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The Future of Iran’s Economy as the US Bows Out of the Deal

May 10, 2018
Behrouz Mina
6 min read
The Future of Iran’s Economy as the US Bows Out of the Deal
The Future of Iran’s Economy as the US Bows Out of the Deal

On Tuesday, May 8, President Trump announced that the United States will leave the nuclear agreement with Iran known as the Joint Comprehensive Plan of Action (JCPOA). Immediately after his announcement, he signed a presidential memorandum reinstating Iran’s Nuclear Sanctions, which will begin to take effect within 90 days, with the full list imposed within 180 days. 

In anticipation of the decision, Iran’s gold and currency markets have already been volatile over the last weeks. It appears that Iran’s economy is gearing up to repeat the past. 


Trump’s decision will give priority to the following sanctions: 


·     Sanctions on Iran buying or acquiring US dollars

·     Sanctions on Iran trading gold and other precious metals

·     Sanctions on Iran's sale, supply or trade of metals such as aluminum and steel, as well as graphite, coal and certain software for "integrating industrial processes"

·     Sanctions on "significant" sales or purchases of Iranian rials, and the maintenance of significant funds or accounts outside the country using Iranian rials

·     Sanctions on lending and issuing debt and credit to Iran

·     Sanctions on imported goods to support Iran’s automobile industry


It appears as though President Trump has tried to set the clock back on Iran’s economy, returning to the climate of four years ago. In response, President Hassan Rouhani and his Foreign Affairs Minister Javad Zarif have announced that as long as the European countries that signed up to the JCPOA follow up on their commitments, along with Russia and China, Iran will continue to honor its commitments under the deal. 

For now, the magnitude of the economic impacts of Trump’s decision to leave the JCPOA depends primarily on the European Union’s response. Analysts have general ideas about what will come next, and as for Iranians, they have already taken their cue from the way the domestic markets have reacted.


The Currency Market 

In the short run, the first market to react to this decision will be Iran’s currency market. Since the United States will impose sanctions on Iran’s access to US dollars, the supply of this currency in Iran and to Iranian businesses will be greatly reduced, and it is likely that the Iranian rial (IRR) will decline even further. Iran’s currency exchange market has already reacted to this eventuality, as the rial has been in free fall over the last month — partly in anticipation of what Trump might decide. Amid speculation, many Iranians have already taken their capital out of Iran, and out of the grasp of the United States’ sanctions. It is estimated between US$10 billion an $30 billion left the country during winter 2018. Demand for the rial has been in decline, and demands for other means of storing value has been on the increase. The investment market in Iran will continue to be in flux. 

If Iran’s currency exchange market responds quickly to any expected change, it is in part due to this existing liquidity. However, the same cannot be said of other economic sectors. Iran’s airline industry is bewildered and has been thrown into chaos by the United States’ decision to exit the JCPOA. Airlines have signed memorandum of agreements to receive more than 400 airplanes from international aircraft manufacturers such as Boeing, Airbus and the French-Italian ATR. The planes are much needed to renovate Iran’s aging air fleet — and to improve flight safety. The US Treasury Department’s Office of Foreign Assets Control (OFAC) has not lost any time in revoking the licenses that had been issued to export and re-export commercial aircraft to Iran. It also announced that it would no longer consider any application for such activities under the JCPOA, although, it did state it would continue to consider applications submitted under flight safety standards. Iranian airlines still hope they can receive the promised deliveries from Airbus, and some are reluctantly considering Russian and Chinese manufactures aircraft for their operations. All are beginning to regard the United States as an unreliable business partner that cannot be trusted. The United States might as well consider this $80-million-strong market lost for good. 


Will it be the Same as Before?

It is not easy to speculate about the long-term impact of a JCPOA without the United States. It is true that the United States once implemented these sanctions successfully. However, at that time, Iran was considered a rebellious country, at least in its nuclear ambitions. Today all international organizations, parties to the JCPOA and US intelligence agencies acknowledge that Iran is compliant with its commitments under the JCPOA and the Non-Proliferation Treaty. It is doubtful that the United States’ allies will collaborate with such sanctions as they did before. The EU will have to find another way to supply Iran with the euros the country needs. One thing is certain. Iran will look east, again to Russia and China, for sustainable economic partnerships and business ventures. These oligarchic countries are willing to benefit from the United States’ decision, imposing higher prices on Iran and demanding favorable terms in their dealings. They know they have found a strong market and they will be reluctant to let go of it. 

As for the oil sector, Iran’s oil sales are already in decline. Ever truthful to their regional ambitions, both the Kingdom of Saudi Arabia and the United Arab Emirates have offered to sell oil to Iran’s traditional customers. However, again the situation is different now when compared to the time when sanctions were at their peak. President Trump’s decision to leave the JCPOA does not mean that the United Nations’ sanctions will snap back into place. Iran can still sell oil and have access to its oil revenues. Iran might choose to deposit its revenues in other currencies — the Chinese yuan seems to be a candidate. Iran also can use oil to pay for its imports, a solution already under consideration in trade agreements with the European Union. But the most significant impact will be on foreign direct investment (FDI). Iran’s oil sector won’t be attracting the foreign investment it needs to expand its capacity and productivity. Over the demand for investment, if oil prices remain constant, both will decline. 

The decline in demand for investment might be translated into a lull in the construction industry and the housing sector. There are already thousands of empty housing units in Iran, the owners of which refuse to lower their asking prices. And now the number of housing sales will decline even further. This is an important development, since most of the bank loans in this area are guaranteed by collateral in the form of real estate. A recession in the housing sector will increase Iranian banks’ vulnerability, reducing their ability to supply money and credit lines to businesses. As a consequence, Iran’s economy will slow down and unemployment will increase. 

The Iranian government will use the concept of a resistant economy to revive the economy. However, with the weakened ability to trade, the economic impact of such projects will be lessened. If major structural reforms are not carried out, Iran’s economy will begin to shrink.

It is true that the United States does not have the international support it once enjoyed to impose draconian sanctions on Iran’s economy. However, it also is true that Iran’s economy is burdened by decades of lost opportunities and mismanagement. Its ability to bear additional costs for the sake of politics is unclear. And this factor will only add to the complex challenge of predicting Iran’s economic future. 


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