Iranian Economy Will Continue To Grow Despite Cheaper Oil Prices and Current Sanctions, Report Finds

WASHINGTON – The Foundation for Defense of Democracies (FDD) and Roubini Global Economics (RGE) released their ninth joint report today that found that the Joint Plan of Action (JPOA) will continue to allow Iran’s economy to grow, despite the recent steep decline in the price of oil and current sanctions. The report finds the drop in oil prices will be “insufficient to precipitate the kind of economic crisis that drove Iran to the negotiating table in the first place.”

The report, a product of FDD’s Center on Sanctions and Illicit Finance, found that while declining oil revenues amplify economic pressure, they do little to reverse the near-term benefits of sanctions relief provided under the JPOA, the interim deal reached in November 2013, which helped Iran move from a severe recession to a modest recovery. By limiting Iran’s access to most of its oil revenues, sanctions cushion the immediate effects of oil price drops on Iran’s economy.

“The Islamic Republic has weathered three difficult years of sanctions with rapidly declining oil exports and two years without full access to its overseas oil revenues,” the report says. “Today, in a strange twist of fate, these restrictions blunt the full impact of the drop in oil prices on Iran’s economy.”

Oil price reductions will be a drag on Iran’s economy, the report found, slowing the rise in oil export volumes and likely forcing the new Iranian government to cut spending plans, further devalue the rial, and increase tax revenues. But Iran experienced its own asymmetric oil shock three years ago and has had time to adjust to the painful impact of decreased oil exports and restricted access to its overseas oil revenues by reducing its budgetary reliance on oil revenues. Further, the recent growth in Iranian non-oil export earnings and overall better management of the economy by Iranian President Hassan Rouhani’s administration will help the economy weather this period of cheap oil prices.

“This report challenges the assumption that falling oil prices are a substitute for the kind of escalating sanctions pressure required to force Iran’s supreme leader to choose between a nuclear weapon and economic collapse,” said Mark Dubowitz, executive director of FDD, CSIF director and co-author of the report. “It shows that the JPOA helped Iran avoid a severe economic crisis and that any further extension will only harden Iranian economic resilience and nuclear intransigence.”

Other key findings of the report include:

• Sanctions relief, improved sentiment, and better economic management have already fostered an economic turnaround. A final agreement is needed to sustain or accelerate the recent pace of expansion over the longer-term.
• The final GDP data for the first half of fiscal year 2014/15 finds that Iran’s economic recovery has broadened to domestic demand and the more labor-intensive service industry. However, the economy is still growing below its long-term trend.
• Oil prices are widely expected to recover late this year, however, a longer-term slump in oil prices and global energy demand would weigh more heavily on Iran’s medium-term economic outlook. An extended glut would keep foreign investors at bay, meaning that Iran would have to roll out extensive incentives, even in the event of a nuclear deal.
• The drop in oil prices globally lessens incentives for Iran’s buyers to cheat sanctions, meaning oil exports will be more modest than previously envisaged.
• As most of Iran’s oil export earnings are captured in escrow accounts, sanctions blunt some of the effect of cheaper oil. However, the lower value of exports erodes balances in select import markets, driving up the rial price of hard currencies on the black market and threatening to create supply shortages.

Rachel Ziemba, senior director of RGE’s Emerging and Frontier Markets and co-author of the report, said “Sanctions on Iran have already disrupted some of the normal channels through which oil prices usually affect the economies of major energy producers, partly mitigating the immediate consequences of plummeting prices for the Iranian economy. In the end, any further extension of the JPOA will allow Iran’s economy to continue its moderate expansion and avoid the sort of financial crisis it experienced in 2012.”

You can download the full report here.

About the Foundation for Defense of Democracies:

The Foundation for Defense of Democracies (FDD) is a non-profit, non-partisan 501(c)3 policy institute focusing on foreign policy and national security. Founded in 2001, FDD combines policy research, democracy and counterterrorism education, strategic communications and investigative journalism in support of its mission to promote pluralism, defend democratic values and fight the ideologies that drive terrorism. Visit our website at www.defenddemocracy.org and connect with us on Twitter, Facebook and YouTube. 

About FDD’s Center on Sanctions and Illicit Finance:

FDD’s Center on Sanctions and Illicit Finance (CSIF) provides policy and subject matter expertise in areas of illicit finance, financial power, and economic pressure to the global policy community. CSIF seeks to illuminate the critical intersection between the full range of illicit finance and national security, including money laundering, terrorist financing, sanctions evasion, proliferation financing, cyber crime and economic espionage, and corruption and kleptocracy. This includes understanding how America can best use and preserve its financial and economic power to promote its interests and the integrity of the financial system. The Center also examines how America’s adversaries may be leveraging economic tools and power. For more information, please visit www.defenddemocracy.org/csif.

About Roubini Global Economics:

Founded in 2004 by economist Nouriel Roubini, Roubini Global Economics is an independent, global macroeconomic research firm. The firm’s research combines expert insights with systematic analysis to translate economic, market and policy signals into practical intelligence for a wide range of financial, corporate and policy professionals. This holistic approach uncovers opportunities and risks before the come to the attention of markets, helping clients arrive at better decisions in a timelier manner. Roubini Global Economics is headquartered in New York, with offices in London and Singapore.

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