Responding to Sanctions from the Supply-Side

One of the fundamental asymmetries of sanctions policy is that countries that apply sanctions have many opportunities to do so. Countries targeted by sanctions are usually only targeted once. Those using sanctions get to practice their economic statecraft. Those facing sanctions get a single shot to try and secure their economic survival.  

The question of how countries use their one shot has been little studied, especially since the emergence of financial sanctions as the primary tool of Western economic statecraft. This is a fundamentally important area of study. The efficacy of sanctions is a function of the resilience of the target. If a target can resist the coercive effects of sanctions in the medium-run, it is less likely that the sanctions will lead to the intended change in behaviour, particularly if the intended behaviour change is significant. Being able to estimate the resilience of the target is therefore a requirement for the judicious use of sanctions.

In a recent essay, I discussed how the Russian economy might respond to sanctions. My analysis drew on the experience of Iran, a country that has proven remarkably resilient in the face of the most expansive sanctions ever imposed. President Trump’s Iran envoy, Brian Hook, once stated “Because of our pressure, Iran’s leaders are facing a decision: Either negotiate with us or manage economic collapse.” We know that Iran managed to stave economic such a collapse. But was Iran’s response to the sanctions-induced economic crisis a good one?

Iranian economic policymaking is about as deft as in most middle-income countries. The grit of firms and households, which fought hard to prevent their own financial ruin, flattered Iranian policymakers. There were some successful policy interventions, such as a move to better regulate foreign exchange through the creation of a new parallel market, and the limited use of cash transfers to soften the blow of the economic downturn on households. But overall, it is difficult to conclude that Iran is a case study for an effective policy response to a sanctions crisis.

This is not to say Iran lacks sharp minds. But in the fog of economic war, a misunderstanding of the nature of the economic crisis and a reliance on textbook economics, combined to prevent a more nimble and effective policy response. The policy failure reflected an inability to respond to the key economic impact of sanctions—higher rates of inflation—with the correct set of policy tools. The Iranian government responded to persistent high inflation through a combination of monetary and fiscal interventions. Absent was any active industrial policy. This may come as a surprise. Helmed by a “revolutionary” government, Iran might have been expected to favour economic centralisation and public investment in its response to economic crises. But as a review of the statements and commentary of leading economic policymakers and economists makes clear, whether the interventions were monetarist or Keynesian, they have generally been focused on shielding aggregate demand from the sanctions pressure by seeking to control inflation or to compensate for its effects.

In a recent op-ed in the Financial Times, Iran’s finance minister, Ehran Khandouzi declared that the Raisi administration is seeking “to change the course of fiscal policy,” by aiming to “promote economic growth, price stability, and inclusive growth.” As part of this plan, Khandouzi called for “increasing government investment,” noting that the “public sector must play a more active role in investing in physical capital.” The timing of the op-ed was curious—talks over the future of the Iran nuclear negotiations have languished. By publishing his commentary in a leading international newspaper, Khandouzi may have been aiming to signal the Raisi administration’s readiness to engage with the global economy. Even so, the message of the op-ed was calculated. While Khandouzi notes that the negotiations in Vienna “could potentially lead to positive economic outcomes for Iran,” he concludes by explaining that the country is “ready for whatever scenario emerges — pessimistic or otherwise.”

In recent years, supply-side responses to inflation have come to the fore, particularly after the COVID-19 pandemic during which Western governments experienced inflationary pressures directly related to supply chain disruptions. As Yakov Feygin has written, the COVID-19 crisis “created bottlenecks in the production of practically every commodity.” For Feygin and other supply-side economists, the pandemic was a clarifying moment that “an active industrial policy” was a necessary part of any response to the “upward pressure on prices” that emerged as households continued to demand consumer goods and durables at a time when factories were forced to cut back production. Such an industrial policy would see policymakers “use the spending power of the government to issue long-term capital to vital but low-margin sectors.”

Could Khandouzi’s call for a “change in fiscal policy” see the emergence of an active industrial policy and a true supply-side response to inflation? Iran’s Supreme Leader, Ali Khamanei, has frequently cited the need to increase domestic production, which has been interpreted as a nod to import substitution. In an address given in March marking the start of the Iranian new year, Khamenei declared that “Production is the key to solving economic problems and the path to pass through economic difficulties.” However, looking beyond the Supreme Leader’s slogans, it is notable that more economic policymakers in Iran are increasingly connecting the specific problem of high prices to the challenge of low production. In a 2020 interview, Ali Salehabadi, now serving as governor of the Central Bank of Iran, expressed a decidedly supply-side outlook. “It goes without saying that the root of inflation in our country is not only monetary, but also related to real variables such as production. That is, increasing production in the long run will reduce inflation. Therefore, the growth of production will make the preparations for improving the living and economic conditions of the people,” he said. For his part, Khandouzi highlighted how “negative net investment in recent years” is “severely undermining future production and household welfare.”

There is no doubt that sanctions induce monetary and fiscal shocks that explain a significant portion of their inflationary impact. Moves to freeze Iran’s central bank reserves led to a shortage of foreign exchange. This weakened the Iranian rial. The Iranian government also printed money to finance budget deficits caused by the impact of sanctions on government revenues, principally oil revenues. But to fully capture the macroeconomic impact of sanctions it is important to look at goods, and not money alone. Financial sanctions hurt because they are the most effective means to determine what goods a target country can buy and sell in global markets. Sure, sectoral sanctions and export controls impact trade, putting pressure on the target country’s balance of payments. But countries have a knack at finding new buyers and suppliers (and intermediaries) who are willing to skirt these measures. What proves harder is finding banks willing to facilitate payments to those buyers or suppliers. It was not until financial sanctions cut Iranian banks, including the country’s central bank, from the global financial system in 2012, that there was a major impact on Iran’s current account. If an economy is highly import dependent, these disruptions have a direct inflationary impact. If the targeted country is relatively industrialised, producing more of the goods it consumes domestically, then the impact is less direct. This is the case in Iran and likely for Russia. In Iran, a decade of diminished imports of raw materials and intermediate goods have suppressed industrial output, in turn creating upward pressure on prices. In other words, consumer prices rose because producer prices rose. Iran experienced a supply-side shock.

