Relations Between France and Iran in the Biden Era

The French government has welcomed the election of new US President Joe Biden, who disapproves of former President Donald Trump’s withdrawal from the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), and has confirmed his desire to return to it. France, like the rest of Europe, is mostly pleased by Biden’s declared intent to rebuild transatlantic relations and consult European allies on Iranian matters, as well as on other regional tensions. Biden’s early steps to rejoin the Paris Agreement, the World Trade Organization and the World Health Organization confirm that he is following through on his campaign promises: that the United States is back and that it will play the multilateralism role, consulting allies and partners and ending the previous administration’s abrasive practices.

Against this backdrop, France, together with Germany and the United Kingdom—the E3 parties to the nuclear agreement—is facing several challenges with both Tehran and Washington. Paris seeks a clear understanding of Washington’s true intentions with Tehran, whilst also needing to realistically assess Iran’s posture and develop a European-wide vision for relations with Iran.

An Enduring Hawkishness

France’s current approach to Iran can be traced back to former President Nicolas Sarkozy, who introduced a new Middle East policy based on neoconservative intellectual visions shaped by a team of strategists nicknamed “The Sect” and led by the late Thérèse Delpech. Paris not only maintained its hawkish approach under François Hollande as president and Laurent Fabius as foreign minister, but it also hardened this approach during the painstaking negotiations leading to the Iran nuclear deal in 2015. At a series of tense meetings, Fabius endlessly added complexity to talks, claiming that US negotiators were naive and ready to make undue concessions to Iran while neglecting critical safeguarding details. The French felt that former US Secretary of State John Kerry and Iranian foreign minister Mohammad Javad Zarif were poised to strike a hurried, weak deal without taking France’s expert guidelines into consideration. Fabius nearly killed the negotiations.

Fabius and other members of The Sect also sympathised with Israeli Prime Minister Benjamin Netanyahu and included some Israeli priorities within French positions. Saudi Arabia has become a growing consumer of French weapons and Riyadh’s views were likewise taken into account, and Saudi pressures to prevent or slow Iran’s nuclear capacity have been considered. Some in France hoped for more pragmatic behaviour when Emmanuel Macron became president, but the new foreign affairs minister, Jean-Yves Le Drian, who previously worked as the defence minister, is the guardian of the hawkish line.

Macron occasionally distances himself from his more hawkish advisers. He opposed ousting Syrian President Bashar al-Assad by force before a political solution could be reached, and Macron has stated that he wants an end to a neocon policy. Macron showed his independent streak when he invited Zarif to the 2019 G7 Summit in Biarritz, bringing a four-point plan to Trump and genuinely attempting to arrange a phone conversation between the US president and Iranian President Hassan Rouhani on the sidelines of the UN general assembly later in the year. The conversation did not end up happening because Trump did not take the opportunity and Rouhani did not have the necessary political support. But the facilitation efforts were sincere and significant.

Short-Term Gains but Long-Term Costs?

French officials have repeatedly stated that they want to see the JCPOA survive. But their messages can appear to contradict that mission. In a phone call on Tuesday, Macron told Rouhani that Iran must make “clear gestures” to revive the nuclear deal. In an interview last month with the French weekly newspaper Journal du Dimanche, Le Drian said that tough discussions on ballistic proliferation and regional destabilisation by Iran will be necessary in the course of new negotiations. While the content of the message does not differ much from that set out by the Biden administration, the tone is more aggressive—an ultimatum rather than an offer to negotiate. Unsurprisingly, Iranian responses were harsh, but France’s top diplomats do not seem to understand—or do not want to understand—that posing diktats to a nationalist state is a big miscalculation.

Another miscalculation was made when Macron participated in an interview hosted by the Atlantic Council on February 4. Macron stated that Iran is closer to the atomic bomb now than before the 2015 agreement, that concerns about ballistic missiles, and the new negotiations should be global and inclusive—including even Saudi Arabia and Israel.

Macron added that the nuclear agreement cannot work if regional governments are not satisfied, but his vision of potential Saudi and Israeli involvement in the future of JCPOA is ambiguous. Is the involvement limited to consulting these “partners,” or will they be invited to the negotiation table? Biden will likely consult his regional partners without inviting them to the negotiation room—Washington is under no illusions as to the impact such a move would have. Officially inviting the Saudis and Israelis to be consulted is itself an affront to Iran. Unsurprisingly, Saeed Khatibzadeh, the spokesperson of the Iranian foreign ministry, immediately rejected the idea of new participants in nuclear deal talks after Macron’s comments were publicised.

Categoric opposition from Tehran was certain, so why did Macron make such a statement? According to Al-Quds Al-Arabi, a pan-Arab newspaper, the French president is set to visit the Saudi capital of Riyadh soon and may discuss the Iranian nuclear program with King Salman and Crown Prince Mohammed bin Salman. This will certainly please the Saudis, who will appreciate receiving France’s political support, but the Iranians see this move as deliberately provocative. On 9 February, François Nicoullaud, a highly respected expert and France’s former ambassador to Iran, commented on Macron’s proposals, saying that the mediator’s job is listening to and exploring opinions from both sides and then developing a step-by-step solution in a manner that’s as neutral as possible and that’s acceptable to everyone. Al-Quds Al-Arabi reports that talks would include reinforcing bilateral cooperation, notably military. If this is true, it might indicate that Paris is seeking advantages from Biden’s intention to review US military cooperation and weapons deliveries to the Saudis. France is likely to see this as an opportunity for juicier military contracts.

France’s flirtation with Saudi Arabia undermines its bilateral relations with Iran, depriving Macron of his claimed ambition of being a major facilitator of a “demanding dialogue” between Iran and the United States. During his interview with the Atlantic Council, Macron reiterated the role he is willing to play as a mediator. The French-Saudi alignment, even if France does not agree with all of the Kingdom’s actions and policies, will convince Iran that Paris cannot mediate impartially. If Le Drian distrusts Iran, the reciprocal is also true.

Repairing Bilateral Relations

Bilateral relations are in bad shape, and polite diplomatic language cannot hide the cracks. But it is not too late for a fix. The priority now is to safeguard the possibility of an orchestrated return to the JCPOA. Zarif has suggested that Josep Borrell, the European Union’s High Representative, could “choreograph the actions that need to be taken” by the United States and Iran. Here, France might play a role by showing that as a de facto leader of the E3, it can lend visible support to such an initiative. Macron would have the opportunity to implement its “honest broker” status. Another issue might allow France to gain credibility not only with Tehran but also with other Europeans. The Instrument in Support of Trade Exchanges (INSTEX), which facilitates transactions for European trade with Iran despite limitations in direct banking channels, deserves more attention. France, joined by other Europeans, should press Biden to quietly bless the operation of INSTEX. If France, supported by other EU member states, manages to persuade Biden to make such a step, the impact on bilateral trade between France and Iran could help repair some of the lost bilateral trust.

On regional issues, France should use its influence on Saudi Arabia, Iraq, Qatar and the United Arab Emirates to encourage direct dialogue with Iran. Paris could make suggestions both on confidence-building measures and on the practical steps for a dialogue with Iran on regional concerns, such as ballistic missile proliferation, and particularly Yemen, working in coordination with the UN envoy. First, France should try sharing these views and reactions with Tehran, and later it could present new ideas on a future region-wide security system. Excluding talks on nuclear issues would be more palatable to Tehran, unless all participants, including Saudi Arabia and Israel, start negotiating on regional denuclearisation. However, this move will likely not be seen enthusiastically by all.

France can have a fresh start with Iran, but it will take time, prudence, and humility. France’s policies towards Iran must use strategic criteria when assessing the field and devising a policy. Professional advice from governmental departments and agencies as well as from external experts, including the business sector, should not be neglected, and lessons must be drawn from past mistakes.

Photo: Wikicommons

Reviving the Nuclear Deal Gives the U.S. More Leverage Over Iran

By Mahsa Rouhi

As officials in Washington consider returning to the 2015 Iran nuclear deal, much of the debate has centered on whether the U.S. government will lose leverage. Some experts and officials argue that if the Biden administration rejoins the deal—also known as the Joint Comprehensive Plan of Action (JCPOA)—the United States will squander the leverage built in recent years through former President Donald Trump’s maximum pressure strategy.

While U.S. sanctions have caused Iran’s economy major challenges and limited Iran’s access to financial resources, they have not succeeded in changing Tehran’s behavior regarding its nuclear program. Indeed, Iran has not offered additional concessions. Instead, it has engaged in its own leverage-building strategy by ramping up its nuclear activities, missile program, and regional activities. Iran is not only closer to having the capacity to build a bomb, but even the political discourse of key officials on whether to cross that threshold has been shifting.

Leverage is only meaningful if it can be effectively used to produce desired policy outcomes. Continuing to build leverage merely for the sake of inflicting pain or adding pressure is neither an effective nor sustainable negotiating strategy. It leads to a vicious cycle of chasing a perfect deal that does not exist and ignoring the opportunities for incremental progress as Iran inches closer to a nuclear weapons capability. By reviving the nuclear accord, the U.S. government will not squander any sanctions leverage, but if it plays its cards wisely, it could enhance its position for follow-on negotiations on Iran’s nuclear program and regional activities.

In response to the maximum pressure effort, Tehran sought to increase its own leverage. Iran’s Islamic Revolutionary Guard Corps (IRGC) has ramped up its naval military operations in the Persian Gulf, targeting maritime trade routes through the Strait of Hormuz to signal its ability to harm U.S. interests and those of its allies. The most recent example was in early January when the IRGC seized a South Korean-flagged vessel most likely in reaction to the $7 billion in Iranian funds frozen in compliance with U.S. sanctions.

Iran has increased its nuclear activities to bring it closer to having the capacity to build a nuclear weapon if it chooses to do so. Iranian officials indicated in January that they would expand their nuclear program by resuming uranium enrichment to a 20 percent level, which is much higher than the low-level 3.67 percent limit set by the 2015 deal. Furthermore, to minimize the impact of sanctions and U.S. leverage, Iran has focused on investing in a resistance economy infrastructure to diversify the economy in ways that it will be more inward-looking and less reliant on foreign trade, particularly with the West. Today, Iran is nowhere near the brink of collapse. The country, rather, is projected to see an economic recovery in 2021.

The United States should swiftly attempt a clean return to the deal with a compliance-for-compliance approach because it can stop Iran’s quickly-growing nuclear program in its tracks. This move would not undermine U.S. leverage but rather enhance it. It would allow the United States to stop the ticking clock on Iran’s nuclear advancements, mitigate the possibility of a military confrontation between Iran and Israel or the United States, and restore multilateral diplomatic efforts. More importantly, returning to the deal would allow more time for follow-on agreements on regional issues and other areas of contention. These issues are critical to the security interests of the United States and its regional partners, and Tehran is unlikely to engage in any talks on these issues unless the JCPOA is restored.

An important component of U.S. leverage is sanctions relief. With both sides committed to compliance, lifting sanctions on Iran will not give Tehran an overnight economic boost strong enough to disincentivize further negotiations or to fund its destabilizing regional activities as some fear. Non-JCPOA-related sanctions will remain in place, and even with the JCPOA-related sanctions lifted on paper, the practical side of operationalizing trade and transactions will not be swift. Iran would only begin a slow process of economic recovery. But relief will give the United States the upper hand at the negotiating table, exchanging more immediate economic incentives for additional concessions.

Should Iran violate the deal, the U.S. government can reimpose sanctions not only with the support of Europe but also potentially from China and Russia. These other parties to the original deal all share a common interest: preventing Iran from having a nuclear weapons capability. The common interest of global nonproliferation is what created this coalition in the first place. If Iran crosses the red line on its capabilities, these countries have an inherent interest in applying pressure to pursue their own nonproliferation objectives, and a multilateral response to any violation is much more likely with a U.S. return to the deal than if Washington stays out.

