Iran: remaining sanctions increase investment uncertainty in 2017

02 March 2017

US President Donald Trump’s more robust approach to Iran will raise diplomatic tensions between the US and Iran in the short term. Despite this, the multilateral nuclear deal implemented in January 2016 will remain in place, with sanctions relief boosting economic growth in 2017. Uncertainty over remaining US sanctions will drag on investment decisions by international companies, although significant opportunities will emerge in energy and infrastructure projects in the long term.

Security Environment

Relations with the US have worsened under President Trump, and will likely remain strained in the medium term. In February 2017 the US imposed sanctions against 12 companies and 13 individuals in response to a ballistic missile test carried out by Iran on 29 January 2017. In spite of this, the cancellation of the Joint Comprehensive Plan of Action (JCPOA) nuclear agreement is unlikely, given multilateral commitment to the deal. 

Trump will attempt to implement stricter enforcement of the nuclear deal in the short term, in an effort to demonstrate a harder line than the previous administration. This is not likely to spark Iranian non-compliance with the JCPOA, given the importance of sanctions relief for Iran’s economic outlook. President Hassan Rouhani is likely to win re-election in May 2017, with no viable hard-line candidate having yet emerged to challenge him. However, hard-liners in the government will likely seek to use Trump’s more robust rhetoric against Iran to increase their influence and undermine the moderate Rouhani. This would pose a challenge to inter-state relations, with hard-liners more likely to advocate a provocative response to Trump’s actions, such as increased military testing.

Trading Environment

Sanctions relief will boost the Iranian economy in the two-year outlook, with growth forecasted to rise from 3.8% in 2016 to 5.1% in 2017. Higher oil production will underpin this recovery. Crude production was up 20% in 2016 to average almost 3.8 million barrels per day, and this is expected to deliver revenues of USD 41 billion in F/Y 2016/17. 

Foreign exchange reserves are estimated to have risen to USD 135.5 billion in 2016 from USD 110 billion in 2015, reducing sovereign credit risks. Country economic risks remain heightened as hesitation over sanctions will drag on international investment, limiting potential economic growth in the medium term. The maintenance of the JCPOA will be vital if Iran is to attract the investment necessary for sustained economic stability, with the country hoping to attract almost USD 13 billion of foreign direct investment by the end of F/Y 2016/17.

Investment Environment

The removal of a number of international sanctions in January 2016 raised the prospect of investment opportunities for international companies in critical sectors such as oil and gas. However, remaining US sanctions will drag on investment decisions in 2017, as companies look to remain compliant with US regulations. Primary US sanctions will continue in the medium term outlook, precluding the use of US dollars in any transactions relating to Iranian business. 

This could deter investment from large European companies, as banks will want clarity over sanctions implications before committing to Iranian business. For instance, non-US companies conducting business with Iranian entities controlled by the Revolutionary Guards could have their US assets seized. Such risks cloud the legal environment for Western companies in Iran, and as a result investment decisions are likely to be delayed in 2017. In February 2017 French oil firm Total announced that its planned USD 2 billion gas project investment in Iran would depend on the Trump administration’s renewal of certain sanctions waivers, with a final investment decision to be made by summer 2017. 

Over the long term, there are significant opportunities in energy and infrastructure projects. In January 2017 Iran selected 29 companies to bid for oil and gas tenders, including Chinese and Russian majors, alongside European firms such as Shell and Eni. In addition, around USD 30 billion of investment is required to meet demand in Iran’s power sector. In June 2016 Turkish company Unit International agreed a USD 4.2 billion deal to develop seven natural gas power plants in Iran, with a combined capacity of 6,000 megawatts. 

Please note the appetite for Iranian business within JLT CPS and within the market is currently limited, however, all enquiries will be considered on a case by case basis.

In this month's risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Ecuador, Angola, Lebanon and Chad, all of which have been the subject of recent enquiries from JLT's client base.

CPS WRR Chart

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 60 international sources of data.

Download March Risk Outlook

For further information, please contact Ruth Lux, Senior Consultant on +44 (0)20 7886 5409 or email ruth_lux@jltgroup.com

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