As the short-run shock gives way to medium-run stagnation, persistent inflation and other economic impacts, such as unemployment, will lead to reduced demand—this is demand destruction. But in the immediate period after the imposition of sanctions demand remains mostly unchanged, even as inflation mounts. Households are inherently reluctant to cut back on spending in ways that will appreciably reduce quality of life and will therefore dip into savings. As prices rise further, families will increase the proportion of their expenditure on key categories, such as food and other consumer goods, including durables—demand for these goods is relatively inelastic. These are also the goods that Iran’s manufacturing sector tends to produce, given the large domestic market. This is partly why the supply-side challenge emerges. Consider the spending behaviours of a middle-class family in the aftermath of a sanctions shock. As the economic outlook worsens and as inflation expectations rise, that family will cut back on discretionary spending. They may delay the purchase of a luxury car or cancel a planned vacation abroad. But those decisions do not alleviate broader, society-wide price pressure because that consumption was either met through imports or facilitated by the Iranian services sector and not underpinned by domestic industry.

In more formal terms, under a major sanctions programme, aggregate demand in the targeted economy will fall. But in a relatively developed economy with a large domestic manufacturing base, the contraction in aggregate demand will be smaller than the contraction in aggregate supply for two reasons. First, uncertainty over future demand will see producers reduce investment. While sceptical of government interventions, Iranian private sector business leaders have sounded the alarm that a decade of low-investment is hitting production. Second, even when firms do have the means to invest, they may not be able to do so. Sanctions can prevent firms from acquiring the needed machinery and equipment, leading to the degradation of the capital stock and a drop in output. For example, sanctions on the Iranian oil sector made the acquisition of equipment more difficult, leading to concerns over the productive capacity of oil and gas fields.

Implicit in this analysis is the assumption that in the medium-run, sanctions will be lifted. Even so, the effects of reduced investment are significant. In the short-term, as producer prices rise, aggregate supply falls faster than demand, adding to inflationary pressure. But the nature of this contraction is where the real pain of sanctions lies. The shift in aggregate supply is not temporary, and it cannot be fully reversed through the lifting of sanctions because of a change in the elasticity of aggregate supply. In other words, enduring sanctions makes it fundamentally more difficult for an economy to bounce back when sanctions are eventually lifted in the medium-run. The relationship between the elasticity of aggregate supply and extended economic recessions has not been well-studied. This may be because a normal recession, even if lengthy, does not inherently impact the components of long-run aggregate supply—land, labour, capital and, productivity. But sanctions do not cause normal recessions. Sanctions prevent investment in capital goods by prohibiting or complicating the import of machinery and equipment. In this way, the prolonged lack of investment leads to a degradation of the capital stock. Mothballed facilities can be difficult to recommission and those assembly lines that do restart may be using obsolete technology. Iran’s leading automaker still produces the Peugeot 206, which was first introduced in France in 1998. In this way, while the lifting of sanctions may lead to a recovery of demand, particularly as restored foreign exchange revenues serve to strengthen the currency and boost purchasing power, producers may not be able to rapidly increase output in response to the expansion in demand.

The implication is that policymakers ought to think about major sanctions programmes—those that induce several years of high inflation—from the supply-side. In the short-run, the primary economic impact of sanctions is higher inflation, but in the medium-run, even after the lifting of sanctions, the pain of sanctions lingers as supply remains constrained. This is also why the beneficial impact of sanctions relief on the monetary and fiscal situation of the target country may not be sufficient to lead to a normalisation in price levels. On one hand, the upfront capital expenditure necessary to overhaul productive sectors may be prohibitively high after an extended period of underinvestment—in the aggregate, the targeted economy will struggle to ramp-up production at pre-sanctions rates. On the other hand, turning to imports to compensate for the new inelasticity of domestic supply will introduce its own price pressures, particularly given the lingering effects of sanctions on foreign trade, such as higher transaction costs. Under these conditions, sanctions relief is insufficient to deliver growth. As Nicholas Mulder and I have argued, countries ravaged by sanctions require sanctions reconstruction.

This analysis suggests that true sanctions resilience requires supply-side interventions. Finding ways to prevent the contraction in output is more important than trying to shore consumption, especially given the ways in which greater inelasticity in supply will diminish the prospects for the sanctioned country to recover under conditions when sanctions are eventually lifted. Taking this view, the response of Iranian policymakers to the inflation problem is peculiar. The focus on monetary policy reflects a textbook approach. Even in the aftermath of sanctions that obviously degraded supply chains and limited production, Iranian officials primarily viewed inflation as a phenomenon related to the growing money supply, which needed to be addressed through tighter monetary policy and higher interest rates. To put it another way, the response to the crisis focused on the production of money and the price of money, even though the sanctions crisis was largely, if not predominantly, about the production of goods and the price of those goods. This is why the rise of supply-side rhetoric among Iranian economic policymakers is so intriguing.

Beyond the economic significance of any forthcoming change in Iran’s policy response to sanctions, there are political implications that ought to be considered. If belated supply-side interventions make countries like Iran more resilient to sanctions, beyond the levels of resilience currently observed following faltering and orthodox demand-side interventions, sanctions may become less effective over time, especially as those countries yet to be targeted with economic weapons learn from the experiences of those that have.  

