Frontera Deep Dive: Itching to Invest in Iran? 4

Euphoria Over End To Sanctions Masks Supreme Tension

Iran’s president has won the world over to lifting sanctions. His diplomatic victory is being repaid with death threats and arbitrary arrests as the clash between hardliners and reformists builds toward next month’s election.

AFTER NEARLY TWO years of tense diplomatic activity, President Hassan Rouhani has fulfilled his key electoral pledge and returned Iran to the international stage. His biggest battle lies far closer to home.

The deteriorating economy – and its repercussions on the country’s political stability – was a powerful incentive behind Iran’s decision to put an end to the nuclear stalemate.

The sharp drop in oil prices has hit the Treasury hard. The 2015-2016 budget was based on an assumption of $70 a barrel – already tricky as the country needs $130 to balance its budget. The tumble to $30 has caused a severe budget deficit and liquidity crisis.


In 2013, the incoming Rouhani administration’s improved economic management and enthusiasm in business circles sparked by the interim nuclear agreement tamed inflation and pulled the country out of recession, with 3% growth in 2014. Now, Iran has quasi-null growth (between -0.5 and +0.5%).

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The Central Bank of Iran confirmed the current economic stagnation in December, while disclosing in a report that the government owed it $8 billion and a further $34 billion to the banking sector. The government had been unable to finance 90% of the development projects in the 2015-2016 budget, the CBI wrote. Private investment in the manufacturing and industrial sector had fallen by 23%.

The malaise has forced the closure of thousands of industrial manufacturing plants throughout the country. Non-oil imports have fallen by 22% since March last year and non-oil exports by 11%, Iran’s Customs reported.

One perverse effect of the expected lifting of sanctions is that consumers have been saving their spending for better quality foreign products.

Unemployment is a serious concern, reaching 48% among Iran’s population under 30 years old, according to the Mehr news agency.

Surreptitious Plan

Against this background, the expected unfreezing of Iran’s foreign assets will have little impact. While the agreement has led to an incessant flow of business delegations, major new foreign investment, which the country desperately needs to upgrade its big industries and improve its economic situation, will be slower.

Tehran has dismantled its nuclear program faster than expected, with the lifting of sanctions positive for Rouhani’s political allies in legislative elections on Feb. 26. Voters will also select members of the Assembly of Experts, the institution in charge of choosing the next Supreme Leader.

Testifying to the importance of these votes is the unprecedented high number of registrations – more than 12,000 for the 290-seat Parliament and 801 for the 88-member Assembly of Experts. It is not only a strong signal that elections do matter in Iran, but also that the elite is cognisant this could bring about a potential power shift and restrain the conservatives’ power, at least in Parliament.

Although legislative elections are a more immediate concern for the Rouhani administration, as a conservative victory would frustrate its agenda, a lot is at stake in the Assembly of Experts selection. Considering that Supreme Leader Ali Khamenei is 76 and suffering from prostate cancer, it is likely that this incoming Assembly, which is elected for eight years, will oversee the succession process.

Hardliners – primarily Ahmad Jannati, Chairman of the powerful Guardian Council, the ultimate vetting body – have repeatedly warned of a surreptitious plan by moderates to take control of the Assembly of Experts.

Battle for Supremacy

With this factional struggle building, Hashemi Rafsanjani – their political rival – announced in mid-December the establishment of a commission within the Assembly of Experts to review candidates to Khamenei’s succession. This makes more concrete his oft-repeated comments about the need for a collective leadership council instead of a single Supreme Leader.

Although this structure was originally included in the 1979 constitution, it was removed in the constitutional reform of 1989 following the death of Khomeini and the first succession.



Bearing in mind that Jannati and a series of other hardline clerics and high-ranking security officials fiercely oppose this option, it is possible that the Guardian Council rejects Rafsanjani’s candidacy to weaken his influence within the Assembly.

Hardliners, who currently dominate the Assembly, fear an alliance between Rafsanjani, Rouhani and Hasan Khomeini – Ayatollah Khomeini’s grandson, who supports the reformist agenda and has family ties with the movement’s figurehead Khatami, through marriage.

It is by no means certain that Rafsanjani will manage to alter the composition of the Assembly of Experts, but if he succeeds, it would potentially have transformative consequences, and could slightly increase the Supreme Leader’s accountability to the public.