The threat of reimposing sanctions is stronger today than it was four years ago. While the maximum pressure strategy failed to produce Washington’s desired policy outcomes, it showcased the power of U.S. unilateral sanctions despite international opposition. The dire consequences of isolation when facing U.S. sanctions have become crystal clear to most Iranians.

Iranian President Hassan Rouhani is under pressure both from hard-line factions and due to growing public dissatisfaction with the country’s economic challenges. He needs to secure at least the start of a process to revive the JCPOA in the coming weeks. There is a growing perception among Tehran’s political elite that the best strategy to push the United States to end the maximum pressure campaign is to present it with the choice between an unresolved confrontation escalating to war and a nuclear-capable Iran.

The assumption is that Tehran can take advantage of Washington’s reluctance to engage in military confrontation to advance its political agenda—and that it can do so by pushing the limits on its nuclear program and regional activities to a point where the U.S. government has to choose between accepting an Iran with a nuclear weapons capability and a military strike against Iran—both of which are anathema to the Biden administration.

Leaders in Tehran assume that the unattractiveness of the alternatives can make Washington conclude that time is not on its side to continue its pressure campaign through sanctions and will need to take action quickly to revive the agreement.

Iran’s brinkmanship could invite military confrontation over its nuclear program as Israel is threatening. Iranian hard-liners are overly confident about their nuclear leverage and the long-term sustainability of the resistance economy. Iran’s resistance economy faces serious challenges: There is increasing internal dissatisfaction with the pace of economic growth that is turning into political pressure. As Iran struggles to manage the pandemic, its “pre-purchase” of nearly 17 million COVID-19 vaccines from the vaccine-sharing facility COVAX had reportedly been delayed due to U.S. financial sanctions.

But maintaining this stance will come at a dire cost of domestic dissatisfaction and delayed economic development. Expanding nuclear and military activities could also endanger the political support still provided by Russia and China. Thus, by hanging on to what it perceives as leverage, Iran risks squandering a unique opportunity to reach an agreement with a U.S. administration that has signaled its willingness to engage diplomatically with Iran and is in a unique position to deliver on that.

For the Rouhani administration to be able to convince the hard-liners to reverse the steps on nuclear advancement and return to compliance with the agreement, it will need to kick-start the process of returning to the deal within the next few weeks. If there is no clear prospect of reviving the accord, then the Rouhani administration may take more drastic measures, such as halting international nuclear inspections, in a show of strength to political opponents prior to the presidential elections in June, which Rouhani will lose if he doesn’t revive the deal. Already, inspections are set to be scaled back if the United States does not return to the deal by February 21 in order to signal the time pressure on the government in Tehran.

A return to the deal would not jeopardize U.S. leverage; it would bolster it for future negotiations. Continuing to focus on holding on to leverage and adding pressure simply to inflict pain will continue to lead to the same results—namely, a lack of progress on key policy objectives. Meanwhile, it will squander the opportunity for diplomatic outreach that could rein in Iran’s nuclear weapons program.

By returning to the deal, the United States would both retain the leverage it has built by demonstrating the devastating economic effects of its unilateral sanctions and use its leverage through sustained diplomacy and multilateral efforts to produce more desirable policy outcomes. Restoring the deal would also put the Biden administration in a much stronger position moving forward to negotiate a follow-on agreement that addresses other issues and concerns, such as Iran’s missile program and destabilizing activities abroad in a regional forum.

Four decades of sanctions and the history of U.S. and European negotiations with Iran indicate that it has only pushed back on pressure by doubling down on its nuclear program and regional proxies. It has only accepted and complied with clearly defined and desirable concessions through an agreed framework such as the 2015 deal. After four years of failure to coerce Iran into changing any policies for the better, it is time for Washington to rethink how to employ leverage effectively.

The analysis and conclusions presented here are based on individual research and do not necessarily represent the policies or perspectives of National Defense University, the U.S. Defense Department, or the U.S. government.

Mahsa Rouhi is a research fellow at the National Defense University’s Institute for National Strategic Studies. She is also an associate with the Project on Managing the Atom at the Harvard Kennedy School's Belfer Center for Science and International Affairs. Follow her at @MahsaRouhi.

Photo: IRNA

How Biden Can Stop Iran’s Conservatives From Undermining the Nuclear Deal

By Saheb Sadeghi

U.S. President-elect Joe Biden has so far spoken sparingly on Iran, including an op-ed on the CNN website and in an interview with the New York Times. As part of a step-by-step strategy, he has said that he would return to the nuclear deal as the first step and then address other concerns about Iran’s regional influence and missile capabilities. But how will the Iranian government react to the United States’ demand that the regional issues and the missile capabilities should be part of the negotiation?

There are two different approaches in Iran to handling comprehensive negotiations with the United States.

There is broad consensus within the Iranian establishment that Iran will not make any concessions regarding its deterrence and defense strategy.

Iran has traditionally used a deterrent strategy to strengthen its national security and defend its territorial integrity in recent years. This strategy has two prongs. The first is strengthening and supporting regional allies and militant movements in Lebanon, Iraq, Syria, Yemen, and elsewhere; the second is enhancing its missile capabilities and building and testing short- and long-range missiles, as well as ballistic missiles.

This strategy has expanded since the U.S.-led wars in Iraq and Afghanistan, which brought hundreds of thousands of U.S. troops into the region just a few miles from Iran’s eastern and western borders, dramatically increasing the risk of an imminent military strike on Iranian territory. Tehran has pointed to security threats in its vicinity and the fact that it is not a member of any regional military coalitions as the reasons it needs to develop missile capabilities and expand its influence in the Islamic countries in the Middle Eastern region.

Despite this general consensus on deterrence strategy, the Iranian government’s approach to Biden’s call for comprehensive negotiations can be divided into two camps.

The first group is made up of conservatives, who recently gained an absolute majority earlier this year in parliamentary elections and are expected to win the next presidential election. The conservatives strongly reject any talks with the United States on non-nuclear issues and their position has been further strengthened by the assassinations of the commander Gen. Qassem Suleimani in early 2020 and more recently the prominent nuclear scientist Mohsen Fakhrizadeh.

In their view, these assassinations were an attempt by Iran’s enemies to paralyze Iran’s deterrence, and now is the time to revive this deterrence, rather than negotiate. Reflecting this view, Saeed Jalili, a senior member of Iran’s Supreme National Security Council (SNSC) and the former nuclear negotiator during the presidency of Mahmoud Ahmadinejad, harshly criticized President Hassan Rouhani for discussing the missile issue with French President Emmanuel Macron in a telephone conversation. (He called for the refusal of such talks on the part of Rouhani, declaring that non-nuclear talks are prohibited and unacceptable.)

Conservatives believe that just as the West sought to limit Iran’s nuclear capabilities in past nuclear talks with the country, any negotiations on missile and regional issues would inflict a crushing blow to Iran’s national security. The hardline speaker of the parliament, Mohammad Baqer Qalibaf, recently said, “Negotiations with the United States are absolutely harmful and forbidden.” During Ahmadinejad’s presidency, when conservatives were in power, the world witnessed six years of fruitless negotiations between Iran and the West from 2008 to 2014, and this trend could repeat itself if the conservatives win the next presidential election.

The other group is made up of pragmatists and moderates who, despite emphasizing the need to strengthen Iran’s deterrence strategy, do not see non-nuclear negotiations as a threat to Iran’s national interests. Even so, they will not accept that the implementation of the nuclear agreement should be conditional on regional and missile negotiations.

In their view, if Biden’s foreign policy team focuses on the alleged need for so-called Middle East security and arms control talks instead of insisting on countering Iran’s regional influence and the need for limiting and disarming its missiles, it will be possible to reach an agreement between Iran and the West with the cooperation of countries in the region.

To them, when “countering Iran’s regional influence and its missiles,” is on the U.S. agenda, it means an aggressive approach toward Iran that does not consider the country’s legitimate security concerns. Such an approach will not be effective as the Iranians have shown with their resilience in the face of unprecedented U.S. sanctions, resulting from outgoing President Donald Trump’s maximum-pressure campaign.

The pragmatists believe that Iran’s missile policy is entirely defensive and deterrent in nature; Tehran has already stated that its missiles’ range will not exceed 2,000 kilometers (1,240 miles) while some Arab states in the region such Saudi Arabia have purchased missiles with a range of 5,000 kilometers (3,100 miles).

The pragmatists believe that in potential future region-wide negotiations, if pressure is put on Iran to limit its missile capabilities, Iran could rightfully bring up the issues of Saudi Arabia’s missiles, Israel’s nuclear warheads, and modern arms purchases by the Persian Gulf states as a justification for its insistence on keeping its own missile capabilities. The purchase of F-35 fighter jets by the UAE and Israeli nuclear weapons could be on the agenda of the possible future talks, which will give Iran the upper hand in those negotiations.

In such a situation, the United States and regional actors must decide whether to move toward a broader arms-control process in the Middle East or to recognize Iran’s right to have a missile capability. The pragmatists think that there should not be any fear of negotiation; instead, they argue that the opportunity of negotiations should be used to consolidate Iran’s regional and defense achievements. They see Biden’s victory as an opportunity to resolve Iran’s regional and international problems and see his approach to solving the Middle East’s problems as balanced in contrast to Trump’s.

This pragmatists’ view is even more relevant given Biden’s talk about reconsidering the U.S. position on Saudi Arabia. During his presidential campaign, he vowed to reassess the U.S. relationship with the Saudis and put an end to U.S. support for Saudi Arabia’s war in Yemen.

The pragmatists argue that former President Barack Obama was moving in that direction, and now Biden could step into Obama’s shoes and continue along that unfinished path. In an interview with the Atlantic in May 2015, Obama emphasized that an approach that rewards Arab allies while presenting Iran as the source of all regional problems would mean continuing sectarian strife in the region. Obama stressed that Saudi Arabia had to learn to share the Middle East region with its sworn enemy, Iran.

Biden’s pick for national security advisor, Jake Sullivan, said in a lengthy interview with The Center for Strategic and International Studies that the Biden administration will stop Trump’s maximum pressure campaign against Iran and would not hold the nuclear deal hostage for regional and missile talks, but by returning to deal it would put pressure on regional actors—including Iran and Saudi Arabia—to undertake regional talks. He also said that the United States will hand over these negotiations to regional countries and will not take the lead. Such a position aligns with Iranian Foreign Minister Mohammad Javad Zarif’s recent statement reiterating Iran’s readiness to hold talks with countries in the region on security and stability in the Middle East.

Even China’s foreign minister has recently called for Middle East security talks. Russian Foreign Minister Sergei Lavrov recently reiterated Putin’s proposal for talks between the U.N. Security Council permanent members and Iran to establish a collective security order in the Persian Gulf.

Iran’s readiness to use the influence it enjoys over the Houthis to end the Yemeni war—which Biden has insisted on and which lies at the core of Saudi Arabia’s national interests and security—seems to be a golden starting point. Iran can persuade its Yemeni allies to sign a peace agreement with Saudi Arabia.

However, there are serious barriers to regional and missile negotiations, the resolution of which will depend on the approach of the Biden foreign policy team. The atmosphere of mistrust between Iran and the United States, influenced by Trump’s maximum-pressure campaign and the assassinations of Suleimani and Fakhrizadeh, is the primary obstacle.

The second obstacle is the short period that Rouhani is still in office. With Biden taking office on Jan. 20, 2021, the two countries have only five months before Iran’s upcoming presidential election to revive the nuclear deal and work on other issues.

If the Biden administration’s plans to revive the JCPOA and lift sanctions do not go ahead as predicted, the two sides will be in serious trouble in early February, when the deadline included in a bill pushed by hardliners as an intentional spoiler and recently passed in the Iranian parliament expires.

Iran’s parliament has given European countries and the United States two months to lift sanctions. The Rouhani administration has expressed its opposition to the bill, describing it harmful to diplomatic efforts. However, because it has become law, they cannot prevent it from being enforced. Zarif has said the government will be forced to implement the law, according to which Iran will abandon almost all its nuclear obligations.

