There is little concrete debate in Iran about the economic implications of the U.S. decision on May 7 to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the Iran nuclear deal, and to re-impose sanctions. Although Iranians are slowly coming to terms with the scope of the new sanctions and its impact on trade, this lack of reflection should come as no surprise. Since the revolution, the Iranian state has neglected economic priorities. Instead, it has focused on how best to export its revolutionary ideology beyond Iran’s borders. Last week’s protests in the Tehran bazaar over currency fluctuations is the latest example of the state’s carelessness in managing economic problems. As internal economic issues mounted, partly due to economic mismanagement and partly because of Iran’s growing political isolation on the world scene, the country lacked the expertise to tackle them. But rather than looking inward and fixing the problem, it blamed the world for its economic challenges. Even when the United States committed to the JCPOA in 2015, promising Iran an economic opening in return for curbing its nuclear activities, no major plans emerged in Iran to end economic stagnation. Iran had eyes set mainly on foreign investments to salvage its broken economic policies, and preferred to turn a blind eye to domestic mismanagement and rampant economic corruption. When progress to attract foreign investments was slow, it blamed the United States, and partly rightfully so for delaying Iran’s ability to tap into foreign markets.
On June 27, President Hassan Rouhani tried to address problems at home that contribute to economic stagnation. He insisted that though Iran’s economic challenges resulted from external pressures by the United States, if Iran failed to shift internal policies to address them, then the outcome for the country could be devastating. The Iranian president argued that wasteful spending must halt, and that civil society, artists, athletes and provincial authorities should all rally to help the state alter Iran’s economic misfortunes. But Rouhani offered very little by way of real solutions, and instead spoke of general policy goals to overcome the country’s economic woes. His policies, broadly speaking, aim to generate employment, fight poverty, regulate the markets and boost production.[1]
How Iran will achieve these goals is unclear. President Rouhani has merely insisted that various ministries should step up to increase employment, revive the private sector, issue bonds, redistribute unused assets, and build a fair business environment. It is unclear if any of his plans will gather followers. Even now in the face of pending economic crisis, Tehran appears divided about its options to move forward. Its Foreign Ministry is charged with leading international economic initiatives but is faulted for performing poorly in using the JCPOA openings to make trade deals. By November 4, Iran will be unable to receive oil export revenues when the United States begins enforcing tight sanctions on the country. This has left Iran in a state of relative paralysis as it improvises responses to economic challenges.
Factional debates in Iran reflect confusion on how to tackle economic problems, with attention by the Rouhani government still mainly focused on foreign investments. Failing to articulate clear policy, Tehran has issued mixed messages, for example, on whether European Union companies will continue to invest in Iran when new U.S. sanctions are imposed.[2] These signals are distressing to some hard-liners who argue that it is best to leave the JCPOA rather than succumb to U.S. pressure and settle for economic bread crumbs in return for Iran abandoning its regional influence, missile program, and nuclear ambitions – the terms the administration of President Donald J. Trump has set to renegotiate with Iran.[3]The Iranian newspaper Kayhan’s hard-line editor Hussein Shariatmadari argues that the EU mandate for the European Investment Bank to consider making Iran eligible for investments will sabotage the country by forcing it to delay making meaningful local policies to tackle economic challenges until the bank weighs its options to work with Iran or not.[4] Experts sympathetic to Rouhani advise him to focus on internationally isolating Trump over his decision to withdraw from the JCPOA.[5]Reformists urge Rouhani to publicly clarify what his government aims to renegotiate in the JCPOA, rather than try to obfuscate in seeking a face-saving deal no matter the price.[6]Members of parliament urge Rouhani to reshuffle his economic team and bring in a younger and more robust group of experts. Some critics think Rouhani should resign, though he insists that will not be helpful to the country.[7]
Amid rising concerns that President Rouhani is incapable of saving the JCPOA, his current efforts to boost Iran’s “economic diplomacy” might achieve little to help Iran overcome sanctions. As a result, his government seems to be paying only lip service to Supreme Leader Ayatollah Ali Khamenei’s call that Iran should develop a “resistance economy” to withstand external economic pressures. Khamenei and his foreign policy advisor Ali Akbar Velayati are reportedly unhappy that the Foreign Ministry did not negotiate a stronger nuclear deal in the first place. A close advisor to Khamenei, Mohsen Rezai, criticized the ministry for lacking a strong team of economic experts to negotiate the deal.[8]
This lack of internal cohesion has led Tehran to simultaneously threaten to pull out of the JCPOA and insist on preserving it, although it now clearly wants to explore all options to stay in the agreement. But when Foreign Minister Mohammad Javad Zarif turned to YouTube to urge all parties to comply with the JCPOA, he gave no indication that Iran was prepared to renegotiate the terms of the agreement or address concerns over Tehran’s regional ambitions and ballistic missile program. Since Khamenei has not openly discussed the possibility of such talks, ambiguity over Iran’s real position on the fate of the agreement persists, though Tehran insists it will decide soon. In fact, it might make little difference whether Iran tries to stay in or leaves the JCPOA if prevailing confusion in the country persists on how to attract foreign investments and keep the United States at arm’s length.
For his part, Rouhani may want to avoid the pitfalls of Iran’s 2010 experience with international sanctions, when hard-line President Mahmoud Ahmadinejad utilized secret deals to surreptitiously trade with partners who were willing to circumvent sanctions. But he failed to bolster the economy or secure lasting trade agreements. Iran’s black market flourished and corruption went unchecked as locally empowered economic interests pocketed money through illicit sanctions-avoidance deals. It remains to be seen which of these experiences Rouhani will try to repeat or avoid.
