially considering that Chinese refiners like Sinopec and CNPC have also halted orders.

Third, the most potent impact of US sanctions acts on Iran’s access to international finance and investors. Indeed, decreasing oil exports and revenues are a recurrent aspect of the economy, to which Iranian officials can more or less adjust by further diversifying the budget, which already relies more on tax revenues than oil revenues. Yet, when it comes to financial sanctions, the adjustment is near impossible, and we have seen that Iran is trying its best to avoid being isolated. In addition to having guarantees for a Special Purpose Vehicle (SPV) from trading powerhouses like the European Union, the country’s legislators are engaged in a dogfight to ensure that Iran approves and implements legal bills required by the Financial Action Task Force. However, on the ground, it is already too late. Most major European companies and financial institutions have left the country and cancelled their investments. The only ones left and susceptible of being sustained through the EU’s SPV are small and medium companies not representing a lot of capital for a country in dire need of investments. Sanctions have also made payments to and from Iran a true hassle for companies as well as ordinary people, who cannot access anymore vital goods such as medicines.

The impact of sanctions is also visible in terms of economic growth: the country’s economy is set to contract by 1.5% this year and 3.6% in 2019. Double-digit inflation is quickly making a comeback and likely to reach at least 30% this year. In other words, economic growth, low inflation, foreign investments and a stable currency, which were all achievements of Rouhani’s first term, have all been thrown away, in great part because of sanctions.

Yet, despite all the hardships, we do not expect to see an imminent collapse of the Iranian economy considering that the country’s leaders have an elaborate sanctions playbook to use and gain time to wait out Trump’s Administration.

Castlereagh Associates expects to release a long report on the effect of sanctions on the Iranian economy. The report will include exclusive information and projections for the future of Iran’s economy.

Photos Copyright © U.S. State Department 2018.

 

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