Analysis

Iran's Economy Isn't Ready for Sanctions' Impact, but Tehran Won't Fold Over Nuclear Issue

U.S. sanctions won't necessarily change Iran's stance, and protests over staggering inflation still aren't threatening the regime. Nonetheless, there's a chance for a new negotiation

Iranian President Hassan Rohani giving an interview to Iranian TV in Tehran.
AFP

Preparations in Iran for the first round of U.S. sanctions have not yet produced an impressive plan of action. President Hassan Rohani’s statements about his willingness to take diplomatic steps but not when Iran is under sanctions is not a very creative response given the scope of the threat on Iran’s doorstep. Equally unimpressive is the warning of Qassem Soleimani, head of the Iranian Revolutionary Guards’ Quds force, to the effect that “Iran is prepared to stand up to the United States.”

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It’s true that Iran has mobilized support from Russia, China and Turkey, which continue to invest or at least have pledged to invest tens of billions mainly in oil exploration. But these countries will also be faced with a decision ahead of November 4, the date on which sanctions go into effect against oil imports from Iran.

Iran’s foreign currency reserves, estimated at more than $130 billion, and the National Development Fund of Iran, which has a few dozen billion dollars more, give it some breathing room. But these cannot replace significant economic reform to stabilize the riyal, which this week reached a historic low of 120,000 riyals to the dollar.

Changes that Rohani made in his administration, such as firing Central Bank Governor Valiollah Seif, who was in charge of regulating the capital market, and the departure of Mohammad Bagher Nobakht, the head of Iran’s budget and planning organization, were intended mainly to show that Rohani is “listening” to the outcry from the street and responding to political pressure. This month he will have to respond in parliament to pointed questions about the way Iran’s economy is being handled and about the failure of the nuclear agreement. This will be the opportunity for Rohani’s rivals to sling accusations at him and highlight his failures, but the members of parliament have no better idea how to extricate Iran from its economic crisis.

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The Iranian government’s only move so far is the decision to establish a secondary foreign currency market in which the value of the riyal will be set by its free-market price, without government intervention. Travelers abroad will no longer be able to buy dollars at the official rate of 42,000 riyals per dollar, and money changers can return to work and sell dollars at the secondary market rate but no more than $10,000 per person.

These measures will not be enough to appease the protesters, who are facing dizzying price hikes due to surging inflation, unemployment and shortage of drinking water. So far, the protests are sporadic and local. Slogans against the government and the supreme leader Ali Khamenei can be heard alongside denunciations of Iran’s involvement in the wars in Syria and Yemen. But this has so far failed to create the critical mass of opposition that would threaten the survival of the regime.

The new sanctions are supposedly intended to get Iran to agree to negotiate with the United States over a new nuclear agreement that will include Iran giving up its ballistic missile development and ending its involvement in conflicts in the region. But sanctions are the relatively easy part of the battle against Iran. It is much harder to ensure that the sanctions will change Iranian policy.

The American concept rests on the assumption of a direct connection between the penalties imposed and the outcome. But Iran withstood sanctions as far back as the 1950s, when the British imposed a full closure following nationalization of its oil by Prime Minister Mohammad Mosaddegh. Since the Islamic Revolution, Iran has been under ongoing sanctions, American and international, which until 2013 did not lead to significant negotiations on freezing Tehran’s nuclear program. Only after Rohani came to power did Khamenei give the green light to enter the historic negotiations that led to the nuclear agreement.

A decade before, in 2003, Iran proposed embarking on negotiations with the United States over the nuclear program and even halted the program in exchange for the lifting of sanctions. But then it encountered the solid wall put up by President George Bush, who was on the verge of war against Iraq. Bush’s disregard for Iran’s proposal led to the renewal of the nuclear program and the refuting of the theory that Iran would agree to freeze the program out of fear of an American attack in the wake of the U.S. war against Iraq.

Iranians preparing to burn American flags during an anti-U.S. demonstration outside the former U.S. embassy in Tehran.
Bloomberg

Heavier sanctions on Iran over the past decade were only one component in the development of its economic crisis. Many other factors led to the crisis, among them: a lack of rational economic policy during the term of President Mahmoud Ahmadinejad, deep-seated corruption that wasted tens of billions of dollars, the lack of practicable five-year development plans, generous government subsidies to the people, and the takeover by the Revolutionary Guards of more than half of Iran’s economy, random management of the oil sector, and political power struggles.

According to leading Iranian economists and senior officials, Iran could have overcome the crisis more easily, even under sanctions, if it had implemented proper economic reforms. From time to time these economists have made recommendations to the supreme leadership but they were rejected by those with vested interests who funneled millions into their own pockets from the sanctions, often by smuggling oil and other products. Some of those responsible were later put on trial, but the heavy damage was already done. And after most of the sanctions were lifted in the wake of the nuclear agreement, control over foreign investment contracts by those with influence did not disappear. The Revolutionary Guards continued to hold on to most of the deals, as did those in Khamenei’s inner circle, which is managed like an economic mafia led by his son, Mojtaba Khamenei.

Now too, under the new sanctions, Iran’s economic survival depends on loosening the economic and political systems. But if the past is any indication, it seems that the many layers of vested interests and the tight pyramid of control will lead to continued profit-seeking rather than implementation of real reforms.

This structure could, as in the past, cause the sanctions, and President Donald Trump’s punishment strategy to fail. In addition to political and economic failures, the sanctions could play into the hands of the regime as it attempts to crush all protest and rebellion.

The Iranian regime, which has adopted the slogan of “revolutionary economics,” can be expected to mobilize the public in its efforts to resist the enemy’s attempt to bring down the regime, thus rendering opposition to the regime as akin to treason.

At the same time, those in favor of sanctions against Iran cannot ignore the fact that Tehran has decided to stick to the agreement and not withdraw from it. Rohani’s willingness to continue diplomatic efforts – if the United States would lift the sanctions and return to the nuclear accord – shows that Iran does not consider the agreement a one-time event.

The agreement gave Iran international recognition without it having to build even one nuclear bomb, but it neutralized the significant diplomatic threat it wielded, and confronted Tehran with a complex dilemma.

A decision by Iran to renew its nuclear program will unite the European Union with the United States, and could mean the loss of support by Russia and China. On the other hand, a decision not to renew and maintain the program reveals its most important negotiating hand right away. This dilemma provides a new opportunity for negotiations with Iran – not instead of the nuclear agreement, but in addition to it. After all, the imposition of sanctions on Iran indicates that it is considered a rational country that understands heavy-handed hints, the kind of country with which binding agreements can be signed.