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11 October 2015 |
As the western world powers come to an agreement with Iran over nuclear weapons and economic sanctions, the consequences are still being debated as highly contentious...
As the US presidential campaigns get under way, President Obama will no doubt be thinking about his legacy. In foreign policy, he has certainly left one in the nuclear deal with Iran, which reached accord over the last few months. However, the deal is highly contentious, with opposition from within US Congress and Iran's geo-political neighbours, particularly from Israel. As Mark Fitzpatrick, a leading expert at the International Institute for Strategic Studies in London, commented, "It's not a good deal, but it is an acceptable one. " If Obama's intended legacy is to bring about a stronger foundation for world peace and prosperity, the deal may appear spurious, despite its agreeable intentions. However, as far as the economy is concerned, inside and out of Iran, the deal can only be a good thing.
The deal is between Iran on the one hand, and 6 countries coined as 'P5+1' on the other. Led by the US, it includes the UK, France, China, Russia, plus Germany. The essence of the agreement is to ensure Iran does not build nuclear weapons, and in return, economic sanctions that have incapacitated Iran's economy for years, will be lifted. The US have made clear that if Iran breaks the agreement, economic sanctions will be reinstated.
The primary material used to make nuclear power is uranium, and it must be roughly 90% 'enriched' to forge nuclear weaponry. The deal obligates Iran to give up 97% of its uranium, and for the remainder to be no more than 3.7% enriched. Centrifuges, which are central to this process, will be reduced from around 20,000 in number, to around 5,000. A heavy-water reactor in Arak, a city in Iran, which produces plutonium, a component capable of creating a nuclear bomb, will be modified too. So, although Iran will retain its nuclear facilities, it will have insufficient material to create nuclear weaponry. In addition, the International Atomic Energy Agency (IAEA) will regularly inspect these facilities to ensure Iran is complying with the agreement. These obligations are not timeless, and within 15 years the essential terms of the agreement will expire.
The first major concern is that the deal is not effective. Will inspections by the IAEA catch all prohibited activity or will Iran, if they want to, be capable of building nuclear weapons in secret? The IAEA can only inspect certain sites, such as at Natanz and Fordo. If the IAEA wants to inspect a different site it thinks is suspicious, it must first seek Iran's permission. If Iran denies them access, the final verdict will be made by an independent arbitration panel. But surely the panel can approve the IAEA's request if it needs to? Maybe so. But the problem is that for the IAEA to make such an inspection, it must request access, and then wait for approval. This may be enough time for Iran to move its nuclear operations away from the targeted suspicious site, so as to always be a step ahead of the inspectors.
This would mean the very point of the deal, to ensure Iran does not make nuclear weapons, cannot be enforced in a timely and thorough fashion. And if the agreement is fundamentally ineffective, what will keep the US and EU from reinstating sanctions in fear of Iran not upholding its end of the bargain? This fundamental mistrust surrounding the agreement may lead to the rapprochement falling apart, and possibly into military conflict.
The second concern is about the length of the essential terms. What happens after 15 years when Iran is no longer obligated to restrict its nuclear production? Many, particularly in US Congress, suspect that Iran may go back to its nuclear arms project. After all, the deal leaves the infrastructure to produce nuclear weaponry intact. The agreement does not require destruction of nuclear facilities; it simply diminishes the raw materials used.
Anything denoting a return to a nuclear arms project could force the West to reinstate economic sanctions. But how easy will that be after countries around the world have begun trading and investing there, and in turn, Iran is trading and invested around the world? Arguably not easy at all, because nations would be harming themselves by imposing economic sanctions on a market they have an interest in.
The final concern is how the balance of power in the Middle East will change following the deal. There has been discussion of Iran's funding of various politically destabilising groups, such as Hezbollah in Lebanon, and its assistance to the Assad regime in Syria. As the deal unleashes large sums of capital from frozen assets and investment for Iran, its ability to assist these regimes will only strengthen. This is of particular concern to Israel and Saudi Arabia, allies of the US who neighbour Iran. Benjamin Netanyahu, the Prime Minister of Israel, has expressed outrage at the deal, claiming it to be a "historic mistake ". These fears were compounded when Ayatollah Ali Khamenei, the Supreme Leader of Iran, made the hostile prediction that Israel will not exist in 25 years. Commensurately, the prospect of proliferating Iranian power in the region has spurred concerns of a nuclear arms race in the Middle East, which will have disastrous effects on world peace and security.