Counterintuitively, greater economic resilience among sanctions targets may also benefit those states imposing sanctions. If targeted countries can successfully devise an industrial policy that minimises the negative impact on the elasticity of aggregate supply, for example through financial support for productive firms and greater efforts to protect supply chains for machinery and equipment, it will make the economy more responsive to sanctions relief and reduce medium-run price distortions. Policymakers applying sanctions tend to do so under the false impression that sanctions can be imposed and lifted with the flip of a switch. Sanctions can certainly be imposed quickly—the sanctions imposed on Russia were applied with record speed. But their rollback is laborious, and the economic benefits can be slow to materialise, in large part due to the changes in the components of aggregate supply. Good sanctions policy requires maximising short-run pain while minimising medium-run harms. For both policymakers applying sanctions and those seeking to resist sanctions, better policy outcomes require supply-side thinking.

Photo: IRNA

Eyeing Oil Revenues, Iran’s Public Sector Workers Demand Higher Wages

In its first 200 days in office, the Raisi administration has encountered massive labour mobilisations. In late January, medical personnel across the country’s hospitals and universities joined the picket line. In February, teachers reportedly staged demonstrations in over a hundred urban areas. Last month, pensioners and welfare beneficiaries rallied in more than a dozen major cities. 

Motivated mostly by wage grievances, protestors have adopted a range of assertive slogans and demands. In one provincial city, teachers hung up a big banner that read: “Raisi, Qalibaf, this is the final message: the teachers’ movement is ready to revolt.” Pensioners called Raisi a “liar,” blamed his government for neglecting “the nation,” demanded an end to “oppression,” and called for the immediate release of political prisoners.

Commentators have lumped these labor protests together with other recent protest actions. A recent Financial Times report suggested that workers’ rallies and protests over water rights indicate growing popular discontent with the country’s economic record, leaders, and political institutions.

But these broad explanations fail to capture the undercurrents of the labour mobilisations of recent months. Iran’s economy has been doing poorly for years and dissatisfaction with the government is nothing new. It would also be wrong to assume that labour protests are motivated by general public dissatisfaction. In fact, most of the large and coordinated protests have been staged by a rather specific type of worker: state employees. These are relatively educated and privileged workers, employed in protected administrative and professional jobs in Iran’s state bureaucracy and civil service.

Protests by state employees need to be understood in the context of negotiations over the country’s annual budget. The annual budget, which sets wage levels across the public sector, is approved by the Iranian new year in late March. Workers often mobilise during annual budget negotiations, a drawn-out process involving multiple state actors and institutions. Sectoral and labour pressure tends to intensify when negotiations reach their final stages.

While budget-related protests are a routine occurrence, they have been especially widespread this year because workers are emboldened by the prospect of higher oil revenues. The international price of oil has spiked over the past months and state authorities have already revised projected oil revenues upward. Iran is also in advanced negotiations on the country’s nuclear programme, which may result in sanction relief, potentially unlocking billions of dollars in government income. 

As employees of the Iranian state, public sector workers hope to benefit from these injections of oil money into Iran’s fiscal system. State employees are mobilising now in an attempt to lock in favourable spending commitments for the upcoming fiscal year. In 2014-2015, when Iran was in similarly advanced talks with the Obama administration over sanctions’ relief, public sector workers also mobilised in large numbers. 

A final factor is the legitimacy of the Raisi government itself. Coming to power last year through manipulated elections and record low turn-out, Ebrahim Raisi has been eager to display himself as tolerant and understanding of the country’s impoverished urban middle classes. Raisi has tried to court Iran’s historically reformist-leaning middle classes to gain a degree of popular legitimacy and consolidate his tenuous leadership among various hardliner factions.

Teachers, pensioners, and nurses represent a bloc of reformist-leaning state employees that have coordinated protest actions over the past months. Rather than cracking down on their rallies, security forces have relied on containment and targeted repression—strategies which, so far, have not been successful in preventing further protests.

Teachers have staged by far the largest rallies, winning major concessions in the process. They began protesting right when Raisi came to power in August 2021. Nationwide strikes in November 2021 put pressure on parliament to finalise an expensive piece of employment law that teachers’ unions had long lobbied for. Emboldened by this legislative victory, teachers have continued to protest to make sure that the government allocates enough money to the program.

Teachers, pensioners, and nurses have long complained that government spending prioritises state employees in the armed forces, judiciary, police, and the security apparatus. Over the past months, the government has tried to address their concerns about pay discrimination by reigning in salary increases in these relatively privileged and conservative-leaning parts of the state.

Notably, in January, parliament rejected a bill on payroll spending in the judiciary. Judiciary workers and lawyers immediately responded by taking to the streets, angered by the fact that Raisi, their former boss and patron, had hit their interests so openly. The judiciary protestors argued that they too have a range of legitimate concerns, including having to rely on corruption and bribe-taking to top off their salaries.

In response, the head of the Administrative and Recruitment Organisation justified limiting spending on judiciary salaries by stating that it would “create dissatisfactions in other government bodies.” Mehdi Taghiani, a hardliner MP from Esfahan, made a similar claim. “Severe inflation over the past years has reduced the purchasing power of all workers, not just one specific group in the civil service. If we increase salaries in the judiciary, it will lead to a domino effect by which pay discrimination will eventually lead to the collapse of the government’s financial system,” he stated. 

The Raisi government has tried to sell its fiscal policies as prudent and responsible to the outside world. Iran’s finance minister recently proclaimed that the country’s new budget “includes a number of structural reforms.” Such structural reforms, he explains, include “increasing the salaries of government employees at rates less than the inflation rate.”

Yet, the final budget, which was approved several days ago, shows little evidence that the government is committed to austerity and lowering labour costs across the board. The budget increases spending on education by 40 percent, almost double last year’s raise. The government also decided to increase the official minimum wage in the upcoming Persian year by over 50 percent, which will take its real value back to 2017 levels.  