If such a law is implemented, it is possible that the JCPOA—which has survived four years of Trump administration’s immense pressure—would die in the first month of Biden’s presidency. Biden could lift the sanctions that were suspended by the nuclear deal with several executive orders, and then, as Rouhani recently announced, Iran will return to its nuclear obligations.

Saheb Sadeghi is a columnist and foreign-policy analyst on Iran and the Middle East. Follow him at @sahebsadeghi.

Photo: Wikicommons

The Optimistic Case for Biden and Iran

“It’s over.”

So reads the November 8 headline of Hamshahri, one of the leading newspapers in Iran. The past four years have been brutal for ordinary Iranians. The Trump administration waged an economic war on Iran that exacerbated the political and social tensions endemic to the country. Iranians are hoping that the election of Joe Biden and Kamala Harris will enable a return to the optimism they experienced in the short period between the implementation of the Joint Comprehensive Plan of Action (JCPOA) in January 2016 and the dismaying election of Donald Trump in November of the same year.

In a CNN op-ed published in September, Biden made clear his intention to “rejoin the [JPCOA] as a starting point for follow-on negotiations” so long as “Iran returns to strict compliance with the nuclear deal.” Here, Biden is accepting the basic premise of “compliance-for-compliance.” In response to Trump’s withdrawal from the nuclear deal, Iran has reduced its own commitments to the deal, particularly by increasing its levels of uranium enrichment beyond what is permitted by the JCPOA. These moves, which have dismayed the remaining parties to the agreement—France, Germany, the United Kingdom, Russia, and China—are nonetheless perceived as tactical and reversible. The administration of Iranian president Hassan Rouhani remains committed to the JCPOA and appears ready to welcome the U.S. back into the deal so long as the U.S. policymakers accept “to be held responsible for damages” caused to “the people of Iran” as a result of Trump’s withdrawal, while also providing “guarantees” that such an event would not be repeated. Notably, Iranian foreign minister Javad Zarif has described the stance of the Biden administration as “promising.”  

Despite these encouraging statements by both the Biden camp and officials in the Rouhani administration, there is a remarkable degree of pessimism surrounding the prospect of a U.S. reentry to the JCPOA. These assessments highlight pressure, particularly from U.S. allies in the Middle East, to build on the nuclear deal and achieve diplomatic breakthroughs on issues such as regional security and Iran’s missile program. They also point to the ascendency of Iran’s hardliners, a loose coalition of politicians who savaged Rouhani and his moderate bloc as the nuclear deal faltered. The vocal anti-Americanism of these conservative politicians and their labeling of figures such as Rouhani and Zarif as either naïve or knowing traitors, has furnished dire predictions for the future of U.S.-Iran diplomacy under the hardline president expected to prevail in Iran’s elections next year. 

In a recent piece, Ariane Tabatabai and Henry Rome seek to account for the likely victory of a hardliner president, arguing that “the United States shouldn’t rush to secure a deal in the hopes of shaping Iran’s domestic politics, or for fear that the window of opportunity will close.” They observe astutely that “the new administration shouldn’t assume that without Rouhani, diplomacy wouldn’t stand a chance.” Tabatabai and Rome explain that the next Iranian president “will almost certainly be more conservative,” but note that the decision to engage in diplomacy with the United States will not be the prerogative of this hardline figure. Rather, such decisions require “buy-in from the whole system.” So long as Iran’s national security interests would be advanced by negotiations, it is reasonable to expect a receptiveness to talks, even with the U.S.

According to Tabatabai and Rome, it follows that the new Iranian administration will “have no choice but to negotiate” with the U.S. principally because of the country’s weak economic position. But this assessment likely underestimates the ability of the Iranian economy to limp along under sanctions pressure—even for four or more years. Before the COVID-19 pandemic hit the country, the Iranian economy was already returning to growth despite two years under Trump’s maximum pressure sanctions. High inflation has emerged as the single most significant challenge facing Iranian policymakers, but as the case of Venezuela shows, even the most extreme circumstances of hyperinflation can prove insufficient to coerce policymakers to the negotiating table.

Trump’s national security advisor, Robert O’Brien, recently conceded that the administration was seeing diminishing returns from economic coercion, having imposed “so many sanctions” that there was little pressure to add. This view reflects the assessments of the U.S. intelligence community, which is developing a more sophisticated understanding of the Iranian economy and its adaptability to sanctions pressure. The takeaway is that Trump’s sanctions offer Biden no real leverage on Iran and that it will not be possible to coerce Rouhani nor his successor into talks.

Despite this, Tabatabai and Rome are still correct to claim that Biden will have a shot at diplomacy—a very good one at that. To understand why, it is important to look beyond Trump’s withdrawal from the nuclear deal as the critical political act of the last three years. Far more significant is the fact that Iran remains in the agreement. Sure, Iran has reduced its compliance with key aspects of the deal. But the extraordinary political price paid by the Rouhani administration, spurred by a creditable commitment to diplomacy for its own sake and also by the strategic considerations of the wider Iranian “system,” suggests that understanding the logic of Iran’s persistence with the deal is the key to understanding the prospects for U.S.-Iran talks.  

Back in 2018, on the eve of John Bolton’s appointment to lead the National Security Council, it appeared that the writing was on the wall for the Iran deal. As I wrote at the time, “by any conventional assessment, then, the Iran deal is dead.” Implementation of the deal was already faltering, and Bolton was hellbent on killing the agreement outright. But I foresaw a different outcome, arguing that “the Iran deal cannot be killed” because of a set of “several undeniable truths about Iran and its place in the world.” My argument focused on three structural factors that underpin Iran’s diplomatic engagement: the geopolitical influence of Iran, the demographic and economic drivers of the Iranian policy of engagement, and the fact that the United States has limited leverage because there is no credible or affordable military threat behind diminishing sanctions pressure.  

Each of these structural factors is even more pronounced today. The Islamic Republic is less isolated diplomatically than ever before because it opted to remain in the JCPOA following the U.S. withdrawal. In the face of reduced oil revenues, the Iranian economy is more dependent on economic diversification, including in its trade partnerships. The combination of sanctions overuse and the American public’s calls for a pullback from the Middle East will leave Biden with less scope to coerce or threaten Iran.  

The notion that Iran’s commitment to engagement (and the nuclear deal) is structural was underscored in a November 3 speech by Iran’s Supreme Leader, Ali Khamenei. Addressing the possible impact of U.S. elections on U.S.-Iran relations, Khamenei stated, “We follow a sensible, calculated policy which cannot be affected by changes of personnel.” Many took the statement to be Khamenei’s way of pouring cold water on the prospect of a Biden victory revitalizing the JCPOA. But again, in the Iranian assessment, the deal is not yet dead. The calculated policy to which Khamenei is referring is the policy of keeping the nuclear deal alive in accordance with Iran’s strategic interests.

This structural commitment means that the Biden administration does not need to rush to make a deal with Iran—the window of opportunity will not close when Iran elects a new president next summer. However, that does not mean Biden will not need to make some early gestures to signal the depth of his own commitment to diplomacy. In an excellent report envisioning a roadmap for the Biden administration’s reengagement of Iran, Ilan Goldenberg, Elisa Catalano Ewers, and Kaleigh Thomas, point to the importance of an early “de-escalation” phase, stating that the Biden administration “should start with immediate, modest unilateral confidence-building measures” in order to achieve both compliance-for-compliance on the nuclear file and “calm-for-calm” when it comes to regional tensions.

As Edoardo Saravalle has convincingly argued, the Biden administration can use executive orders to implement its sanctions relief commitments under a compliance-for-compliance framework in under sixty days. These moves can be made tangible by coordinating moves with European allies and international bodies to deliver tangible economic benefits to Iran. For example, this coordination can ensure that sanctions relief enables the unfreezing of foreign exchange reserves and the provision of Iran’s requested COVID-19 relief loan by the International Monetary Fund—moves that would ease inflation, delivering appreciable economic relief for ordinary Iranians. Should the Biden administration choose incentivization over coercion and thereby prove itself a credible counterparty for follow-on negotiations by the time of the Iranian election in the early summer of 2021, it is more than likely that any Iranian president elected—even a so-called hardliner—will take up the mantle of new talks.

The fierce opposition of hardliners to the nuclear deal was far more about the stakes of domestic politics than the terms of the deal itself. Even before talks had concluded, hardline politicians were gripped by anxiety that the successful implementation of the nuclear deal would grant Rouhani, a savvy political operator, a diplomatic and economic triumph that would consolidate the dominance of reformist politics in Iran for a generation. The opposition to the nuclear deal, which extended to efforts to undermine the deal itself, was intended to take Rouhani from the heights of popularity—he won two stunning mandates in high-turnout elections—to the depths of disgrace. The hardliners succeeded in this cynical mission and Rouhani was battered. But tellingly, the nuclear deal, as a product of Iran’s largely apolitical strategic decision-making, has survived.

A hardline president in Iran can be confident of his ability to run the country for an initial four-year term without needing a détente with Biden. The economy will limp along, regional tensions will remain high, and domestic unrest will simmer. But the presidential administration will be able to coordinate with state organs to keep Iran resilient to external and internal pressure—even as the Iranian people continue to suffer from the country’s stagnation.

But what president would choose to preside over a constant slow-moving crisis, particularly one that was not of his own making? For hardliners, 2021 represents an extraordinary political opportunity. For the first time since 1989, Iran and the United States will have first-term presidents at the same time. Meanwhile, Iran’s conservative politicians are increasingly concerned about the political legacy and legitimacy of the Islamic Revolution as it enters its fifth decade. Negotiations with the Biden administration offer Iran’s next president, and his political backers, the opportunity to give to the Iranian people that long-awaited gift—a robust, transformational deal with the world powers, chief among them the United States.   

The impact of Biden’s election on U.S.-Iran relations has been the subject of strategizing for months. Today, what was once a hypothetical has become a reality. The impetus for U.S.-Iran talks arises from both an emergent political opportunity and the unchanged structural factors that push both sides towards engagement. The mechanics and sequencing of an American reentry into the JCPOA remain to be determined, but it will not be harder than when the deal was originally struck, when taboos needed to be broken in Tehran and Washington alike. Much has been learned over the last four years about what it takes to implement an “Iran Deal” successfully. We ought to be optimistic about comes next.

It’s a beginning.

Photo: Wikicommons

Young Candidates Enter Fray for Iran Presidency

With less than a year until Iran’s presidential election, political camps are making preparations for what is expected to be a watershed contest to decide who will succeed moderate president Hassan Rouhani.

The state of Iran’s economy will be the key issue for most Iranian voters, and by extension, there will be a fierce debate among hardline camps, which now control the parliament and the judiciary, as to whether the country should continue the pro-engagement politics introduced by Rouhani and his political allies following the 2013 election.

But alongside this political debate, another question has emerged—whether it is time for younger candidates to come to the fore.

“I have stressed time and again that I do believe in a young and religiously committed administration,” said Supreme Leader Ali Khamenei in a May 17 virtual meeting with representatives of student unions.

Khamenei, however, made it clear that the notion of a young government does not mean electing a president who is “say 32 years old.” Rather, Khamenei called for “an administration … within an age range capable of working hard, one that is not fatigued.”

The supreme leader’s speech has spurred new names to be added to the already long list of candidates expected to run for president. Iranian media have touted three rising figures who may be aiming to succeed Rouhani.

Topping the list of young candidates is Mohammad Javad Azari Jahromi, the country’s 39-year-old minister communications minister, who has positioned himself as a progressive technocrat. Jahromi has sought to earn the trust of younger Iranians by seeking to make his ministry more transparent and by vowing to protect access to social media platforms such as Instagram.

 “Let them rest easy that I will not run for president,” Jahromi told reporters when asked whether his push for transparency was a stunt to gain popularity ahead of the election. Of course, Iranian politicians typically deny their ambitions for as long as possible, and Jahromi’s statements have not put an end to speculation that he is planning to run.

