Thursday, July 23, 2015

Iran’s Next Step: A Shopping Spree

Like a lottery winner who’s waiting for the check to be awarded and cleared, the Iranian government is probably having intense internal squabbles as to how to spend the $100 billion assets about to be unfrozen upon the lifting of sanctions.

For the short-term Iran will be the model global citizen and adhere to the terms and conditions set forth in the recent nuclear deal which will allow Iran to secure the release of $100 billion in frozen assets.  Additionally, because of their reintegration into the world financial markets, they can more easily sell the 40 million barrels of crude stored in tankers which represents about $2 billion at today’s world prices. In other words Iran gains not only hard currency but substantial financial liquidity.

With respect to investments of their windfall, ironically as insurance Iran may invest a good part it in the ever growing shadow markets. The shadow market is dominated by esoteric financial instruments that can be highly illiquid – tough to sell in tough times. However transactions in this market evade world financial oversight and control. In case of a snapback Iran’s assets will not be as vulnerable to be seize or frozen compared to being invested with a regulated financial institution. Although the agreement has a snapback provision which requires only one key country to provide evidence of non-compliance, Iran will have already taken the money and left, essentially defanging the snapback provision.

The mystery question is how will Iran invest this windfall? As an autocratic state, it will certainly, at minimum, maintain its political and military influence in the region through its proxies, particularly Iraq. To the extent that they enhance this influence vs. domestic investment in numerous industries, particularly energy, is an open question.

Iran will certainly upgrade and update their antiquated military hardware through their favorite supplier sources are Russia and China. The reason is practicality because Russia and China are more dependable sources in providing spare parts and maintenance, critical for 21st century military equipment. Additionally, spare parts can easily be shipped through third parties to legally circumvent future snapback sanctions.

For the medium and long-range, the savvy tactic would be to fully develop their energy industry which represents a considerable component of their hard currency revenue and use those proceeds to support and even expand its geopolitical objectives regardless how it may destabilize the region.

How the Iranian government reacts geopolitically with access to billions of assets despite the specter of sanction snapback provisions is anyone’s guess. People are rarely sensible and logical particularly when winning a windfall.  And because governments are run by people, there should be no exception to this rule.

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