FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition highlighting rising US-Iran tensions as sanctions risk regional instability.

Key Takeaways on US-Iran Tensions and Regional Instability

US-Iran tensions have increased substantially since March, when the US declined to extend sanctions waivers for Iranian oil imports. The US is also moving to increase economic pressure through additional sanctions. The Trump Administration does not have an aligned view on the policy objective that further sanctions are designed to achieve – be it a restart of limited negotiations on the nuclear accord, a more sweeping set of demands that include Iran pulling back support for proxies in the region, or regime change. Iran has remained largely committed to the 2015 nuclear deal, even after the US withdrew from the agreement. The Iranian government is seeking diplomatic resolution with the US with the help of the European Union, Russia, and China.

Our View

Iran will try to avoid an open conflict with the US, and the political regime is well equipped to withstand the economic sanctions in the short term, even as these sanctions leads to a significant economic contraction in 2019. Continued economic pressure on Iran will likely force it back to the negotiating table within the next year. But if the US demands really do require Iran to convincingly scale back support for regional proxies in Yemen, Lebanon, Iraq, and the Palestinian territories as a precursor for sanctions relief, this will be a far more difficult situation for the Iranian political establishment to accept than a few minor modifications to the nuclear deal.

Business Implications

Though we expect Iran to avoid conflict with the US, there is a risk that tensions flare up and compromise supply chains in the region, and firms should prepare by building inventories in areas that could be impacted. In any case, the lack of any short-term resolution will weigh heavily on the Iranian economy. The Iranian rial will continue to slip as inflation reaches record highs, sharply reducing consumer spending. Falling public revenues and business confidence will further cause the economy to contract by 5.3%YOY in 2019.

Mansour El-Zahab, MENA Analyst

FrontierView clients: See our recent MENA Market Monitor update for further insights

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