The influences of the elimination of sanctions on the

Iranian financial market, specifically the goods market

Student: Mohmmad Javad Amouei

Student number: 225227

Winter 2016

Introduction
As we know, sanctions occur with the intention of targeting a countrys economy, with the
motive to lead its diplomacy and politics in the desired direction.
Sanctions might occur in different methods:
1-Commercial Sanctions: In this method, any trading or business is avoided with the sanctioned
country.
2-Investment Sanctions: In this method, the sanctioned country cannot invest in other countries
and other countries also prevent investing in the sanctioned country as well.
3-Investment withdrawal Sanctions: In this method, the sanctioned countrys assets in the
other countries are blocked and therefore inaccessible.
For a country such as Iran that completely relies on its oil income and since the oil market is
axial, the easiest way to pressure and cripple its economy, is to put sanctions on the oil market,
because Iran other than oil, has noticeable export material such as carpets and dried goods but
these are also heavily supplied by countries such as China, India and Ukraine. Therefore after the
oil sanctions, other sanctions against Iran such as sanctions against Irans banks and preventing
the export of goods to Iran can be considered.

Analyzing the influence of sanctions from two perspectives

In Iran, two different theories exist for analyzing the influence of sanctions:
1-Optimistic perspective: In this theory, primarily due to geographic and strategic position of
Iran and the oil and other resources being unreplaceable, and secondarily because Iran has its
own society meaning that goods can be produced and consumed domestically, it can be said that
the sanctions has no effect on the Iranian financial market.

2-Realistic perspective: In this theory, which is closer to reality, it can be said that the sanctions
actually do influence the Iranian financial market (and also, indirectly the Iranian goods market).
It is worth mentioning that the basis of this research is based on this perspective.

Introducing the Iranian goods market

The goods market is a market consisting of manufacturers that provide goods with principle in a
certain manner to the consumers. Today the Iranian goods market has some main activities that
are mentioned below with their respectable examples:
1-Metals and ferrous material, metals like iron, aluminum, copper and steel.
2-Chemical and petrochemical products like the various polymers.
3-Oil and refinery products like paraffin and tar.
4-Agricultural products like sugar and soya.
5-Advanced deals like gold and gold bullions.

The aim of creating the goods market in the year 2010 in Iran was the official establishment to
prevent the different prices for the same merchandise. During this action and with a united
pricing system (the markets pricing), a clear pricing system became in effect.
A reflective point about the goods market is that some of the employers believe that since the
pricing and the amount of supply and demand directly affect Irans economy (an advantage that
the stock pricing of a company in the stock market might be missing), index of the entire goods
market, is an indicator of the countrys economic situation.
Following that, first the influence of the sanctions, specifically on the financial and goods
markets is analyzed and then as a conclusion, it can be determined that the elimination or the
lessening of these sanctions, will have what kind of consequences on the way.

The consequences of sanctions

Iran, since the early 1979 and the capture of the American embassy in Tehran, has been the
target of international sanctions and these sanctions in the past 10 years and especially due to the
mentioning of the nuclear energy, has increased, but during the negotiations of the year 2010, the
biggest sanction in Irans history, with the purpose of putting pressure on the countrys earnings
sector occurred. (Sanctions on the energy and banking sectors)

Reduction of oil export of Iran

Due to the sanctions on Irans energy resources, demanders of energy and Iranian merchandise
have decreased. But this is not the only consequence of the sanctions in this industry, because
this area of the industry is in need of immense investors and the up to date technology. But Iran,

due to the sanctions, is isolated from both and therefore not only it is not able to increase its
capacity of products, but after a while, once the equipment of the refineries become worn out,
they are going to manufacture less than their current amount of products.

On one hand however, with the sanctions on oil export, a domestic surplus manufacture and
supply is configured in the country, which of course cannot be accompanied with a reduction in
price. With sanctions relief, the domestic price would be lowered and we would witness a
development of motive and encouragement of trafficking and establishing of the black market,
which results in the formation of an economic inflation cloud.
Therefore Iran must match its pricing strategy system with the international pricing strategy
system, and we know that this is due to the massive changes in the international market. (It is
worth mentioning that this is true for domestic merchandise as well, because to prevent the
emptying of resources and in result creating a mafia network that illegally exports merchandise
from the country, a correct political approach has to be taken.)

