The changing face of Iran’s political risk post-nuclear deal
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As international sanctions on the country are loosened after the ground-breaking, albeit tentative, nuclear deal, Iran’s influence in the region will undergo dramatic changes, argues Emad Mostaque, of Noah Capital Markets.
The Geneva agreement, reached on Sunday, could finally see Iran slowly forge its way back into the international community and away from its damning brand as a pariah state.
In return for weakening nuclear weapon-related sanctions during the next six months – which have affected the auto industry, precious metals and oil exports – Iran will stop enriching uranium beyond 5%, greater access will be provided to international inspectors, while development of the Arak plant (believed to have been able to produce plutonium) and the Natanz fuel enrichment plant will be suspended.
Here are some other implications the deal will have in the Middle East, according to Emad Mostaque, strategist at Noah Capital Markets, a London-based broker.
“We remain negative on oil with short-term targets of $80 WTI, $90 Brent as geopolitical risk continues to seep out of the price and production increases – primarily from Libya and Iraq – approach.
“The belly of the oil futures curve may well start to decline anticipating Iranian oil coming back next year sometime, but the level of backwardation in the front end of the curve remains significantly overdone, particularly given the recent snapback in the Brent-WTI spread that surprised many market participants.
“We remain bullish looking to the end of 2014 on Iraq deterioration in particular and would view weakness as an opportunity to accumulate. Concerns over geopolitical risk should keep EM energy equities from catching up with developed peers, which look a touch rich in comparison.”
“There are 600,000 Iranian residents of the UAE who spend $1 billion a year on the property market, something that has dropped in the last year due to bank sanctions.
“A reasonable chunk of this buying, which makes them the fifth-largest group in the market, is squirrelling money offshore from Iran as concerns over the currency and inflation concerned the upper classes.
“With an improving situation on the ground and significant upside to the economy, there may be a slowdown in Iranian purchases and some repatriation of capital to take advantage of local potential in Iran.
“The strong recovery of Dubai is likely to keep many Iranians from moving too aggressively back, and existing sanctions and devaluation have already impacted a reasonable amount of the import/export business to Iran.
“Medium term, an infrastructure and logistics-poor Iran coming back into the international fold will be a strong positive for Dubai in particular."
“Political Islam is under attack across the region and while it is a potential competitor due to its similar profile, Iran could well be a key ally and market for Turkey in future, with opportunity on further gas exports and Iran-Turkey trade increasing from just $1.2 billion in 2002 to $21.3 billion last year, with Iran, according to the Turkish ministry of the economy, Turkey's third-largest export market last year ($9.9 billion).
“The goal remains $30 billion in total trade volume by 2015, something eminently achievable, particularly if Iran shifts more of its import routes from the UAE to Turkey.”
Perhaps most importantly, the easing of sanctions, and the subsequent pick-up in international investment, is how Iran is hoping to expand its influence in the region and accelerate growth, and not through the development of nuclear weapons, says Mostaque:
“As for Iran itself, not much more oil will flow, but the suspension of certain sanctions against petrochemicals in particular opens up significant potential for foreign investment and economic stabilization.
“Iran has significantly lower downstream capabilities than it should have due to some structural issues ... and sanctions, but there is clearly massive potential here.
“[Iranian president Hassan]Rouhani believes that he could get up to $100 billion of investment in this sector alone, which may be a bit high, but not by much. Chinese and Russian firms are already increasing their involvement and the trickle could soon be a stampede.”