Sunday, 22 March 2015

Nuclear deal offers only a glimmer of hope for Iran’s economy

This article originally appeared on Global Risk Insights

Between crippling sanctions and plunging oil prices, Iran’s economy has been under severe pressure in recent years. While the potential for a nuclear deal has caused optimism, entrenched interests of the Revolutionary Guard will likely prevent Iranians from feeling the full benefit of sanctions being lifted.

While still volatile, Brent crude oil prices seem to have reached a floor around $50 a barrel. With renewed hope that a nuclear program agreement with the US could result in the lifting of sanctions, speculation grows over a potential resurgence in Iran’s energy sector and an influx of foreign inventors.

Holding the world’s second largest natural gas reserves, there is great potential for Iran to develop lucrative resources and diversify away from oil, which accounts for more than 40% of government revenue.

Aside from exporting gas, Iran has shown a desire to change its domestic energy mix from oil to gas and free up more crude for export.

However, the sanctions have limited the potential for energy investment and exports, as foreign investors have stayed away from Iran fearful that banking sanctions could lead to the freezing of assets.

Iran’s president, Hassan Rouhani, has said that he is seeking the removal of all sanctions if a nuclear agreement is to be reached. The apparent nearing of a deal by the end of March has led to hope of an imminent removal of sanctions.

Prospects of an agreement have stopped the free fall of the the TIPEX Index, a broad measure of Iran’s stock market.

Easing inflationary pressures have caught on, with the current rate now around 17%, down from 40% in 2013. Add to this the Iranian central bank’s claims that the economy has grown in the past year, and the end to two years of contraction set the stage for a positive turn in the immediate future.

Then again, such optimism seems excessive. Apart from the fact that Iran’s youth unemployment rate is around 24%, the lifting of sanctions may not be a dramatic tailwind. If a deal is reached at all, the lifting of sanctions could be a gradual process spread over many months.

And there is the Revolutionary Guard. Established to protect Iran’s Islamic system, the role of the Revolutionary Guard has morphed over the years to include deep interests in the nation’s business activities.

Under former president Mahmoud Ahmadinejad, the Guard’s influence grew markedly, while the impact of sanctions added to the group’s power. As foreign energy firms exited Iran, the Guard’s engineering companies stepped in to take control of oil resources.

It is unlikely that the Guard views the prospect of easing sanctions and return of foreign energy investors as a welcome development. Conservative Iranian hardliners have already been blamed for slowing progress in the nuclear talks, and have highlighted the ineffectiveness of last year’s partial easing of sanctions in alleviating hardships faced by average Iranians.

An inefficient energy sector free from foreign influence is much more desirable to the Guard than a flourishing industry that would benefit the broader economy.

Even if a nuclear deal is reached and sanctions are lifted, it is doubtful that the Guard will immediately give up its clout in Iran’s business affairs. Foreign companies should not expect a warm welcome back to Iran, despite the efforts of a pragmatic Rouhani to build relations with the West.

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