Iran’s econ­omy likely to ride out US sanc­tions storm, say an­a­lysts

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Iran is likely to ride out the storm from US oil sanc­tions, suf­fer­ing re­ces­sion but no eco­nomic melt­down, thanks to ris­ing crude prices and deep­en­ing divi­sions be­tween the United States and other ma­jor pow­ers, of­fi­cials and an­a­lysts say.

“Iran’s sit­u­a­tion is bet­ter than pre-2016 be­cause of high oil prices and the fact that the US is iso­lated this time,” said a Euro­pean diplo­mat who asked not to be fur­ther iden­ti­fied.

Iran emerged in early 2016 from years of global sanc­tions un­der a deal with world pow­ers that curbed its dis­puted nu­clear pro­gramme.

But Pres­i­dent Donald Trump with­drew the United States from the deal in May, call­ing it flawed to Iran’s ad­van­tage, and reim­posed far-reach­ing US sanc­tions in phases, with the most dam­ag­ing oil and bank­ing penal­ties taking ef­fect on November 5.

Trump aims to force Wash­ing­ton’s long­time ad­ver­sary to ac­cept tougher re­stric­tions on its nu­clear ac­tiv­ity, drop its bal­lis­tic mis­sile pro­gramme and scale back sup­port for mil­i­tant prox­ies in Mid­dle East con­flicts from Ye­men to Syria.

But the broadly united front of world pow­ers that en­forced sanc­tions on Iran pre­vi­ously, push­ing Iran into nu­clear re­straint, has un­rav­elled since Trump took of­fice and clashed with al­lies over ev­ery­thing from trade to col­lec­tive se­cu­rity.

The other sig­na­to­ries to the nu­clear deal – Ger­many, France, Bri­tain, the Euro­pean Union, Rus­sia and China – have con­demned Trump’s walk­out from the pact.

The EU is pre­par­ing a spe­cial mech­a­nism to en­able pay­ments for Ira­nian oil and other ex­ports with­out US dol­lars, pos­si­bly through a barter sys­tem. “It will be a dif­fi­cult pe­riod but Iran’s econ­omy will with­stand it for var­i­ous rea­sons,” a sec­ond diplo­mat said, “in­clud­ing (the fact of) Rus­sia be­ing un­der (US and EU) sanc­tions, Saudi Ara­bia hav­ing its own fi­nan­cial and po­lit­i­cal is­sues, and (trade war) be­tween China and the United States.” Big power dis­unity and EU moves to cir­cum­vent Trump’s sanc­tions regime have given Tehran a psy­cho­log­i­cal boost – but not dis­suaded for­eign busi­nesses rang­ing from oil ma­jors to trad­ing houses and ship­ping con­cerns from pulling out of Iran for fear of in­cur­ring new US penal­ties.

Still, while the US clam­p­down will prob­a­bly trig­ger re­ces­sion in Iran next year, eco­nomic melt­down should be avoided, with a re­duced but still sig­nif­i­cant vol­ume of oil ex­ports con­tin­u­ing, a Fitch so­lu­tions an­a­lyst said.

“Tehran is still likely to see a sub­stan­tial share of its for­eign ex­change earn­ings main­tained,” An­drine Sk­jel­land told Reuters. “This will en­able Tehran to con­tinue sub­si­dis­ing im­ports of se­lected ba­sic goods, keeping the costs of th­ese down and thus lim­it­ing in­fla­tion to some ex­tent.”

In hopes of mit­i­gat­ing the im­me­di­ate eco­nomic hit, Ira­nian au­thor­i­ties have hinted that Tehran might have to sell its oil at a dis­count to en­tice buy­ers go­ing for­ward.

“Oil rev­enues might de­cline but (they) will still be enough to run the coun­try,” said an official in­volved in Iran’s in­ter­na­tional com­merce. “If we sell our oil for $1 less than mar­ket price, it will have tens of buy­ers.”

