The Economic War Against Iran

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by Esfandyar Batmanghelidj

There is a telling line in Thomas Erdbrink’s recent report on Iran’s roiling currency crisis. Erbrink speaks to Kaveh and Reihaneh Taymouri, whose monthly household income fell from about $1,400 to just $90 following the collapse of their small electronics business. Reflecting on her household’s “downfall,” Reihaneh Taymouri told Erdbrink, “I’m not really that sad, because we are not alone… It’s happening to so many people.”

On the eve of the third anniversary of the implementation of the Joint Comprehensive Plan of Action (JCPOA) and the fortieth anniversary of the Islamic Republic, the era of hope ushered in by the election of Hassan Rouhani and the implementation of the nuclear deal seems a lifetime ago. Iran remains in compliance with the agreement, but begrudgingly. Europe looks impotent in the face of U.S. sanctions. Russia and China are demonstrating the contingent nature of their commitments to Iran as both seek to extract concessions in return for providing an economic lifeline.

There was a time when Iranians could look forward to the promise of sanctions relief. But the experience of sanctions relief under the JCPOA has been sobering. When the relief finally comes again, Iranians now know not to expect a dramatic rebound. On one hand, the political and economic machinery of U.S. sanctions means they are incredibly difficult to roll back given the myriad ways in which lingering stigma and the whims of a new administration can combine to undercut the relief.

On the other hand, looking beyond sanctions, the political and economic machinery of the Islamic Republic is too developed for policy to produce anything more than marginal improvements in outcomes. The path to prosperity requires the thousands of incremental steps that allow marginal gains to become substantial. The challenge of incrementalism is that taking each step continues to require significant political capital, even as gains diminish in absolute terms. Governments need to be politically dominant to achieve even modest economic and social victories, and policymakers can hardly afford to make mistakes.

This is the dilemma facing all middle-income countries, once labeled “emerging markets,” whose high growth rates were burnished by external finance. Since the global financial crisis, Brazil, Mexico, Russia, Turkey, and South Africa have all failed to achieve more than a few percentage points of economic growth each year, contributing to considerable electoral turmoil and, in turn, illiberal politics. Looking across its peer countries, Iran may be uniquely hampered by “maximum pressure” sanctions, but it is not clear that the absence of sanctions would have seen Iran achieve levels of growth necessary for it to escape the global middle-income doldrums. The deadline for “convergence” has been pushed back.

But this is not to say that the return of sanctions and the attendant recession are unimportant. Marginal changes in a country’s macroeconomic circumstances do correspond to dramatic changes in the fortunes of individuals and households in both good times and bad.

The one-year period between the implementation of the Iran deal and the inauguration of Donald Trump saw the emergence of a “gold rush” mentality in Iran. Although Iranians witnessed improvements in the range of goods and services available to them, the greatest expectations were tied to the idea that in the new period anyone could “strike gold” and achieve a major reversal in their fortunes. Any minor improvements in quality of life were far less important than the possibility of a major uplift.

Today, the same dichotomy between the marginal and major is at play, but now it is the dichotomy between marginal deterioration and major downfall. The IMF has already predicted that Iran could emerge from its new recession as soon as 2020. In the short term, Iran’s government can spend its way out of a contraction, using the same monetary and fiscal tools employed by governments in the aftermath of the financial crisis. But these interventions will matter little for the many households that have already undergone a significant decline. The trajectory of Iran’s economy may reverse in due course, but for the Taymouri family and other middle-class families like them, their personal trajectories have propelled them into a new and embattled reality. The Taymouri family now lives in “a 485-square-foot apartment in one of the city’s worst neighborhoods, next to its sprawling cemetery.” It will be difficult for them to escape the new middle-class doldrums.

The fate of Iran’s middle class is directly tied to that of its private sector. The growth of Iran’s private-sector companies over the last 20 years, catering to the burgeoning consumer tastes of the middle class, has been the subject of continual lip service in the government’s economic plans. But in practice, entrepreneurs have had to fight entrenched interests and a stifling bureaucracy in order to carve out a more modern and efficient corner of the economy.

On the back of the sanctions relief afforded by the nuclear deal, the private sector was poised to take its place at the center of Iran’s economy. A spate of new contracts struck with foreign partners saw privately owned enterprises cross the threshold in the energy, automotive, and telecommunications sectors, long the domains of Iran’s state-owned firms. Across Iran’s political establishment, calls were being made to curtail state control of the economy in order to boost Iran’s appeal to foreign investors.

Today, European governments are struggling to protect their own private-sector companies from the impact of US secondary sanctions. On one hand, given a deep ideological commitment to liberal markets, European governments are loath to pressure their companies and banks to continue working in Iran. Moreover, as evidenced by the lack of implementation of the blocking regulation, European governments cannot even compel their businesses and banks to provide basic services to those few European companies that do wish to maintain commercial activities in Iran. As foreign partners flee Iran and the private sector reels, major contracts are once again going to groups such as the Revolutionary Guard. In this way, the considerable power European private-sector firms wield over their governments will condemn Iranian private-sector companies to remain beholden to the state.

Europe’s struggle to maintain commercial ties with Iran has inspired calls for greater “economic sovereignty.” France, Germany, and the UK are developing a state-owned special purpose vehicle to facilitate trade with Iran. The mechanism represents the kind of trade intermediary more common in the 1960s, before Europe had cast aside statist approaches to economic development. In recent decades, because of market liberalization, Europe has separated economic power from state power. Increasingly, European governments are reckoning with the political limits of their unified economic model, which leverages little more than the slim technological advantage and brand power of European products. Meanwhile, the United States is continuing to wield powerful sanctions, exposing how the financialization of the global economy has dramatically increased U.S. state power despite the appeals to free-market mantras. As Bruno Maçães has compellingly argued, after flirting with liberalization, Russia and China have reaffirmed the ultimate importance of economy as a tool of state power. Russia is advancing its vision for a Eurasian Economic Union. China is spending billions on its Belt and Road projects.

Iran is perhaps the only country in the world where all four of these distinct economic agendas currently clash and compete. So far, it is not clear which model will prevail. Cognizant that Iran has been starved of the investment its unique geography and large population warrant, Iranian officials debate whether their economic planning should face “East” or “West,” as though the orientation of Iran’s own economic planning will suffice to break the deadlock. But in fact, Iran faces domestic economic challenges that are also global economic realities. The “economic war” in which Iran finds itself is larger than the Iranian leadership or Iranian people may realize.

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Esfandyar Batmanghelidj

Esfandyar has spent the last 5 years working on projects related to "business diplomacy" between the West and Iran. He is the founder of the Europe-Iran Forum, the leading annual gathering for business, government and civil society leaders committed to Iran's economic development, and the executive editor Bourse & Bazaar, a digital business publication with a focus on Iran. He is a graduate of Columbia University.

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