Tuesday, 16 May 2017

Is Iran at Risk

This year, the Iranian economy was slated as the economic market for investment. Thanks to the Joint Comprehensive Plan of Action (JCPOA), institutions such as the World Bank believe that economic growth in the Iran will jump 4.6% from last year creating boom conditions. However, growth in Iran is often contingent on two factors. One is the expansion of oil and gas production, which thanks to the recent OPEC deal is now transpiring. The second is Iran’s relationship with the international community, in particular the United States.

When Iran conducted a series of recent mid-range ballistic missile tests earlier this year, the aftermath saw many market analysts become more cautious about Iran’s economic revival and the security of their clients investments. Citing the unpredictability of the Trump administration, its aggressive policies and the continuation of older sanctions and fines that companies like Amazon are currently facing, there are fears that Iran’s boom may be at risk.

The Problem with Sanctions

Economically, the risk with the older sanctions is that they have spooked many investors including corporations like Apple.

Apple had, from September 2016, been slowly adding Iranian developed I0S apps to its online store, many of which were banking and e-commerce related applications. However, in January, Apple removed many Iranian apps like Digikala, the largest e-commerce site operating in Iran, despite companies like Digikala using the Shaparak payment system which is isolated from international systems thereby not breaching the American regulations.

The new regulations are also spooking the international banking community which is highly suspicious of the current American administration’s reaction to doing business in Iran. Some of the world’s biggest banks who had worked under the previous internationally-accepted trading regime were outraged by the large fines the US banking authorities issued to them and as a result have told their clients that if they want to work in Iran, they will have to find other bankers.

For Iran, this will limit the amount of investment interest in the country and place in doubt many of the larger deals currently in place. Boeing’s deal for example, is shadowed by doubt thanks to their need for the Trump Administration’s approval over any transactions with Iran, and given the current administration’s desire to control Iran through all means this deal faces an uncertain future.

The Rich Keep Getting Richer

Even if these deals do go through, Iran’s economic future is still threatened thanks to endemic governmental corruption. According to Iranian opposition leader, Maryam Rajavi, much of the countries new revenues are being channelled into state enterprises controlled by the Iranian Revolutionary Guard Corps (IRGC) or those run by the Supreme leader Ayatollah Khamenei’s network and may do little to increase the economic prosperity of Iran. Instead, it is more likely to increase tensions within the society and the government of President Rouhani will bear the brunt of this economic failure in the upcoming electoral process.

Economic Problems will lead to Political Risks

The lack of economic growth and endemic corruption will figure heavily in the hardliner candidates, Ebrahim Raisi and Mohammad Ghalibaf, campaigns’ for this week’s national election. If Iran is to continue an upward economic trajectory and exchange with the west, moderate President Hassan Rouhani needs to consolidate his political grip on the Iranian parliament for another 4 year term. An act he may not be capable of thanks to the failure of economic growth to materialise for the majority of Iranians.

Rouhani is aware that he needed this economic recovery. In 2013 he campaigned and won on a platform of economic reform and the development of civil rights and society. What’s worse is that it was an expected outcome from the 2015 nuclear deal. As hard-line conservative presidential candidate Ebrahim Raisi argued in the first presidential debate on May the 5th, the ‘deal was like a cheque that the government has been unable to cash’.

Instead, the Iranian economy has slumped and Iranian unemployment is at the highest level in 4 years at 12.7 percent with a reported 30.2% percent of those unemployed being highly educated young adults. This combination of high youth unemployment and increasing economic difficulties can be expected to create significant problems for the next Iranian government.

Typically, high youth unemployment when paired with high rates of underemployment, inequality, and the marginalization of educated youth inevitably leads to significant social upheaval, political instability and potential civil violence. A fact that could destroy the gains Iran has made thanks to Rouhani’s government.

The risk of returning the hardliners to power is very real. According to Iranian political analyst Hamid Farahvashian who pointed out that thanks to the ‘uncertainty over Trump’s Iran policies, Iran’s presidential election [on May 19th] and the economic hardship’ there is a real possibility the establishment will give ‘more power to the IRGC (Iranian Revolutionary Guard Corps).’ Many of the IRGC’s members are seeking a return to a much more extreme, aggressive, militaristic and repressive strand of national politics; a position support by the Ayatollah Khamenei.

The Middle East at Risk

The threat to the Middle East from Iran under a president like conservative Ebrahim Raisa will be the rise of a more aggressively revolutionary Iranian foreign policy. Currently Iran has a heavy presence in all the flash points throughout the Middle East. From Syria and Iraq, to its sponsorship of the Al Houthi rebels in Yemen, Hezbollah in Lebanon and Palestine and its aid for Kurdish militias or its support of the more sectarian opposition parties in Bahrain, Iran is a source of instability across the Middle East. Under a conservative government this is expected to get worse. According to experts Iran’s engagement in Yemen and Syria will intensify and there is further belief that they may expand their operations to include Turkey via their current support networks for the Kurdish militias.

Is the Potential For Genuine Economic Growth Gone for Good?

Despite these risks Iran still provides exciting opportunities. European, African and Asian companies are well placed to avoid the fallout from American sanctions and this is where Iran is taking advantage of the energy sector which is predicted to bring in 33 billion in revenue for the next calendar year. China, for example, plans to expand its trade with Iran to 600 billion dollars in ten years as part of its One Belt Initiative to take advantage of these gas deposits. Likewise, India upped its energy imports by nearly 6% to nearly 546,600 barrels per day (bpd).

Iran pharmaceutical manufacturing industry is also predicted to continue its extraordinary growth rapidly thanks to its new global medical market the halal pharmaceuticals program which is attracting investment from the Middle East and South East Asia. While another sector that has potential to avoid any economic contraction is the e-commerce industry which has seen huge growth spurts with the Iranian e-commerce industry overall growing 25% in the Middle East last year.

Even if these sectors are growing, much still depends on the outcome of the election. Investors prefer stable, less volatile, political environments for long term investments and Iran under the conservatives, who plan to do little to address corruption or the youth unemployment crisis, will be a volatile political environment. Under these circumstances Iran could see it’s hope for economic development fail to emerge as the country returns to its position as an international pariah dependent upon Russia and China for its development.