In an­other counter-mea­sure made pos­si­ble by state con­trol of the oil sec­tor, Ira­nian au­thor­i­ties are us­ing spe­cial ex­change cen­tres to sell dol­lars at cheaper rates to importers of ba­sic foods, medicine and other es­sen­tial goods.

IHS Markit se­nior econ­o­mist Pa­trick Sch­nei­der doubted that Iran could cush­ion the eco­nomic blow in the near term.

“De­spite the rhetoric and at­tempts to mit­i­gate the down­side ef­fects..., un­cer­tainty will re­main preva­lent for the next 6-12 months,” he told Reuters.

The In­ter­na­tional Mon­e­tary Fund has fore­cast that Iran’s econ­omy will con­tract in 2018 by 1.5% and by 3.6% in 2019 due to the dwin­dling of oil rev­enues.

At the same time the World Bank an­tic­i­pates in­fla­tion in Iran jump­ing to 23.8% in 2018-19 from 9.6% in 2017-18, and to 31.2% in 2019-20.

But Ira­nian of­fi­cials are de­fi­ant, cit­ing Trump’s iso­la­tion in re­pu­di­at­ing the nu­clear deal, climb­ing oil prices and Trump’s agree­ment to grant sanc­tions waivers to eight coun­tries es­pe­cially de­pen­dent on Ira­nian crude.

“Crude prices are ris­ing. Even if Iran’s oil sales drop to 800,000 bar­rels per day (bpd), we will be able to run the econ­omy. But we will send much more than that. Our econ­omy will be far from col­lapse,” said a se­nior Ira­nian official.

“Our bud­get is based on oil of $57 per bar­rel and is now over $75 per bar­rel.”

In Oc­to­ber, Iran’s crude ex­ports were es­ti­mated at 1.82mn bpd by data in­tel­li­gence com­pany Kpler and 1.5mn bpd by an­other firm that traces Ira­nian ship­ments.

Trump granted 180-day sanc­tions waivers to China, In­dia, South Korea, Ja­pan, Italy, Greece, Tai­wan and Turkey, which to­gether took in over 80% of Iran oil ex­ports last year, Refini­tiv Eikon data shows.

“Even with­out the ex­emp­tions, we will sell our oil. We will by­pass sanc­tions. We have so many coun­tries that are on our side.

Amer­ica can­not do a damn thing,” said a se­nior official close to Ira­nian Supreme Leader Ay­a­tol­lah Ali Khamenei.

The sanc­tions, how­ever, will in­evitably erode Iran’s state fi­nances and raise al­ready high in­fla­tion and job­less rates, mak­ing life harder for or­di­nary Iranians.

Since May, when Trump took Wash­ing­ton out of the nu­clear deal, prices of bread, cook­ing oil and other staples have soared and the value of the rial cur­rency has plunged.

The rial’s weak­ness has sent prices of some im­ports rock­et­ing, de­stroy­ing jobs as some fac­to­ries us­ing im­ported parts have folded.

Around 70 % of small fac­to­ries, busi­nesses and work­shops have be­gun to close down in the past few months due to scarcity of raw ma­te­ri­als and hard cur­rency, ac­cord­ing to the Ira­nian state news agency IRNA.

More­over, Trump’s sanc­tions against Iran’s fi­nan­cial sec­tor es­sen­tially make 30 banks and their sub­sidiaries off-lim­its to for­eign lenders, un­der­min­ing its means to fa­cil­i­tate trade.

Still, Iran demon­strated con­sid­er­able re­silience and in­ge­nu­ity in cop­ing with ear­lier in­ter­na­tional sanc­tions, and there is lit­tle to sug­gest Tehran could not do this again.

Iran is likely to ride out the storm from US oil sanc­tions, suf­fer­ing re­ces­sion but no eco­nomic melt­down, thanks to ris­ing crude prices and deep­en­ing divi­sions be­tween the United States and other ma­jor pow­ers, of­fi­cials and an­a­lysts say

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