Another young would-be candidate is Sorena Sattari, the Rouhani administration’s Vice President for Science and Technology. The son of a late air force commander, Sattari is seen as someone who maintains ties on both ends of the Iranian political spectrum. Trained as a mechanical engineer, he is understood to maintain strong ties to the supreme leader’s office. But he is also seen as forward-looking and has won praise for his relentless support of the country’s start-up ecosystem, hardly a bastion of conservatism.

Sensing that a generational shift is underway in Iranian politics, conservative camps have also sought to elevate younger politicians. Now 40 years old, Mehrdad Bazrpash, began his political career at the age of 25 and has been ruthless in his criticism of the Rouhani administration, especially with regards to the state of the economy and efforts to normalize ties with the West.

But for all the appeals of youth, the old guard is not ready to step aside just yet. Within the reformist-moderate bloc that supported President Rouhani, debate continues about the candidacy of former parliament speaker Ali Larijani, one of the most powerful politicians in the history of the Islamic Republic, who underwent a transformation over the last decade from a conservative firebrand to a moderate figurehead. Rouhani owes much of the internal backing for the nuclear deal to Larijani.

Still, reformists remain divided about Larijani and his loyalties.  “The Reformists will not resort to a proxy candidate,” said Hamid-Reza Jalaeepour, a key voice in reformist circles. But other leading reformists, including Mohammad Atrianfar, consider Larijani the only viable candidate to continue the political project Rouhani began. In a recent interview, Atrianfar argued that Larijani had “significantly distanced himself from the hardline conservatives in recent years and insists on maintaining this distance.”

Parviz Fattah, an IRGC member and the head of the Mostazafan Foundation, one of the country’s largest bonyads, or charitable endowments, has also been touted as an attractive presidential candidate in hardliner circles. Fattah is seen as someone who, if not young himself, may be able to galvanize conservative-minded youth through his uncompromising ideological outlook.

With the economy looming large in the minds of voters, a theme of technocratic competence has also emerged much like the theme of youth. There is growing speculation that the governor of Iran’s central bank, Abdolnasser Hemmati, could come forward as a candidate, allowing the reformists and moderates to avoid some of the internecine tensions that would surround a Larijani candidacy. Hemmati’s performance at Iran’s central bank has not been without controversy, with some questioning his heavy-handed approach to the country’s turbulent foreign exchange markets. But he is broadly seen as someone who has reinstated the relative independence of Iran’s central bank, instituting policies that have eased some of the impacts of U.S. secondary sanctions.

In a similar vein, Mohammad Bagher Nobakht, the head of the country’s Plan and Budget Organization and a longstanding figure in Iranian economic policy, has fueled speculation about his own candidacy after several trips to Iranian provinces, which included campaign-style posters and press conferences. Nobakht has, nevertheless, dismissed speculation of his candidacy as “unfounded.”

But if the reformists and moderates are to recapture some of the enthusiasm that thrust Hassan Rouhani to two landslide election victories, charisma may be key. Hossein Kanani-Moghaddam, founder of the center-right Green Party of Iran, has suggested that the greatest hope for those wishing to preserve the political project begun under Rouhani comes in the form of Hassan Khomeini, the grandson of Ayatollah Rouhollah Khomeini, the founder of the Islamic Republic. The 47-year-old cleric is a close ally of the spiritual leader of the reform movement, Mohammad Khatami, but has largely stayed away from the political scene and has declined calls to run in past presidential elections. 

Whomever the reformists and moderates put forth, the most difficult hurdle will be the vetting process carried out by the Guardian Council, a body dominated by conservative clerics. In a worrying sign, the council purged the majority of pro-reform candidates ahead of the February parliamentary vote, a move which contributed to the lowest turnout in any major election since the founding of the Islamic Republic.

Akbar Torkan, a veteran moderate politician and a former senior aide to Rouhani, believes that the presidential election will have much in common with the parliamentary polls, warning that the Guardian Council will “select the candidates on their own just to have the public approve them at the ballot box.”

Outspoken political scientist Sadegh Zibakalam has made an even more pessimistic predication, arguing that the “reform movement is over.” In his view, those who voted for Rouhani in 2017 have become disillusioned, contributing to low turnout.  “It’s not about names, even someone like Khatami cannot garner votes,” he said of the dwindling popularity of the reformist camp.

Zibakalam believes that a low-turnout election will favor a hardline figure who can mobilize his base, perhaps even Mahmoud Ahmadinejad, the controversial former president who refused to rule out plans for his candidacy in a recent interview. Ahmadinejad, who has cultivated a populist image by focusing on the grievances of Iran’s lower classes, has already begun touring the country, mustering large crowds that give credence to Zibakalam’s warnings.

Ahmadinejad was barred by the Guardian Council from the 2017 presidential race. But he is reportedly engaged in behind-the-scene talks with the vetting body to get the green-light for next year’s election “An Ahmadinejad candidacy could disrupt all the calculations,” said prominent conservative politician Morteza Talaee, noting that the ex-president technically belongs to no major camp after breaking away from the hardliners, who once supported him unequivocally.

Ahmadinejad’s national profile is matched by just a few other potential candidates—prominent political figures who continued to eye the presidency after failed bids.

Former Tehran mayor, Mohammad Bagher Ghalibaf, who was named the new parliament speaker in June, has failed to become president in 2005, 2013, and 2017. In recent years, Ghalibaf has cast himself as a conservative stalwart in an attempt to galvanize the new generation of “revolutionary” youth behind his leadership.

Chief Justice Ibrahim Raisi, who came second to Rouhani in the 2017 election is also expected by many pundits to be considering a second run. But another election defeat would dent Raisi’s hopes of becoming the country’s next supreme leader and he may wish to focus on the ambitious anti-corruption drive widely seen as a gambit to increase his chances of succeeding Khamanei.

Finally, Mohsen Rezaee, a former commander of the Islamic Revolutionary Guard Corps, who has already had three failed bids for the presidency, appears to be warming up for another fight. As a proponent of “resistance economy”, Rezaee has recently sharpened his attacks against the Rouhani government’s economic performance, including a slogan-like tweet issued last week. “I can give our people assurances that by pushing aside the pro-Americans from power … our national currency will become the strongest in the entire region,” Rezaee declared.

Iranian voters have a long wait to see who will appear on their ballots. But the crowded field makes it clear that Iran is set to have a watershed election, one that will combine a likely shift away from progressive reformism with the potential emergence of a new generation of political leaders.

Photo: Various

Why Hassan Rouhani Ended Iran’s Lockdown

By Saheb Sadeghi

As businesses resume their activities in Iran at the behest of President Hassan Rouhani, many experts have criticized the government’s decision and warned of a second wave of the coronavirus outbreak. Some even have accused Rouhani of favoring the economy over the health of the people.

According to the latest official figures, there are more than 95,000 confirmed coronavirus cases in Iran, and the death toll has exceeded 6,000.

On April 22, Rouhani described the reopening of businesses as “a necessity for the country.”

To understand the reasons behind Rouhani’s risky and possibly dangerous decision, one needs to look back at the Iranian economy’s condition before the coronavirus outbreak. Iran’s economic growth rate was negative 7 percent. Stagflation had put the economy into a serious crisis.

After the United States’ 2018 withdrawal from the nuclear deal and reimposition of sanctions, Iran’s foreign trade and oil exports declined dramatically—and political tensions with Gulf neighbors spiked as the United States deepened the crisis.

In the meantime, the International Monetary Fund had predicted that Iran’s economy would shrink 9.5 percent last year, and according to the Central Bank of Iran, the annual inflation rate reached 41 percent, the highest level in 25 years. The number of unemployed people had already reached about 3 million before the coronavirus crisis, and some estimates would suggest the number to be even higher.

Then came the coronavirus outbreak. After the government’s decision to shut down businesses, at least half of Iran’s economy, which is dominated by service sector jobs, was seriously affected. The living conditions and welfare of an estimated 7.3 million people became precarious as millions lost their jobs and others had their wages or hours cut.

The shutdown came at a time when many businesses were expecting almost 50 percent of their annual income during the last two months of the Iranian year before Nowruz, the Persian New Year, at the end of March.

Every year during the last Iranian month of Esfand (beginning in February and ending in March) and before the New Year people usually do most of their shopping. Esfand is followed by the first month of the year, Farvardin (March 20-April 19), which is generally a month of holidays and tourism. During Farvardin, many businesses—including restaurants, travel agencies, and hotels—tend to witness a boom, but this year their revenues reportedly fell by more than 90 percent.

Estimates suggest that Iran’s GDP has now decreased by about 15 percent as a result of the disruption to businesses, and that the economy will shrink further compared to last year. Businesses have reduced their activities as well as their workforce, and statistics show that about 36,000 people are applying for unemployment insurance each day.

Although the increase in the unemployment rolls caused by coronavirus outbreak has not been officially announced yet, some estimates indicate that 1 million Iranians have lost their jobs during the crisis, while other figures put the number at 2 million.

Under such circumstances, government support could have eased the pain, but extending a safety net was not an option in Iran. While income support measures were introduced all over the world to deal with the economic consequences of the coronavirus outbreak, Rouhani’s government could not afford to assist affected businesses due to a lack of financial resources, largely because U.S. sanctions have denied Iran access to its assets and money held in foreign banks.

The financial assistance amount that Rouhani has so far promised to support affected businesses is 100 trillion tomans ($6.25 billion), most of which is supposed to be paid to businesses in the form of loans. (One toman is equivalent to ten rials. Although the rial is the official currency, Iranians use the toman in everyday life.)

These loans have a three-year repayment term with a 12 percent interest rate. In the event of a second coronavirus outbreak and a bad economic situation, the government will give these loans to businesses; in normal times, bank loans would come with a higher 20 percent interest rate.

According to the Iranian economist Mohammad Hashem Botshekan, this economic package was more like a monetary policy than an economic stimulus; if the government were seriously considering an economic survival package, it would need to give interest-free loans to businesses, and it would provide free economic assistance to the people. Furthermore, the amount spent by the government compared to the volume of Iran’s GDP was insignificant.

After all, the U.S. government’s package accounts for approximately 10 percent of the country’s total GDP, the German and Japanese support packages are equivalent to about 20 percent of their GDPs, while the economic packages of some Persian Gulf countries accounts for about 30 percent of their GDPs. But the offered economic survival package from the Iranian government only equates to 2 percent of the country’s GDP.

Rouhani’s government also announced that it would give a 1 million-toman loan (about $62) to low-income families—an interest-free loan that would be repaid in 24 monthly installments, sparking widespread criticisms. This amount is equivalent to half of the minimum monthly salary of a laborer in Iran and would not do much to help people with their economic hardships.

But the Rouhani government’s revenues have shrunk dramatically. Since the coronavirus pandemic began, demand for oil has declined, pushing prices down. Moreover, another source of revenue for the Iranian government—taxes—has been seriously eroded due to the closure of businesses. Indeed, the government has stopped collecting taxes from some businesses that have been financially damaged as a result of the coronavirus pandemic—but it is the government that will decide which businesses receive a three-month deferment of tax payment.

In the end, Rouhani had only two options: Either he could go on with the shutdown of businesses and government bodies until the virus is brought under control and the medical and health system of the country is restored to normal, or, due to the dire economic situation, he could allow the businesses and government offices to resume their activities.

He opted for the latter and reopened the markets and government offices on April 11, a decision that sparked a great deal of criticism from medical experts as well as some high-ranking government officials such as the head of the judiciary, who criticized the government for prioritizing the economy over the health of the people.

Rouhani ordered almost all economic sectors, including financial markets and shopping centers to fully resume their activities. Some high-risk businesses such as sports clubs, big restaurants, and cinemas are not still allowed to reopen. Even now, several weeks after the decision was implemented, Iranian health officials are still declaring their opposition to it.

Since the reopening of businesses and government bodies, social distancing measures in Iran have not been observed; in a matter of few days, people began to act as if the coronavirus crisis was over and life had returned to normal.