In a move away from austerity, the budget contains a variety of cuts and concessions that are part of Raisi’s strategy to mediate between various public sector demands while trying to win over sceptics and opponents. These policies will not only fail to address fundamental labour concerns, but internal rivalries and sectoral interests within the public sector will almost certainly continue to undermine labour solidarity. Teachers and judiciary personnel, for instance, have refused to express support for each other’s struggles. After the judiciary protests in early January, the Twitter feed of Mohammad Habibi, an outspoken leader of the largest teacher’s union, remained unusually quiet. Long-standing competition over the allocation of state resources have led to mutual suspicions will prove difficult to overcome.

Photo: IRNA

Removing the IRGC from the FTO List Risks Nothing

As we wait for the resumption of the Iran nuclear negotiations, reports indicate that the “final hurdle” is Iran’s demand for the removal of a key sanctions designation. Iranian negotiators are seeking the removal of the Foreign Terrorist Organisation (FTO) designation placed on the Islamic Revolutionary Guard Corps (IRGC), part of Iran’s armed forces. The FTO designation was imposed by the Trump administration in April 2019.

President Biden will probably lift this designation to clear the way for the mutual restoration of the Joint Comprehensive Plan of Action (JCPOA). The restoration of the JCPOA would see Iran’s nuclear programme once again placed under the strictest monitoring and verification regime ever devised, ending a four-year period of growing concerns over possible Iranian proliferation. But even with the enormous security gains on offer, Republic lawmakers and other critics are suggesting that the removal of the FTO designation is an unacceptable concession to make.

The arguments being made against the removal of the FTO designation are weak. More judicious critics of the move concede that little is at stake. Matthew Levitt of the Washington Institute for Near East Policy has written that the designation “was largely symbolic” and that its removal “would have few if any legal implications.” Still, he considers removing the FTO label to be a “terrible idea”—a determination that reflects how politics can trump pragmatism in American policymaking.

Levitt makes four arguments as to why Biden should not remove the FTO designation. First, he argues that Iran is treating the removal of the FTO designation as a red line because the leadership “wants something it can point to when attempting to persuade investors that it is not really involved in terrorism.” Levitt ignores the fact that the Iranian leadership has not demanded the undoing of October 2017 designation of the IRGC as a Specially Designated Global Terrorist (SDGT). Nor has Iran insisted that its status under US law as a State Sponsor of Terror be rescinded. Iran is obviously not seeking to change the minds of foreign investors, whose decisions to engage in the Iranian market will remain predicated on significant due diligence to avoid transacting with IRGC entities, all of which will remain under sanctions. Iranian negotiators are seeking the removal of the FTO designation to demonstrate to the IRGC’s leadership that a constructive stance towards diplomacy with the United States can bear fruit. It is precisely because the imposition of the FTO designation was politically symbolic that its removal is being sought.  

Second, Levitt argues that because Iran has insisted that the “nuclear negotiations must remain focused on its nuclear activities alone,” it would be a mistake to “provide relief from any terrorism-related sanctions.” Doing so would “undermine the efficacy of other non-nuclear sanctions.” But this argument is undercut by the Trump administration’s own messaging. The White House statement on the FTO designation makes clear that the move was not imposed as a discrete action to counter Iranian terrorism, but rather as a means to “significantly expand the scope and scale of our maximum pressure on the Iranian regime.” A central feature of the “maximum pressure” campaign was the “sanctions wall,” a rapid expansion in the scope of the Iran sanctions programme intended to make it more difficult for President Biden to re-enter the Iran nuclear deal.

Given that the FTO designation was symbolic and that its removal will not meaningfully change the legal status of the IRGC, the designation was clearly imposed with another goal in mind. The FTO designation was a non-nuclear sanctions measure imposed to make nuclear diplomacy more difficult. If removing the designation is necessary to secure the tremendous national security benefits of the JCPOA, then doing so is justified. In fact, failing to remove the designation would undermine the efficacy of US sanctions policy because it would prove that presidents can tie the hands of their successors in ways that make diplomacy nearly impossible to conduct.

On a related note, Levitt claims that “to protect the credibility of US sanctions authorities worldwide… the IRGC should not be removed from the FTO list until there is evidence it has ceased terrorist activities.” This is, on face, the most logical argument being made by those opposed to the removal of the FTO designation. The IRGC will almost certainly continue to engage in its “forward defence” activities, including support for proxies that the US considers terrorist groups, in the aftermath of the nuclear deal. At the same time, removing the designation would not increase the threat posed by the IRGC. Speaking to reporters last week, CENTCOM commander General Kenneth McKenzie explained that he did not expect the removal of the FTO designation on the IRGC to impact US forces. “In terms of the way we think about [the IRGC], in the terms of the way we think about the threat, and what they do on a daily basis across the theatre, I don't think much would change,” he stated.

Given that any operational impact will be limited, there are two reasons why the removal of the FTO designation is warranted absent a change in behaviour. First, the removal of the FTO designation cannot be construed as a signal that the IRGC has ceased its support for terrorism. The organisation will remain subject to wide range of sanctions, including the SDGT designation and there will be no change in messaging from the Biden administration on this point. Second, the US government also assesses that the IRGC has major influence over Iran’s national security doctrine. That the nuclear negotiations have reached this late stage clearly demonstrates that there is a consensus among Iranian policymakers, including among the ranks of the IRGC, that restoring compliance with the JCPOA is in the country’s interest. Returning to Levitt’s concern over the credibility of US sanctions, a symbolic move to recognise the IRGC’s inherent support for the successful conclusion of the Iran nuclear negotiations is sensible, especially as the Biden administration aims for future dialogue on a wider set of security concerns.