Disturbance in Import and Export

In spite of widespread competition in financial markets, one of the ways to remain in this
competition is to create advantages through import and export. Iranian production units and
companies are no exception and are dependent on the import and export in order to pursue their
activities.
According the fact that Iranian goods exchange consists of a combination of internal and foreign
goods, we can conclude that the sanctions on Iran would have a direct impact on industries such
as automobile industry, petrochemicals, contractor companies, pharmaceuticals etc.; since under
these sanctions, the involved in these industries might have to provide the required raw materials
for higher prices and with more limitations (disturbances in import) and in case they manage to
go beyond this limitation, they will not be able to present their goods in every international market
(disturbances in export). Regarding this aspect, not only the institutions who need imported raw
materials, but also even producers that require equipment to use for extractions, commissioning or
in the production process will be negatively affected.

Limiting foreign investments and reduction in the amount of investments

Developing countries -such as Iran- that suffer from shortage of financial resources, with the help
of foreign investments can benefit from other advantages (in addition to financial support) such as
advanced technologies (assuming that later these technologies would be localized), industrial
expertise and technical knowledge, which in turn are followed by increased profitability,

enhancement of industries conditions, economic growth rate, financial markets and even goods
exchange market.
Imposing sanctions on a country, demotivates foreigner investors for business and investments,
since it depresses the economic and business environments which leads to inflation and
immigration of work force and especially expert work force. Additionally, an unsafe and risky
environment would deteriorate the situation. In the end, the countrys economy would be isolated
due to the reduction in the level of international relations caused by sanctions, which would reduce
the size of economy. On the other hand, cutting the financial aids such as international loans cause
the amounts of investments to reach its lowest degree.
All the above mentioned economic causes would lead to depressive inflation; under these
circumstances the financial policy of reducing the interest rates would not be effective since the
investors (neglecting the governmental sector) will not show any tendency towards investing due
to the high risks.

Sanction Banking System

As we know, all transactions performed by the Central Bank of Iran sanctions have stopped
Swift. Swift, is the financial relationship between the international banking communities. Due to
limitation of access to the methods of the transfer of funds, these sanctions are strictly affected in
trade with its trading partners:

1. Credits are one of the most important pillars in international transactions due to time,
place, to facilitate the transaction, and differences in the laws of countries .
Unfortunately, by enforcing these sanctions all trade credits are banned, because there are
no banks to support and finance Iranian brokers. For example, consider an Iranian
manufacturer before the sanction, by using credit was doing its shopping and at certain
time intervals (e.g. 6 months or one year) would to pay the contracted amount; But after
the ban, these manufactures did not have the ability to pay the contracted price in cash
altogether. So the Iranian buyer demands are significantly reduced and that leads to
reduction of supply in Iran and high growth in prices because the two instruments
affecting the price (supply and demand) are working cross-wisely. This means that we
face the reduced supply and increased demand at the same time (however, demand in the
first phase will not increase but at a later stage, with aggregated demand that has not been
satisfied in the first stage become a proportion in this stage , we will see increased
demand).
2. On the other hand the transfer of trading from credit to cash form increases the demand
for the domestic currency, especially US and Canadian dollars and British. But as it was
said due to oil embargo, that is the main source of income of the country, import of

foreign currency in the country has decreased. As a result, the increase in demand for
currency (the file size has also greatly reduced), its price will increase drastically, which
means the state money is worthless. With regards to this case as well as the rising cost of
domestic and imported goods, we find that purchasing power and welfare and
consequently the volume of investments in the financial markets (such as stock markets)
are reduced.

Increase Prices in the Stock Market of Products

In addition to the reasons previously mentioned, the existence of parallel markets should be
examined as a separate factor. Due to the limited annual quota for buyers in the goods markets, it
creates inevitable parallel markets. Now if the differences between the price of goods in the
goods exchange market and the black market are large, the situation will be created for people
with rent seeking and speculation begins to work in the goods market. This means that, firstly,
the market structure leaves it competitive situation and it desires exclusive market situations,
because dealers identify their customers outside the goods market and know that if they buy a
product at market price and take it out form the market then they can sell it at a higher price.
(Despite sanctions, widespread hoarding in the context of food will be seen). Secondly, not only
these speculators have entered any capital to the market, but also make the main benefit of their
own and the stock will not benefits in this activity. Therefor the pricing policy of commodity
exchange market should be the way that the price difference between the official price and the
market price is not great (this is the same thing about gold and other currencies that we have
seen).

In the following figures you can see the noticeable effect of the sanction on the consumer prices,
oil production and official exchange rate.
It is evident after 2012 oil sanction the consumer prices increases sharply and the production of
oil fell down.

Conclusion
We come to a conclusion by expressing the different consequences of removing sanctions
(which was mentioned in the introduction).