For now, Iran’s president is focused on how to preserve, at least for a short time longer, the nuclear agreement to allow Iran to engage in both international trade and peaceful nuclear activities. The country’s standing in the world community has generally improved under his presidency. Thanks to the JCPOA, Europe became far more willing to work with Iran. A high-ranking Iranian delegation visited China in early June to receive support for Iran’s long-standing and previously unsuccessful efforts to join the Shanghai Cooperation Organization. In a meeting with Russian President Vladimir Putin on the sidelines of the summit in China, Rouhani stressed that Tehran and Moscow should have serious talks about unilateral U.S. actions against the JCPOA. Despite U.S. sanctions, some of Iran’s trade partners, including Chinese oil and gas companies, could opt to stay engaged in Iranian markets if they can avoid US sanctions.[9]
Still, these positive signs will not yield real cash unless Iran is able to export oil and gas. When U.S. sanctions return, most foreign companies will almost certainly stop or at least reduce imports of oil from Iran, or avoid making payments to Iran for the oil they buy from it.[10]The U.S. Treasury will sanction any company that makes such payments to Iran’s Central Bank, and is unlikely to offer exemptions for now. Iran’s Oil Ministry predicts the drop in exports of crude oil after sanctions resume will start at 200,000 barrels per day but soon reach over 1 million barrels per day. The figure is likely to be higher. Tehran also knows that foreign investors will refuse to transfer sensitive know-how and technologies to improve Iran’s oil and gas industry.[11]
In response, some hard-liners are urging Rouhani to stop relying on foreigners and develop instead a “self-sufficient economic model.”[12]But pressures are mounting on Rouhani to deliver on the JCPOA agreement within weeks. Velayati proposed developing Iran’s ability to operationalize centrifuges and existing advanced nuclear capabilities as the best way of improving JCPOA.[13] This will give Iran the momentum it needs to advance its nuclear policies, and in return for keeping a peaceful program, negotiate better trade deals. The president’s supporters criticize Velayati for complicating the government’s ability to compromise in future talks over the JCPOA. The world does not want to see an advanced Iranian nuclear program, and Iranian ambitions in this regard could jeopardize the JCPOA. Some reformers think it is time to part ways with Rouhani, whose poor economic leadership will make them all unpopular. They believe that without a clear economic agenda, it will be impossible for any political faction in Iran to win people over in the coming months and years when Iran holds parliamentary and presidential elections in 2020 and 2021 respectively.[14]
No Iranian faction seems to have a clear economic program with significant potential or to be working on one. Rouhani has tried to make economic reforms a priority, but there are very few promising signs that he can overcome the economic obstacles, which will be exacerbated by renewed sanctions. Many of his promising policies have already failed to materialize including advancing Iran’s local production capacity and stabilizing the currency, and he is faulted for over-selling his government’s economic performance record. With little else to do, Iran’s top government managers are content speculating about future options. Years of isolation from the rest of the world have made them quick to entertain Iranian-centric points of view. They believe that Iran is too critical to world trade to ignore, and that it can therefore effectively circumvent the sanctions. By and large, Iran-based economists argue that the U.S. withdrawal from the JCPOA will fail to have an immediate short-term impact on Iran’s economy. It is a resilient economy, they say, and all Iran must do is stay in the JCPOA, possibly with Russian and Chinese support as two critical parties to the agreement, and negotiate ways to compensate for the United States leaving the agreement. Since none of the European parties to the agreement have indicated that they will abandon it, Iran expects the remaining parties to explore avenues to strengthen the JCPOA.[15]
Debate in Iran’s media echoes Rouhani’s sentiments to rally the country in the face of pressure. The verdict is not clear how united Iran is internally in the face of renewed U.S. threats. People fear the prospect of a war with the United States, and the government plays into that to build support. This is even though during countrywide protests when the JCPOA was still in force in 2017, Iranians chanted anti-government slogans and called for the downfall of the Islamic Republic. As a result, most Iranian politicians are trying to appease people to rally support. Rouhani hosted artists for an iftar to break the fast during Ramadan. While several artists boycotted the event in protest, others who went said they were keen to maintain national unity in the face of hardships. A former hard-line presidential candidate who ran against Rouhani in 2017, Ebrahim Raisi, broke his fast by eating a modest meal with farmers, possibly to boost his candidacy in the next presidential race. The supreme leader held his own annual iftar with university students, who received a platform to speak directly to Khamenei and voice their economic grievances.
A professor at Sharif University, Abbas Maleki, in the Iranian newspaper Shargh, summarized the general mood in the country over its options moving forward. He suggested prospects for keeping the nuclear deal from collapsing are not promising and admitted that Iran’s goal was to “enter the pool of international trade” and find its rightful place in world markets through the JCPOA. But he also argued that the time has arrived to devise a “survival strategy.” Tellingly, though, he said very little about what economic components such a strategy might have. But any such plan must involve developing new domestic and international policies, easing social and political pressures, encouraging state-society convergence, ending factional fighting, reversing wasteful spending, exporting oil and gas, and becoming a party to the solutions to regional conflicts like those in Syria and Yemen. If his statements are any measure of the general mood among Iran’s political elite, then Tehran will likely stick with what it does best by improvising as it moves forward. It remains to be seen how that might impact Iran’s economic and, in turn, political stability.[16]