Finally, Levitt points to a “serious messaging problem” and claims that “America’s partners and allies in the region” would be dismayed if the US were to “take pressure off the [IRGC] by delisting it.” Israeli Prime Minister Naftali Bennet and Foreign Minister Yair Lapid have written a joint letter urging President Biden not to scrap the FTO designation. Reports claim that UAE leaders are “shocked” that the FTO designation may be removed. But these various protests appear to be part of the horse-trading by partners and allies that has long burdened Biden’s efforts to restore the nuclear deal. By seeking to impose political costs at this late stage, regional leaders are aiming to extract their own concessions from the Biden administration as part of their acquiescence to a nuclear deal that looks increasingly likely.

Even so, GCC leaders have yet to directly comment on the possibility that the FTO designation will be removed. The possibility of removal became public knowledge in the summer of last year. The GCC issued a joint statement with the United States in support of the JCPOA last November. It is highly unlikely that the GCC leaders would treat the removal of the FTO designation as a kind of red line given their interest in maintaining a regional security dialogue that includes bilateral engagement with Iran. Senior Saudi and Emirati officials have held meetings with Iranian officials, including those linked to the IRGC, over the past year. Consider also that the UAE just hosted an unrepentant Bashar al-Assad, leaving the Biden administration “troubled.” Clearly, regional leaders are ready to set optics aside when there are hard security benefits to be gained.  

Given the noise about the FTO issue over the last few weeks, the Biden administration is already paying a political cost for the anticipated removal of the designation. But the administration should not lose sight of what will be gained. Removing the designation in no way changes the legal or political status of the IRGC, but it does enable the restoration of the Iran nuclear deal. For those who care about US national security, the choice is clear.

Photo: IRNA

Iran, Russia, and the Limits of Financial War

In response to Vladimir Putin’s increasingly brutal invasion of Ukraine, the West has declared a financial war on Russia. The US Department of Treasury unveiled new sanctions on the Russian financial sector late last week, measures that “target nearly 80 percent of all banking assets” in the country. Forthcoming sanctions on the Central Bank of Russia (CBR), announced by the European Union jointly with the United States, United Kingdom, and Canada, will effectively freeze Russia’s gross international reserves. Further measures targeting Russia’s energy sector will make the Western sanctions programme among the most expansive ever devised, and certainly the most significant to target such a large economy. There has been impressive coordination between US and European authorities in designing and implementing these sanctions, which have been justified by Putin’s provocations. In their rapid imposition and their broad scope, these sanctions are clearly intended to have significant deleterious effects on the Russian economy. The strategy has shifted from deterrence to attrition and from targeted measures to full financial war.  

The only other comparable financial war waged by the United States and Europe has targeted Iran. The Iran sanctions were applied more gradually than those being applied to Russia today. But in 2012, Iran’s central bank assets and energy exports were targeted in move that will be the model for the sanctions on CBR and Russia’s energy industry. These sanctions were initially multilateral in nature, with UN, US, and EU measures imposed in tandem. The multilateral sanctions were in place until 2016, when the implementation of the Joint Comprehensive Plan of Action (JCPOA) saw the lifting of most UN and EU sanctions as well as US secondary sanctions. Iran benefited from sanctions relief for just two years, enough time for a return to economic growth, but not enough time for a remediation of the harm that sanctions had caused most Iranian households. In 2018, President Trump withdrew from the JCPOA and reimposed US secondary sanctions on Iran, once again thrusting Iran into an economic crisis, later compounded by the COVID-19 pandemic.

Broadly speaking, the financial war on Iran has been in effect for a decade. The damage incurred by the Iranian economy has been extensive. Currency volatility and high inflation have sapped Iranian purchasing power, pushing millions of Iranians below the poverty line. Chronic weaknesses of the Iranian economy, such as high unemployment and systemic corruption have been exacerbated. Still, despite the many hardships, the Iranian economy did not collapse. Rather, the economy stagnated, growing an average of just 0.37 percent between 2012 and 2020. When excluding 2016 and 2017—the two years of sanctions relief under the JCPOA—the average falls to -1.96 percent. A decade of stagnation and the diminishing welfare of ordinary Iranians combined to create new political pressures on the Iranian government. Labour mobilisations have become commonplace and there have been multiple waves of nationwide protests focused on economic grievances. These protests have been violently suppressed by authorities. Even so, the Iranian government is today pursuing sanctions relief—in the context of renewed negotiations over the JCPOA—not because of fears an impending economic collapse, but because of a view that economic resilience allows Iran to engage in negotiations from a position of relative strength, seeking the conditions for a return to growth.

Unsurprisingly, Iran has become a touchpoint in the discussion around the growing Russia sanctions programme. But the focus has been the Iranian precedent for key moves, such as the removal of Russian banks from the SWIFT messaging network. So far, there has been little consideration of what the outcomes of the financial war on Iran might tell us about the prospects for the financial war on Russia. The cases are not only comparable because of the kinds of sanctions that are being applied, but because the two economies share important similarities. Of course, Russia and Iran are both major energy producers and revenues from oil and gas exports are centrally important for government budgets. But the two countries also boast large manufacturing sectors principally supplying internal markets. Despite general corruption and rentierism, key institutions exhibit technocratic sophistication.

In response to the 2012 and 2018 sanctions shocks, Iran demonstrated that its flawed economy could undergo structural adjustments to sanctions pressure. Such adjustments begin immediately, meaning economies targeted by sanctions can return to fragile growth in as little as a year. In Iran, this capacity for adjustment reflected the bottom-up resilience of households and companies seeking to survive the financial war. The Iranian state lucked out. Officials boasted of their “resistance economy” policies, despite failing to develop a cohesive response to sanctions pressure. Meanwhile, the composition of the Iranian economy meant that sanctions pressure could be absorbed. There is reason to believe that Russia will also absorb such pressure. Across key indicators, Russia appears in a stronger position than Iran was at the outset of its financial war.  