Although the pace of coronavirus-related deaths has decreased recently, more than 1,200 new cases and about 100 deaths from the virus are still being reported each day. According to health officials in some cities, such as Tehran, the number of people infected with the coronavirus is increasing. Many doctors and officials in Iran’s health sector are scared, saying that the government’s decision to lift social distancing restrictions may soon lead to a second wave of infections.

Indeed, a resurgence of the pandemic could have a much more devastating impact. The illness and death of tens of thousands of people in a second wave would force businesses to close once again, and the Iranian health care system would come under immense pressure. Under such circumstances, the government would barely be able to keep the economy alive and stable. The government’s revenues would further shrink, and it would probably not be able to support poor and low-income families. In such a situation, millions of people could lose their jobs and a greater economic recession might put Iran’s economy at risk of collapse.

While Rouhani’s move could lead to a new outbreak with all the devastating consequences it brings, his unpopular decision has, for now, saved the economy from further deterioration and possible protests.

Rouhani’s decision was based on the view that Iran has passed through the first major wave of the coronavirus outbreak and that continuing curbs on economic activity are no longer justifiable. According to this view, an ongoing economic lockdown would have dangerous consequences for the country. The unemployment rate would rise sharply, many businesses would go bankrupt, and social unrest could follow.

While Rouhani is well aware that there is a risk of a second wave, the country cannot keep the lockdown in place for another month or two because the government cannot make up for the losses suffered by businesses, as wealthier governments in Europe and North America have done. That is why he is insisting on bringing the economy and society back to normal as soon as possible.

The country has yet to leave behind last November’s public protests against the substantial increase in the prices of gasoline, fear of reemergence of public protests and riots was evident in a letter sent to Rouhani by 50 economists on April 3. They cautioned him that the economic consequences of the coronavirus crisis could lead to unrest in the second half of the Persian Year 1399, which has just begun, and that the next year, 1400, would be a year of crisis.

Saheb Sadeghi is a columnist and foreign-policy analyst on Iran and the Middle East. Follow him at @sahebsadeghi.

Photo: IRNA

Trump Administration Pressures Global Financial Watchdog to ‘Blacklist’ Iran

This article was originally published by Responsible Statecraft.

The Financial Action Task Force (FATF), a global body that sets standards to combat money laundering and terrorist finance, has placed Iran back on its infamous “blacklist,” following the failure of Iranian policymakers to enact two key bills in accordance with an action plan set in 2016.

The FATF statement, issued on Friday at the conclusion of the body’s latest plenary meeting, calls on members to “to apply effective countermeasures” following Iran’s failure to implement “the Palermo and Terrorist Financing Conventions in line with the FATF Standards.”

Such countermeasures include increase monitoring, reporting, and auditing of Iran-related financial transactions for all financial institutions worldwide. While members can decide how to reimpose the countermeasures, the decision taken by FATF serves as a kind of external validation of the Trump administration’s claims that the Iranian financial system is regularly used to facilitate money laundering and terrorist finance on a massive scale. This characterization is a principle justification for the administration’s “maximum pressure” sanctions campaign and U.S. officials had been dogged in pressuring FATF to call “time out” on Iran’s reform process.

The FATF decision will be deeply disappointing to many officials in the Rouhani administration who had expended extraordinary political capital to try and get the necessary legislation enacted, succeeding in getting four key bills passed by parliament, but only managing to have two bills enacted into law. Opposition by hardliners had been fierce — the FATF issue was linked to the slow-rolling crisis around the nuclear deal and the Trump administration’s sanctions campaign. The politicization of the action plan reforms — both in Tehran and in Washington — was perhaps unprecedented in the history, putting “the task force is between a rock and a hard place,” as Tom Keatinge, as RUSI Director of the Centre for Financial Crimes and Security Studies, has recently observed.

The FATF’s decision could have a significant impact on Iran’s economy, but likely indirectly. Iranian officials who advocated for implementation of the action plan insisted that failure to do so would lead to international banks, including banks in Russia and China, to cut ties with Iran. More precisely, the reimpositon of countermeasures means that it will be exceedingly difficult for Iran to open any new cross-border financial channels. But the countermeasures set to be reimposed, including FATF’s exhortation of its members to impose enhanced supervision and reporting requirements for financial institutions handling Iran-related payments reflect a level of oversight already adopted by the few global financial institutions that continue to transact with Iran. For example, European officials do not expect the FATF decision to interfere with the operationalization of INSTEX, the mechanism established to support European trade with Iran, given the longstanding policies of the banks on which INSTEX will rely.

Existing banking channels are unlikely to be constricted for the express reason that Iran is back on the blacklist — although this does not preclude that the FATF decision will be used as a timely excuse to stop handling Iran-related payments by some banks.

The more likely damage to Iran’s economy will arise from the setback that FATF’s decision represents for the wider push for financial transparency reforms in Iran, which including everything from calls for greater fiscal transparency to the adoption of international standards for accounting. In May of last year, I wrote about how this broad campaign was suffering under the pressures of a “financial war” waged by the Trump administration. Although “transparency has become a discourse and ongoing demand” in Iran, to use the words of one reformist parliamentarian, a pervading paranoia got in the way of reforms, including those required by the FATF.

As I wrote at the time, many Iranians increasingly feared that when sanctions were being applied too aggressively, any increase in financial transparency was “akin to exposing the location of a piece of critical infrastructure and leaving it vulnerable to attack.” The Trump administration sought to actively stoke this paranoia through its use of public messaging and sanctions designations, causing a significant rift with European partners engaged in a technical dialogue with the Rouhani administration over the reform process.

I have been closely following the FATF issue for three years, during which time I have had the opportunity to discuss the action plan and its implementation with American, European, and Iranian officials as well as business leaders engaged in trade between Europe and Iran. There remain many unknowns about the economic impact and the damage the countermeasures will have. But what is profoundly clear is how easy it was for the Trump administration to seek to interfere with the apolitical work of FATF and the fragile process of financial transparency reforms in Iran, even though that process was driven in large part by the concerns of the Iranian electorate around systemic corruption.

In this way, the FATF experience offers a cautionary tale. To whatever extent the current nuclear deal will remain resilient in the face of the Trump administration’s maximum pressure and reduced compliance from Iran, and to whatever extent a new deal may be strengthened to avoid a repeat of the current crisis, any diplomatic reset with Iran will require greater protection of the myriad technical processes of reconnection and reform that will be necessary to ensure that promises are delivered. We promised to give Iran a chance. We failed those who tried to take it.

Photo: FATF

Iran Looks to Central Asia in Effort to Grow Exports

Over the past year, Iran has faced disruptions in its foreign trade relations following the withdrawal of the United States from the Joint Comprehensive Plan of Action.  Trade with partners like Europe and China has suffered because of U.S. secondary sanctions. In the face of these uncertainties, Iran has adopted a “neighborhood policy” as it seeks to protect trade flows. The policy has been recently expanded to Central Asian states, which serve both as an export market as well as the geographic bridge as Iran seeks to strengthen integration with Russia and China. For the landlocked Central Asian states, Iran is a vital conduit to international waters. In a May 2018 speech, President Rouhani described closer ties with Central Asia as a “fundamental policy.” The policy is now in the early stages of implementation.

At the beginning of December, Tehran hosted two economic summits with Tajikistan and Kyrgyzstan, the first such meetings in two and three years respectively. A week later, an Iranian delegation traveled to Tashkent in an effort to deepen trade ties.

On December 2, a joint commission of economic cooperation was held between Iran and Tajikistan. Iranian energy minister Reza Ardakanian presided over the meeting, which focused primarily on cooperation in energy and transportation projects. Iranian contractors have a history of infrastructure development in Tajikistan, such as the Anzob Tunnel completed in 2015 and Sangtuda 2 hydroelectric power plant. But discussions at the joint commission focused on new projects that would improve Tajikistan’s links to export markets through Iran, and also help support increased bilateral trade, such as the construction of warehouse facilities at Chabahar Port, and the completion of a railway corridor that would link Tajikistan and Turkey through Iran as part of the integration efforts of the Economic Cooperation Organization. 

As part of a broader effort to reset political relations, Iran’s President Rouhani made a state visit to Dushanbe in March 2019. Tajik President Emomali Rahmon may soon make his first visit to Iran in six years.

Just a day after the summit with Tajik officials, Iran held a similar high-level commission with Kyrgyzstan. Mohammad Eslami, Iran’s minister of roads and urban development, led the Iranian participation in what was the first commission meeting in three years. The negotiations, which resulted in an extensive memorandum, included a focus on banking ties and transport links.

In the area of banking the Iranian and Kyrgyz officials discussed the establishment of a protocol to ease trade conducted in national currencies among commercial banks. Iranian economy minister Farhad Dejapsand and his Kyrgyz counterpart, Hukan Batov, also discussed the establishment of a joint export bank and export credit agency to help facilitate trade. In the area of transit ties, Iranian and Kyrgyz officials continued dialogue on the use of Iran’s Chabahar port, where Kyrgyzstan has owned land since 2007 following a land swap with Iran, but has yet to develop warehouses or other infrastructure at the site. Iran has sought expanded ties with Kyrgyzstan in recent years. Kyrgyzstan so far is the only Central Asian state to have agreed a 10-year strategic roadmap with Iran—the agreement was signed in December 2016.

A week after the Tajikistan and Kyrgyzstan summits, Iranian industries minister Reza Rahmani led a delegation of over 50 Iranian companies for a two-day business summit in Tashkent, Uzbekistan. Like Tajikistan and Kyrgyzstan, Uzbek companies use Iranian ports to get their goods to global markets. But with a population of 33 million, Uzbekistan also represents a significant potential market for Iranian exporters. Iran’s Zagros Airlines has re-established a direct light between Tehran and Tashkent, after a three-year hiatus. Bilateral trade between Iran and Uzbekistan grew 40 percent in 2018.

Increased trade with neighbors such as Iraq and Turkey has been a key contributor to Iran’s economic resiliency over the past decade, particularly as sanctions depressed exports to markets like Europe and China. In this regard, improved relations with Central Asian states have a strategic importance for Iran in the face of the U.S. “maximum pressure” sanctions companies. Moreover, the Central Asian states will also play an important role in China’s growing sphere of economic influence and as part of the Russian led Eurasian Economic Union, with which Iran has recently concluded a free trade agreement. If the plans discussed by Iran with its Central Asian neighbors are properly implemented, a new pathway for regional economic development will be opened in the medium-term.

Photo: Railnews.ir

After the Iran Protests: How Europe Can Keep Diplomacy Alive

This article was originally published by the European Council on Foreign Relations.

The Middle East is facing a wave of protests—with the latest unrest in Iran sweeping the country in November. For the moment, a swift government crackdown that reportedly left at least 208 dead has largely brought the protests to an end. An unprecedented internet shutdown during the unrest means that information and debate from inside Iran are now going viral, with observers seeking to take stock of what it could mean for the country. While much remains unclear, the episode has shaken a fragile Iranian nation, diminished the already dwindling popular support for the Rouhani administration, and further complicated European efforts to reduce tensions between the United States and Iran.

The protests were sparked after Iranians woke up to steep hikes in petrol prices of around 50 percent brought in overnight in mid-November. The Iranian state has long subsidized fuel, but Iranian officials argued that this was a necessary step to address the budget deficit (hard hit by US sanctions cutting off oil revenues) and to tackle illicit fuel-smuggling organizations. The new approach has also allowed an increase in cash transfer subsidies to Iran’s poorest.

The move predictably provoked the greatest anger among Iran’s lower earners, who are barely making ends meet. People immediately took to the streets to voice their fury at the decision, and at the political establishment more broadly. Similar to the last round of protests in Iran in late 2017 and early 2018, most of those who participated appeared to be young and from lower-income households. However, while the unrest in 2017 and 2018 stretched out over a longer period and remained largely peaceful, the latest protests were short-lived, with signs of greater coordination among those that took to the streets and hard-headed action by state authorities in response.

Some Iranian interlocutors from the policy community view the crackdown by the security apparatus as reflective of panic and anxiety in the Iranian security establishment. But others believe the Iranian state felt confident and strong in taking these actions, that it was ready to communicate its preparedness to immediately quash any serious threat, and to introduce a state of fear before protests spread further.

