Whatis the Iran Nuclear Deal?Officially called the “JointComprehensive Plan of Action”, the landmark deal was crystallized betweenworld powers including Russia, EU and US in July 2015. As said by the USSecretary of State of the time John Kerry “the parties have taken ameasurable step away from the prospect of nuclear proliferation, towardstransparency and cooperation”. A joint statement was designed inSwitzerland in which it was decided that Iran would reduce, convert andredesign their nuclear arms, and comply to an Additional Protocol to lift allnuclear based economic sanctions, thus freeing many billions of dollars in oilrevenue and frozen assets.Bulldozing what Obama built on andcalling it ‘the worst deal ever’ as he believes that Iran supports terrorism . It’sno secret that republicans have a tiff with Iran and many economists believethat this is Trump planting a seed in everyone’s mind to vilify Iran and start andcontrol war.
Whatit means to be Sanctioned?Economic Sanctions is a political forcethat is as powerful as military force as it lets a country bleed out in ofitself. When Sanctioned, Iran is restricted to maintain trade relations withany other country. This consists of purchase and sale of products, technologyand other factors of production. This situation sucks dry all Export and Importactivities in the country. Not only are EX-IM of trade affected but also itsinternational financial relations. All international investments and financialexchanges are sanctioned, even with Insurance companies and Banks.Impacton a Global Macroeconomic levelOn the most general level, as everycountry’s currency appreciates with the depreciating dollar, imports of therespective countries will improve, but dampen its export performance.But as Countries have to pay more foroil, they will lead to production levels in countries to dip leading to job losses,thus leading to higher crime rates.
Unemployment will have adverse effects ondemand for goods, bringing down supply along with it.As Trump decertifies the Iran deal,Russia will have a less than favorablerelationship with US. Russia.
This could lead to imposing tariffs on US Importsor high tariffs on Russian Oil Exports.Since USA is a debt economy, banks willbe stressed out with lending to Oil Companies and increasing to its exposure topossible depressed assets. This in turn will increase the LIBOR rate, leadingto economic instability as LIBOR and Treasury bills will have a wider gap.As demand and supply gets stagnant, unemploymentrise, and overall economy goes in a rut- The Central Bank will infuse moneysupply to the economy by reducing SLR thus stimulating productivity into thehands of people. Impacton Iran’s EconomyWith the whole post-sanctions scenario,Iran’s long-term economic pathway is affected as it is overtly dependant onoil, which also hampers its country’sday-to-day functioning since it is very sensitive to the fluctuating oil prices.
This disruption, has affected thecountry’s foreign exchange reserve which puts their whole balance of payment onhalt.It is rightfully said by EconomistSpencer Dale that it is better to have money in the bank than to have oilunderground, as value of oil is meaningless on a macro scale if it cannot beexported. And so Iran will be going through a state of depression in itseconomy.Impacton India’s EconomySince price of Oil has spiked making USDprice dip, It’ll lead to appreciation of Indian Rupee. This makes India boostup its Imports with its power-risen foreign exchange reserves. With theinclusion of Foreign goods and services, it’ll lead to stiffer competition withdomestic Indian goods leading to better customer experience due to sheervariety.
This will lead to purchasing of foreign technology by Indian companiesto curb the competition and enhance market share.But since the price of oil has spikedup, this will lead to a hit in theautomobile space. Since petrol prices are already higher in India, the citizenswill be the most to lose and will affect in less automobile purchasing and morestress in Public Transport leading to Government Expenditure. This massive hitmight open doors for people to be more responsive and adopt newer technologies likeelectricity driven automobiles. And for the Government to be less dependent on oiland petrol sensitivity faced by its citizens might provide incentives toadopters of this new technology leading to even more Government expenditure.
With India having to pay more now forOil and its operations, there will be more stress on Banks. Oil drillers andImports will be more indebted with banks, leading to higher lending and higherexposure to bad debts. With rising Oil prices, demand drops, making the groundseven shakier of banks and increasing probability of owning more depressedassets if Oil companies go bankrupt.
With Indian citizens having to pay a lotmore for petrol and the commodities surrounding oil prices, cost of livingbecomes much higher. With this, Indians will have a harder time investing, evenin real estate. This drop in demand of real estate, will lead to lower pricesto stimulate demand. And not only will this sect of investments take a halt,but there will be lesser capital formation leading to stagnant cash flowcirculation in the economy. Impacton China’s EconomyChina being one of the biggest importerof oil with around 9+ barrels per day, will be hit the hardest in terms of highoil prices. China will be paying extra for transportation of oil, thusaggravating the problem. This problem makes their Belt and Road Initiative makemore sense for streamlining their transportation to reduce cost.China is a manufacturing powerhouse, butwith rising oil prices and higher cost of living, demand of goods will take adip, which will reduce supply.
This reduction of production will have itsripple effects on its abundant manforce, thus aggravating their cost of livingproblem.With production taking a hit, it willhave a drastic fall in its GDP and also affect its relations with countriesoutsourcing their manufacturing in China as they need to pay higher to keep thelights on in these plants. Especially in Airline industry, where almost all assemblyis done in China, lesser orders will be given for assembly, leading to biggerhit in their employment.China will soon spend more resourcesfinding new oil fields in China to reduce dependence on imports. Impacton UAE’s EconomyFor the most part, UAE has the most togain from the decertification of the Iran Deal. As it captures a big chunk ofthe lost Iran market share.
This further strengthens their oil productionlandscape. Since it is taking over a bigger market share, they will becapitalizing on the untapped demand left over by Iran. Since Oil production ramps up, more jobsare produced. This will raise employment levels, ramping up demand from itscitizens which is going to improve the production landscape, making it evenrosier for employment levels as supply needs boost. UAE with its potential healthy economywill lead to more investments further improving market conditions by creatingjobs and enhancing cash flow within the economy resulting in potential capitalformation.
With a healthy economy, crime rates willreduce and so will government expenditure as it will deal with unemployment toa lesser degree.