Access to Foreign Exchange

Sanctions targeting a country’s central bank are the most significant measure in any financial war because of the direct impact on the national currency. During the Trump administration’s “maximum pressure” sanctions campaign, Iranian authorities maintained ready access to just 10 percent of the country’s gross international reserves, putting enormous pressure on the Iranian currency and making it very difficult for Iran to manage deficits with key trade partners. In January 2018, a few months before Trump announced his withdrawal from the nuclear deal, the free market dollar exchange rate in Iran was IRR 46,000. Today the exchange rate is IRR 263,000. The dramatic devaluation of the rial is often cited as evidence of the devastating impact of US sanctions. Indeed, devaluation made imported goods, including foodstuffs like wheat, on which Iranian households rely, more expensive. But the Iranian government demonstrated an ability to return order to currency markets, both by finding ways to supply foreign exchange into the market despite sanctions and also through better technical management of the market itself, including through the creation of a parallel market whereby exporters are required to sell foreign exchange earnings to importers. Russia is arguably in a better position than Iran to weather the attack on the value of its currency. It has gone through this storm before—the rouble lost half its value following the imposition of more limited sanctions in 2014, as part of the Western response to the annexation of Crimea. In response to the latest crisis, CBR has already hiked interest rates to 20 percent and imposed a new requirement for companies to repatriate foreign exchange earnings. If we assume that the 10 percent figure represents maximum efficacy for the freezing of central bank reserves, then that would leave CBR with access to approximately $63 billion. However, Russian reserves are equivalent to about 42 percent of GDP. In 2012, Iran’s reserves (then $104 billion) amounted to just 17 percent of GDP. So even if a similarly small percentage of the reserves remain available to CBR following the implementation of the financial sanctions, Russian authorities could fare better than their Iranian counterparts in stabilising the value of the rouble after the latest devaluation shock caused by the financial sanctions.  

Energy Revenues and Fiscal Space

Despite initial attempts to create carve-outs for Russia’s energy exports, motivated by a desire to shield Europe from an economic shock and to leave room for escalation, it now appears likely that Russian energy exports will be targeted by Western sanctions. In the case of Iran, such sanctions provided highly effective in reducing exports of crude oil and mostly effective at reducing exports of petrochemical products. Broadly speaking the purpose of energy sanctions is to induce a fiscal crisis. Even in periods in which Iran was permitted to export limited volumes of crude oil under so-called Significant Reduction Exemption waivers, the revenues from these sales could only be used for humanitarian trade, meaning that the fiscal constraints remained significant. In the lead-up to 2012, oil sales accounted for around 80 percent of Iran’s total exports and around 60 percent of government revenues. Russia has a significantly lower dependence on energy sales, which today account for around 60 percent of exports and around 40 percent of government revenues. Tax administration in Russia is also significantly more developed than in Iran. In 2020, the Russian government collected $387 billion in tax revenue, equivalent to around one-fourth of GDP. By comparison, tax revenue in Iran was just $32 billion in 2012, equivalent to one-twentieth of GDP. Like the Iranian government, the Russian government is not heavily indebted. In 2012, Iran’s government debt was equivalent to 10 percent of GDP. Government debt in Russia was equivalent to 16 percent of GDP in 2021. The Russian government is likely to have more fiscal space than Iran in the aftermath of the sanctions shock given a similar debt level and more robust revenue sources. Notably, Iran did not really use what fiscal space it had as part of its response to sanctions, choosing to run austerity budgets aimed at slowing inflation. Russia could take a different approach, directing state investment to compensate for the lost growth in the energy sector.

Dependence on Manufacturing

Russia is the world’s second largest consumer of natural gas. Iran is the fourth. These high rates of consumption reflect that natural gas is used for heating homes, for power generation, and as feedstock in the manufacturing sector. The energy sector in Russia will contract dramatically just as it has in Iran over the last decade, but it will not collapse in large part because of the important role of the manufacturing sector in the adjustment to sanctions and wider economic resilience. In 2012, Iran’s manufacturing sector accounted for 14.4 percent of GDP. In Russia, based on data for 2020, the manufacturing sector accounted for 13.3 percent of GDP. The sectors are of similar importance to their respective economies. But these statistics also underestimate that importance. The relative size of the manufacturing sector in Russia and Iran fluctuates with the oil price—high prices mean that the oil sector contributes more than usual to GDP. Moreover, in both countries the manufacturing sector is a larger employer than the energy sector, given the relatively limited manpower necessary to operate modern energy infrastructure. Manufacturing is the sector that really matters.

The latest World Bank report on Iran, which details the country’s fragile economic recovery, notes that recent growth has been driven by manufacturing. The report points to two aspects of the adjustment to sanctions: “Less market competition—due to import restrictions on nonessential goods—and the price competitiveness of manufacturing and mining production—following the currency depreciation.” The resilience of Iran’s manufacturing sector under sanctions has been further detailed in a study by Hadi Esfahani, who used firm-level data to show that “manufacturing firms adapted to the sanctions environment, and many resumed growth based on domestic demand and resources.” While the sanctions shock does lead to a contraction in the manufacturing sector, it is declining output, not “exits” that are to blame. In other words, manufacturing firms do not tend to go out of business. In fact, manufacturers who produce goods for export markets, especially regional markets, can grow their profit margins as they earn foreign exchange. This adjustment is easiest for firms engaged in light manufacturing, as demand for consumer goods is relatively inelastic and as production of these goods is less capital intensive, shielding manufacturers from higher producer prices. But to take advantage of these conditions, manufacturing firms must maintain output.