The aftermath of the protests presents significant challenges for the Iranian leadership. The Islamic Republic is now a pressure cooker, dealing with an unprecedented degree of harsh US sanctions that are have brought about severe economic difficulties, and a fraying of the political fabric. If economic reforms are not forthcoming to weather the storm of sanctions, tackle corruption, and provide relief to Iranian households, Iran will likely face periodic protests with ever higher levels of state repression.

For Rouhani himself, expectations were already low for the parliamentary election due in February. Now, given the brutal repression of these protests, growing numbers of those members of Iran’s middle class that previously backed the president are now likely to avoid political participation. And, over the past year, Iran’s Reformist faction, which had allied with Rouhani’s centrist presidential campaign, has conducted a fierce debate about whether to stand in the election given huge disappointment at the pace of reforms. Recent events have only intensified this debate. Hardliners are therefore expected to make significant gains in parliament and make life much tougher for Rouhani in the final year of his presidency.

Rouhani’s weakened position will make it even more difficult for him to push through any form of pro-diplomacy policy in his last year. The president has repeatedly stated that he is open to negotiations with the US given the right parameters—and he reiterated this after the end of the recent protests. Powerful figures inside Iran, such as the Supreme Leader and senior figures within the Islamic Revolutionary Guard Corps, have rejected the possibility of such negotiations, but Rouhani still has some limited ammunition. This was demonstrated by the recent detainee exchange between Iran and the US—a small but noteworthy sign of diplomatic success.

How far Rouhani can move forward will be influenced not just by internal dynamics but also by the US and Europe. The response by Iranian authorities to the protests complicates the political optics for European governments seeking to provide Iran with economic benefit to sustain the nuclear deal, which now hangs by a thread. Moreover, Washington will likely use the state repression inside Iran to double down against European engagement with Tehran, arguing that there are no moderate actors for change within the Iranian leadership.

Despite these pressures, European governments can still strike the right balance on Iran. Amid the protests, the EU called for “maximum restraint” from Iran. And the newly appointed EU high representative, in a stern statement, called for “credible investigations” into the events. European governments can also consider calling for a special session at the United Nations Human Rights Council to press for impartial investigations into the use of force in the recent protests in both Iran and Iraq.

In parallel, Europe should still move forward with processing the first transactions through the Instrument in Support of Trade Exchanges (INSTEX). This should be rooted in a duty of care towards the Iranian people, namely that Europe acknowledges the severe economic pressures placed on Iranians following the reimposition of US sanctions. Europeans must remain focused on facilitating quicker and cheaper access to humanitarian goods for the Iranian people. If this can simultaneously help prevent a further unravelling of the nuclear deal, this would be no bad outcome.

Greater internal pressure combined with increased weakness for Rouhani will likely push Iran towards a more confrontational stance, and diminish Rouhani’s ability to pursue political solutions. The US and Iran have already twice recently come dangerously close to military conflict, following Iran’s downing of the US drone in June and attacks against Saudi Arabia’s Aramco oil facility in September. US intelligence officials reportedly believe that Iran has increased its stockpile of short-range missiles inside Iraq, and military officials have warned of potential impending attacks by Iran. If the country continues to be suffocated economically by US sanctions, it will continue its withdrawal from the nuclear deal and up the ante in the region.

In the meantime, it is imperative that Emmanuel Macron pursue his initiative to reduce tensions between Tehran and Washington. Senior US officials have vowed to continue the “maximum pressure” campaign, and its proponents are likely to view the recent protests as proof that the policy is working. But Europeans should make clear that the policy has so far backfired in terms of softening Iran’s posture on the nuclear and regional files and only succeeded at pushing the country into a greater state of securitization and internal oppression. Macron should seek to quickly use the positive, and most likely short-lived, political momentum from the US-Iran detainee exchange to impress on both sides that diplomacy can deliver concrete outcomes, and that it is much the preferred option to another cycle of escalation.

Photo: IRNA

In Wake of Internet Shutdown, Iran's Programmers Face Uncertain Future

About twenty years ago, when Milad Nouri first told his parents and university instructors that he wanted to be a programmer, they thought he was another good-for-nothing youth.

Today, Nouri is one of the veteran programmers who have helped lead Iran’s digital revolution, contributing to the launch of companies whose apps and online services are used by millions of Iranians daily, greatly contributing to country’s economy.

Nouri and his fellow programmers had to persistently battle a suspicious state and a dismissive public. Over the years, many left the fight and sought new opportunities abroad, while others remained in Iran and paved the way for the emergence of a genuine startup ecosystem—at last Iran’s has entered its digital age. But a recent nationwide internet shutdown has hit morale in the programmer community like nothing before.

On November 15 an unexpected decision to hike fuel prices threefold led to widespread protests. As part of their crackdown, the following day, Iranian authorities decided to hit a kill switch and—in an unprecedented move—cut off the nation from the World Wide Web.

The internet blackout, which lasted for nearly a week, has cast a dark shadow over Iranian online businesses and the programmer community. Many programmers are once again debating whether they should stay and fight for internet freedom in Iran, or pull up stakes and move abroad. Nouri and his peers are facing a new test of their resilience and resolve.

Alien Technology

Reflecting on the early years of his career as a programmer, Nouri recalls the beeps and screeches of the dial-up modems and that used to connect him to the internet. “I used to go online as soon as my parents went to bed,” Nouri explains, as his parents did not appreciate that the phone line was busy when he was online.

“The funny thing is that this habit got me into trouble too,” Nouri tells me. His parents, like many others, were worried about the sleepless hours he was spending behind the glare of his computer screen.

Computers were still alien technology in those years. State-run broadcasters did little to familiarize people with the nascent digital world. On the contrary, state television sowed seeds of distrust. Numerous “documentaries” were broadcast that called on parents to be vigilant because the internet would surely “corrupt the youth.” Nouri remembers these programs. “Whenever such shows came on TV, my parents and relatives would give me worried looks,” he says.  

Inevitable Change

During his programming career, Nouri has seen three presidents come to power: Mohammad Khatami, Mahmoud Ahmadinejad, and Hassan Rouhani.

During Khatami’s tenure, the country’s technological infrastructure was extremely underdeveloped. The internet penetration rate and average connection speeds were low. Nouri tells me that for a long time, when friends and family asked him what he did for a living, he would lie: "I would just say, ‘I am a university student.’ Most people didn’t know what programming was. And even if they did, they wouldn’t acknowledge it as a job. To be honest, no one made money out of this line of work, so they weren’t really wrong either.”

In the late 2000s, some Iranian businesses started to invest in online advertising, but it was not until the arrival of smartphones that big money first entered the startup ecosystem.

Given political tensions during Ahmadinejad’s two terms—especially in 2009—curbs were imposed on internet access, hampering the growth of Iranian online services and, by extension, the newfound fortunes of local programmers.

But once tensions eased and more investment was directed towards digital innovation, programmers saw their incomes and social status rise again. When President Rouhani was elected for his first time in 2013, he and his administration jumped on the “digital economy” bandwagon and promoted support for such businesses as part of wider reforms to curb Iran’s overreliance on the oil industry.

Following this shift in policy, Iranian startups found room to grow. Careers in computer programming became a trendy and talented programmers were aggressively sought by employers. The same state-run TV channels that once demonized technology were broadcasting programs to teach people about computer science. As ventures grew, Iranian programmers found themselves handsomely paid. Parents began to encourage their children to study computer science at university.

In many ways these changes were inevitable. The spread of cheap smartphones and 3G networks brought millions of Iranians online. For businesses, digital services became a crucial way to reach customers. While Iran’s tech entrepreneurs acknowledge that Rouhani and his administration officials, and in particular the current ICT minister Mohammad Javad Azari Jahromi, have supported the transformations, they believe that the changes were largely inevitable.

During Rouhani’s first term,a nuclear deal was forged with the world powers, granting Iran sanctions relief and opening the country to foreign investment. An influx of foreign capital reshaped Iran’s digital economy, especially in the e-commerce sector. Iran’s political elite could no longer ignore global digital developments.

In the last fiscal year, the nominal value of Iran’s e-commerce market grew 30.5 percent and reached IRR 2.08 quadrillion ($18.4 billion), according to data published by the E-Commerce Development Center of Iran. This impressive growth has seen the senior executives of digital ventures elevated as exemplars of Iran’s dynamic economy. But as executives and investors today enjoy access to senior officials, even sitting down the president for “friendly chats,” the pioneering programmers have been somewhat forgotten.

Nerd Power

The first batch of successful Iranian startups were established by programmers who had both the technical knowledge and the vision necessary to create entirely new business models. But as the Iranian startup ecosystem has matured, tech companies have increasingly hired new managers who do not have a programming background. Coders were forced to take a back seat. “Nowadays, we are just seen as people who turn caffeine into code,” Nouri says.

The programming community has reacted by holding onto their irreverent spirit. Like their peers around the world, Iranian programmers revel in the stereotype of coffee-drinking, introverted nerds always hunched behind their laptops.

The subculture manifests itself on social media, especially on occasions like International Programmers’ Day when Iranian coders trade stories on Twitter and Instagram, or when Iranian social media users joke that it is now cooler in Iran to have a programmer as a boyfriend than a footballer.

The world’s most powerful nerds—Bill Gates, Mark Zuckerberg, and the late Steve Jobs—are revered by Iranian programmers as leaders to emulate, their triumphs known through books like Walter Isaacson’s biography Steve Jobs and movies like The Social Network.

For this reason, some Iranian politicians rail against programmer subculture as too Westernized and too progressive. While it is true that those involved in the digital economy tend to be more socially progressive, the subculture also remains male-dominated. Numerous cases of misogyny and harassment make clear that a lot of Silicon Valley’s most regressive features are also found in the Iranian ecosystem.

Uncertain Future

After the United States withdrew from the Iran nuclear deal and reimposed harsh secondary sanctions, the Iranian economy entered a period of crisis. Many businesses, including tech firms, can hardly make ends meet. The depreciation of the rial over the past two years has also hurt the purchasing power of ordinary people—programmers, like many other Iranians, are increasingly considering emigration, knowing that their skills are in demand abroad. Industry insiders say about 1 in every 5 programmers wants to emigrate.

At the Dayhim Innovation Factory in southeast Tehran, 60 young programmers were hunched behind laptops. They had gathered from across Iran for a coding boot camp held in the once-deserted industrial plant, which had been recently transformed into an innovation hub. During a short break between their classes, the students talked about their dreams and aspirations, asking that only their first names be used.

Wearing a black Linkin Park t-shirt, 20-year-old Sina, relayed his dream to leave Iran. “I grew up listening to Western music, watching Hollywood movie. Life is more fun in the west. Or that’s how it looks,” he laughs, adding, “I want to experience that fun life first hand.”

Sina was honing his programming skills to boost his chances of starting a new life abroad. Many of the young men, all of them between 16 and 24, had similar aspirations.

The internet blackout has shaken the resolve of even the most committed of Iran’s programmers. A prominent programmer known simply as Jadi, who has blogged about the internet in Iran since 2006, captured the sentiment in a widely shared tweet: “The number of people who have left [Iran] in the last two years is shocking… [So is] the number of people that are trying to find a way to leave now… And there is no way to argue, ‘Just stay.’”

But 20-year-old Esmaeil from Esfahan thinks he will stay. In his view, “Iran’s fast-growing tech market provides programmers with a golden opportunity.” Esmaeil believes that given low competition in the sector and growing investment from domestic backers, programmers can continue to make easy money in Iran.

A contrarian streak might be the only thing that can save Iran’s programmer community.

Photo: IRNA

Iran Trade Deal with Russia-Led Bloc Warrants Cautious Optimism

On September 30, Iranian President Hassan Rouhani arrived in Yerevan, Armenia to attend the Eurasian Economic Union (EAEU) Summit. A free trade agreement (FTA) between Iran and the EAEU will come into force on October 27, creating conditions for preferential trade between Iran and the current EEAU members: Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. The FTA will give Iran access to a single market comprised of 183 million people and with an aggregate GDP of USD 4 trillion.