As for Parliament, it is opened to potential significant change. One reason is that Iran traditionally has a rather low incumbency rate (below 30%), with contests mostly fought on local affairs – all the more so the further one gets from Tehran. In spite of the official registration of political factions and societies, there are no institutionalized political parties in Iran and it is not unusual for candidates to run on several lists at the same time.

Marginalized for a decade and violently repressed in 2009, reformists have built an alliance with moderates and pragmatic technocrats led by Rafsanjani and Rouhani in an attempt to significantly reduce the influence of hardliners in the legislative assembly.

Their strategy is to introduce a lot of candidates, in the hope that even if leading reformist or moderate figures are disqualified, lesser-known candidates will be able to run for office. At the same time, they calculate that the more moderate/ reformist candidates register, the higher the disqualification rate will have to be if the hardliners want to secure a victory – a move that is unpopular and politically costly.

The diplomatic victory represented by the nuclear agreement has given a competitive edge to Rouhani and his allies in terms of popular support. This is worrying for conservatives, who have much to lose.

As a result, they have significantly increased their attacks against the government since the agreement was signed – from waves of arbitrary arrests against businessmen to death threats against government officials.

Debating Death

The destabilizing effect of the nuclear agreement on the power balance between elite networks was demonstrated during a stormy parliamentary session, where final approval was granted for the bill that paved the way for final implementation of the deal.

While debating the bill’s general provision, Akbar Salehi, an MIT-educated physicist who heads Iran’s Atomic Energy Agency, was intimidated by a hardline MP who threatened to bury him in the Arak heavy-water reactor and cover him with cement.

Although Khamenei had to intervene to pressure parliamentarians into passing the final version of the bill, he has turned a blind eye to other intimidation tactics used by hardliners. He has tacitly encouraged confrontation between the moderate and ultra conservative camp opposed to détente with American by publicly warning against the dangers of American influence over Iran.

This is in keeping with Khamenei’s leadership style – to adopt ambivalent positions on touchy issues, leaving the political elite to argue over it, before taking a stronger position that protects the interests of his core constituency. Khamenei’s ambiguous statements enable him to retain the upper hand in every scenario and to allow a certain degree of pluralism to ensure regime survival.

It is futile to try to predict the election results, but it is clear that if conservatives retain their control of Parliament, they will prevent the implementation of Rouhani’s social and cultural policies – his second electoral pledge after the nuclear deal – in an attempt to scupper his chances of gaining a second presidential mandate in 2017. Depending on where their business interests lie, however, they may cooperate with his government on selected economic reforms.

Conversely, if moderates and reformists form a new majority, it will be slightly easier for the government to fulfill its domestic agenda, but may also lead to a severe backlash from hardliners, who are then likely to use their control of some of the security forces and the judicial apparatus to thwart Rouhani’s policies.

This could signal a spike in arbitrary arrests and politically motivated trials. In this scenario, however, domestic actors are more likely to bear the brunt of intimidation and political manipulation given that conservative politicians often double as businessmen and they are cognisant of the need for foreign investment in order to salvage the economy.


Banks Are Vulnerable

Despite the optimistic prediction of the IMF that Iran would regain 5.5% growth in 2016-2017 and the multifaceted opportunities opened by the country’s untapped consumer market, structural economic issues and remaining US sanctions create a regulatory minefield. This uncertainty has the potential to slow down the anticipated rush to Iran, particularly for American companies.

Iran certainly has a lot to offer in terms of natural resources and human capital – an oft-overlooked fact. Years of sanctions have only strengthened its resolve to become the lead scientific powerhouse in the region. The country is one of the Middle East’s largest investors in scientific research. Iran’s engineering and medical research institutes would rank among the best worldwide, especially in the high-tech industry and stem cell research.

However, it will take more than significant resources and a well-trained workforce to attract sustained foreign investment. Structural economic reforms are needed in order to improve bureaucratic and financial transparency. The historically low oil prices, likely to remain depressed throughout 2016, will only reinforce this trend.

Fiscal reform is necessary if the government wants to avoid another record-breaking budget deficit next year. To date, efforts by Rouhani and his team to tighten tax collection have been negligible.