As the first result, with the implementation of the complete removal of sanctions, in a the
short term, optimism and positive vision leads to positive overall economic environment and
financial markets and in long terms causes credit in the international environment and also the
entry of foreign investment into the markets of Iran and subsequently an increase in stock market
index; since the stock market is a progressive market and shows vision of the future.
By eliminating the sanctions on investment, as the second result, the imported goods'
market as the only market, which, despite the lack of a significant reduction in currency, may
face a downward trend and finally, this market will encounter lower prices. The process of
circumventing sanctions of the goods will make the path shorter and less costly in that it reduces
the cost of entry of these goods. It is true that the currency will not be faced with drastic cuts, but
the cuts of several thousand Rials (official Iranian Currency) exchange rate and its effect on
reducing the price of these goods will be notable. In addition, government's current policy is to
thrive business environment and to support domestic producers. Thus the domestic produced
goods will affect the market of foreign goods and therefore, trade men must be able to either
compete with domestic prices or import goods that are produced less in the country. This will
make price the only significant factor of competition.
In the end, the market will not have considerable price changes of goods produced inside
the country since just like what we have in domestic housing market, the domestic manufacturer
of goods is not willing to reduce prices. However, some goods that previously had a difficult
process of importing raw materials, will slightly reduce their prices with the facilitation of this
process.
It is noteworthy that after the JCPOA (Joint Comprehensive Plan of Action) and the
realization of commercial relations with large economies of the world, markets in most parts of
Iran such as exchange of goods will be in the center of attention by the place investors and
international markets due to their systematic structure ; since not only is the possibility of
communication with individual manufacturers for foreign investors low, but also with regard to
the guarantee of transactions on the Exchange, the structure of these financial markets is
captivating the international traders.
In the third stage, with the removal of sanctions against Iranian banking system and credit
transactions, international exchange will be done with ease and in lower cost than before. In
addition, the existence of these documents will result in a insignificant decrease in currency
exchange rate and increase in the credibility of the country's official money. Since the economy

of Iran does not obey the free economy rules, deliberately we avoided discussion about the
money value because value of the money in a country can sometimes be considered as a quite
right policy. The obvious example of this case is China using this issue to become one of the
world's largest exporters.
In the fourth stage, with the removal of sanctions against the Iranian energy sector-focused,
probably we are going to see more cuts in the price of oil in world markets. Of course, this issue
is solvable since with the arrival of capital and technology to the country, in addition to the high
production capacity, we can produce oil with a much higher quality and by this quality raising,
we can even have global prices in our control.
The prospects in a post-deal Iran are vast. It is the worlds 18th-largest economy. The population
of 80m is well-educated; the countrys oil and gas reserves are huge. The Tehran stock exchange
is the second-biggest in the Middle East, with a capitalisation of about $150 billion, according to
Turquoise Partners, the first foreign investment fund dedicated to Iran. But at the end of 2014
foreigners owned only 0.1% of listed companies shares, compared with 50% on Turkeys main
exchange in Istanbul. Iran ought to be able to attract much more foreign direct investment, given
its size. One estimate puts Irans pent-up need at over $1 trillion. In the next five years the
country needs an estimated $230 billion-$260 billion of investment in oil and gas, according to
analysts. And Iran Air, starved of investment since the Islamic Revolution in 1979, wants to buy
several hundred planes. Iran is preparing for take off.

The final thing we need to consider is that if the process of sanctions being lifted is not gradual,
not only are not none of these results attained, but in this case it will led to nothing but economic
chaos and the destruction of domestic production. For example, if you log on to the world
technology simultaneously, this sudden release (in any field such as electronic equipment,
vehicles, etc.) will debilitate the internal production of domestic producers. Finally, by importing
goods with great accordance to latest technology in domestic markets, the demand for Iranian
goods will come to an end as soon as one may consider.

References
1. Ghorbani, Masoome, 2014 quality in sanction situation accessible through
http://www.aiti.org.ir/Information/Attachments/209.pdf
2. Partazian, Kambiz 2014 The effect of economic sanctions on insurance company and
stock market accessible through kambizpartazian.blogfa.com/post/3
3. Donyaye Eghtesad, 2015 effect of sanction relief on market accessible through
http://alef.ir/vdcaiinui49nwe1.k5k4.html?206366
4. Enayati, Faride 2015 In which direction do the iranian financial markets go? accessible
through http://www.khabaronline.ir/detail/374092
5. Irans nuclear deal becomes a reality accessible through

Econimist.com