Iranian policymakers have welcomed the FTA with cautious optimism. With parliamentary elections fast approaching, the Rouhani administration and parliamentarians alike are eager to implement policies that may help bolster Iran’s economy as sanctions cause a sharp recession. Reza Rahmani, Iran’s industry minister has stated that the FTA could help counteract Iran’s isolation in the face of U.S. sanctions. Mohammadreza Jahanbiglari, an economist and member Iran’s Chamber of Commerce, has predicted that if properly implemented, the FTA could see Iran’s trade turnover with EAEU member states quadruple to reach USD 10 billion within one year—a view echoed by Mehdi Mirashrafi, the head of Iran’s customs administration. The Iran Chamber of Commerce has been invited to establish a specific body to support exchanges with EAEU counterparts.

However, the highly regarded Islamic Parliament Research Center, the research arm of the country’s legislative assembly, has issued a more conservative assessment, outlining in a June 2019 report that the “low level of Iran’s commercial complimentary” with EAEU member states will result in a “minor impact from the FTA on the country's economy.”

The Parliament Research Center nonetheless concluded that the FTA could help Iran develop its non-oil exports, a central aim of the doctrine behind the “Economy of Resistance” called for by the Supreme Leader, Ali Khamenei. Under the FTA, a list of 502 goods will enjoy preferential tariffs when exported to the EAEU. 

Utilization of the so-called “soft infrastructure” represented by the FTA may also spur the development of Iran’s geo-economic position in the Middle East through the creation of new “hard infrastructure.” Russian leadership of the EAEU is complimentary with its “Pivot to the East” strategy. In this context, Iran can provide the shortest, safest, and cheapest route for Russian goods to the Indian Ocean as envisioned in the International North–South Transport Corridor (INSTC). During the Yerevan summit, Iranian foreign minister, Mohammad Javad Zarif highlighted the pivotal role Iran can play in these plans, tweeting, “With parallel work on North-South & South-West Transit Corridors, ground paved for expansion in regional trade & cementing of our role as vital transit hub.”

Despite practical concerns about the facilitation of trade in the face of US secondary sanctions, Iran will also likely find a sympathetic group of countries among the EAEU, which has an anti-sanctions outlook. The EAEU Treaty was signed on May 29, 2014, after the first round of sanctions were imposed against Russia. Like Iran, Russia has seen the expansion of trade among the countries of the former Soviet Union as a possible bulwark against sanctions.

Before leaving Iran for the Yerevan summit, President Rouhani highlighted the potential for the FTA with the EAEU to help Iran mitigate the effects of U.S. sanctions. One of the key issues barriers for Iran’s cross-border trade is the absence of reliable banking channels. Iran and Russia have been exploring the use of local currencies in bilateral trade as well as the use of a new Russian bank messaging system called SPFS, which is intended as an alternative to SWIFT. Abdolnasser Hemmati, the governor of Iran’s central bank, has stated that Russia has agreed to Iran’s proposal to expand SPFS to the countries of the EEAU. 

Beyond banking, Iranian business leaders are concerned about the harmonization of the trading regimes. For example, while EEAU countries use the more detailed 10-digit “Harmonized System” (HS), Iran uses the 8-digit version. Proper harmonization will require input from a wide range of Iranian regulatory bodies, including the customs administration, the National Standard Organization, the Veterinary Organization, and the Food and Drugs Administration. Aside from the administrative challenges on the Iranian side, there are also concerns around the internal dynamics of the EAEU, in which economic ambitious have not been matched with the kind of political frameworks that have made the European Union customs union so successful. The FTA between Iran and the EAEU is an interim agreement that will remain in force for three years—a short period to overcome a wide range of bureaucratic hurdles.

While Iran might not find drastic gains by joining the EAEU, it certainly has nothing to lose. Over time, if enabled by the creation of more robust banking channels and investment in new transport infrastructure, Iran’s non-oil trade with the EAEU could prove a real boon for the economy.

Photo: Kremlin.ru

Iran’s Supreme Leader Emphasizes Practical—Not Political—Economic Aims

Two weeks ago, during a high-level meeting with the Islamic Republic's political elite, Supreme Leader Ayatollah Ali Khamenei reiterated familiar calls for a “resistance economy,” but also placed new emphasis on the “business environment and increasing the ease of doing business.” While it is not unusual for Khamenei to focus on Iran’s economic challenges in such addresses, the specificity of some of his statements suggests a new appreciation for the importance of practical economic reforms that go beyond political slogans.

Pointing to several chronic “illnesses” of the Iranian economy during the meeting—attended by President Hassan Rouhani, Parliament Speaker Ali Larijani, and Chief Justice Ibrahim Raeisi—Khamenei declared, "If those illnesses are cured under the current sanctions, Iran's economy will experience a leap forward."

Khamenei outlined four main challenges facing the Iranian economy: oil dependence, including the spending of oil revenues on “living expenses” rather than long-term development; unnecessary government interference in the economy, including the failure to fully implement the privatization programs outlined in Article 44 of the constitution; the poor business environment, which is hampered by a cumbersome government bureaucracy; and budgetary reform, which extends to government-led reform of the banking sector.

The supreme leader’s latest speech build on an earlier deadline he set for the Rouhani administration, tasking the government to restructure the its budget and overhaul banking regulations. Khamenei took the opportunity to remind government officials that there remain just "two months left for the task to be accomplished.”

Over the years Khamenei has given his assent to various economic reforms, including privatization and banking reforms. But he has also extolled the virtues of import substitution and the need for Iranian industries to indigenize new technologies to help reduce the Iran’s vulnerability to sanctions. These aims have given his messaging a predominantly political outlook.

Over the last two decades, the slogans chosen by Khamenei to indicate the focus of economic policy for the Iranian new year—“boosting production,” “supporting domestic commodities,” “economy of resistance and job creation” etc.—have offered a general goal towards which government policies ought to be directed. But there is a new specificity in the supreme leader’s recent statements that suggest a growing awareness—perhaps triggered by the economic protests of early 2018—of how economic circumstances have a direct bearing on the perceived legitimacy of the political establishment.

In his recent comments, Khamenei admitted that Iran’s economic struggles are squeezing the poor and the middle class. But he expressed confidence that the country had not reached a “dead-end in the true sense of the word." While conceding that U.S. sanctions on Iran are “unprecedented,” he insisted that "the Islamic Republic is made up of a strong metal,” and that this strength derives from the Iranian people and their mentality of “resistance.”

The concept of resistance has long been a central motif of Khamenei’s political messaging. In an economic context, the supreme leader uses the word to describe policies that “fortify and lay solid foundations for the economy.” For economic planners and the business community, the concept of the “resistance economy,” has spurred the launch of programs that seek to improve the resilience of the Iranian economy to external shocks, whether fluctuations in the oil price or sanctions.

First Vice President Eshaq Jahangiri leads a recently established department responsible for implementation of such programs. Khamenei even offered a few words of rare praise for steps taken by the Rouhani government within Iran's ambitious self-sufficiency drive, including achievements in wheat production and a recent declaration of gasoline production independence.

Importantly, Khamenei’s latest call to boost industrial production included an acknowledgement that Iran’s industries cannot be fully disconnected from global markets. The supreme leader stated, “At times we may need a certain part or raw material which has to be imported. Financial transactions [for those purchases] are not possible. There are problems. But we need to make a push and produce them indigenously.”

Khamenei also pointed to the phenomenon of Iran’s high interest rates, which are a response in part to chronic high inflation. He relayed an encounter with an industrialist who had told him he “can put his capital in the bank and benefit from the high returns,” but had decided not to do so because “the country needs production.” Khamenei stated that “such people are few” in Iran, and therefore reforms are needed to correct incentives.

Perhaps most remarkably, speaking about the country’s poor business environment, Khamenei stated, “I have heard that in some countries of the world, half the time is needed to launch a new business, but [in Iran] there are many challenges and barriers.” The allusion to “doing business” rankings, which measure the ease of establishing a new business in countries around the world, points to an awareness that successful reform will also require Iran to adopt international best practices, a notion that could have a bearing on the success of key reforms such as those required by the Financial Action Task Force (FATF) action plan.

The new specificity in the supreme leader’s comments on the economy may have spurred Rouhani’s speech last week, in which he insisted that he ought to be granted special powers to enable his government to more effectively respond to the “economic war” waged by the United States. Rouhani’s request, which pointed to the provision of such authorities during Iran’s eight-year war with Iraq, was accompanied by a clarification that opening negotiations with the Trump administration is “absolutely” not his government’s preferred policy at this time. 

Some critics have accused Khamenei of seeking to distance himself from the nuclear deal and the widespread disappointment brought about by the reimposition of sanctions.  The supreme leader advised political leaders not to explain away Iran’s economic woes by blaming sanctions, nor to expect the lifting of sanctions at any point in the near future. In a veiled criticism of the Rouhani administration’s economic policy thus far, Khamenei suggested it was a mistake for the country’s economic plan to depend on sanctions relief, stating "[This has been] one of our problems from the outset… We should not make our economy conditioned on [sanctions relief].”

But Rouhani may sense an opportunity in the supreme leader’s more practical interest in economic issues. Having been significantly weakened by the turmoil surrounding the nuclear deal, the Rouhani administration nonetheless retains well-respected ministers in key posts. Rouhani appears to be making the case that should supreme leader truly wish to see some progress on economic reforms, his cabinet deserves renewed political capital as it enters a final two years in office.

Photo: Khamenei.ir

Iran Declares Gasoline Self-Sufficiency but Challenges Still Remain

During a grandiose opening ceremony attended by President Hassan Rouhani and Oil Minister Bijan Zanganeh, Iran inaugurated the third phase of its Persian Gulf Star Refinery in the energy-rich south February 18, declaring "self-sufficiency" in fulfilling national gasoline demand.

Located 25 kilometers west of the port city of Bandar Abbas, the refinery will enable Iran's average daily gasoline production to reach 105 million liters, according to official figures.

The facility, fed by condensate from the South Pars Gas Field in the Persian Gulf, converts light crude into gasoline and other byproducts. The launch of the third phase has been described as a gigantic step in a country whose economy is slowing the face of sanctions reimposed following President Donald Trump's withdrawal from the Joint Comprehensive Plan of Action (JCPOA).

Despite sitting on the world's fourth-largest proved crude oil reserves, Iran has been historically reliant on imports to meet domestic gasoline demand due to insufficient refining capacity.

The latest phase of the Persian Gulf Star Refinery has cost the country USD 4 billion, financed entirely by domestic investment, with no foreign loans secured for the project. While producing 45 million liters of gasoline and 15 million liters of gasoil per day, the refinery also delivers 3 million liters of aviation fuel, as well as 130 tons of sulfur. Iran's oil ministry expects to save USD 15 million per day as imports volumes are expected to fall. The savings are especially important for a government already struggling to supply foreign currency markets amid increasing international banking restrictions.

"Iran's gasoline production has made history with its giant leaps in the past five years," declared Zanganeh during the inauguration ceremony, adding that increased gasoline production would help Iran "to counter unilateral US sanctions".  

With the new refinery added to Iran's gasoline production cycle, Iran could feasibly export surplus production.  Yet uncertainty related to US sanctions as well as skyrocketing consumption at home in recent years seem to have made the government think twice about export plans. "We have intentionally decided not to export our [surplus] gasoline, because we are planning to maintain good storage,” Zanganeh added without elaborating further.

With Iran's budget largely dependent upon its oil income, experts have for long sounded the alarm on the long-term consequences of the country's single-commodity economy. Consecutive administrations have, therefore, pursued policies to make the economy less reliant on the sale of crude oil. While the goal is yet far from being met, the Rouhani government has focused on diversifying energy exports to include other, higher-value petrol products such as gasoline and gasoil.

