The Sky’s the Limit for Iran’s Lofty Economic Ambitions

IranAir has struck deals with two Western aviation giants to buy over 200 planes. However, like much else in Iran, its dreams hinge on the fate of Hassan Rohani in next year’s presidential election.

An Iran Air Boeing 747 passenger plane sitting on the tarmac of the domestic Mehrabad airport in the Iranian capital, Tehran, in 2013. The airliner will buy 100 new Boeings in a $25-billion deal.
Behrouz Mehri/AFP

The website of the architecture and design magazine Dezeen devoted a lot of space recently to a story about recent innovations in Iran. One of the items showcased houses with movable rooms that move outward and open up as balconies in the summer, contracting inward in the winter. A café designed in a disco style was another creation, as well as a wooden promenade incorporated into a pedestrian bridge.

The flourishing of such new architecture, Iranian architects told the magazine, is the new wave that they hope will rise and actually earn them a living. Meanwhile, these innovations are restricted to the northern sections of Tehran, where the city’s (and country’s) affluent people live. These are the folk willing to embrace tradition-defying innovations.

This isn’t the first sign of Western influence in Iran, which knows, and has known, the West throughout modern times. But it does highlight the atmosphere of openness and daring that the new era brings, following the signing of the nuclear accords last year and subsequent lifting of sanctions.

The most significant development in relations with the West has come in the airliner industry. This week, it was revealed that Boeing has signed a $25-billion deal to sell 100 passenger jets to Iran’s national airline, Iran Air. This follows the news that the airline signed another $25 billion deal last January to purchase 118 planes from Airbus. (That deal is conditional on the granting of U.S. export licenses, due to the quantity of U.S.-built parts in Airbus’ planes.)

The Boeing deal isn’t only the largest deal between the United States and Iran since the Islamic Revolution of 1979, but it also creates a link with a giant American corporation – which could open the door to other corporations. Until now, these have been excluded from Iranian markets, even after the signing of the nuclear accords.

The deal with Boeing still needs the approval of the U.S. Treasury, which oversees the implementation of sanctions on Iran. Many members of Congress would love to block the deal, but it seems that the enormous sum involved and the temptation to make inroads into the Iranian air-transportation sector, which needs at least 300 more planes in the next decade – in addition to the competition with Europe-based Airbus – will overcome this opposition.

20 million tourists

The Iranian air transport industry is closely linked to the vision of tourism that the Iranian leadership is trying to build. There were 5 million visitors to Iran last year, but the goal is to attract more than 20 million within a decade. And these visitors will require hotels, transportation and the infrastructure for new types of shopping malls.

Conservative elements in Iran worry about flooding the country with Western tourists, but at a time when the five-year economic plan (which began this year) stresses the need to diversify sources of revenue, even conservatives won’t be able to stem the flow of tourists who are already lining up to see the “forbidden country.”

Indeed, this all points to new directions the regime wishes to develop. The economic plan predicts 8 percent annual growth, which is contingent on a 2.5 percent shrinkage in the number of civil servants and an increase in efficiency. The state intends to thin out its top-heavy level of bureaucracy and fire many government officials; open up the private sector to competition; and update the ineffective and outdated banking system. As the plan notes, the idea is to “create an atmosphere that encourages new investments.”

The Iranian stock exchange has an important role to play in financing state projects, with the plan envisaging 90 percent of project funding coming from investors – compared to 25 percent today. Oil will remain the main source of revenue, but oil profits will fund 30 percent of a national development fund, as opposed to the present 20 percent.

The item most likely to evoke strong opposition is the one aimed at privatizing government companies and preventing the growth of monopolies. Over the last several decades, many monopolies have developed in Iran, controlled by people close to the regime – the Revolutionary Guard, charitable organizations and government authorities – all of which obtained concessions for developing infrastructure and building factory plants.

Anyone trying to dismantle these monopolies will face fierce opposition from the country’s strongest political institutions, who have no desire to relinquish the enormous profits that could be generated after sanctions are completely lifted.

Easing up on bureaucracy won’t pass quietly either, since it entails the firing of hundreds of thousands of government workers and government company employees, who have grown accustomed over the years to receiving salaries without delivering anything meaningful in return.

If Iran intends to increase the amount of direct foreign investments to $12 billion a year, it will need to pass significant legislative reforms that will protect such investments. It will need to introduce new management technologies into a system that is outdated and corrupt, and to change the business culture – which currently forces overseas companies to find official and unofficial Iranian intermediaries before business can be conducted there.

This is undoubtedly an ambitious economic plan, which requires the political backing of the supreme religious leader, Ayatollah Ali Khamenei. The Iranian parliament also needs to legislate its basic elements. President Hassan Rohani, who laid out the plan’s principles, will need to walk on barbed wire in order to fulfill even a fraction of it. Presidential elections will be held in spring 2017, and Rohani will need to present significant economic achievements in order to convince voters that he should be reelected for a second term. Consequently, this will be a critical year for Rohani, one in which his rivals will try to prove that his nuclear deal was detrimental to Iran, or at least didn’t yield the expected economic gains.

The Iranian media is already voicing opposition to Rohani for the closure of 7,000 factories and his part in Iran’s stagflation (a mixture of concurrent economic stagnation and inflation). In order to assist Rohani, the U.S. administration – but mainly Congress – will have to reexamine U.S. sanctions that still apply to Iran, imposed for its support of terror and development of ballistic missiles.

Khamenei has previously warned that he’d “burn the accords” if the United States didn’t remove all sanctions. The Obama administration wants to do so, but this is an election year, when pro-Iranian moves are fraught with political danger in Washington.