President Donald Trump’s decision to withdraw from the Iranian nuclear agreement has raised the risk of conflict between Iran and the US or Israel. Iran’s economy will decelerate as oil exports fall, and international firms operating in the country will face additional regulatory challenges.
On 8 May 2018, President Donald Trump announced that the United States would exit the Iranian nuclear agreement, known as the Joint Comprehensive Plan of Action (JCPOA), and withdraw all nuclear-related sanctions relief. President Hassan Rouhani has indicated that Iran will remain in the JCPOA until it has had time to evaluate the level of support in Europe, Russia and China for continued sanctions relief. There will be growing pressure from Iran’s hardline conservatives to restart the nuclear programme and retaliate against the US. However, any resumption of the nuclear programme may spur US or Israeli airstrikes on nuclear sites, something Iran will be keen to avoid.
Trump’s decision has the potential to destabilise the Middle East, as rhetoric between Israel and Iran escalated rapidly in the wake of the announcement. On 9 May 2018, the Israel Defence Forces (IDF) reported that 20 rockets had been launched at its posts by the Iranian Quds Force in the Golan Heights, Syrian territory occupied by Israel since 1967. No damage was reported, and 4 rockets were intercepted by the Iron Dome defence system. Israel responded with airstrikes on Iranian targets in Syria, indicating that the majority of Iran’s military assets in Syria had been destroyed.
Israel’s response suggests that the country will seek to escalate military action against Iran to force the country’s withdrawal from Syria. Iran’s ability to retaliate will be limited as the economic and political costs of such action would be high, particularly as Iran seeks to shore up the JCPOA with European partners keen to preserve the deal. War risks between Iran and the US will rise in the immediate future, although the US will be reticent to enter a fresh conflict. The US is only likely to take military action, which would likely involve airstrikes, if Iran resumes nuclear activities.
Renewed sanctions will exacerbate economic weaknesses and are therefore likely to increase protest risks in Iran. Dissatisfaction has already been mounting over the limited impact of sanctions waivers on standards of living. Economically motivated strikes by truck drivers began in late May 2018 and have disrupted the transportation of ground cargo. As the re-imposition of secondary sanctions will further limit foreign investment in Iran, renewed protests are a possibility.
The re-imposition of US sanctions will undermine the Iranian economy, with growth forecasted to slow marginally to 3.1% in 2018 before declining to 0.8% in 2019. The deceleration will be underpinned by a fall in foreign investment and a drop in oil exports of up to 500,000 barrels per day. The rial has fallen by over 46% against the dollar since early 2018, and is likely to continue to depreciate in the medium term. This will exacerbate hard currency shortages and lead to a modest uptick in inflation, which is forecasted to rise from 10.0% in 2017 to 10.5% in 2018.
A lack of clarity surrounding potential European Union (EU) measures to help European firms maintain their operations in Iran is likely to weigh on investment inflows. However, countries such as China, India and Turkey are unlikely to fully comply with the US’s unilateral reimposition of sanctions and may even increase their imports, mitigating the extent of the economic impact on Iran.
The anticipated uptick in foreign investment in Iran following the signing of the JCPOA in July 2015 has not fully materialised. Stringent rules around US engagement with Iran ensured that the compliance requirements for international firms remained challenging. As a result of the withdrawal of the US from JCPOA, the barriers to operating in the country have further increased.
Following 90- and 180- day grace periods to allow commercial entities to wind down commercial activities with Iranian entities, a wide range of industries such as the automotive and energy sectors will be affected by the re-imposition of US sanctions. While the EU has reaffirmed its commitment to the agreement, it remains to be seen whether the EU will introduce measures to protect European business activities in Iran, and this additional regulatory uncertainty will further complicate an already challenging investment environment.
†† Due to US sanctions, many insurers will be unable and unwilling to write these risks. For the markets that are able to support Iranian risk, pricing is very likely to be upwards of 7.0% p.a.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Argentina, Armenia, Côte d'Ivoire and Mozambique all of which have been the subject of recent enquiries from JLT's client base.
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 200 international sources of data.
Download Risk Outlook
For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org.
YOU MAY ALSO BE INTERESTED IN