The banking sector is especially vulnerable, burdened by corruption, mismangement, and disturbingly common instances of non-performing loans. Although the government has drafted plans to restore financial discipline, officials reckon that six out of seven financial institutions operating in the country do so without a license from the Central Bank, including six of Iran’s largest credit institutions.

Rouhani’s ability toimplement these reforms will largely depend on which political faction wins the parliamentary elections.

Confronting Instability

Viewed from Tehran, the war in Syria is a struggle imposed on Iran by Saudi Arabia. The Kingdom seeks to take advantage of the popular uprising against Assad. Overthrowing such a long-term Iranian ally would represent a significant strategic blow for its Shia rival.

In the past year, Iran has significantly stepped up its military involvement in Syria, as indicated by the growing number of high-ranking Iranian casualties.

For the political and military leadership in Iran, the war in Syria is considered a necessity to preserve Iran’s national security. This is not only because Damascus is a strategic ally and enables the Iranian regime to wield influence in the Arab world, but also because the fall of Syria might lead to the end of a compliant government in Baghdad. The thought of a potential pro-Saudi and pro-American government in Iraq is unacceptable for the Iranian military, whose senior members are deeply scarred by the legacy of the Iran-Iraq war of the 1980s.

However, Iran’s growing presence in Syria – although officially only consisting of military advisors – has created mounting resentment among some quarters of the Syrian army. Syrian commanders have been increasingly marginalized in favour of Iranian figures, and they are not content to simply execute an Iranian-designed strategy.

Last July, Assad publicly acknowledged that the Syrian army suffered from a shortfall in human capacity. It has been propped up by additional Iran-backed militias – contingents composed of Afghan refugees from Iran or Hezbollah fighters.

Iranian military advisers have remodeled the Syrian army on its own structure, therefore ensuring the loyalty of key players, even after Assad is removed.

This has led to speculation that Russia’s involvement followed demands from within the Syrian military establishment to counterbalance Iran’s influence. Russia and Iran both officially frame their involvement in terms of anti-terrorism – a cover for more strategic goals and a strong foreign policy statement for both countries that they are independent players to be reckoned with on the world stage.

However, despite these similarities and common short-term goals, their long-term interests diverge and both are likely to fight for influence and economic interests in the reconstruction period – whenever it comes.

By the end of 2015, some observers had begun to express guarded optimism for a political resolution in Syria, as epitomized by United Nations Security Council Resolution 2254. Unfortunately, those hopes were dashed on 2 January of this yaer, when Saudi Arabia executed the

dissident Shiite cleric Nimr al-Nimr. The ensuing diplomatic firestorm has sparked a political crisis between the two rivals that further jeopardises peace plans.

Despite official Saudi statements that the severing of diplomatic relations between the two countries will not have a negative impact on the UN-backed peace negotiations, it is bound to complicate any peace-making. A political solution to the Syrian conflict can only be achieved if key foreign backers of each warring side agree to make concessions and put pressure on their allies in Syria to abide by them – a very distant prospect as long as Iran and Saudi Arabia continue to engage in regional brinkmanship.

Similarly, the proxy war that Iran and Saudi Arabia are fighting in Yemen shows no sign of abating – as a fledgling truce was ended by the Saudi-led coalition on Jan. 2, barely two weeks after coming into force.


2016 Watchpoints:

February 2016 elections:

Parliamentary elections will determine whether Rouhani can implement his reform agenda and deliver on his electoral promises as regards civil liberties and societal policies. Coalitions that will form in the legislative assembly will shape the degree of Iran’s openness. Election to the Assembly of Experts is likely to have a direct bearing on the country’s political future as succession scenarios are being increasingly discussed

Regional instability:

Iran has strengthened its involvement in the Syrian conflict throughout 2015 and Tehran’s eventual inclusion in international peace negotiations since October 2015 was a necessary step if a meaningful solution to the civil war is to be found. Syria is likely to become a key foreign policy priority for Tehran, now that the comprehensive nuclear agreement has been reached. However, the Syrian dossier is first and foremost in the hands of the Iranian Revolutionary Guards, and Khamenei and the domestic struggle for power in Iran may complicate Foreign Minister Mohammad Javad Zarif’s position in an already fledgling peace process.

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