Today’s Headlines: Historic Nuclear Deal With Iran

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Today’s Headlines:  Historic Nuclear Deal With Iran
July 21, 2015

Nuclear Deal to Provide Sanctions Relief to Iran

After multiple missed deadlines, a landmark deal was reached on July 14th to limit Iran's nuclear weapons program. The agreement was the result of complex negotiations over 20 months between Iran and the "P5+1" nations (the five permanent members of the United Nations Security Council — the US, France, United Kingdom, China and Russia, — plus Germany).

According to the White House press release, the deal effectively blocks Iran's path to a nuclear weapon and imposes an inspection program to verify Iran's progress. Iran is set to reduce its uranium stockpile by 98%, drastically cut the number of centrifuges needed for enrichment, and keep the uranium enrichment levels below the necessary levels for weapons capability. In return, Iran gets relief from the crippling economic sanctions imposed in recent years by the US, EU and allied nations.

For the moment, let's ignore the argument about whether it will meet the nuclear weapons goals and consider the effect of lifting sanctions.

Gradual Sanctions Removal, But Not All Sanctions

Sanctions do not automatically lift. The agreement charges the international Atomic Energy Agency (IAEA) to produce and release a report by December 15 to determine whether or not Iran is holding up to the terms of the agreement. If so, then sanctions are to be removed gradually. The weapons embargo lasts for five years, and the embargo on ballistic missile technology is set to last eight years.

Foreign countries and companies are lining up to take advantage once economic sanctions are lifted. Iran has a GDP of some $400 billion, which offers significant opportunities for consumer goods manufacturers. It's also home to the world's second-largest stores of natural gas and fourth-largest oil reserves, with plants that are in desperate need of infrastructure investment and repair. Capital Economics suggests that lifting sanctions could result in 6-8% annual economic growth within Iran.

Germany, Spain, and France are among the countries that have sent or will send trade delegations. However, there is not much to cheer about for US businesses. Most US economic sanctions with Iran were applied in response to terrorism and human rights violations and are not part of this action. By contrast, most UN and European sanctions are set to be removed, opening up Western banking access and brightening trade prospects for many of our allies.

A senior Obama administration official was quoted by NPR as saying, "We are not removing our trade embargo on Iran. US persons and banks will still be generally prohibited from all dealings with Iranian companies, including investing in Iran or facilitating third-country trade with Iran." The one exception is civil aviation, which reportedly could bring $20 billion in sales over the next ten years.

Iran is not the easiest place to do business even without sanctions. The most likely beneficiaries are those who already have an in-country presence such as French auto firms, along with oil/gas companies ready to address Iranian infrastructure needs.

Still, European optimism abounds. Business Insider reports that German officials expect exports to Iran to increase to almost 11 billion euros compared to 2.4 billion in 2014, and Italian officials expect exports to Iran to hit 4 billion euros by 2018, over 3.5 times the pre-sanction export levels.

It's Not a Done Deal Yet

It's still possible that the agreement could be scuttled by hardliners on either side of the table. Some Iranian leaders see the agreement as too much capitulation to the "arrogant" West and oppose the deal. At home, virtually all Republicans oppose the deal and a significant number of Democrats have reservations, especially those with strong ties to Israel and the Jewish community.

Lobbying is intense to keep a veto-proof majority should Congress try to pass blocking legislation, but at this point, it seems the Obama administration is likely to prevail. Congress has 60 days to review the deal after they receive it, and then they must decide what actions they want to take — if any.

What happens if Congress does manage to block the deal? Other signatory nations may not agree to keep sanctions in place, and lift any sanctions they can unilaterally. Certainly Russia and China, who would benefit greatly from more Iranian business, would seek their own path.

As of this writing, the UN Security council is set to vote on the sanctions well before the Congressional review period ends, and maybe even before it begins. Since the program begins after ratification, what would a Congressional veto even mean? The legal aspects are not clear.

Still, the administration's full-court PR press is putting pressure on key Democratic senators to go along with the deal. A Congressionally ratified deal would be very difficult, if not impossible, for any future Republican president to revoke by executive action.

Even if the deal is put into place, there's no guarantee that Iran will sufficiently satisfy the inspectors to lift the sanctions — or keep them lifted in the future. The so-called "snapback" provisions of this agreement are an interesting twist.

If Iran is found in violation of the agreement, the sanctions may be quickly re-imposed. Any of the six nations co-signing the agreement can flag a violation, which then goes to a dispute resolution panel. If the panel upholds the ruling, the sanctions are automatically reinstated ("snapped back") after 30 days without the need for a UN Security Council vote to approve them. Instead, it will take a Security Council Vote to lift reinstated sanctions, and the US is certain to veto any such effort.

Potential business partners and investors will likely be looking at the mechanics and make-up of the dispute resolution panel to assess the likelihood of a snapback and whether it could practically be enforced. Consider the energy industry — foreign companies could pour infrastructure money into Iran only to have the sanctions re-imposed and not be able to realize the return on their investment.

The Takeaway

For the average investor, there should be little, if any, effect in the short term except for a general market-lifting optimism. Beyond that, the greatest effect should be on the increase of Iranian oil into an already saturated market. Whether that's good or bad for your energy stocks depend on the segments in which you are invested. Those providing infrastructure and support to the Iranian gas and oil market should do well, but it may be harder times for competing oil and gas ventures.

Holdings that benefit from cheap oil — airlines, trucking/transportation, etc. — should see a continued benefit until the global economy improves enough that worldwide demand sends prices upward. That time will certainly be extended with hundreds of thousands more barrels of Iranian oil added to the supply.

Apart from commercial aviation companies, key stocks that bear watching are European consumer goods manufacturers. If Iran adheres to the deal, many of these companies may benefit from increased exports to the product-starved nation’s 77 million people. Additionally, keep an eye on the news to see which countries and businesses strike deals with Iran, and how that might affect your holdings — either by increasing potential sales or being shut out of a market through deals struck by competitors.

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