Making sense of the Trump's withdrawal from the JCPOA. (Credit: Marco Verch/Flickr)
Making sense of Trump's withdrawal from the JCPOA. (Credit: Marco Verch/Flickr: Creative Commons CC BY 2.0) (via: bit.ly)

On 9 May 2018, Donald Trump announced that US would withdraw from the Joint Comprehensive Plan of Action (JCPOA) because the agreement was of no benefit to the United States.

Iran has faced numerous sanctions imposed by the US and European countries over its nuclear programme, especially since 2011. The sanctions mainly targeted the oil, finance, insurance, and banking sectors. Based on the JCPOA, all sanctions attributed to the nuclear programme were lifted in Oct 2015.

After the sanctions relief, a new horizon was unlocked for the Iranian economy as it was now able to increase oil exports – oil being the major source of national income. Oil exports increased in 2016 and remained as high as 2.6 million barrels per day in April 2018. As a result of the expansion in oil production and export, Iran is currently the third largest exporter of oil among OPEC members. Iran was also able to receive greater flows of foreign investment, mainly from European companies. Because the agreement was signed towards the end of Obama’s time in office, investors faced uncertainty over possible policy changes by the new president and some companies held back from investing in Iran. However, investment has occurred in oil, automotive, rail, and airline industries.

Sanctions that had been lifted due to the JCPOA are to be implemented again within 90 days for non-oil sectors and within 180 days for the oil sector. The future of European companies which have invested in Iran is now highly questionable, given US government threats regarding their activities in Iran: contracts signed between Iranian and European companies will also be affected by the US withdrawal. Among the biggest deals now at risk are airline industry agreements over purchases from Boeing and Airbus with a value of nearly $39 billion. Contracts in automotive, rail, and oil industries will also be affected.

The exchange rate will also be affected by the decision. Speculation over Trump’s decision led to a devaluation of the Iranian rial (IRR) prior to 9 May. After the announcement, the currency depreciated further and the market rate for US dollars increased significantly. Although an official rate was recently set by the government (1 USD = 42,000 IRR), in order to defend the currency, there are no market transactions using this rate. The market rate was around 35,000 IRR to the dollar in January 2018, which doubled to around 70,000 IRR in May 2018. The government has banned the trade of dollars and directed that dollars can only be purchased from banks at the official rate. However, this has failed protect the local currency. The Euro has also followed a similar trend: in January 2018, it traded at around 42,500 IRR and in May 2018 at around 80,000 IRR.

Besides the hardships above, Iran needs to upgrade the technologies it uses in the oil and automotive sectors. Current and potential future sanctions (as mentioned by President Trump) could make the renewal of this technology difficult and costly. Upgrades will be expensive in any case, and will lack cutting edge technology, thus hindering economic growth. IMF data showed Iran had a negative growth rate in both 2012 and 2015 but positive economic growth of almost 7% for 2016 and 5.6% for 2017. Although the US is the only country to have withdrawn from the deal, its pressure on European and other countries will cause a decline in oil exports and discourage investment, potentially leading to an eventual recession and further currency devaluation.

 

On 9 May 2018, Donald Trump announced that US would withdraw from the Joint Comprehensive Plan of Action (JCPOA) because the agreement was of no benefit to the United States.

Iran has faced numerous sanctions imposed by the US and European countries over its nuclear programme, especially since 2011. The sanctions mainly targeted the oil, finance, insurance, and banking sectors. Based on the JCPOA, all sanctions attributed to the nuclear programme were lifted in Oct 2015.

After the sanctions relief, a new horizon was unlocked for the Iranian economy as it was now able to increase oil exports – oil being the major source of national income. Oil exports increased in 2016 and remained as high as 2.6 million barrels per day in April 2018. As a result of the expansion in oil production and export, Iran is currently the third largest exporter of oil among OPEC members. Iran was also able to receive greater flows of foreign investment, mainly from European companies. Because the agreement was signed towards the end of Obama’s time in office, investors faced uncertainty over possible policy changes by the new president and some companies held back from investing in Iran. However, investment has occurred in oil, automotive, rail, and airline industries.

Sanctions that had been lifted due to the JCPOA are to be implemented again within 90 days for non-oil sectors and within 180 days for the oil sector. The future of European companies which have invested in Iran is now highly questionable, given US government threats regarding their activities in Iran: contracts signed between Iranian and European companies will also be affected by the US withdrawal. Among the biggest deals now at risk are airline industry agreements over purchases from Boeing and Airbus with a value of nearly $39 billion. Contracts in automotive, rail, and oil industries will also be affected.

The exchange rate will also be affected by the decision. Speculation over Trump’s decision led to a devaluation of the Iranian rial (IRR) prior to 9 May. After the announcement, the currency depreciated further and the market rate for US dollars increased significantly. Although an official rate was recently set by the government (1 USD = 42,000 IRR), in order to defend the currency, there are no market transactions using this rate. The market rate was around 35,000 IRR to the dollar in January 2018, which doubled to around 70,000 IRR in May 2018. The government has banned the trade of dollars and directed that dollars can only be purchased from banks at the official rate. However, this has failed protect the local currency. The Euro has also followed a similar trend: in January 2018, it traded at around 42,500 IRR and in May 2018 at around 80,000 IRR.

Besides the hardships above, Iran needs to upgrade the technologies it uses in the oil and automotive sectors. Current and potential future sanctions (as mentioned by President Trump) could make the renewal of this technology difficult and costly. Upgrades will be expensive in any case, and will lack cutting edge technology, thus hindering economic growth. IMF data showed Iran had a negative growth rate in both 2012 and 2015 but positive economic growth of almost 7% for 2016 and 5.6% for 2017. Although the US is the only country to have withdrawn from the deal, its pressure on European and other countries will cause a decline in oil exports and discourage investment, potentially leading to an eventual recession and further currency devaluation.

 

Picture credit: Marco Verch/Flickr ‘President Trump Stays Mum on Iran Nuclear Deal Decision’ https://bit.ly/2IlZA21 licensed under CC BY 2.0

 

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The views and opinions expressed in this publication are those of the original author(s) and do not necessarily represent or reflect the views and opinions of the Dialogue of Civilizations Research Institute, its co-founders, or its staff members.
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Behrooz Gharleghi

Senior Researcher, DOC Research Institute, MY

Behrooz Gharleghi has had several academic positions. He worked as an associate professor at the Faculty of Business and Management, Asia Pacific University of Technology and Innovation, Malaysia, from 2013 to 2018 and he served as the head of the Graduate School of Business at the university for 2017. He is currently an affiliate research professor at the CENTRUM Católica Graduate Business School, Pontificia Universidad Católica Del Peru. He has been a senior lecturer of Business and Economics at the Asia Pacific University of Technology and Innovation, Malaysia, a lecturer at Linton University College, Malaysia, and a lecturer at Payame-Noor University, Iran. He has published several articles in the area of financial economics, monetary economics, business, and management. He has led on and collaborated in various internal and external research projects, especially from the Malaysian Ministry of Higher Education. Recently he received the 'Outstanding Researcher in Economics' award from the Venus International Foundation's 'Venus International Research Awards' in India in October 2017. He holds a PhD in Economics from the Universiti Kebangsaan, Malaysia, a Master’s degree in Economic Sciences from Azad University, Iran, and a Bachelor’s degree in Economics from Ashrafi/Isfahan University, Iran.