TSG IntelBrief: Economic Drivers of an Iran Nuclear Deal
November 4, 2014

Economic Drivers of an Iran Nuclear Deal

.

Bottom Line Up Front:

• There are clear and compelling economic imperatives for Iran to accept a nuclear agreement with the P5+1 (U.S., Britain, France, Russia, China, and Germany) by a November 24 deadline

• The Iranian public has chafed under comprehensive sanctions since 2010 and expect President Hassan Rouhani to deliver a nuclear agreement that enables the economy to recover and grow

• U.S. and other P5+1 officials stress the economic opportunities for Iran that will result, including the eventual re-opening of Iran’s oil and gas sector to foreign investment

• Major international firms are poised to re-enter the Iranian market in the event of a nuclear deal, although firms will initially be cautious due to lingering uncertainty.

.

Iran’s economy and population have suffered substantially from international sanctions in place since 2010. The measures have shut Iran out of the international banking system, reduced its oil exports by 60%, locked up most of Iran’s $100 billion in hard currency held in banks abroad, and caused its economy to contract by a considerable 5% in 2013. Iranian workers have experienced widespread layoffs, factories have closed, and key goods, such as advanced cancer medications, have been scarce. The modest sanctions relief provided by the November 2013 interim nuclear deal halted further economic contraction in 2014, but has by no means restored the economy to significant growth.

In recent months, the effects of sanctions have been compounded by a drop in oil prices from over $100 per barrel to about $80. The interim nuclear deal caps Iran’s exports at 1 million barrels per day, meaning that Iran has suffered a major 20% drop in income from crude oil since the summer. Swing OPEC producer Saudi Arabia—a regional rival of Iran–appears in no hurry to cut production to stabilize oil prices. The Kingdom undoubtedly calculates that the oil price drop is putting pressure on Iran to accept the nuclear deal and is harming Iran’s ability to support Syrian President Bashar al-Assad, Lebanese Hizballah, Hamas, Yemen’s Houthi rebels, and other mostly Shi’a pro-Iranian movements.

Iranians’ hunger for sanctions relief contributed to the election of the relatively moderate President Rouhani in 2013, even though Supreme Leader Ali Khamenei clearly preferred hardline candidates. The Iranian public is looking to Rouhani to deliver a nuclear deal that substantially eases the sanctions and enables Iran’s economy not only to recover lost ground but to flourish. There will be profound disappointment in Iran—potentially producing unrest–if the government fails to reach a deal and sanctions are maintained or stiffened.

Still, a nuclear deal must obtain the backing of Khamenei who will weigh the effect of the prospective agreement on Iran’s image of strength and its influence in the region far more heavily than he will its economic benefits. He will not accept any nuclear deal that is seen as an Iranian “capitulation” to the United States and its partners, even if failure to reach a deal economically harms the Iranian population.

The U.S. and other P5+1 officials have emphasized not only the economic imperatives for Iran to reach a nuclear agreement, but also the enormous opportunities. Chief U.S. negotiator Wendy Sherman said in October 2014 that Iran will enjoy a bright economic future if a deal is reached. The primary unresolved issue is Iran’s reluctance to reduce its uranium enrichment program to the purely symbolic level demanded by the P5+1 negotiators.

If the Iranian negotiating team and Khamenei are able overcome their innate reservations to a deal, many major international firms are poised to reenter all sectors of Iran’s economy. International firms see Iran as one of the largest untapped markets in the world–more significant than Burma, for example, which saw sanctions eased substantially as it reformed its politics. Iran has a young, educated population that is eager for Western-made goods, particularly in the technology sector. Iran’s economy was industrializing quickly, particularly in the automobile production sector, before sanctions interrupted that trend. The oil and gas sector requires at least $150 billion in new investment by 2020, and firms such as Total SA of France, ENI of Italy, Royal Dutch Shell, and BP, want to revive and expand their largely dormant investments in that sector. Business executives from European and Asian countries have visited Tehran in large numbers in recent months to lay the groundwork for post-sanctions business deals. And, in 2014, Iran and Russia have signed a broad, multi-year energy cooperation agreement that is likely to be implemented after sanctions are lifted.

A nuclear deal that eventually lifts all sanctions could also produce substantial regional economic integration. Iran is in varying stages of negotiating and implementing natural gas pipeline projects that would allow Iranian gas to flow to Kuwait, Oman, Iraq, Pakistan, and India. These projects have all been hindered by U.S. sanctions, as well as by Iran’s exclusion from the international financial system. An Iran-Turkey natural gas pipeline is operating and, if sanctions were lifted, Iranian gas could potentially also flow through to markets in Europe.

The economic imperatives and opportunities of sanctions relief are likely too great for Iran to walk away from a nuclear deal, even if reaching agreement requires extending the deadline beyond November 24. The drop in oil prices, coupled with the burgeoning expectations of the population for sanctions relief, are bringing great pressure to bear on Iran’s supreme leader to accept an agreement. Should an agreement be reached, major European and Asian firms are likely to quickly resume pre-sanctions levels of trade with Tehran. International firms will proceed slowly on making any major new direct investments in Iran unless sanctions are lifted permanently. A permanent lifting of sanctions will require legislative action by the U.S. Congress, which is not likely in the short term.

.  .

For tailored research and analysis, please contact: info@soufangroup.com

Screen Shot 2013-10-21 at 9.32.42 AM

 

SHARE THIS