It was a hard-earned victory lap.
Having finally undone the sanctions on his country, Hassan Rouhani emerged this week in Rome and Paris, where the newly legitimate Iranian president was greeted like a cinematic celebrity and a lost son.
Italian Prime Minister Matteo Renzi and French President François Hollande didn’t even try to hide their eagerness to do business with the Islamic Republic, and Pope Francis went out of his way to kindle a sense of ecumenical warmth between the largest monotheistic faiths.
Yet while all this indeed signals a new economic dawn, the transition Rouhani is out to ignite faces formidable challenges that cannot be solved by the restoration of the Islamist revolution’s mining- based economy.
Francis surely did not mean such insinuation, but Europe is now for Iran a version of the bishop who stared at Rouhani from the medal Francis gave him.
Like that bishop, the fourth-century Saint Martin who sliced a half of his cloak and gave it to a semi-naked beggar, the Iranian economy is half naked.
While its population has doubled since the revolution of 1979, its infrastructure and industry are antiquated, while its financial, labor and housing markets are ossified and its government is omnipresent and corrupt. Inflation is estimated at 16 percent, while at least one-third of educated young adults are jobless.
The good news, from the regime’s viewpoint, is that the very lifting of sanctions is creating the kind of momentum its economic salvation begs.
More than $100 billion of frozen funds have been released, a sum that would be a welcome infusion even to bigger and healthier economies. Newly lifted limits on oil and gas sales will soon land fresh petrodollars in Tehran. And deals like the $18b. worth of contracts that Iranian and Italian businessmen signed in Rome this week will now abound.
While American business remains physically distant and politically skeptical, European companies are geographically close, politically optimistic and commercially eager to storm the Persian frontier. To them, Iran is now El Dorado.
European firms are eager to build the new highways, bridges, airports and hotels Iran’s economy demands, and to flood the Islamic Republic with the new cars, modern clothing and quality foods that millions of Iranians crave.
Meanwhile, China, India, Korea and Japan – unlike Europe – thirst for Iran’s oil, and will be competing with the Europeans over the Iranian household’s income – assuming, of course, that it begins to grow soon.
Yet that is where the catch lies. Iran’s revenues are one thing, and the Iranian household’s income is another. A post-Islamist economy will have to be preceded, as it was in post-communist China, by a political showdown pitting economic pragmatists against the old guard’s mandarins, ideologues, adventurers and thugs.
THE MARKETS gave post-sanctions Iran no period of grace. The past two years’ turbulence in the energy markets has been catastrophic for all oil-based economies, even Saudi Arabia, but Iran’s case is the worst.
No other major oil producer’s population has swelled as dramatically as Iran’s did since the 1980s, and no other major oil producer faced an economic attack as crippling as the sanctions Iran has just endured. One would think, therefore, that with its oil barrels back on the counter and the customers back in the store, the mullahs can now return to do business as usual.
Even if an oil barrel’s price had remained in the $90- $120 range where it moved in 2011-2014, Iran would have been compelled to reinvent its economy, which already then was failing to properly employ and house a critical mass of its population. Yet while the Iranian economy was away, oil’s price plunged to $30 and, at one point this week, even to $27.
Faced with this, it takes no economist to understand that the Khomeini revolution’s economic formula, which crowned oil as the country’s dominant, longterm source of revenue, has become obsolete.
Iran will have to truly privatize many state assets rather than sell them to semi-governmental buyers, as it did last decade; it will have to deregulate its financial markets; to free its central bank; to float its currency; to complete the retreat from subsidies that Mahmoud Ahmadinejad began; and most importantly, to encourage the arrival of many foreign-owned assembly lines, where millions of unskilled workers will be put to gainful work and, while at it, migrate from village to town.
The problem is that such economic transition means unleashing a kind of social commotion that will threaten the revolution’s social order.
The revolution chased away the previous era’s moneyed elite and kept a tight lid on the urban middle class, while pampering the lower classes with assorted subsidies that at one point gobbled a fifth of GDP, while making the working and rural classes the regime’s social backbone.
Now, as the economy thirsts for new income, diversification and deregulation, the mullahs will have to decide whether they are prepared to empower the urban middle classes, and worse – allow the rise of a plutocracy. Such rising classes are prone to quickly become culturally open, religiously cynical, and politically restive.
Iran’s revolution, in short, has come of age. It reached the point where the immediate future’s pressing needs clash with the revolution’s values and beneficiaries.
Ideologically, this means that the regime will face growing pressure to shed its religious resistance to the unbridled importation of things like cosmetics, computers and luxuries. Politically, this means that a newly empowered merchant class and a meritocratic financial elite would threaten the Revolutionary Guards’ economic clout.
Founded a generation ago as a veterans’ order of some 100,000 men, this organization has since become a corporate conglomerate, winning unfairly countless construction tenders and building around them an octopus of other businesses that became a multibillion-dollar celebration of cronyism and patronage.
Controlling major economic pillars like the National Iranian Oil Company, the Guards have a vested interest in the existing order’s preservation, and will therefore see in any attempt to undo it a threat to their survival.
Meanwhile, the economically rising pragmatists will also challenge the revolutionary elite’s adventurism abroad.
IRAN’S FOREIGN MEDDLING, beyond being diplomatically costly, is financially expensive.
Two years ago, for instance, Tehran granted the war-strapped government of Syria a $3.6b. credit line with which to buy oil, and another $1b. with which to buy Iranian goods. Chances that Syria will somehow return this money under financially reasonable terms are very low. Such sums, however, are now sorely missed in the Iranian economy.
Official figures for Iran’s foreign aid are unavailable, but it is clear that such foreign aid, disclosed in its time by Syrian officials, was but part of a broader, multibillion- dollar effort, which includes the financing of Hezbollah and assistance to the Houthi revolt in Yemen.
The financing of Hezbollah, which prior to the Syrian civil war was estimated at a minimum of $60 million per annum, has since risen sharply. The dispatching of troops to Syria at various stages of the war, which at one point reached 10,000, has also been costly.
Meanwhile, the military will demand its share of the newly flowing petrodollars, in order to replace its antiquated matériel. This process began already last summer, when Iran sealed a $21b. arms deal with Russia.
Such lavish spending, which does not bring bread to struggling Iranians and in fact comes at their expense, will eventually be questioned by an increasingly impatient middle class which will ask: Where is my oil barrel? Iranian leaders got to glimpse the future briefly last Friday, when Chinese leader Xi Jinping emerged in Tehran and, in a joint statement with Rouhani, said their countries were launching a strategic alliance.
The future’s hint was not in the alliance but in the visiting president’s outfit and mind-set.
It wasn’t long ago that China’s leaders, like revolutionary Iran’s, also appeared in distinctive garb; routinely derided Western civilization in general, and capitalism more than all; and lavished aid on America’s enemies, from Cuba and Vietnam to Cambodia’s Pol Pot.
Now China’s leaders wear Pierre Cardin suits and Rolex watches while ruling an empire of stock markets, private factories, business schools and glitzy shopping malls.
The man who led this transition, Deng Xiaoping, was never seen in Western attire, but it was he who sewed his successors’ suits. En route to that transition, he and his cause faced a rear-end battle by the previous order’s mandarins, led by Mao Zedong’s widow. It took a struggle, but Deng’s victory was complete, as Iran’s mullahs could have seen last week.
Just how much of what happened in China will be repeated in Iran remains to be seen. But the conditions of a Chinese-style transition are now in place, while each of its protagonists considers his role in the showdown that sooner or later will be impossible to hide.
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