The Second Wave of Sanctions and Foreign Investment in Iran

The head of the Central Bank of Iran has stated that the implementation of the U.S. sanctions in November will not lead to a "disaster" and that the sanctions will not yield a "desired outcome." However, terms like "disaster" are not very precise in economic literature, which tends to be quantitative and relatively accurate. Therefore, the head of the Central Bank's intentions cannot be fully understood through such language. If we consider the consequences of the first wave of sanctions, the second wave could reduce Iran's economic growth and accelerate variables such as unemployment and poverty, as it targets the heart of Iran's economy, namely the oil industry, disrupting the flow of foreign currency investment into Iran. Until last year, before the U.S. withdrawal from the JCPOA, there was an increasing interest in investing in Iran from Western businesses in various forms. With the signing of the JCPOA, it seemed that uncertainty and, consequently, some of the economic and political risks associated with Iran would diminish. In this context, it was expected that the political and economic situation in Iran would normalize. Representatives from many Western businesses, hundreds of Western traders and politicians visited Iran, and numerous memorandums regarding investment in Iran were signed. Even the inflow of foreign investment into Iran increased compared to the period before the sanctions. However, at the same time, Europeans did not show much urgency in cooperating economically with Iran, and a kind of hesitation in their behavior was observed, which provoked criticism from the opposition faction and even the leader of the government. Even banks and risk assessment institutions did not lower Iran's risk index, as the risk of disruption between Iran and Western countries due to Iran's involvement in regional countries was high. However, with the emergence of Donald Trump, the situation changed, and signs of increased political tension between the U.S. and Iran led to increased doubts among foreign businesses active in Iran. Ultimately, with the U.S. withdrawal from the JCPOA, the exit of foreign businesses from Iran intensified, and the demand for investment in Iran decreased. This can be seen in the latest published statistics on foreign investment attraction. According to the latest published statistics, the number of approved projects by the Foreign Investment Board in industrial, mining, and commercial projects in the first four months of this year has decreased to less than half compared to the same period last year. The details show that in the four-month period of the year 1397 (2018), 24 projects were approved by the Foreign Investment Board, with a total investment volume of $349.1 million. In contrast, the amount of approved foreign investment in the first four months of last year was $775.3 million. Of course, this data only includes approved projects, and its decrease is not surprising, given the rising tensions between Iran and the U.S. and the increased uncertainty regarding the future of investment, as well as the exit of international businesses from Iran. It should be emphasized that not only the investment projects but also the investments themselves have decreased. Of course, the statistics only pertain to the first four months of the year, when tensions between Iran and the U.S. had not yet reached their current level, so it is expected that capital flight and investor exit in the coming months, especially as we approach November 4, the date of the second wave of sanctions, will be much greater than this. Meanwhile, we will also witness the flight of domestic capital and investors abroad. The skyrocketing prices of foreign currencies against the rial is a manifestation of this. The consequences of reduced investment at various economic levels are significant. A decrease in international investment is a macro variable that gradually affects intermediate variables such as the level of business activity or a specific industrial sector such as oil or petrochemicals, and the impacts will continue from the intermediate level to the micro level, affecting businesses and households. A reduction in investment means a decrease in GDP, a reduction in production capacity, a decrease in job opportunities, and a reduction in household income. In such conditions, unemployment and inflation will increase, and the misery index, which is a combination of unemployment and inflation, will rise above current levels. In this context, the International Monetary Fund adjusted its previous forecasts and, despite usual conservatism, presented a bleak scenario for Iran's macroeconomic variables, predicting that Iran's economic growth will be negative 1.47% this year and negative 3.6% next year. In this framework, Iran's per capita income is expected to decrease from $5,221 to $4,052 over the next two years. The ratio of household savings to GDP is also expected to decline over these three years, from about 40% to 38.7%. The meaning of this decrease in per capita income and the ratio of household savings to GDP is a reduction in household income and savings, and consequently, an increase in poverty and vulnerability to economic risks.