(Bloomberg) -- Whatever steps Iranian leaders take after Donald Trump’s decision to withdraw from the nuclear accord, none will be more critical to domestic stability than their efforts to minimize the economic damage.
The currency is plunging, banks are struggling with bad loans and the looming return of broad U.S. sanctions mean European companies, many already on the fence, will likely decide it’s too risky to invest in the Islamic Republic. A significant loss of oil revenues would hit state coffers hard and present a challenge for President Hassan Rouhani, who won two elections promising to end Iran’s isolation and revive its economy.
“The next few months will be very, very hard for the Iranian economy,” said Henry Smith, lead analyst at Control Risks in Dubai. “It’s hard to see it any other way. The saving grace would be if there’s some type of mechanism put together to manage some of the secondary sanctions.”
Pratibha Thaker, editorial director for the Middle East and Africa at the Economist Intelligence Unit, predicted Iran will go into recession next year.
Those who lobbied Trump to nix the deal argued that delivering a major blow to the economy could force Tehran to roll back its regional presence and stop developing ballistic missiles. Iranian leaders have said they won’t compromise on national security, and Iranians largely blame the U.S. for not abiding by the deal it spent years negotiating.
These are the main areas of the economy that could be affected as the standoff develops.
Oil, Oil, Oil
The biggest impact on government revenues will come from the expected drop in oil sales after the U.S. gave companies 180 days to extricate themselves from Iranian energy deals. But Iran is unlikely to suffer as badly as it did under sanction-regimes imposed before the 2015 deal because, this time, the U.S. is going it alone.
OPEC’s third-largest oil producer, Iran is currently exporting about 2.5 million barrels of crude and condensate daily, more than double what it sold when multilateral sanctions were at their tightest from 2012 through 2015. A recent Bloomberg survey predicted Iran could lose up 500,000 barrels a day in output when U.S. measures snap back.
Iran’s biggest buyers, including China, will likely oppose the U.S. move and look for ways to avoid secondary sanctions that put banks, shipping companies, refiners, insurers and ports at risk of losing access to the global banking system by trading with Iran.
In an effort to shield its economy, Iran had already switched to trading its oil in currencies other than the dollar and last month announced the euro would become its reference currency. But the switch offers limited protection for European companies that are enmeshed in the global banking system, according to economists and sanctions experts.
“Receiving payments in euros only partially immunizes Iran’s oil exports,” said Sara Vakhshouri, head of Washington-based consultancy SVB Energy.
Even before Trump withdrew from the pact, Iran’s rial was plunging. The central bank has vowed to eliminate a burgeoning black market but with licensed foreign-exchange traders now closed, dollars are increasingly hard to obtain. Local businesses say the shortage could prove more devastating for them than the declining value of the currency.
The rial weakened to about 69,000 against the dollar on the black market after Trump’s announcement, from about 55,000 per dollar last week, a 25 percent drop, according to three unlicensed traders in Tehran.
If oil revenues fall and foreign investment dries up, currency pressure could fuel higher prices. Inflation has dropped from above 40 percent in 2013, when Rouhani was first elected, but still hovers around 10 percent. Unemployment is 12 percent and further hardship could fester into political anger.
“I opened this shop last August when this precinct opened and thought the situation would get better and the market would improve,” said Reza, 48, who sells men’s clothing, adding that he may have to close if the rial crisis persists. “I just don’t want us to get to the stage where we’re forced to take food from each other.”
Iran has also been struggling to avoid a banking crisis. Years of poor regulation since the financial services industry was opened to private lenders in 2004 allowed banks to proliferate with little oversight.
Loans at risk of default soared and liquidity was squeezed after oil prices tumbled in 2014. The foreign investment promised by the nuclear deal didn’t live up to the hype. The International Monetary Fund has repeatedly called on authorities to urgently recapitalize and restructure lenders.
That takes time though, said the EIU’s Thaker. “They didn’t restructure the banks even during when the sanctions were lifted in last two years,” she said. “It doesn’t happen overnight.”
Uncertainty over the nuclear deal since Trump’s election has kept many European companies away. In that sense, Iranians have less to lose than many expect.
“As a result of the very hostile rhetoric toward the deal and the repeated threats to pull the United States out, there’s no doubt that a lot of companies that had been considering those types of activities but were on the fence ultimately decided not to go forward,” said Andrew Keller, partner at Hogan Lovells law firm which advises companies on sanctions compliance.
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