Foreign Affairs: What next for Iran?

Iran’s leaders will soon discover that their problems were not caused by the sanctions and will not be solved by their removal.

Iranian FM Zarif with Swiss FM in Geneva 370 (photo credit: REUTERS)
Iranian FM Zarif with Swiss FM in Geneva 370
(photo credit: REUTERS)
They’re gloating in Tehran.
“US sanctions have utterly failed,” the suave, telegenic and conceited Foreign Minister Mohammod Javad Zarif, who spearheaded Iran’s agreement with the P5+1 world powers last month for mutual and partial retreats from sanctions and nuclear development, said this week.
Zarif’s euphoria, animated by the previously worthless rial’s 20-percent leap in Tehran’s bazaar, is understandable.
From a national viewpoint, he cracked the financial siege that was steadily strangling his country’s economy, in turn for the relatively low price of a six-month freeze of its nuclear program and a temporary capping of its uranium enrichment.
From a personal viewpoint, the law professor who earned his PhD at the University of Denver has reason to be elated, having come to Geneva anonymous and returned to Tehran an international celebrity and national hero.
Otherwise, however, elation in Tehran may soon prove premature, as Iranians slowly emerge from the economic trenches where the ayatollahs led them, and start surveying the financial ruins, strategic mess, social contradictions and political time bombs that now abound throughout Iran.
THE FIRST dose of reality will arrive when Iranians realize that the sanctions have largely remained intact, as have the average Iranian’s daily hardships – which have come down to average urban families having meat barely once a week.
The most debilitating of the many sanctions imposed on Iran have been its eviction from global electronic banking, which all but froze its foreign trade; the American ban on practically all Iranian imports and the prohibition on Americans’ involvement in Iranian energy development; and Europe’s embargo on Iranian oil, gas and gold imports.
Consequently, oil revenues, the country’s economic lifeline, dropped this decade by 60%, while the economy shrank by 5 %, joblessness plagued a third of the workforce, and the rial, which on the eve of Europe’s embargo traded at less than 15,000 to the dollar, plunged to 30,000 to the dollar, while inflation officially crossed 40%, and unofficially approached triple-digit levels.
In all, the sanctions cost Iran an annual $60 billion in unearned oil revenues alone. Coupled with the rest of the sanctions, which included freezing of financial assets in Europe and America, Iran lost double that amount.
The deal’s letter lifts none of the main sanctions. Instead, it gradually releases $7b. from assorted blocked accounts where deposits reflect deals made in the past. Future oil deals await the next round of talks for a prospective longer- term retreat from Iran’s nuclear ambitions.
Even so, optimism in Tehran is now such that the rial traded this week at less than 25,000 to the dollar, as opposed to 30,000 last month. The traders might be right in their general hunch that the future may be better than the past. Yet even if that’s true, the Iranian economy will have to undergo open-heart surgery for reasons that have nothing to do with the sanctions.
Having addicted the economy to oil production, the mullahs avoided investing in industrial development, even that of the oil industry itself. That is why, absurdly, even while sitting on the world’s fourth-largest oil deposits and exporting them freely, the ayatollahs were importing refined oil because of a lack of modern refineries.
Lurking behind this inaction was a reluctance to open up the economy, lest that empower the middle class. The mullahs preferred instead to keep the economy underdeveloped, and shower the less educated masses with assorted subsidies.
That, and not the sanctions, is why they failed to create jobs for thousands of university graduates, while annually wasting $114b., one-fifth of national spending, on artificially reducing the prices of food, gasoline, electricity, housing and even tractors. Iran’s previous president, Mahmoud Ahmadinejad, began to dismantle this system, but his effort failed because it was not coupled with financial liberalization and easing of duties, which would have shortened the distance between supply and demand.
To reignite the economy, President Hassan Rouhani will have to do what Israel did in 1985, namely cut spending, and at the same time let the central bank set interest rates independently and overrule politicians’ orders to print money in disregard of internal revenues.
There will also have to be more subsidy cuts and privatizations.
The nuclear program itself has I reportedly already cost Iran a cumulative $200b.
While this money will never return, defense spending can be cut, and will have to be if Iran is to offer its largely jobless and restless youths the future that the current regime claims is already around the corner.
Spending cuts will be good in the longer term for the middle class, but will weigh on an already struggling lower class, because they will initially result in yet more price hikes. Meanwhile, privatization will require confrontation with the Revolutionary Guards Corps, and budget cuts will challenge the mullahs’ regional meddling.
