Iranian nuclear agreement: questions and politics

The announcement that Iran and the five permanent members of the UN Security Council (United States, China, France, Russia, and the United Kingdom) and Germany have reached an agreement that places limits on Iran’s nuclear program in return for the lifting of economic sanctions has drawn international praise and raised concerns.

Nader Habibi, the Henry J. Leir Professor of the Economics of the Middle East in Brandeis’ Crown Center for Middle East Studies, spoke with BrandeisNOW about the agreement, its potential impact on Iran and the Middle East and how it might affect the petroleum market.

BrandeisNOW: What has been the international response to the agreement?

Habibi: Israel’s opposition to this deal is already quite clear. Prime Minister Netanyahu immediately denounced it.

The Gulf Coast Countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have been relatively quiet publicly. They have all nominally expressed support for the agreement. In private, however, they are worried about Iran’s regional policy in the Middle East.  So they are unhappy that the agreement is limited to the nuclear program. I think they are still skeptical that under this agreement, Iran might be able to continue some covert programs to develop nuclear weapons.

Turkey will be happy with the deal because it has a large amount of trade and investment relations with Iran, and now it will be one of the main beneficiaries of the sanctions relief. The volume of trade and investment between Iran and Turkey will increase after the sanctions are lifted.

BrandeisNOW: How will it affect Iran domestically?

Habibi: The agreement will positively affect Iran on many fronts, especially the economic front. The United Nations, the European Union and the United States will lift the majority of the most important sanctions after the International Atomic Energy Agency verifies that Iran is in compliance with the restrictions on its nuclear program.  

Once the sanctions are lifted, the oil revenues will increase and some foreign investment will also go to manufacturing and oil sectors. While sanctions will be lifted in six months at the earliest, the more immediate effect of the agreement will be an increase in consumer and investor confidence. This means that the resources that have been put on hold inside the country will now be invested and economic activity will increase.

As far as domestic politics, I think this will strengthen the moderates and President Hassan Rouhani. They may gain more influence on government policy.

BrandeisNOW: Will it change Iran’s role in the Middle East?

Habibi: Clearly, since Iran is one of the countries actively fighting the Islamic State, I think Iran’s hand in combatting Islamic State will be strengthened and that might be perceived as a positive development.

The proxy war going on between Iran and Saudi Arabia might be affected. Iran will now have more economic resources, which means that it might be able to inject more resources into areas where the proxy wars are currently under way such as Syria. I think this will be limited, however, because Iran’s domestic economy is starving for resources, especially financial resources. The expectations inside the country are so high that the government will have to devote most of the additional resources to improving the domestic economic condition.

BrandeisNOW: What does this mean for the world’s petroleum market?

Habibi: Once the sanctions are lifted, Iran will be able to increase its oil production. In the short run, the amount increase will be limited, to about one million barrels within a year or so. In the longer run, within 5-10 years, Iran can add another one million barrels per day to its capacity.

The psychological effect on the marketplace is that it will at least reduce the fear of shortages and perhaps put a minor amount of downward pressure on prices. The risk is that Iran and Saudi Arabia might engage in some kind of production competition as they each try to protect their market share and we might end up with an excess supply from OPEC that could have a stronger effect on the market.

BrandeisNOW: Who stands to benefit from Iran’s plan to expand its oil and gas production?

Habibi: The primary beneficiaries could be the European-owned companies, including Royal Dutch Shell and Total, the French oil company. U.S. companies would also have an opportunity take part if the United States government allows them. Of course, at this point, the agreement is still subject to review by the U.S. Congress. We have to wait to see whether the Obama administration will be able to protect the agreement against opposition from the Congress.