If the nuclear deal with IRAN
succeeds, the world will see a great shift in geopolitics and economic growth.
IRAN has reached an
agreement with the UNITED STATES and five other countries to curtail its
nuclear development program in return for economic sanctions being lifted. They
plan to provide a final blueprint of the deal in June.
What are the potential
economic consequences of a deal with IRAN? It has the potential to be a
transforming event not just for IRAN, but also for the global economy.
THE
IRANIAN PERSPECTIVE
As for IRAN, the country
suffered from economic mismanagement before HASSAN ROUHANI became president.
The nuclear deal could transform IRANIAN politics, allowing it to become more
pro-business and pro-investment.
It will be difficult for
the government to remain hostile to the West if foreign companies are creating
jobs and increasing the supply of consumer goods – each of which is something
the country desperately needs.
True, the IRANIAN
Revolutionary Guards oppose a deal because they earn large sums from violating
the sanctions. But that pits them against the IRANIAN people who want to escape
from such corruption and end IRAN’S status as a pariah state.
As for the debate in the
U.S. Congress, the Republicans – who also oppose the deal — have not yet heard
from U.S. corporations, a traditional ally. Large firms could benefit from a
re-engagement with IRAN.
Sanctions have reduced
U.S. exports to IRAN by as much as $175 billion during the past 17 years,
according to a study by the NATIONAL IRANIAN AMERICAN COUNCIL (NIAC). Both U.S.
and EUROPEAN businesses will be excited about the prospects of tapping into
this major frontier market, but the process will take time.
EFFECTS
ON THE GLOBAL ECONOMY
The first effect on the
world economy, once sanctions are lifted, will be that IRAN will be able to
increase oil exports. Iran could probably double oil exports in the year ahead.
In 2009-11, IRAN was producing 3.5 million barrels per day (bpd) and exporting
2 million bpd. The 2010 sanctions cut oil exports in half.
Once the sanctions are
gone, many foreign oil companies would return to IRAN and invest in developing
new oil reserves as well as reviving older fields with modern equipment.
IRAN’S new exports would
probably drive the oil price down to $40 per barrel next year. This could
produce a positive shock for the oil-importing nations and a negative shock for
oil exporters.
Every $10 decline in the
oil price could transfer 0.5% of GDP from oil producers to oil importers. It
would be a de facto trillion-dollar tax cut at a time when most industrial
countries are focused on deficit reduction — and thus cannot cut taxes.
The major winners would
include JAPAN, INDIA and EUROPE because they import most of their oil. The U.S.
economy would also benefit because it still imports about one third of its oil
consumption.
WORRIES
FOR RUSSIA AND VENEZUELA
The second major
consequence of falling oil prices would be to further undermine the economies
of RUSSIA and VENEZUELA. Oil and gas account for 69% of RUSSIAN exports and 45%
of the government’s tax revenues.
The combination of the
oil price decline and Western sanctions will probably cause RUSSIAN GDP to fall
by 4-5% this year. New IRANIAN exports could set the stage for a further 3-4%
contraction next year.
Background
Information:
A
CHALLENGING TIME FOR RUSSIA-IRAN TIES
RUSSIAN policymakers had
been budgeting for a $100 oil price this year which, absent some exogenous
shock, will clearly not occur. The devaluation of the RUSSIAN ruble is helping
to offset some of the revenue effects of the falling oil price, but it cannot
offset a major decline in the value of country’s exports.
In fact, the downturn of RUSSIA’S
economy could create a peace dividend, by limiting RUSSIA’S ability to increase
military spending (and pursue new conquests in the UKRAINE).
VENEZUELA will be highly
vulnerable to a further oil price decline. Oil accounts for over 90% of the
country’s exports. Meanwhile, the state oil company, PDVSA, provides over half
of government revenues.
VENEZUELA is already
confronting a fiscal deficit amounting to a staggering 17% of GDP, so the
decrease in oil revenues could force its central bank to resort to
hyperinflation to fund the government. The country’s inflation rate is already
over 60% — and still rising.
VENEZUELA had chronic
financial problems when the price of oil was over $100 per barrel because of
economic mismanagement. A new oil price decline will only intensify these
problems and possibly force the government to default on its debt.
A large oil price decline
might also force President NICOLÁS MADURO to curtail low-priced oil exports to CENTRAL
AMERICA and the CARIBBEAN. These exports cost VENEZUELA $2.3 billion per annum
in what are effectively oil price subsidies for its neighbors.
IRAN’S RE-ENGAGEMENT WITH THE GLOBAL ECONOMY
IRAN has 78 million
people and the 27th largest GDP in the world, at about $437 billion. IRAN’S
central bank estimates that this GDP is composed of 52% services, 18% oil, 13%
manufacturing and mining, 12% agriculture and 5% construction.
Many WESTERN companies
are keen to invest in IRAN in both the oil sector and manufacturing. Some major
companies are still there — despite the sanctions. DANONE, COCA COLA, PEPSI and
NESTLE are in the consumer sector, while MTN of SOUTH AFRICA has a major
cellular phone operation. NESTLE is keen to grow in a market that was the
company’s third-largest in the world before the 1979 revolution.
If IRAN’S economy
rebounds after the sanctions are lifted, the country could have a GDP growth
rate exceeding 6% by 2017.
If successfully concluded
this June, the IRAN deal could set the stage for a further revival of the
global economy, as well as profound changes in geopolitics.
By David Hale via The Globalist
No comments:
Post a Comment