The likely outcomes of the Iran nuclear deal, the impacts on economic prospects for Iran, and how international investors are likely to position themselves in the coming months.
With the November 24th deadline for the conclusion of a permanent agreement on Tehran’s nuclear program fast approaching, it is still unclear if negotiators can clinch a final deal. Others have extensively covered the key issues at stake, whether the P5+1 or Iran has been the party unduly obstinate in the talks, and the resulting impact on regional stability.
Whatever the final outcome, however, we know that it will significantly affect the short-term economic prospects for Iran, including the political risk assessment of major new foreign investment in the Iranian economy. There are three potential outcomes a month from now, each of which will generate a set of disparate economic and financial results.
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The first outcome, and the one regarded as most likely, is that the two sides remain too far apart to produce a grand compromise, but also recognize that a collapse of diplomacy is harmful for all involved. Accordingly, they choose to kick the can down the road and agree to another extension of the interim agreement that caps Iran’s nuclear program for the time being in exchange for modest sanctions relief and the continued assurance that no further sanctions are forthcoming. This extension, anywhere from as short as three months to as long as a full year, allows for talks to continue on a permanent agreement while essentially freezing the status quo.
Under this scenario, Iran’s economy will continue to plod along, neither generating enough growth to follow through on President Rouhani’s campaign promise to reenergize the domestic economy, but also protecting against a significant recession. An extension may afford Iran access to additional funds currently frozen in overseas financial institutions.
While the global sanctions regime will remain constant, a relaxation of enforcement at the edges will likely occur, given the demand of firms in states like India, China, and Turkey to regain access to Iranian markets and Tehran’s readiness to facilitate such evasion through smuggling and other black market activities. Nevertheless, major Western corporations will continue to move slowly on returning to Iran, mindful of the legal and reputational risks of doing so.
The second outcome, one now slightly more plausible in the wake of optimistic remarks on the negotiations from lead U.S. negotiator Wendy Sherman last week, is that a breakthrough is achieved and a final deal is concluded next month or shortly thereafter. It is important to acknowledge that any comprehensive deal will likely facilitate only a gradual suspension and dismantlement of sanctions, as the P5+1 will want to keep Iran’s feet to the fire prior to permanent lifting of these penalties.
But make no mistake: conclusion of a final deal will start the sounding gun for a Gold Rush-like frenzy into Iran as companies rush to secure their market position in an economy with significant long-term potential. European entities will likely have an advantage owing to their previous commercial relationships with Iran. Russian and Chinese firms are also likely to exercise leverage owing to their governments’ closer ties with Tehran. But a clear message will resonate around the world: Iran is once again open for business.
The third, and least likely, outcome is a collapse of diplomacy. Under this scenario, the failure to reach an agreement next month incites hardliners in both Tehran and Washington, leading to pressure on one or both sides to pull out of the negotiations, declaring the other side is too hardheaded to make further talks worthwhile. An immediate atmosphere of escalation takes over, with the military option once again touted as being back on the table, whether by Israel, the United States, or some combination thereof.
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Iran’s economy is hard hit if this outcome materializes. No multinational corporation is likely to contemplate resumed investment in this atmosphere. Putting aside the legal implications of continued sanctions that may further intensify in the near term, the geopolitical atmosphere would also be too risky to proceed with a significant inflow of resources into Iran. The prospect of military action, no matter how unrealistic, is enough to put a chill into any conversations on deal-making.
One last wild card exists. In recent months, crude oil prices have sharply declined, with a 20 percent drop since the start of the summer alone, exacting greater pressure on Iran’s economy. If this decline continues or accelerates in the coming weeks, it may make a final deal more likely if the Iranian leadership recognizes that its economy will crater unless it takes action to stem the bleeding.
Moreover, in the event of a final agreement, a lower market price for crude oil may temper the enthusiasm of multinational oil firms to re-enter the Iranian market as they may wish to hold off on long-term investments until they can be assured of a profitable market return.
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By Jofi Joseph
Source – www.globalriskinsights.com
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