"Self-sufficiency in gasoline and gasoil production and moving toward exports were targets set and pursued by the government of Hope and Prudence," reported Arman, a reformist newspaper. In a February 19 editorial, the paper noted that in the face of disruptions caused by the US pullout from the JCPOA, Iran's oil ministry had redoubled efforts toward the self-sufficiency in gasoline production and that more countries besides Iraq and Afghanistan are expected to join the list of Iran's gasoline customers.

The inauguration of the new refinery phase took place just one week after nationwide ceremonies to mark the fortieth anniversary of Iran's Islamic Revolution. State media outlets hailed "gasoline self-sufficiency" as an “achievement and blessing" bestowed by the Islamic Revolution upon the nation. "It came at a time of economic war being waged on our country, with the enemies going the extra mile to inject disappointment in [the minds of] young Iranians," declared a report from the Islamic Republic News Agency (IRNA).

The governor-general of Hormozgan province had earlier described the new refinery as a successful example of Iran’s push to establish a "resistance economy", a term coined by Iran's Supreme Leader Ayatollah Ali Khamenei. The concept has now evolved into a directive to all government institutions, a strategy to neutralize Western measures and a roadmap toward economic independence during sanctions times.

The leading contractor involved in the project was Khatam al-Anbia Construction Headquarters, known by the acronym GHORB. The company is an engineering, procurement, and construction firm with a near monopoly over Iran's mega projects. GHORB is affiliated with Iran's powerful Islamic Revolutionary Guard Corps (IRGC).

Saeed Mohammad, the company’s managing director, told Iran's state TV that the country's share in the enormous South Pars Field now exceeds that of neighboring Qatar. Mohammad also noted that the project was executed by an exclusively Iranian team with an average age of around 30 years old.

But even with the new refining capacity, worries persist that Iran's new gasoline self-sufficiency may be short-lived as domestic consumption continues to rise. The country’s average daily consumption last summer stood at 97 million liters, according to a report by the financial newspaper Donya-e-Eqtesad. Notwithstanding the total capacity of 105 million liters achieved after the inauguration of the third phase, the 9% annual consumption growth rate "will use up the stored gasoline,” the newspaper reports.

Consumption continues to rise because gasoline in Iran remains cheap. Despite rising inflation, Iran's government has in recent years maintained a cap on the price of gasoline. Experts lament the fact that with considerable subsidies allocated to gasoline, the government has not only failed to curb the consumption, but has in fact stoked it. President Rouhani's budget plan for the upcoming Iranian year offers no provision to reduce subsidies in order to reduce consumption.

The future of genuine gasoline self-sufficiency in Iran might be less bright than the development of the Persian Gulf Star Refinery suggests.

Photo Credit: IRNA

Brexit Britain Must Match EU Efforts to Save Iran Nuclear Deal

The European Union and its member states have been scrambling to to preserve the economic benefits of the Joint Comprehensive Plan of Action (JCPOA) for Iran following President Trump’s withdrawal from the agreement on May 8. In the last month, the European Commission has moved to add Iran to the investment mandate of the European Investment Bank (EIB), the EU’s long-term lending institution (even in the face of significant resistance from EIB’s management). Similarly, the European Commission’s Directorate-General for International Cooperation and Development (DEVCO) has set-aside a pool of funding to support projects in Iran. The European External Action Service is also coordinating discussions around central bank payment channels and the European Commission’s revival of the blocking regulation, which prohibits European compliance with extraterritorial sanctions.

As a core party to the JCPOA, the UK government has a strong interest in seeing these European efforts succeed. However, in March of 2019, at the end of the Brexit process, the UK will likely leave the EU, meaning that it will end its participation as stakeholder in European institutions, including EIB, as well as European legal frameworks, such as the blocking regulation.

While the Bank of England is exploring the creation of payment channels with the Central Bank of Iran, the UK government has shown little real initiative to match European efforts to sustain economic engagement with Iran. In recent weeks, Iranian authorities have indicated that they believe bilateral efforts will prove the most successful in delivering solutions to protect trade and investment in the face of US secondary sanctions. Countries like France, Germany, Austria, Italy and Sweden have been exploring whether it may be possible to use state investment vehicles and financial institutions to facilitate investments to Iran. The UK has not, pointing to the EIB's expanded mandate. But given that EIB is unlikely to finance projects in Iran, and given that the UK is set to exit the EU anyway, the UK government can no longer lean on European efforts in devising an economic package for Iran. 

To demonstrate its commitment to the JCPOA, the UK should parallelize its Iran policy with that of EU member states and seek its own mechanisms through which to support access to financing in Iran’s economy—both because of the clear national security implications of maintaining the the nuclear deal, but also to take advantage of economic opportunities in a major emerging market, particularly one in which UK companies can continue to make inroads from a low base of activity.

The reimposition of US sanctions means that the UK government cannot reasonably rely on British private sector financiers to engage in project finance in Iran. Just as European governments are exploring state-owned entities through which to provide financing, so will the UK financing entity need to be state owned. Helpfully, such an institution exists.

CDC Group is the overseas investment arm of the UK government. The group is a state-owned development bank overseen by the Department for International Development. It currently overseas an investment portfolio of around GBP 5 billion and primarily funds projects in Africa and South Asia, with a strong focus in countries where were formerly part of the British Empire and now part of the Commonwealth.

CDC has a wide portfolio of investments in infrastructure, health, manufacturing, food and agriculture, and construction. The investment philosophy is focused on “sectors where growth leads to jobs” and the institutions “decision-making process ranks sectors based on their likelihood of creating jobs.” Investments take the form of both equity and debt financing.

On the basis of its focus on emerging markets and its investment philosophy focused on job creation, there is justification for the UK government to extend the investment mandate of CDC Group to include projects in Iran. Such a move would parallel the EU’s attempted move in regards to EIB and the still planned funding via DEVCO, as well as the various efforts at the member-state level.

If CDC’s investment mandate is extended to Iran, the challenge will be to ensure that the relevant capital can be deployed in Iran. For this purpose, the UK government should seek to use the UK-regulated branches of Iranian financial institutions. These institutions will be able to maintain correspondent banking relationships with their Iranian parent banks in the face of US sanctions. If the UK government can institute additional due diligence protocols around the transfer of funds via this channel, it should be possible to deploy capital in Iran without the need to rely on the UK’s tier one banks.

Importantly, in order to encourage the UK to make such a move, the Iranian government must be prepared to offer a privileged pipeline of investment opportunities to CDC Group, particularly with regard to public-private partnership projects in Iran that would include the participation of UK multinationals or SMEs. For example, CDC Group financing could help support the strong inroads made by UK solar energy developers in the Iranian market. Furthermore, the Iranian government should explore export credit or sovereign guarantee arrangements that would project CDC Group’s investments in order to lower the assessed risk behind a given project in Iran.

The Iranian government should actively seek a UK commitment to facilitate development financing in Iran. Politically, such a move would be consistent with the ambitions of “Brexit Britain” as the UK will need to replace its reliance on EU institutions in regards to engaging global growth through proactive investments. As with bilateral relations with other European countries, an expansion in economic engagement could reduce pressure on political relations. The UK will no doubt expect to see progress on its consular cases as part of trust-building and the deepening of ties with Iran.

Beyond challenges of structuring, the continued political uncertainty in the UK, including the recent change in foreign minister, will make such plans complicated to execute. But Iran can leverage its relationships with key stakeholders within the Foreign and Commonwealth Office as well as in the House of Parliament and House of Lords in order to seek a structured dialogue on this matter. Whether through CDC Group or another special purpose vehicle, Brexit Britain should be pushed to at least match EU proposals to support trade and investment in Iran, and thereby to safeguard the nuclear deal.

Photo Credit: IRNA 

Killing Iran’s Economy Won’t Help the U.S.

The Trump administration has announced a set of seemingly aggressive policies against Iran, including decertifying the nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA). The thrust of the “new” U.S. policy on Iran appears to be the imposition of additional sanctions against organizations such as the Islamic Revolutionary Guards Corps (IRGC). Critics of the JCPOA claim that new sanctions will not only “fix” the JCPOA, but also help roll back Iran’s increasing influence in the Middle East. Both assumptions are wrong.

The JCPOA has been effective in constraining Iran’s nuclear program, a fact confirmed by the International Atomic Energy Agency and the other parties to the JCPOA, namely the United Kingdom, France, Germany, Russia, and China. The Trump administration’s actions not only risk undermining an effective agreement, but are unlikely to change Iran’s regional policies or weaken the Iranian regime at home. Iran’s economy is likely to be damaged by any new U.S. sanctions, with foreign investment having already slowed in response to Trump’s rhetoric. The biggest losers will not be the Iranian regime but the Iranian people,  whose striving the U.S. has long hoped would bring about a less antagonistic Iran.

The IRGC is responsible for Iran’s impressive expansion across the Middle East. Iran is a primary power-broker in Iraq, Syria, and Lebanon; Tehran also wields substantial influence in Afghanistan and even in relatively far off countries such as Yemen. The IRGC is also a major economic player in Iran. So it may seem to make sense that sanctions against the IRGC would help curtail its power in the Middle East. Yet the opposite is true.

Money is not the IRGC’s only motivation in shaping Iran’s regional policies. Rather, a combination of revolutionary zeal, fear of external enemies, Iranian nationalism, and regional instability have also fueled the IRGC’s successes in the region. Yes, it does take substantial funding for Iran to expand its power. Tehran not only funds Hezbollah and the Assad regime in Syria, but a myriad of pro-Iranian groups in Iraq, Afghanistan, and Palestine. But Iran was able to expand its regional power even under the severest of sanctions imposed prior to JCPOA. The rise of the Islamic State and state collapse in places such as Syria have allowed Iran to exploit fear and instability to expand its power. The region’s Shi’a populations, while not always ideologically aligned with Iran, have little choice but to turn to Tehran for protection in the face of extremist Sunnis. Iran does not need billions of dollars to be powerful given the IRGC’s ability to mobilize historically disaffected Shi’a to their cause.

New U.S. sanctions are also likely to undermine President Hassan Rouhani’s attempts to liberalize the economy. Opponents of the JCPOA often claim that “moderates” such as Rouhani are indistinguishable in terms of goals and ideology from the IRGC. No one in Iran’s political establishment can be considered pro-American; yet to ignore or deny political realities in Iran does a disservice to American interests. Rouhani’s government was able to negotiate the JCPOA in spite of Supreme Leader Ayatollah Ali Khamenei’s deep suspicions. The Iranian president hoped that the sanctions relief promised by the JCPOA would help liberalize Iran’s economy and attract substantial foreign investment, decreasing Iran’s dependence on energy exports and potentially weakening the IRGC’s grip in key economic sectors.

To be sure, economic liberalization may enrich Rouhani’s faction and regime insiders largely opposed to American influence in the region; but millions of middle class Iranians who envision better U.S.-Iran relations will also benefit from privatization, foreign investment, and the attendant new job opportunities. U.S. sanctions against the IRGC, which could slow the process of liberalization, will ultimately punish all Iranians, including those who want better ties with Washington. Khamenei’s claims that America can never be trusted will appear increasingly as fact rather than mere political rhetoric. The Trump administration’s efforts to decertify Iran and undermine the JCPOA without justification will reinforce the Iranian public’s suspicions of U.S. intentions. This also would quiet any segment of the Iranian public that might object to Iran’s nuclear pursuits at high cost to the economy.

The IRGC will not stop its expansionism in the Middle East because of sanctions. And sanctions will not weaken the Iranian regime at home. Sanctions may have worked in building American leverage before the JCPOA. But, political conditions in Iran and America’s standing both in the Middle East and across the globe have changed considerably in the last few years. The U.S. is losing its credibility among the Iranian public and U.S. allies who helped negotiate the JCPOA. And Iran is more powerful in the Middle East than before, especially as international powers such as Russia, regional states such as Iraq, and even Turkey turn to Iran as the region’s decisive actor. The biggest losers will be the Iranian people, caught between punitive U.S. policies and a illiberal regime.

Photo Credit: Thomas Cristofoletti