The economic sanctions set by the US, UN and EU have been crippling Iran's economy for years. The US had been least forgiving. It practically imposed a blanket ban on trade with Iran, but for some humanitarian goods such as medicines. The ban on trading oil and gas posed a huge problem because Iran is an oil exporter and receives a large proportion of its revenue from that income.
The UN had also frozen Iranian assets overseas. This means that any assets owned by Iran or by Iranian companies abroad, such as company factories, cannot be linked back to the country. Any money made from an overseas asset cannot flow back to Iran. This means that Iran suddenly lost huge revenues that were meant to flow to the country from investments around the world.
Perhaps most debilitating was Iran's exclusion from international finance. In 2012 Iran's financial institutions were unable to transfer money electronically via a global system called SWIFT. This meant that citizens and businesses literally could not buy or sell anything that required money being transferred electronically overseas. It would be as if you could only shop on one shopping street with only so many goods, unable to get anything else, from anywhere else, for lack of a bank card.
As a result of the sanctions, prices in Iran soared. This is because bans on goods meant there were fewer goods and services in Iran. With less supply, domestic suppliers can afford to raise their prices knowing consumers have few alternatives. The drastic shortfall in revenues from abroad also put many businesses under strain resulting in unemployment. Iran's loss of revenue, particularly from oil trade (it lost roughly £16 billion worth of oil revenues since 2012) has contributed to its inability to acclimatise to these changes, exacerbating the depressed economy.
Lifting the sanctions will open up Iran's 80m people-strong market to the world, and the world to it. The result will surely be sharp rises in investment in Iran as businesses move to exploit this potential demand. Big brands are already looking to expand into Iran, such as Coca Cola. The car industry, which is Iran's biggest non-oil industry, will be unleashed too. Global brands, such as Mercedes, will be keen to expand into the country, which was once Peugeot's second largest export market. US grain producers, Iran's largest supplier of wheat, will find renewed custom from Iranian buyers as well. Assets frozen overseas are worth roughly $100bn, so large sums of capital will finally be able to flow back into the country enabling businesses to invest more and expand in and from Iran. Some businesses already invested in Iran, such as MTN, a South-African telecommunications company, will finally be able to access their assets there to continue business expansion.
The general trend following the deal will be growth, for Iran and for those looking to invest there. The people of Iran will also be flooded with new business, and as a result, new products. The increased competition will help push prices down so that essentials, and some luxuries eventually, will become more affordable. More business will also mean an increase in employment as companies look to recruit local workers.
There may be some economic problems. As Iran releases its oil exports into the world, it will likely push commodity prices down further by compounding the glut in oil supply. Corruption is a big issue in Iran which may discourage foreign businesses from setting up shop there. State monopolies and political influence mean that business may be hindered and possibly controlled by higher forces. For instance, in 2004 the Revolutionary Guards, a branch of Iran's armed forces, stopped a Turkish airport services company from getting a contract in Tehran. The contract was later given to a local consortium. On the other hand, it is worth noting that ambiguity in the rule of law and corruption did not prevent businesses from investing in China, where similar problems are rife.
An Uncertain Future
It seems the economic benefits of the deal are clear. The problem is how the deal will unfold diplomatically. Although Hassan Rouhani, the president of Iran, has committed to honouring the pact if the West remains committed, Ayatollah Ali Khamenei's continued hostility towards the US and Israel remains unsettling. The deal's success is rooted in the trust between Iran and the West, the absence of which caused the economic sanctions that led to this agreement in the first place. For Obama's legacy to hold good, the agreement will have to work, but it's too early to tell. And the alternatives, military action or continued sanctions, only serve to augment conflict and destabilise the world. For now then, the dialectical will just have to watch this space.