Africa and the Iran deal: Caught in the Middle

The decision by US President Donald Trump to pull back from the Iran nuclear deal — and re-impose sanctions against Iran and companies that do business there — could unravel recent agreements forged with Iran and threaten the economic progress of emerging countries caught in the middle of a dispute between the US, Iran and Europe.

The US backing out of the Joint Comprehensive Plan of Action, which curbed Iran’s nuclear program and was agreed to in July 2015 by the US, UK, France, China, Russia and Germany, has already sent shockwaves around the world. The impact is keenly felt in Africa.

Global companies like French major Total and South Africa’s MTN are on shaky ground, with investments already made in Iran. Total has committed $5 billion to developing gas resources there, while MTN, South Africa’s largest mobile carrier, holds a 49 per cent stake in MTN Irancell, Iran’s second-largest mobile operator.

Oil prices spiked after Trump’s announcement, declined again as Europe threatened to stay in the deal on its own and have since rallied yet again, with some predicting oil could top $100 per barrel.

Emerging economies, many of them in Africa, are caught between agreements already made with Iran and what is likely to be a dispute between major economic powers, Europe and the USA. Already, Britain, France and Germany are meeting with Iranian officials to try to save the deal, even as Trump threatens European companies with sanctions if they continue engaging with Iran.

Trump’s decision to withdraw from the landmark nuclear accord will certainly impact African economies. The question is: How will they be impacted and to what degree?

The investments

Following the finalizing of the Joint Comprehensive Plan of Action in 2015, Iran’s then-minister of cooperatives, labor and social welfare visited Zimbabwe and said Iran was focused on building its relationship with African nations. Indeed, since the deal was completed Iran has zeroed in on African markets with potential, like Zimbabwe, and countries like South Africa have also invested in Iran.

Investments committed since the 2015 deal was enacted are now in jeopardy, and many of the home countries are taking the biggest stand against Trump’s decision. France, for example, which is home to Total (standing to lose $5 billion) and Airbus (which stands to lose nearly $20 billion), is working hard to ensure Europe stays in the agreement. Emerging markets like South Africa, however, have little impact on the outcome, though that hasn’t stopped South Africa’s newly elected president Cyril Ramaphosa from condemning Trump’s decision this week.

“In the interest of regional and international peace and security‚ the South African government calls on the other parties…to continue to honour their commitments under the agreement. In this regard‚ the decision of the United States should not prevent the remaining parties from honouring their commitments‚” Ramaphosa said in a statement.

A report by Bloomberg Economics expects South Africa would be one of the countries hardest hit by the Trump’s decision to pull the US from the Iran nuclear deal. Since sanctions were lifted in 2015, South Africa resumed oil imports from Iran (in 2004 South Africa imported about 8 million tons of crude oil from Iran, making it South Africa’s third-biggest oil supplier before sanctions were imposed in 2012); South Africa’s MTN has also become a major player in the Iranian cell phone market; and trade deals between the two countries were expected to increase. But the US is one of South Africa’s biggest trading partners, putting the country in between a rock and a hard place.

“By backing away from the Iran nuclear deal, Trump is punishing emerging markets and we are an emerging market,” Jakkie Cilliers, Chief Executive of the Institute for Security Studies, told South Africa’s The Citizen. “Money is already flowing back to the US because of Trump’s tax reforms. These vague global threats could have a very negative impact on an emerging market such as ours, because we depend on business confidence and foreign direct investment.”

The prospect of facing sanctions from the US just for engaging with Iran could certainly halt bilateral investment already in the works.

The oil price

 For oil producing nations, like powerhouses Nigeria, Angola and Equatorial Guinea, the prospect of a higher price for oil has strong appeal. And if the US convinces Europe to back out of the deal and enforce sanctions as well, oil prices are likely to dramatically increase. Iran is currently exporting 2.6 million barrels of oil per day, compared to just 1.5 million barrels of oil per day under the previous economic sanctions. Much of that is headed for Europe and Asia, though South Africa’s imports of Iranian oil have also steadily increased since sanctions were lifted.

If, however, European nations decide to continue with the accord, the oil that leaves the market could be in the range of just 300,000 to 500,000 barrels of oil per day, according to CNBC.

This uncertainty within the oil markets — even if prices climb — could still be a negative, as investors shy away from market instability. As seen in the oil price crash of 2014, one of the only groups able to make money in times of volatility are the oil traders.

“For energy you have to make big investments,” said ENI’s CEO Claudio Descalzi in an interview with CNBC about Trump’s decision. “And when there is a lot of uncertainty, the investment is not easy to be performed. But there are so many other geopolitical issues, that the landscape is very difficult to understand where we’re going.”

The United States leaving the accord with Iran will continue to rattle markets — the oil markets and beyond — as countries and companies around the world battle to protect their investments. For emerging markets with little voice on the global stage, the impact could be severe.