The comprehensive agreement between Iran and six world powers over the Islamic Republic’s nuclear programme—after protracted, intense and complicated negotiations—represents not just a new departure in non-proliferation but a cooling of the enmity between Iran and the US going back to the 1979 Islamic revolution. The agreement will galvanise Iran’s struggling economy from early 2016 as sanctions are lifted and will start to uncover attractive trade and investment opportunities for foreign firms. Nevertheless, Iran will remain an extremely challenging place to do business. Meanwhile, the deal will not be a panacea for the geopolitical tensions in the Middle East. We had expected a deal along these lines, and so our current forecast remains intact.
The agreement stands as a major achievement for the presidents, Hassan Rowhani and Barack Obama, and for the two central negotiators, the US secretary of state, John Kerry, and the Iranian foreign minister, Mohammed Javad Zarif, especially as it has been achieved in the face of domestic opposition in both countries and from US allies in the Middle East, notably Israel and Saudi Arabia.
Essentially, Iran has agreed to limit the capacity of its nuclear programme, meeting US demands to ensure a minimum “break out”—the time it would take Iran to produce enough weapons-grade uranium for a single nuclear weapon—and to accept a tighter inspection regime by the International Atomic Energy Agency (IAEA). In return, Iran has received explicit recognition from the US and the EU that it will enrich uranium, which Iran argues is its “right” as a signatory of the Nuclear Non-Proliferation Treaty (NPT). Crucially, the agreement means that sanctions against Iran will be lifted.
The easing of sanctions, which will come as the agreement is implemented, will represent a transformative boost to the Iranian economy from early 2016. Crude oil exports, halved under sanctions to around 1.1m barrels/day (b/d), will rebound, adding around 700,000 b/d by the end of 2016. Despite low oil prices, this will provide some respite for the government’s finances. Foreign reserves and assets stuck abroad—often estimated at around US$100bn—will start to be accessed. And, as the sanctions are removed from its banks, Iran will be able to engage more freely in trade and investment. The extent of the improvement will depend both on how quickly international investors are prepared to return to Iran and the government’s conduct of economic policy. Mr Rowhani’s administration faces a significant challenge over structural reforms, including further reductions in spending on subsidies and measures to boost the private sector and the business environment.
Agreement builds on Lausanne
The Joint Comprehensive Plan of Action (JCPOA) reached in Vienna essentially builds on the agreement reached between Iran and the P5+1 (the permanent members of the UN Security Council plus Germany) in Lausanne in April. At Lausanne it was agreed that for ten years Iran would operate only 6,104 centrifuges—the device used for enriching uranium—in a substantial reduction from the current 10,000 operating, and that all would be “first generation” rather than more efficient machines.
All enrichment will be at the Natanz site, and although Iran will continue research into more advanced models of centrifuges, it will not operate them for the ten-year period of the agreement. Nuclear research will continue at the fortified Fordow facility, built underground to withstand attack, but no enrichment will take place there. In addition, the heavy-water reactor at Arak will be modified to rule out the production of plutonium, potentially an alternative route to a weapon.
Timescale and implementation
The agreement links implementation to monitoring of Iran’s compliance by the IAEA. Some US sanctions will be lifted by presidential waiver within 90 days of the JCPOA being quickly submitted (“without delay”) to the UN Security Council, at which point Iran will also notify the IAEA that it will apply the Additional Protocol (AP) of the NPT, allowing more intrusive IAEA inspections. Then as soon as the IAEA verifies Iran’s compliance with the agreed restrictions on the nuclear programme, the EU will suspend or end “nuclear-related” sanctions, the US “cease” sanctions, and the UN “terminate” sanctions: the wording appears designed to allow the US and EU to reintroduce sanctions should Iran fail to comply with the terms of the JCPOA.
After eight years (“or earlier” if the IAEA concludes “all nuclear material in Iran remains in peaceful activities”) the US will terminate (or “modify”) remaining sanctions and the EU will terminate remaining sanctions, while Iran would ratify the AP. The JCPOA would then end after ten years, provided no more UN sanctions had been reinstated. The enhanced role of the IAEA is also seen in a separate agreement, under which Iran and the IAEA have agreed a road map designed to ensure the agency can complete its assessment of possible military dimensions of the Iranian nuclear programme by December 15th and present it to its board of governors.
Essentially, this means that the main nuclear sanctions that have harmed Iran’s economy since 2012 will stop being applied when the IAEA has verified that Iran is in compliance with the requirements of the JCPOA. This is likely to take until the end of 2015 at least. We had assumed that sanctions would be lifted in early 2016, and so we will retain our current forecasts.
Implications for the region
Although the agreement in Vienna is a major triumph for diplomacy in a Middle East where violence has been a staple for decades, it will not remove all tensions between the US and Iran. At least in the short term, it may even exacerbate tensions between Iran and two US allies, Saudi Arabia and Israel. But the agreement does reflect the complexities of the region, with a US administration that has moved a long way from president George Bush’s characterisation of Iran as part of an “axis of evil” towards an acceptance that on some issues Iran and the US may share some interests. Mr Rowhani’s claim that the agreement opens up a “new chapter” in Iran’s relations with the world may raise as many questions as it answers—the US and Iran take opposite sides in the Syrian conflict, for example—but it does show the possibility of finding diplomatic solutions to apparently intractable problems.
Implications for Iran
In carrying through a long-term aim to reduce tensions over Iran’s nuclear programme, Mr Rowhani has shown great political dexterity. As secretary of Iran’s Supreme National Security Council under the reformist president, Mohammed Khatami, he failed to achieve an agreement with the EU in talks between 2003 and 2005, both because of domestic opposition and in the face of the Bush administration. Now, as a conservative but pragmatic president, Mr Rowhani has carried the support of supreme leader, Ayatollah Ali Khamenei, the bulk of the political class and also the Iranian public.
His challenge will now be to use that support, and the boost of the nuclear agreement, to carry through structural reforms at home. He will face criticism both from fundamentalists and reformists but will seek to build as wide a consensus as possible for encouraging the private sector, economic liberalisation and cautious social reform.
Opportunities and risks for business
We estimate Iran’s nominal GDP at US$420bn at market exchange rates (using the official exchange rate) in the 2014/15 Iranian year (March 21st-March 20th). Given this, and a population around 80m, Iran is clearly a large market. Given Iran’s hydrocarbons wealth, demographics and economic diversity, we expect that the nuclear deal could herald a return to trend real GDP growth rates of around 5%—with two years of stronger growth as the economy bounces back.
The opening-up of Iran will provide opportunities across a whole host of sectors, including hydrocarbons, power, automotive, pharmaceuticals, consumer goods, information technology and tourism, as well as for companies selling aircraft, capital goods and industrial supplies. The capital market will also probably see more foreign investment. Nevertheless, Iran will be a difficult place to do business even without sanctions. Iran comes close to the bottom of our business environment rankings and not just because of sanctions. Other problems for companies include corruption and vested interests (including the Revolutionary Guards’ myriad business networks), wide-ranging state influence and an undeveloped private sector, a flawed tax system and a failing banking system.