Shifts in Trade Composition

The fundamental challenge for the Iranian manufacturing sector since 2012 has been disruptions in the supply of inputs and high producer prices. In this way, the impact of sanctions on imports of industrial goods may be more consequential for the targeted economy than the impact of sanctions on the sale of energy products. Iranian manufacturing firms remain in business and continue to produce for a large domestic market and newly growing regional demand. But to do so, they needed to maintain imports of industrial equipment. Purchasing managers’ index data for Iran makes clear that the primary constraint on the manufacturing sector’s economic performance under sanctions has been the reduction in raw materials and intermediate goods inventories and the high cost of replenishing those inventories. Historically, intermediate inputs and equipment were sourced from Europe. But beginning in the late 2000s, China became a larger supplier. The financial war on Iran accelerated the shift in the country’s trade composition as Chinese suppliers proved more willing to sell to Iran in the face of sanctions. One way to express the relative importance of Chinese and European supply is to look at the ratio of exports from the two suppliers. In 2012, Iran imported 1.2 times more goods from China than it did from the European Union. But machinery imports (HS Chapters 84 and 85) from China and Europe were about equal. By comparison, Russia is significantly more dependent on Europe as its financial war begins. The total value of all imports from the European Union is about twice that from China. The dependence is slightly lower when looking at machinery—the total value of Chinese machinery exports to Russia is 70 percent of European Union exports.

On one hand, this higher dependence may mean that the sanctions shock to the Russian manufacturing sector will be greater than that in Iran. But on the other hand, it demonstrates that Russia has yet to make the “Eastward turn” that many have observed in Iran and other Eurasian economies. To be clear, Chinese firms did not completely ignore Western sanctions on Iran and did engage in de-risking that left Iran behind its regional neighbours with regards to economic ties to China. Bilateral trade has stagnated since 2012 and the inability of Iran to maintain significant oil sales to China for large periods over the last decade also posed financial challenges for maintaining industrial imports. But whereas Iran is one of China’s many economic partners in West Asia, Russia has presented itself as a unique geopolitical partner within a wider Eurasian context. This may make the difference as Russian manufacturers seek alternative suppliers for crucial industrial goods.  

Capital and Its Survival Instincts

If Russia does demonstrate a similar kind of economic resilience to Iran, that does not mean that there will not be economic hardship. In Iran, annual inflation exceeded 30 percent following the 2012 and 2018 sanctions shocks. Skyrocketing prices, especially for food products, pushed many working-class families into poverty. For a once upwardly mobile middle class, the diminished standard of living has been embittering. For most in Iran’s upper class, sanctions have been a nuisance. For some among the wealthy, they have been a boon.  

One unique feature of the Russia sanctions programme is the focus on oligarchs and the perverse influence that individuals with extreme wealth have on the country’s politics, particularly in their perceived fealty to Putin. Western officials are directly targeting these oligarchs, both by targeting their personal assets and through measures targeted at the conglomerates they own. The Moscow Exchange suspended trading last week after a massive sell-off saw the main index fall 50 percent. European and American regulators are promising to review the lax rules that have allowed Russian oligarchs to purchase extensive real estate in Western cities. In both capital markets and real estate, the wealth of Russia’s ruling classes has been augmented by the commingling of domestic and foreign investor capital. As foreign investors retreat from Russia, and as high-net worth Russians are blocked from foreign real estate markets, oligarchs will take a hit. But capital has its own survival instincts.

Russia’s capital markets are far more developed than those of Iran. Unlike the Moscow Exchange, the Tehran Stock Exchange has never hosted significant foreign investment. Still, capital markets did play a role in Iran’s sanctions response in a way that diminished the political, if not absolute economic, impact of sanctions. In 2019, deep into Trump’s restarted financial war on Iran, the Tehran Stock Exchange was the world’s best performing equity market, with market value doubling in dollar terms. There were three reasons for this remarkable performance. First, many listed companies, particularly manufacturing firms, were posting strong financial results after adjusting to the new sanctions reality. Second, high inflation left Iranians scrambling to invest in a safe asset while sanctions made capital flight difficult and costly. For middle class families, the safe havens were hard currency or gold. For upper class families they were domestic real estate or stocks. Third, as wealthy Iranians increased their exposure to capital markets, a policy shift took place. Suddenly, developing the capital markets became a priority for the government and for the nascent financial services industry, particularly with the aim of increasing the number of retail investors. More money poured into the market, even from middle class households, driving prices higher. The returns outpaced inflation, drawing in more investment, and giving rise to what many considered to be a dangerous bubble. But in the meantime, a new feature of Iranian political economy emerged. The newfound importance of the country’s capital markets, an outcome of the financial war, was exemplified in the decision of the government to liberalise a “justice shares” programme that had granted shares in state-owned enterprises listed on the stock exchange to disadvantaged families. Overnight, Iran had 50 million new retail investors with an interest in the political and economy stability that favours stock price appreciation.

By comparison, Russia has around 13 million retail investors. There is significant potential for domestic wealth to pour into the stock exchange, whether spurred by the inflationary environment or encouraged as a matter of new government policy. The implication is that capital markets are useful tools for preserving capital—the desperation of middle and working classes in Russia may help shore the wealth of oligarchs, already in stocks and real estate. Many of the enterprises that oligarchs control may successfully adjust to the new reality and remain profitable. A new class of “light” oligarchs may emerge as certain light manufacturing enterprises benefit from reduced competition and better export prospects. The financial war could also provide a pretext for state capture, with private capital facilitating rentierism, corruption, or smuggling deemed expedient in the face of sanctions.

Take all of this together and it becomes clear that the most problematic aspects of Russian political economy—the obscene concentration of wealth among a politically-connected ruling class—will remain unchanged in the financial war. Meanwhile, the immiseration of the middle and working classes will further disempower civil society, creating a dynamic where dangerous protests are the only means through which to air grievances and in which deprivation focuses those protests on wages and bread. As Bourse & Bazaar Foundation board member Djavad Salehi-Isfahani has shown, just as poverty has increased since sanctions were imposed on Iran, so too has inequality risen. The rich are not getting poorer, but the poor certainly are.

