Trump looks set to scrap Iran's nuclear deal — and this is where it'll hurt the most

  • Iran's fragile economic recovery is in jeopardy with President Donald Trump widely expected to scrap an internationally-brokered nuclear deal and re-impose sanctions against the regime.
  • Trump has given the European nations that helped broker the 2015 nuclear deal — which he called "terrible" — until May 12 to change it, but that is looking increasingly unlikely.
An Iranian man walks past the stock exchange building in the capital Tehran.
BEHROUZ MEHRI | AFP | Getty Images
An Iranian man walks past the stock exchange building in the capital Tehran.

Iran's fragile economic recovery is in jeopardy with President Donald Trump widely expected to scrap an internationally-brokered nuclear deal and re-impose sanctions against the regime.

Trump has given the European nations that helped broker the 2015 nuclear deal — which he called "terrible" — until May 12 to change it, but that is looking increasingly unlikely.

Iran has said it won't accept changes to the deal, which saw it reigning in its nuclear ambitions in return for a relaxation of international sanctions that had sorely damaged the oil exporter. Europe has so far failed to convince Trump to save the nuclear agreement, known formally as the Joint Comprehensive Plan of Action (JCPOA).

Where sanctions will hurt most?

Now, those sanctions are likely to return and Iran's economy, which was slowly recovering due to the nuclear deal, could suffer again — particularly in key sectors for the economy, such as oil and banking.

"We are expecting that Trump will withdraw from the nuclear deal on May 12 and this is likely to come with a first step of re-imposing sanctions related to Iran's oil sector," Dalia Naguib, MENA Analyst at advisory services firm Frontier Strategy Group, told CNBC Tuesday.

"We could see more sanctions come back related to strategic sectors like the auto sector or around Iran's shipping sector," she told CNBC's Squawk Box Europe.

Iran's oil is the main source of its export earnings but agriculture, the services sector, manufacturing and financial services are also pillars of the economy too, according to the World Bank.

The bank noted in a report last year that Iran's growth prospects relied on the pace of Iran's reintegration with the global economy in terms of banking, trade and investment.

But if further sanctions are imposed on Iran, companies and international banks are unlikely to touch the country during that time, one analyst said.

"As always, the parts of the economy that will be worst hit are the parts that are most internationally-connected," Marcus Chevenix, MENA analyst at independent research firm TS Lombard, told CNBC Tuesday.

"And those parts in Iran are oil and banking. If I had to flag up an area that was very vulnerable it would be banking," he said.

Chevenix said that if the U.S. decided to impose "secondary sanctions" on Iran, it could prevent European firms doing business with the country, even if they wanted to.

Secondary sanctions deter other countries or institutions (such as European banks) from doing business with Iran because they don't want to be blacklisted — or "exposed" as Chevenix said — by the U.S. for doing so, effectively cutting off Iranian business from access to external investment and financial systems.

"If Trump was to impose secondary sanctions, he could cut off the Iranian banking system from the rest of the world and that would take us back to a pre-2015 situation. The U.S. has all sorts of unilateral power here," he said.

Sanctions 'very bad' for Iran

Problematically for Iran, its economy was just starting to recover after a period in the wilderness.

The International Monetary Fund (IMF) said in a country report in March that Iran had witnessed a "strong rebound" in the aftermath of the nuclear agreement and that real gross domestic product (GDP) growth is expected to reach 4.3 percent in 2017/18 – giving it the strongest growth forecast among other regional oil exporters.

In the first half of 2017/18, the IMF said that the recovery broadened to the non-oil sector and was "aided by supportive fiscal and monetary policies and a recovery in construction and services activity."

Reforms and economic recovery will be at stake if sanctions are re-imposed, however. A senior consultant for the Middle East and North Africa at consultancy Control Risks, said the revival of sanctions would be a "very bad scenario for Iran."

"That's why it's clear that they want to stay in the deal," Allison Wood told CNBC's Squawk Box Europe Tuesday.

"And I think that even if the U.S. was to withdraw from the deal, Iran would stay in it at least temporarily in an effort to show its commitment to the deal to the international community and in an effort to find the European and Asian businesses that have invested in Iran, to stay in the country," she said.

Goodbye JCPOA?

The JCPOA was struck by Iran and six world powers, the U.S., U.K., Russia, France, China, and Germany. Although the other parties in the group have tried to salvage the deal, the U.S. looks set to scupper it.

U.S. ally and Iran nemesis Israel stuck the boot in Monday with Prime Minister Benjamin Netanyahu revealing files the he claimed showed Iran was still running a secret program to produce nuclear weapons.

For his part, Trump has repeatedly accused Iran of flouting the agreement and says "sunset clauses" that would see restrictions on Iran's nuclear enrichment program lifted after 2025, are unacceptable. He has also argued that it has not halted Iran's ballistic missile program.

Meanwhile, Iran accused Israel of "repeating old lies," according to Iran's FARS news agency on Tuesday, and said it hopes Trump comes "to his senses" over the nuclear deal.

French President Emmanuel Macron met with Trump last week to try to persuade him to save the deal, but later stated that he believed Trump would still scrap it. German Chancellor Angela Merkel also went to meet Trump last Friday for talks but trade tariffs seemed to be higher up the agenda than Tehran.

Asked whether European countries could renegotiate a new package of sanctions on Iran, Frontier Strategy Group's Naguib said there was no consensus among European nations.

"Italy and Austria don't want to add additional sanctions on Iran whereas we see France and Germany more willing to cooperate with Trump and perhaps create a new sanctions package to pressure Iran. So even in Europe we're seeing a lot of confliction between countries," she said.

But a small light at the end of the tunnel could be found in Iran's cordial relations with Russia and China, both of which have criticized U.S. threats to destroy the deal.

"At this point, if the U.S. withdraws from the deal, Iran won't see the economic benefits it was promised from the deal … But at the same time it's building ties with China and Russia so it can continue to have positive economic relations with these countries," Naguib said.