Analysis |

In Iran, You Can't Buy Groceries With Nuclear Weapons

Iran stands to gain from a new nuclear deal, but without reforms it will look like Iraq, which is oil-rich but mired in economic crisis due to failed management and rampant corruption

A photo of Dr. Zvi Bar'el.
Zvi Bar'el
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Iranian President Ebrahim Raisi, right, visiting a gas station in Tehran in October 2021.
Iranian President Ebrahim Raisi, right, visiting a gas station in Tehran in October 2021.Credit: Iranian Presidency/AFP
A photo of Dr. Zvi Bar'el.
Zvi Bar'el

While representatives of the countries negotiating with Iran over the nuclear deal discuss the latest draft agreement and awaiting Iran’s decision, Iranian President Ebrahim Raisi is marking a year in office.

The president who promised to solve the economic crisis within two months, build 1 million housing units, invest billions in industrial development and prove that Iran can defy sanctions – now finds himself entangled among his promises and attacked not just by his political rivals.

Regime supporters, including the state-controlled media, conservative religious scholars and right-wing lawmakers are making harsh accusations against him and publishing long lists of his failures. A reformist newspaper published in honor of Raisi’s first anniversary in office a detailed table of price rises during his term: rice by 200 percent, oil by 367 percent, eggs by 116 percent and cheese by 133 percent.

Iran’s citizens do not need such tables to know how much the rial’s purchasing power has shrunk and what they have to leave out of their shopping baskets to make it to the end of the month. The eight people who have died by self-immolation since May – because of financial problems – seem to have understood this better than anyone.

One can read and hear in the media official statistics touting that Iranian oil and gas exports have climbed 77 percent over the past year, bringing in some $39 billion, compared to $22 billion last year. But, citizens also know that little of this money will reach their pockets.

It may have been a relatively good year for Iranian oil, which benefited from the high prices because of the war in Ukraine, and revenues from non-oil products also climbed. But according to reports from the Iranian customs authority, the revenue increase occurred because of price rises rather than increased quantities of exports. From March through July, non-oil exports produced some $17 billion in revenues, up 22 percent over last year, but the quantity of goods exported fell by over 10 percent.

The data also contradict Raisi’s rosy reports of impressive job growth over the past year. The agricultural workforce decreased by 10 percent, as agriculture workers prefer to move to the cities to make a living, even for very low wages. As for industry, which Raisi promised to support with affordable loans and government investments, it is actually shrinking.

According to a report presented to the government, over 100,000 industrial jobs have been lost just in the first quarter of 2022. The regime is trying to offset the high price of living by massively printing rials. However, the new bills are just feeding inflation, which has already reached 50 percent and is forecast to rise even more toward the end of the year.

If the nuclear agreement is signed, Iran would be able to get its hands on about $100 billion of frozen assets worldwide. It would also be able to increase its oil exports by about another 1 million barrels a day initially, and by some 5 million barrels down the line. The Iranian leadership is citing the global oil shortage to convince Western nations to agree to its demands when it says: “If you want Iran’s oil, make the right political decisions on the nuclear question.”

But this is a disingenuous equation. Europe needs gas more than oil, and Iran has no gas reserves it can make available for export. Iran is also bound by a long-term oil sales agreement with China, and it will try to woo back customers like India, South Korea and Japan. So, it will be forced to offer them the oil at a significant discount to compete with suppliers who took its place in recent years, and especially the Arab countries of the Gulf.

A gas flare on an oil production platform in the Soroush oil fields, alongside an Iranian flag in the Gulf.Credit: Raheb Homavandi/Reuters

Iran will undoubtably return to being a rich country after the sanctions are lifted, but a large gap exists between the regime’s wealth and the improvement in its citizens’ standard of living – and between the potential profit and the ability to exploit it properly.

Because without deep economic reforms, oversight on spending, fixing the banking system, legislation that encourages investment and most important, infrastructure – Iran can be expected to continue to operate on the verge of a crisis, even after sanctions are lifted. Its situation will not be any different from that of Iraq, which is rich in oil but is wallowing in an economic crisis because of failed management and rampant corruption that has crushed the appropriate plans for development and reconstruction.

One example is the enormous gap between the billionaire and millionaire elites and the rest of the citizens. Forbes reported in June 2021 that Iran had 250,000 millionaires, ranking it the 14th richest country. Based on this figure, 0.3 percent of the Iranian population owns assets worth collectively $250 billion, equivalent to 8 percent of GDP.

As much are there are rich people, so is there tax evasion. Official reports indicate that Iranians evade paying over $3 billion in taxes, while the budget deficit is $15 billion. This loss of revenues does not include exemptions that Iran provides to huge economic institutions that control billions in assets but qualify as charitable and aid organizations. Morever, about a third of doctors and a similar rate of free professionals are not registered at all in the tax system and don’t pay income tax.

The Iranian government will be required to overhaul the tax system to drastically ramp up enforcement and realize its income potential from unrealized revenues. However, such a reform, after decades of neglect, turning a blind eye and horse-trading can’t be implemented in one blow if at all possible.

Too many people with influence and interests enjoy the status quo. If Iranian government’s couldn’t increase taxation during an economic crisis, it’ll be even harder once the big post-sanctions money comes in.

The previous president, Hassan Rohani, well understood how low Iran had sunk. He tried starting reforms, including increased collection and subsidy cancellations. But he hit a wall put up by his belligerent opponents, who blocked the requisite legislation. It’s doubtful whether Raisi will succeed where his predecessor failed. Despite the criticism by lawmakers and the demands to fire economic ministers, it seems they will be the first to stand in his way should he present a reform package liable to hurt them or their close business associates.

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