Author: Gestri Hali Co-Vp Research, Arham Chohan Co-VP Research, Fahad Salman Research Analyst
United States Withdraws from Iran Deal
On May 8th, 2018, President Trump announced his decision to withdraw from the Iran Deal. The Iran Deal In 2015, Iran along with the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States) signed the Joint Comprehensive Plan of Action (JCPOA) also known as the Iran Deal. With this deal, Iran agreed to cut its stockpile of enriched uranium, which can be used to make nuclear weapons. In return, Iran would receive relief from nuclear-related economic sanctions from the P5+1.1 Sanctions included the following:
A renegotiation of the deal has not been an option so far. Iran’s foreign minister Mohammad Javad Zarif has reported that he is not looking to make new deals as there are several reactions that Tehran, Iran’s capital, could have. It is not confirmed what these reactions could be.3
Why does Trump not like the deal?
There are 3 main reasons that Trump does not like the Iran deal:
1. Trump believes Iran is violating the deal by testing ballistic missiles, supports terrorist groups, and counters Saudi Arabia. However, neither of these clauses are mentioned in the deal.
2. The deal would stop Iran from being able to obtain a nuclear weapon for only 15 years and after that, the restrictions on Uranium enrichment are lifted.
3. Trump believes there could be a better deal in place, and he can negotiate it.
Why is this important?
Trump’s decision on the deal is important due to 2 main reasons, the immediate effect on futures and the long-term effects of the deal. There will be no immediate impact on oil prices since the oil supply shortage will be delayed, however the withdrawal could cause a long-term effect on oil prices, pushing them higher since Iran is one of the largest oil producers in the world. Oil prices have been inflated in the last week, already factoring in the withdrawal from the deal. However, prices are expected to increase even more in the long term.
This can result in decreased profits for companies if they rely on oil (e.g. airlines, asphalt & chemical products), causing their shares to lose value. Not to mention, the cost of transportation goes up, which causes the cost of food and other products that need to be transported to go up as well. As these costs go up, we can see inflation as companies try to maintain their margins.
There are also global implications that the deal would have. Numerous countries around the world have negotiated deals to take advantage of the Iran Deal, however when withdrawn, these deals would have to be broken off as they would not be profitable. Total, Royal Dutch Shell, Renault, Airbus etc.,5 all had deals in Iran. The withdrawal from the deal could have implications in the feasibility of the deals already negotiated.
Sanctions aren’t implemented immediately, instead, “The treasury depart said in a statement that sanctions would be reinstated after “wind-down periods” of 90 or 180 days” 6 . However various companies have already been impacted despite sanctions not fully reinstated. For instance, Boeing and Airbus SE have a combined $40 billion in aircraft sales to Iran that have been halted by the sanctions. Iranians hoped the deal would help their struggling economy grow but with the new sanctions in place, companies in the United States would be unable to invest in Iran. In fact, “A resumption of U.S. sanctions would threaten Iran’s ability to attract foreign investment”6
Additionally, the decision by the US strains relationships between the United States and other P5+1 countries. “French President Emmanuel Macron and German Chancellor Angela Merkel vigorously lobbied President Trump to remain in the agreement during recent visits to the White House, and British Foreign Minister Boris Johnson made a similar appeal”7 . Despite the United States pulling itself from the deal, Iran’s president Hassan Rouhani suggested they will continue to abide by the agreement but now it will be between Iran and the remaining countries in the P5+1. 6
1 “Iran’s Nuclear Program Timeline and History”, Nuclear Threat Initiative. Last Updated: July 2017
2 Soloman, J. “Shift Clouds Iran Nuclear deal”, WSJ. June 26, 2015
3 ‘The One Thing That May Stop Trump From Cancelling the Iran Nuclear Deal” Haaretz and Reuters, April 2018
4 Why Trump hates the Iran Deal in 400 words” Alex Ward, Vox.
5 “As Trump Weighs New Iran Sanctions, Companies Prepare for the Worst”, Benoit Faucon and Sarah Kent, WSJ, May 2018
6 “Trump says He’ll Exit Iran Nuclear Deal”, Margaret Talev and Toluse Olorunnipa, Bloomberg, May 2018
7 “The Impact of the Iran Nuclear Agreement”, Zachary Laub, Council on Foreign Relations, May 2018
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.