The Economic Implications of the Iran Nuclear Deal
Iran's president along with six other world leaders agreed to a compromise at 3 a.m. Geneva time on Monday after five days of marathon meetings. While the bickering in Washington over this deal is just getting started, reactions around the world have a more immediate impact that is already evident. The current and any future sanctions on Iran have serious economic impacts in Iran and across the globe.
Key points of this nuclear deal with Iran:
- Six-month trial period, at which point the seven leaders will reevaluate progress
- Lock and impede critical components of the Iranian nuclear weapons program
- Eliminate Iran's stock of enriched uranium
- Halt any addition to the Iranian stock of lower-enriched uranium
- Iran will not construct new nuclear facilities
- Iran will allow daily international access to key facilities for unprecedented levels of monitoring
- Iran wil halt work on the reactor that would have provided Iran with a plutonium path to nuclear weapons
In exchange for these actions, Iran will experience a relaxation of some sanctions to ease its ability to trade in certain commodities, including some precious metals and petrochemicals. It will also be able to access $3.6 billion of currently frozen financial assets held in foreign currencies. The value of this sanction reduction is estimated at $7 billion, with about 60% of that from oil revenue.
The business opportunity in Iran
What most Westerners don't realize is that Iran is an incredibly well-educated country. The population in Iran has nearly tripled since 1970. Its youth literacy rate is near 100% and more than half of its population is under age 35. That means that Iran is a country filled with well-educated, able-bodied people who are hungry for change and growth. They comprise the perfect entrepreneurial opportunity, within Iran's borders and for foreign countries looking for a new market.
This easement of sanctions is quite limited, at least in strictly legal terms. Aerospace companies, car manufacturers, and pharmaceuticals will be able to resume some trade with Iran. By and large, U.S. consumer product sales are technically banned in Iran, though there is heavy evidence of these sales are already happening in Tehran. For example, a website dubbed "The Iran Project" seeks to show that the power of the existing sanctions is mostly limited to paper only. It describes Apple product sales as "booming." This shows that the Iranian market for U.S. consumer products is highly viable.
Now what it needs is the elimination of roadblocks to truly free trade dictated by supply and demand. Currently, Iranian retailers of consumer products have to work through underground trade networks to obtain foreign goods banned by the sanctions.
Iran reacts to the news of the deal
The country has experienced severe drops in global trade and dangerous levels of inflation that hover around 40%. In 2011, Iran exported 2.2 million barrels of oil per day. Two years later, that number dropped to 700,000 barrels. Iran's Minister of Oil confirmed that this cost the country $26 billion in 2012. These sanctions have caused the Iranian rial to lose two-thirds of its value against the U.S. dollar. Monday the rial gained 3% based on news of this deal. The IMF confirmed that Iranian GDP shrunk by 1.9% in 2012 and would likely see a drop of 1.3% in 2013 due to the sanctions.
Iranian President Hassan Rouhani has quite a bit of political clout to gain from this deal in his first 100 days in office. He ran for president on the platform of easing sanctions and Iranians met the news of his success with great enthusiasm. They are hopeful that inflation on staples such as rice, which currently costs $2.30 per kilo, will finally drop and ease the plight of many Iranians who struggle to make ends meet.
However, their greatest hope goes beyond basic economics. One female listener of Iran's RFE/RL's Radio Farda said, "The greatest benefit will be peace." Overall, the Iranian media -- including publications Etemad, Sharq, Ghanun, Iran, and Shahrvand -- all ran positive stories that expressed the hope that this agreement will improve the quality of life in Iran in every respect. One publication questioned the trustworthiness of the U.S. and cautioned against a deal like this.
Global financial markets react
Iran is the fourth largest holder of oil reserves in the world, but under this six-month agreement it cannot increase its oil sales. World crude oil prices dropped less than 1% after the deal was announced ... hardly the nosedive many anticipated.