THE REVOLUTIONARY GUARDS are to the current Iranian economy what the Communist Party was to the declining Soviet Union – a privileged and despised class of the nouveau riche, whose damage to the economy has become unaffordable.
Originally a military elite of some 100,000 men, the Revolutionary Guards have since morphed into an army-within-an-army that presides over its own multibillion- dollar business empire, as they gradually obtained government contracts in public works, manufacturing, construction and even healthcare, with which they handed out jobs to family, friends and cronies.
These businesses are often wasteful and corrupt, and take jobs away from able people who lack contacts. A potential clash between this class and the young university graduates who are now underemployed, unemployed or sitting in jail in the aftermath of the political upheaval of spring 2009 is what awaits Rouhani and his cabinet as they embark on the bumpy road to economic rehabilitation.
This social chasm, and the political predicament of the urban middle class, which Supreme Leader Ayatollah Ali Khamenei provoked when he allowed – or ordered – Ahmadinejad’s theft of that election, can only be kept under a lid for so long.
Jailed, intimidated and threatened while former presidential candidates Mir Hossein Mousavi and Mehdi Karoubi languish under house arrest, Iran’s more ambitious reformists remain sidelined while Rouhani tries to deliver maximum prosperity with minimum change.
As he will prove slow to deliver, pressure from Iran’s young and restless will likely grow, and the contradictions between their expectations and the Revolutionary Guards’ interests will prove increasingly irreconcilable.
In his election campaign, Rouhani hardly discussed economics. Now he will deal with little else, and the more it will confound him, the more pressure for change will build on other fronts besides the economy.
Back in spring 2009, when thousands took to the streets before and after the election’s theft, it became clear that a critical mass of the Iranian public had grown at least partly tired of the revolution’s assorted restrictions, from access to the Internet to women’s dress code.
These sentiments have not changed since then. If anything, they have only intensified.
Meanwhile, Rouhani’s pressing economic needs will demand confrontation not only with the Revolutionary Guards and the middle class, but also with his superiors, and on their most treasured exploit: Syria.
IF THE Revolutionary Guards are Iran’s equivalent of the former Soviet Union’s party membership, and the sanctions are the equivalent of Star Wars, the American program that defeated Soviet defense spending – then Syria is Iran’s Afghanistan.
Iran might not care much for the military hemorrhaging it has been suffering in Syria and Lebanon, where it has sent many advisers but few troops. Financially, however, the cost of its involvement in the Syrian civil war is beyond Iran’s means. If it wants to let the people prosper, Tehran will have to quietly fold its imperial flags.
The Syrian economy is believed to have shrunk by at least one-third since the beginning of the civil war there in winter 2011, as GDP plunged from $60b. to $40b. while the Syrian pound lost more than 80% of its prewar dollar value. In addition, the government lost to the rebels vital oil wells in the east and flour mills in the west, resulting in emergency shipments from Iran of fuel and flour.
The ones refilling President Bashar Assad’s empty pockets are the same Iranians who have no jobs and eat meat hardly once a week.
Iranian loans to Damascus, most recently a $3.6b. credit line signed last summer, and before that a $1b. deal partly in return for Syrian fruit and textiles, as well as a $500 million loan to the Bank of Syria in order to offset Assad’s dwindling foreign currency reserves, have been vital for the Syrians – but exorbitant for Iran.
From an economic viewpoint, Iran’s interest now is that fighting in Syria end as soon as possible; not only because of the war’s costs, but also because of its aftermath’s benefits. An end to fighting will be immediately followed by a massive reconstruction drive, in which Tehran can expect to play a leading role. That is how the man Rouhani installed as governor of the Bank of Iran, the business-minded Valiollah Seif, will surely see things.
The mullahs, however, have other considerations, as they try to cultivate a Shi’ite belt stretching from Tehran to Beirut through Baghdad and Damascus.
For them, Hezbollah’s rising casualties in Syria, and attacks like the one waged last month at the Iranian Embassy in Beirut, apparently by al-Qaida, are no reason to retreat. Indeed, as Khamenei sees it, the government’s role even now is not to deliver prosperity, only to keep the people fed and quiet while the clerics continue to spend on arms, meddle abroad and build a bomb.
The Iranian people, in short, may be ready for Perestroika, but they have to somehow get there with the revolutionary old guard yet to depart.