#IranTalksVienna: Three Outcomes In Play

As Vienna buzzes with diplomats engaged in a last attempt to come to a agreement on Iran’s nuclear program, markets across Iran are experiencing an unprecedented lull. The currency market, the gold market and the real estate business have all slowed down significantly. Even Tehran’s Stock Exchange Index, which has been relatively steady for the past two weeks, is in decline. So, when people now look to Vienna, their first thought is: what is in store for Iran’s economy?

The deadline for a decision on Iran’s nuclear program is Monday, November 24. For the past 12 months, terms set by the Geneva interim agreement known as the Joint Plan of Action (JPOA) have allowed Iran access to some of the oil revenues that were previously blocked as part of UN-implemented sanctions. The action plan eased the pressure caused by sanctions and gave Iranian businessmen and their counterparts some hope that sanctions might be lifted. Encouraged by this, over the last year, business executives from around the world met with Iranian officials and delegations to explore possible business opportunities within the country.

Following the introduction of the JPOA, the Iranian government received $4.2 billion in oil revenues, including a $900 million payment from India. These payments have revived Iran’s treasury. Meanwhile, for the first time since the 1979 Islamic Revolution, US aircraft manufacturers Boeing issued Iran Air with technical guidelines and navigation material in anticipation of the two companies doing business together in the near future. Iran’s Civil Aviation authorities also signed the country’s first air transportation deal with a European Union member country by coming to an agreement with Portugal.

Though anxiety and uncertainty over nuclear negotiations continues to take its toll on the economy, there have been sufficient grounds for optimism. Tourism is on the rise, the currency exchange rates for the rial, Iran’s national currency, have stabilized and the inflation rate began to decline from the frightening height of 41 percent. After months of contraction, Iran’s economy began to grow.

It is true that some of these improvements can be attributed to President Rouhani’s administration and its policies. Economic conditions have improved as Iran’s image on the international stage has bettered, but, in the absence of any radical developments in daily business practices and any real structural change, the dramatic shifts needed to boost the economy will be unrealized.

But Iran’s business community is understandably worried that the optimism, however slight, will be brought to an abrupt end next week. It is holding its breath, and avoiding any big business decisions until after November 24. The business community is very familiar with the options on the table.

So what are these options, and what impact will they have on Iran’s economy? There are three scenarios: a) a nuclear deal will be reached b) an extension is given for reaching an agreement c) a failure in talks and a return to pre-JPOA terms.

1. Nuclear Deal Reached

The P5+1 countries and Iran are all committed to reaching an agreement by November 24 — at least that is what they say publicly. It is impossible to know the specifics, but economists have sketched out a few general predictions. If a deal is reached, the Iranian government will have access to a larger proportion of its blocked oil revenues. There will be a timetable for lifting sanctions, and some of them may be removed immediately. Iran’s position in foreign trade will improve and its import and export trade will increase.

For the Iranian economy, this is the best outcome. However, its true impact cannot be accurately measured. It will depend largely on Iran’s economy remaining stable and being properly managed, and on the exact terms of the agreement and how they will be implemented. And, any boost to the economy that emerges from an agreement will be counter-balanced by the effects of widespread on-going corruption and endemic mismanagement across a number of industries. And the continued influence wielded by the Islamic Revolutionary Guards Corps and other military-affiliated organizations means there is a limit to how much the private sector will benefit.

Following any deal, Iran’s currency market will experience a shock, lasting between several weeks and months. The rial will gain ground against hard currencies and households will be encouraged to sell their hard currency savings. Iran’s economy has undergone similar shocks before, and it is therefore crucial to remember that these shockwaves will be temporary. The Iranian government has no incentive to see the rial gain against foreign currencies; the current exchange rate has encouraged foreign tourists and Iranian exporters alike.

In this scenario, the inflation rate will continue to fall and the economy will grow. The government may well consider economic reforms, which would leave military organizations’ economic interests unharmed. The country could import higher numbers of automobiles, and the commercial real estate market would enjoy further investment. It is hard to predict when employment figures will improve in Iran, as the job creation process is currently held back due to inadequate labor regulations, interrupted markets and a surplus of college graduates. Even in this best-case scenario, there is no hope of a rapid recovery in the labor markets across Iran.

2. Deadline Extension

If Iran and world powers cannot reach an agreement by November 24, the deadline could be extended to spring 2015 meaning that JPOA terms will continue. This will be a frustrating outcome for the Iranian business community but is unlikely to damage the corporate environment or economic conditions. It will keep the hope of reaching an agreement alive. Iran may also be granted access to several more oil revenue instalments. But if a deadline is extended, Iran will not attract as much business or as many tourists as was originally hoped.  

An extension means that the new recession in Iran’s real estate and investment markets will become the new equilibrium, stabilizing the number of economic transactions and the size of economic activities at currently diminished levels. Iranian military organizations, such as the Revolutionary Guards, will continue to dominate the economy and shadow economy in Iran. And, the black market will remain active as the main source of hard currency, much needed equipment, medical supplies and other items.

Equally, the exchange rate for Iran’s currency will decline and there will be an increase in the price of imported goods and vehicles. Iran’s inflation rate will continue to waver at current low levels averaging between 18 to 21 percent. The economy will continue to grow at a painstakingly low rate. Hopes of improving the job market will disappear and Iranian households on a fixed income will go on suffering with little chance of relief on the horizon.

When compared to the first scenario, extending the deadline may appear unfavourable but it is considerably more desirable than the last option. A failure in the talks, which would mean a return to pre-Geneva conditions, will be a nightmare for every Iranian business. If no deal is reached, Iran’s economy will go into steady decline. The budget deficit, which has remained at bay by incorporating the $4.2 billion sum from oil revenues into the economy, will rear its ugly head. Consequently, the Iranian government will have to implement contractionary policies, which will cut public expenses and social welfare programs. Both these options are vastly unpopular, even among regime supporters.

3. No Deal

If talks break down, the Iranian rial will be in free-fall. The inflation rate will rise sharply to 30 percent — although the government might borrow more from the Central Bank of Iran. Unemployment will rise. The average household in Iran will be further strapped for money. Confidence in the economy will sink to an all-time low. Iranian businesses will become idle, losing hope. The price of smuggled vehicles and commodities will soar and Iranians will use any means possible to protect the value of their savings. Real estate prices will also increase, particularly because new opportunities for construction will stall. An inflationary recession will set in. Anything will be better than this scenario.  

November 24 is just a few days away. November 25 will either be a dark day for the Iranian economy or the beginning of a new era. One thing is certain: Iran’s economy cannot endure any more politicking. The economy is desperate for an agreement — not so it can prosper, but so it can survive.