Tag: p5+1

Iran’s Economy, With and Without a P5+1 Agreement

The haggling between Iran and the so-called P5+1—the permanent members of the United Nations Security Council, plus Germany—is scheduled to come to a close on Monday, November 24th. The two parties each want different things. One thing that Iran would like is the removal of the economic sanctions imposed on it by the United States and its allies.

After decades of wrongheaded economic policies, Iran’s economy is in terrible shape. The authoritative Economic Freedom of the World: 2014 Annual Report puts Iran near the bottom of the barrel: 147th out of the 152 countries ranked. And the “World Misery Index Scores” rank Iran as the fourth most miserable economy in the world. In addition to economic mismanagement, economic sanctions and now-plunging oil prices are dragging Iran’s structurally distorted economy down. So, it’s no surprise that Iran would like one of the weights (read: sanctions) on its economy lifted.

Just how important would the removal of sanctions be? To answer that question, we use the Institute of International Finance’s detailed macroeconomic framework. The results of our analysis are shown in the table and charts below the jump.

Iran: From Hyperinflation to Stability?

With the announcement on Saturday night that Iran and the P5+1 group reached a tentative deal over the Iranian nuclear program, the Iranian rial appreciated 3.45% against the dollar on the black market. The rial jumped from 30000 IRR/USD on Saturday November 23rd to 29000 IRR/USD on Sunday November 24th. A daily appreciation of this magnitude is rare. In fact, it has occurred fewer than ten times since the beginning of 2013. Indeed, this indicates that the diplomatic breakthrough is having a positive effect on Iranian expectations.

Over a year ago, I uncovered the fact that Iran experienced a period of hyperinflation (in early October 2012), when its monthly inflation rate peaked at 62%. Since then, I have been actively monitoring and reporting on the IRR/USD black market exchange rates and calculating implied inflation rates for the country.

Since Hassan Rouhani took office, on August 3rd, Iranian expectations about the economy have turned less negative. Thus far, it appears Rouhani has been successful in ending the long period of economic volatility that has plagued Iran, since the US imposed sanctions in 2010. This has been reflected in the black-market IRR/USD exchange rate, which

There are three main factors at work here. The first is a concerted effort by the Rouhani administration and the central bank to curb Iran’s inflation. This stands in stark contrast to the previous regime, whose strategy was to simply deny that inflation was a problem.

The second is that that Iran’s economy has proved remarkably “elastic” – meaning that the country has ultimately adapted to the sanctions regime and has found ways to keep its economy afloat in spite of them.

The third factor in the rial’s recent stability is an improvement in Iranian economic expectations. This is where the P5+1 talks come into play. Iranians recognized that easing of the sanctions regime would be a bargaining chip in any nuclear negotiations. In consequence, their economic expectations improved as the talks progressed. Indeed, Saturday’s announcement gave these expectations a shot in the arm.

In light of the rial’s recent stability, I have delisted the rial from my list of “Troubled Currencies,” as tracked by the Troubled Currencies Project. For starters, the rial no longer appears to be in trouble. And, on a technical note, implied inflation calculations are less reliable during sustained periods of exchange rate stability.

That said, we must continue to pay the most careful and anxious attention to the black-market IRR/USD exchange rate in the coming months. Like the P5+1 agreement, Rouhani’s economic progress in Iran is tentative and likely quite fragile. Since the black-market IRR/USD is one of the only objective prices in the Iranian economy – and perhaps the most important one of all – it will continue to serve as an important weather vane, as the diplomatic process continues, and as Iran’s economy gradually moves into a post-sanctions era. 

Negotiations with Iran: What Has Changed?

May 23, the permanent five members of the UN Security Council, plus Germany (P5+1) will enter into talks with the Iranian leadership about the latter’s nuclear program. The Baghdad talks come on the heels of talks last month in Istanbul. A number of observers have raised expectations for the talks in Baghdad. The latest hopeful development is IAEA chief Yukiya Amano’s declaration, on the heels of his visit to Tehran, that he expects a structured agreement for inspections to be signed “quite soon.” Any progress toward a diplomatic solution would be preferable to backsliding or a collapse. Unfortunately, the talks are unlikely to live up to the high expectations.

Beyond Amano’s visit to Tehran, the big change since last month’s talks is French President Nicolas Sarkozy’s loss to the socialist, François Hollande, who appears less truculent on Iran than was Sarkozy. Previously, Sarkozy was the hardest-driving member of the P5+1, so Hollande’s victory is likely to bring the P5+1 into closer harmony. More broadly, the considerable anxiety over the prospect of an outright collapse of the Euro is likely to diminish European interest in focusing too much attention overseas.

Despite these changes, however, one wonders how the underlying calculus of negotiations has changed. The United States is still threatening to bomb Iran in order to prevent it from developing a nuclear deterrent. Israeli Prime Minister Binyamin Netanyahu is continuing to define “success” in a way such that it cannot realistically be achieved, and warning that anything less than total Iranian capitulation is failure. Like-minded U.S. legislators, such as Senator Lindsey Graham (R-SC), agree that the only acceptable Iranian move is immediate surrender. And high-ranking Iranian military officials are declaring that Iran is “standing for its cause that is the full annihilation of Israel.”

Given these two sets of developments, the question remains: Have sanctions by the United States and its partners caused enough pain and fear of instability in Iran that its leadership will forego a nuclear program that it likely feels is vital for its legitimacy and security? Most skeptics, this writer included, would like to be proved wrong, but they still appear to have the better of the argument.

Cross-posted from the Skeptics at the National Interest.

Give Talks with Iran a Chance

In today’s Philadelphia Inquirer, my co-author Doug Bandow and I argue that Washington must engage Tehran in order to keep it from following the same course as Pyongyang—a nuclear regime ruling over a population anguishing under international sanctions.

Negotiating with Iranian leaders will not resolve the nuclear issue in the next few months. What’s needed is a process that encourages Tehran to make tactical concessions, such as persuading it to forestall uranium enrichment at higher levels and allowing for more intrusive inspections. Next month, when Turkey hosts talks between Iran and the “5+1 group”—the United States, Russia, China, Britain, France, and Germany—American officials should move toward adopting a long-term policy that incorporates Iran into the community of nations. Diplomacy remains the best means of containing Tehran’s nuclear ambitions. Unfortunately, diplomacy is unpopular with those who see war as the answer to most international problems.

But an attack is not in America’s national interest. Rather than promoting regime change or bringing hope and prosperity to the region, an attack will unify a divided country, likely lead to a regional conflagration, and potentially leave the global economy in turmoil. Moreover, an attack would be counterproductive. As those opposed to the prospect of military action have argued, bombing Iran is the fastest way to ensure that Iran gets a bomb.

The U.S. is willing to allow Iran to have civilian nuclear power, but not nuclear weapons. As Doug and I argue in our piece, “Virtually no one wants Iran to develop nuclear weapons. But war would almost certainly leave America worse off, and sanctions could well fail while punishing the Iranian people for no good reason.”

This Friday, the Cato Institute is hosting a half day conference to examine two main questions surrounding the Iranian nuclear program: What are the prospects for a diplomatic solution? And what are the options should diplomacy fail? Two excellent panels with diverse views, including the Skeptics’ own Justin Logan, will debate the topic. You can sign up here or watch it live here.

Cross-posted from the Skeptics at the National Interest.