· Historical breakthrough between Iran and the P5+1 group sets ambitious roadmap to reintegrate Iran into the world economy · Recovery in Iranian crude production will be gradual but competition for market share may increase · Implementation Day is likely to kick start in early 2016 when most nuclear-related sanctions will be removed; US sanctions are complex as they also involve terrorist-related sanctions and will thus require further clarification Iran and the P5+1 group have agreed to a breakthrough nuclear deal on July 14 following two years of intense negotiations. The nuclear agreement marks the first step to reverse Iran’s international isolation. It also highlights the role of far-reaching international sanctions combined with active diplomacy. The final agreement will be implemented in distinct phases and is set to face several hurdles, which we expect to be overcome. Nuclear negotiations since late 2013 have involved the highest level diplomacy between Iran and the US since the Iranian revolution in 1979. The election of President Rouhani in June 2013 —Iran’s key negotiator in 2003-05—had been critical to such rapprochement. Rouhani had simultaneously attempted to warm up relationships with countries of the Gulf Cooperation Council. We previously argued that the election of President Rouhani represented a structural change in Iran’s foreign policy (see Reformist Rouhani wins presidential elections, MENA Today June 17, 2013) which highlights the likely commitment to the terms of the nuclear agreement in coming years. A difficult balancing act The final nuclear deal has successfully struck a difficult balancing act between several red lines set by both parties. Iranian officials have vehemently defended the country’s right to enrich uranium as a member of the Non-Proliferation Treaty (NPT). As such, the Joint Comprehensive Plan of Action (JCPA) of July 14, which extends the interim agreement on April 2, officially recognizes Iran’s right to nuclear enrichment for peaceful purposes, subject to the successful implementation of the nuclear agreement. Consequently, Iran will keep most of its nuclear infrastructure and no enriched uranium will be shipped overseas. Negotiations also faced a difficult balancing act to build trust involving continuous nuclear enrichment for peaceful purposes with strong guarantees that Iran will not acquire the nuclear bomb. The final nuclear agreement can be summarized in three phases. During a first and relatively short phase (six to nine months), terms of the final deal will be implemented from both sides. This will be followed by a much longer second phase (at least 15 years) aimed at building trust. Once Iran has complied with its full obligations and its nuclear programme has been recognized for peaceful purposes, the country will be treated equally to any other non-nuclear-weapon state part of the NPT. The different timelines of the nuclear deal had also to strike a balance between quickly removing nuclear proliferation-related sanctions (a critical demand for Iran) and maintaining international pressure (crucial for the credibility of the deal). A “snapback” plan was hence introduced in order to restore international sanctions in 65 days in case Iran violates the terms of the final deal. If members of the United Nations Security Council (UNSC) cannot agree on new sanctions within 30 days (for example due to a veto), previous sanctions will automatically be re-imposed. Implementation and hurdles facing the nuclear deal Five key dates will characterise the implementation of the final nuclear agreement. After the finalization of the deal, the UNSC is expected to adopt a resolution to approve the JCPA as soon as next week. Such a vote will define the Adoption Day which will be 90 days (or earlier subject to the consent of all JCPA participants) following the endorsement of the Joint Comprehensive Action Plan. Iran and the P5+1 group will start implementing commitments in the JCPA following the Adoption Day which will also be the anchor for several future timelines that will shape the phasing out of sanctions. The UNSC resolution will terminate seven previous resolutions against Iran which will come into effect only after Implementation Day. The latter marks the start of easing sanctions which will be critical to the Iranian economy. The EU and the US will lift nuclear-related sanctions on Implementation Day. In other words, any sanction-related legislation and waivers that could be adopted after the Adoption Day will come into effect after Implementation Day. The latter will closely depend on the IAEA report verifying implementation by Iran of the nuclear-related measures including the clarification of past and present outstanding issues. Such process will involve intrusive inspections by the IAEA in coming months and the final assessment about past and present outstanding issues will be presented to the Board of Governors by December 15. This suggests that Implementation Day will likely kick start in early 2016 when oil exports can be increased and financial sanctions phased out. Implementation Day will be followed by a protracted period aimed at building trust that will end on Transition Day or 8 years after Adoption Day. Such transition can be shortened if the IAEA is able to draw the so-called ‘Broader Conclusion’ that all Iranian nuclear activities are for peaceful purposes. Ten years after Adoption Day, the UN Security Council will terminate all resolutions relating to Iran. The nuclear deal will cap Iran’s ability to enrich uranium above 3.67% and to add heavy water reactors for 15 years. Iran will also refrain from uranium enrichment at Fordow site during this period. Although Iran will become a threshold nuclear state after a period of 15 years, the IAEA will continue monitoring of the production of uranium ore concentrate during an extended period of 