What to Expect If US Walks Out of JCPOA?

The US is expected to decide tomorrow whether to continue to waive sanctions on Iran, as agreed under the 2015 nuclear deal formally known as the Joint Comprehensive Plan of Action.

The media is abuzz about what US President Donald Trump will decide on.

Opinions are divided. Some argue that the US lifting of nuclear sanctions did not do much in the first place, as secondary sanctions remained in place and Iranian markets were not properly connected to the global financial system, despite the removal of international sanctions.

Others are more skeptical, as they believe JCPOA’s other signatories, notably the EU, might not side with Iran if the US walks out and oil trade and banking ties return to the pre-deal state.

In either case, there’s a lot at stake: Iranian stock market’s recent rally was augmented by the US Congress’s decision to not reimpose sanctions, which has now died down partly over the risk posed by the new waiver deadline.

The fate of contracts with Boeing and Airbus to purchase a total of 180 planes–one of JCPOA’s main achievements for Iran–is up in the air and the $4.8-billion contract with the French oil and gas giant Total S.A may be at risk.

 Capital Market

Tehran’s markets have witnessed Trump’s hostile rhetoric and behavior, and reacted negatively to all Iran-centered Trump-related news. The fate of JCPOA has been the developments’ centerpiece in nearly all cases.

For instance, shockwaves hit Tehran Stock Exchange and Iran Fara Bourse–alongside other global markets–in November 2016 when Trump was elected as US president, dropping 1.83% and 2.4% respectively in a matter of a single day. Investors rushed to safe haven markets, raising foreign exchange rates and gold coin prices.

The same scenario unfolded repeatedly throughout 2017, albeit with less and less impact every time, as investors got more familiar with Trump’s rhetoric and learned to respond to actions, not words alone.

Trading at TSE and IFB is more cautious these days even though the markets seem stable. Wary investors are awaiting actual political measures before responding.

Analysts also seemed nonchalant. They note that Trump’s decision to not comply with waivers could ignite a short-term market panic, but is unlikely to have a lasting impact.

“Our capital market has grown more through government assistance than foreign investments … We were never that connected to global markets anyway … Even JCPOA gave the markets only a slight boost over optimism, which died down after a short while,” Hossein Pourahmadi, Shahid Beheshti University’s economics professor, told Bourse 24.

Pourahmadi emphasized that reduced interest rates and global commodity price growths were the markets’ primary drivers in 2017, both of which are independent of the impact of Trump’s decision.

Mostafa Omid Qaemi, the head of Mehr Ayandegan Financial Development Company, also believes that the US departure from JCPOA has the silver lining of making things clearer, as the current state of uncertainty “only makes the markets agitated”.

“We’ve been sanctioned for years and haven’t had any dealings with the US. Reinstating sanctions will not have much of an impact on [exchange-listed] companies,” he said.

 Banking Relations

Many expected Iran to have a full reintegration into the global banking system after the nuclear deal, but the reality was far from that.

The lifting of sanctions did enable Iran to reestablish relations with foreign banks, but remaining secondary sanctions imposed by the US has barred Iran from dollar transactions and effectively disheartened bigger banks from working with the Islamic Republic.

Iran has consequently been forced to approach small and medium European banks to conduct its much needed oil trade transactions, as only China, Russia and India’s bigger banks dare to work with Iran.

What this means is that if the US pulls out of the JCPOA, Iran’s banking ties will not change drastically, unless the Trump administration resumes the pre-deal aggressive stance toward any global banking ties with Iran. If so, “we have a lot to lose”, said senior Central Bank of Iran advisor, Pouya Jabal-Ameli, in a phone interview.

“The deal didn’t make things great, but what we have now is incomparable with the situation under sanctions.”

Jabal-Ameli believes that the EU’s firm backing for Iran can be the only deterrent to the negative banking impact of the US walkout from JCPOA.

“However, this seems unlikely. They might initially voice their support, but they can’t sustain it in the long run over concerns of being fined by the US,” he said.

This is while EU Foreign Policy Chief Federica Mogherini said in mid-December that preserving and implementing the 2015 nuclear deal with Iran is “an absolute must”, criticizing Trump’s Iran position.

 Aviation Sector

Deputy Minister of Roads and Urban Development Asghar Fakhrieh-Kashan believes that the scrapping of JPCOA will not affect Iran’s plane deals with Boeing and Airbus.

The aviation deals were part of the nuclear bargain. Based on the JCPOA, the United States is required to “allow for the sale of commercial passenger aircraft and related parts and services to Iran”.

“Even if the US decides to leave JCPOA today, it won’t affect OFAC-issued licenses. New decisions have no ex-post facto implications,” he was quoted as saying by ILNA.

However, the official noted that the US walking out of the deal can naturally affect future licenses to be issued by the US Treasury’s Office of Foreign Assets Control.

Iran Air signed contracts with Boeing and Airbus to purchase a total of 180 planes. Airbus has delivered three aircraft, but the first Boeing delivery is not expected until April 2018.

“Despite Iranian officials’ optimism, any US decision to enact new JCPOA-related sanctions or restrictions may well lead to pressure on OFAC to rescind the licenses,” Saj Ahmad, chief analyst at StrategicAero Research, told Financial Tribune.

“That would impact both Airbus and Boeing orders … Airbus would have a massive headache as it is counting on Iran Air orders being realized as part of its production plans.”

Noting that refusing to renew the waivers will in the short run have little impact on the current state of the deals, Ahmad said, “The longer this state of play lasts, the more likely it becomes that the delays will torpedo the viability of the airplane deals.”

Not allowing Boeing to sign off on these deals will hurt the US, too, as it will mean Iranian airlines being dominated by Airbus and risking tens of thousands of US jobs, Ahmad concluded.