The news boosted global equity markets, and stocks in the airline industry and travel-related services rose by 2% to 4%. It's important to note that U.S. travel to Iran is tremendously complicated, and this deal does not make traveling to and within Iran any easier for Americans. Though not outlawed, the U.S. "does not have diplomatic or consular relations with the Islamic Republic of Iran and therefore cannot provide protection or routine consular services to U.S. citizens in Iran," according to the State Department. U.S. citizens in Iran can obtain limited help from the Swiss embassy in Tehran, though the timeline for receiving such help is often delayed.
In early Asian trade, gold fell slightly. Some analysts commented that this decline was limited by the negative reaction to the deal by Israel and other Arab nations.
Beyond these changes, the markets seem to have a "wait and see" stance. There is a lot of excitement about the potential of increased global trade with Iran, though the country has a lot to prove to foreign nations over the next six months. If it can live up to its end of the deal, this time next year the world could see the Iranian economy in a very different light.
Nations across the globe react
The world is clearly divided on this news. Israel is furious and Israeli President Benjamin Netanyahu calls this deal "a historic mistake." Saudi Arabia and other Gulf states are equally dismayed, as there is a deep-seated distrust of Iran based on its past actions. The West, aside from some key members of the U.S. Congress, is hopeful that this deal represents a true turning point.
President Obama calls this deal a "new path" toward a more secure world. He believes this is the first step in resolving differences with Iran to "achieve a comprehensive, peaceful settlement." The American people have repeatedly voiced their desire to avoid military conflict in Iran, which leaves diplomacy as the only route to eliminate Iran's nuclear threat. This is a 30-year breakthrough in relations between the U.S. and Iran and it could have an enormous impact on the global geopolitical map. From the most optimistic point of view, this deal could be the first step in a landmark accord that would return Iran to the community of nations for the first time since 1979.
The news caused an interesting wrinkle in today's divided Washington. For months, we've experienced the clear break in Congress along party lines. But this weekend's uneasy deal has fractured Congress in unpredictable patterns that have no semblance to party lines. Some members of Congress support and applaud Obama and Secretary of State John Kerry for their roles in this compromise.
But others on both sides of the aisle are steaming about the compromise, vowing to send additional sanctions to the president for signature in the coming months. If Obama stands behind his word -- and he's indicated he will -- he must veto those sanctions if they happen over this six-month trial period of the agreement.
The opportunity cost
Perhaps the greatest economic impact for the U.S. comes down to opportunity cost. Washington is already at near gridlock and the division over the Iranian compromise could exacerbate that. Obama's approval rating has sunk to an all-time low of 40% with three years to go in his second term. The country cannot afford a three-year stalemate in Washington given our mounting domestic and foreign concerns.
We have enormous domestic challenges in the areas of health care, education, economic growth, jobs creation, poverty, and environmental impact, to name just a few. Let's not forget that the government shutdown and debt ceiling fiasco we witnessed this fall will rear its ugly head again in the first quarter of 2014. Internationally, the continuing instability in the Middle East and the danger of Al Qaeda loom large. This agreement has angered many of our allies in that area of the world and could trigger a loss of support in the countries where we need it most.
Every minute that we bicker over whether Iran deserves our diplomacy, and whether that diplomacy will prevent Iran's potential to create an atomic bomb, is a minute we don't spend on these other domestic and international issues, all of which desperately need collaboration and focus. They all have dire consequences for our economy and society as a whole.
Is the start of this potential path to peace with Iran worth the sacrifice we may have to make in these other areas? In the end, will we look back and find ourselves in a stronger position than we are today? Will the world, and by extension the American people, be safer for it? Will our economy prosper by adding a willing and able new trading partner for our goods and services? We made a six-month deal about nuclear power and limited sanctions with Iran, but the real compromise made in Geneva has many more far-reaching implications on our society and economy. Will it be worth it? Just like the global markets, we'll have to wait and see.
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