After weeks of speculation, this week we finally learned what would happen to the Iran nuclear deal: Donald Trump announced that the United States will be withdrawing from the agreement. Today we would like to take the time to talk about what this means and what it entails for the financial markets.
Although it can be argued that the Middle East in general is a very volatile region, Iran has long been of special interest to the international community. The country is big and powerful, and it was successful in developing a nuclear weapons program, the only one in the region. The Iranian government, however, is a complicated matter as they have both civic and religious authorities, and lately there has been tension between those who want a more democratic regime and the religious radicals. With ISIS being active in the region a few years ago, having nuclear weapons in the Middle East was quite a dangerous prospect. This is why the most powerful countries in the world – the United States, China, Russia, and the European Union came together and struck a deal with Iran in 2015.
The Iran Nuclear Deal
The deal that was agreed upon was beneficial for both sides. On the one hand, Iran agreed to stop its nuclear development, ensuring a degree of safety for the region and giving the rest of the world one less thing to worry about. In order to stimulate Iran to follow through on this, the other countries agreed to lift the sanctions that they had imposed on Iran, making it easier for the Middle-Eastern country to export goods internationally and expand its economy.
Donald Trump is widely known for not providing accurate factual information, and instead operating on feelings. If he feels that something is not right, then the actual facts about it become irrelevant. In this sense, Trump and his administration felt that the deal with Iran is unfair to the United States (who previously benefited from the sanctions). He expressed mistrust in Iran, insinuating that it is easy to not comply with the deal. The truth is that Iran has been under heavy regulation from international bodies this whole time who had unlimited authority into monitoring Iran’s nuclear resources and could even drop by unannounced for inspections if they suspected that Iran might be secretly developing nuclear weapons at a new, unregulated location. Not to mention that hiding a nuclear program is basically impossible in this day and age. Since the deal was implemented in 2015, Iran has been completely compliant and has passed all of the check-ups to which it was subjected periodically.
The other countries involved in the deal with Iran urged Trump’s administration not to withdraw from the deal. While Trump claims that the deal is unfair and that the US is getting nothing out of it, it basically prevents Iran from having nuclear weapons today. Without the deal, Iran could be fully equipped for nuclear warfare within weeks. That is what we were getting from the Iran nuclear deal: safety.
Certainly, just because the United States have decided to withdraw, it doesn’t mean all of the other countries involved would have to do the same, right? Not quite. If Europe, Russia, and China want to oppose the United States on this issue, it would mean they are directly supporting Iran, choosing it as an ally over the United States. Much can be said about how volatile US politics are in Trump’s era, but the States are still the most powerful country in the world and nobody wants to be on their bad side. If they impose sanctions on Iran, likely their allies would do the same, even if they do not like it.
With sanctions imposed on Iran, international exports for the Middle-Eastern country will once again become difficult. Iran is an OPEC member, and among its most active ones. Due to the developments with the nuclear deal oil prices have surged to highs from 2014 on the expectation that Iran will not be able to export as much oil anymore (the old limit was 1 bn barrels). With the US, China, Russia, and the EU closed off to Iran, the oil market will experience a shortage of supply and prices can surge. They have already reached levels around $70-72 per barrel. Some analysts have argued that in the coming months we can see oil up to nearly $100 per barrel.
Another consequence of the US walking out of the Iran nuclear deal has to do with North Korea. The situation with North Korea is very similar to Iran in 2015: it has nuclear capabilities and a somewhat dangerous regime, thus being a source of instability. To make North Korea safe and help it become better integrated in the global economy, a deal on denuclearization needs to be struck: exactly like the deal with Iran of 2015. Seeing how easily the United States abandoned their promise to Iran, can North Korea really trust the US? This is how in just a few weeks Trump’s administration managed to sabotage years of hard work in diplomacy and may yet see more problems occur because of this.