25 years as well as centrifuge rotors and bellows for 20 years. Implementation of the nuclear deal will likely be tested in the coming years. In particular, the inspection of military sites may become contentious again. Yet, the largest hurdles that could face the nuclear agreement are related to domestic political developments in Iran and the US. While the agreement that has been reached with the P5+1 is strongly backed by the Iranian population, it may be impacted by Iranian presidential election cycle and power transition from Ayatollah Khamenei. For example, the election of President Ahmadinejad in 2005 highlights such risks. Yet, the JCPA terms have substantially reduced the likelihood of a repeat of 2005 when nuclear negotiations had come to a halt. US Congress represents the largest immediate hurdle facing the final nuclear deal. As the July 9 deadline was missed, the period of Congressional review has doubled to 60 days. During this period, the JCPA will come under close scrutiny, especially that most House Republicans have expressed opposition to the deal. If the nuclear agreement is not backed by US Congress, President Obama will veto the vote as he publicly expressed on several occasions. Under this scenario, a two-third supermajority will be required in both houses of Congress in order to override the Presidential veto. Historically, only 4.3% of vetoed bills since 1789 have been successfully overriden. In our view, the nuclear deal is unlikely to be blocked despite public criticism. Oil production to recover gradually Sanctions against the import and transport of Iranian crude oil severely hit the economy more than most other sanctions. The removal of the ban on insuring tankers transporting Iranian oil along with efforts to reduce the country’s crude oil sales will be cornerstone to redress economic hardship. Iran will be able to regain crude market share only after Implementation Day in early 2016. Iranian officials have repeatedly stressed the country’s ability to increase crude exports by 1mbd back to pre-2012 levels. However, we believe Iran will add 300-500kbd of crude exports and production to increase gradually thereafter due to the lack of investment in previous years. Iran is estimated to have as much as 40mn barrels of crude and condensate floating offshore that may be sold into Asian markets potentially adding further near-term downward pressure on crude oil prices (see Oil Market Weekly: Negative price risks crystallize, but pillars of support still remaining, Martin et al., July 10) Over the medium-term, potential for Iranian crude supply is substantial thanks to the fourth largest proven reserves in the world. The end of financial sanctions related to the nuclear programme, especially in hydrocarbon investments, will encourage International Oil Companies (IOCs) to explore opportunities in Iran. The country is currently revisiting the terms of oil contracts that will offer greater participation in all phases of upstream projects compared to old buyback contracts which are similar to service contracts. In our view, the cycle of new investments in the upstream sector will be protracted and the country’s market share in global crude supply should stay well below its historical level. In the meanwhile, the return of Iranian crude to oil markets will increase pressure on other MENA oil producers to defend market share. The below chart shows how Saudi Arabia has substantially increased the share of its production in world output since mid-2014 when the Kingdom signalled that it will no longer be the swing crude producer. The kingdom increased crude supply to a historical high of 10.56mb/d in June and we believe risks remain to the upside. Figure 1: Iran’s oil market share still low Source: JODI and J.P. Morgan Trade channel to benefit most from sanction relief The removal of sanctions against the central bank should free about US$100bn of frozen foreign assets and boost the trade channel especially after the removal of sanctions on letters of credit. In addition, the likely reintegration of Iranian banks into SWIFT in early 2016 and the removal of broader sanctions against banks should boost domestic liquidity and economic recovery. The trade channel is set to benefit the most from the immediate relief of sanctions that should boost bilateral trade with UAE and Turkey (see Iran: Nuclear deal to boost trade with UAE and Turkey, GDW, June 26). Iranian automotive industry is also likely to largely benefit from the removal of sanctions which cut domestic car production by 55% between 2011 and 2013. With an economic size close to UAE and larger than South Africa, Iran will likely emerge as a new regional economic hub by the end of the decade. Terms of the nuclear deal highlight that US sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt will be removed, among other measures. Iran may thus be allowed to issue sovereign debt in coming years, especially to finance the expansion in the hydrocarbon sector. It is noteworthy that only US nuclear-related sanctions will be removed. In fact, several US sanctions are related to the financing of terrorism which will likely remain over the medium term. For example, the 1987 Executive Order 12613 imposed an embargo on Iranian-origin goods and services as the country was accused of supporting international terrorism. Similarly, the Executive Order of 1997 confirmed that all trade and investment activities with Iran by US persons, wherever located, are prohibited. Furthermore, some assets of the central bank of Iran (US$12bn in government bank deposits, gold and other properties) were frozen following the seizure of the American Embassy in Tehran in 1979. The removal of US sanctions after Implementation Day will thus require further clarification about which US sanctions will not be removed. | 
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