A bad agreement likely to get worse

The Obama administration estimates that its sanctions-relief deal provides Iran with about $7 billion over six months in repatriated oil earnings, gold, petrochemical and auto sanctions, and some tuition assistance for Iranian students. Since Iran only has unrestricted access to an estimated $20 billion in overseas foreign-exchange reserves, even this $7 billion will increase Iran’s unrestricted foreign reserves by over 30%. The interim agreement thus gives a rapid cash infusion to a regime that faced escalating sanctions and a potential full-blown balance-of-payments and currency crisis.

The Geneva deal, however, promises Iran potential sanctions relief of much more than $7 billion. Members of Congress, the Israeli government and the Foundation for Defense of Democracies have valued the potential sanctions relief over a six-month period at up to $20 billion. These calculations factor in how Iran could fully exploit the loopholes opened by the Geneva deal, and how an environment of sanctions relief and de-escalating sanctions could change the market psychology from fear to greed.

How could Iran do that? The impact of the Geneva deal on oil sanctions alone is instructive. First, despite administration promises not to touch the “core sanctions,” the interim agreement does exactly that by suspending for six months a 2011 U.S. law that requires countries buying crude oil from Iran to significantly reduce those purchases. The deal also suspends the core European Union and U.S. insurance and transportation sanctions for these Iranian oil sales that have been a major barrier. This could be worth over $2 billion to Iran that it otherwise would have lost over the six-month period. In addition, sanctions relief on Iran’s auto sector reverses the free-fall of an industry that, before sanctions, accounted for 10% of Iran’s GDP and is the second-largest employer after the energy sector.

When it comes to sanctions, official loosening prompts more unofficial loosening as the market reads the trend lines.