Confounding Aspects

Iran’s economic resilience in the face of sanctions owes little to the state and a lot to its people, who have simply tried to prevent their own financial ruin. Economies are made up of individuals—some wealthy, most poor—who marshal the resources they have. How those resources are distributed determines the effects of sanctions on the wider economy. When comparing the fundamentals of the Russian and Iranian economies—the depth of the comparison here is limited by my lack of detailed knowledge about the Russian economy—it seems reasonable to assume that Russia will endure its financial war. The composition of its industry, the size of its domestic and regional markets, and the resources available to the state are all comparable to what Iran had at its disposal in 2012 on the eve of the financial war that has now lasted a decade. Given the fundamental comparability of the Russian and Iranian economies, it stands to reason that the Russian structural adjustment to the newly imposed sanctions may not even require astute political leadership. This may be a good thing. The Iranian leadership was more inclined to pursue diplomacy when it believed that it had achieved a stalemate in the economic war.

As Nicholas Mulder has observed, “Perhaps the most confounding aspect of sanctions is that regardless of technical sophistication, their outcome is never a matter of economic factors alone.” Western governments will no doubt be able to cause massive damage to the Russian economy, but the individuals who comprise that economy will attempt to adjust. The Russian public, like the Iranian public, is at best ambivalent about the policies of their leaders in response to which sanctions have been imposed. In Iran, a decade later, there is a widespread sense that the price endured by ordinary people is no longer proportional to the wrongs committed by their government. If the sanctions persist in the aftermath of a cessation of the conflict in Ukraine—which is likely—a similar reality may come to pass for the Russia. In this context, the resilience of ordinary people in the face of financial war will not be an act of political resistance, but of basic survival. They will toil for low wages in factories and fields, struggling to put food on the table and at times they will protest, facing down the violence of the state. Meanwhile, the economy will stagnate. So too will a dismal political reality.

Photo: Getty Images

As Putin Invades Ukraine, Uzbekistan Feels Vindication and Fear

Vladimir Putin has begun his invasion of Ukraine, sending troops across the border to “defend” the Luhansk and Donetsk People’s Republics, which Russia has now recognized as independent states. The unfolding crisis in Ukraine offers the latest evidence of Putin’s irredentist obsessions and the ways in which those obsessions threaten the political and economic integrity of Russia’s neighbours.

Last week, Uzbekistan marked Ukraine’s “Day of Unity,” a Ukrainian national holiday. The façade of the historic Hotel Uzbekistan, overlooking Tashkent’s main square, was lit in the colors of the Ukrainian flag. Beyond shared affinities, Uzbekistan and Ukraine are both confronted by the challenge that is Putin. For Uzbekistan, the events unfolding in Ukraine validate a decades-long effort to hedge relations with Russia. But they also raise the spectre that Putin will no longer tolerate divided loyalties among the former Soviet republics.

As Maximillian Hess has written, Uzbek president Shavkat Mirziyoyev has sought to rebuild relations with Russia since coming to power in 2016. Mirziyoyev‘s predecessor, Islam Karimov, who led Uzbekistan from 1989 until his death in 2016, believed that “Moscow’s vision for Central Asia was to keep it as a colonial backwater.” In both security and economic spheres, Karimov challenged Russia’s regional dominance. Uzbekistan was an on-again, off-again member of the Collective Security Treaty Organization (CSTO), a military alliance of post-Soviet countries. Uzbekistan served as a staging ground for NATO operations in Afghanistan from 2001 to 2005. Karimov also delayed joining the customs union that preceded the founding of the Eurasian Economic Union (EEAU), Putin’s grand vision for an economic bloc.

Mirziyoyev’s ascendence to the presidency required horse-trading. Developing more constructive ties with Putin was an important aspect of his attempts to consolidate his authority after a power struggle with Rustam Inoyatov, the chief of Uzbekistan’s intelligence services. Inoyatov was eventually sacked in January 2018. In October of that year, Putin visited Uzbekistan bringing with him a large delegation of Russian companies. The visit saw the signing of contracts totalling $9 billion, including provisional agreements for the construction of a nuclear plant that would help Uzbekistan free its natural gas production for export.

But Mirziyoyev has also sought to limit Russian political and economic influence in Uzbekistan by pursuing a multilateral foreign policy and economic liberalisation. While Uzbekistan is expected to join the EEAU, Mirziyoyev has slow-rolled accession, meanwhile pursuing formalised ties with the European Union, including preferential trade terms under the EU’s  Generalized Scheme of Preferences. Uzbek officials have continued to engage with counterparts in the United States, building on a state visit by Mirziyoyev to Washington in May 2018. Since the outset of his term, Mirziyoyev has also sought to develop better relations with neighbours. At the heart of this strategy is a series of “consultative meetings” among Central Asian leaders that exclude the presence of either Russia or China, the two states that typically wield convening power.

In this way, Uzbekistan has hedged in its relations with Russia. While developing more constructive bilateral relations, it has also ensured that parallel developments in its foreign policy and economic agenda serve to circumscribe Russian influence. Recent events have shown the prudence of such an approach.  

In January, as protests accelerated into a full-blown political crisis in Kazakhstan, the Uzbek government reacted cautiously. But Putin’s deployment to Kazakhstan of a “peacekeeping” mission comprised of CSTO forces raised concerns over Russia’s respect for the sovereignty of its neighbours. Likely commenting on the circumspection of Uzbek leaders, Belarussian president Alexander Lukashenko issued a veiled threat to Uzbekistan, suggesting that the country’s failure to join CSTO would leave it vulnerable to “terrorists.”

For many Uzbek political commentators, the threat underscored the risks of posed by the increasingly irredentist Russia. Xushnudbek Xudoyberdiyev, deputy director of state news agency UzA and a prominent blogger, criticized Lukashenko, calling the CSTO a “trojan horse.” In a lengthy interview published two days after the threat, political analysts Farhod Tolipov and Kamoliddin Rabbimov questioned the wisdom of joining the EEAU.

Similar dynamics can be seen in the response to the Russian aggression against Ukraine. While Uzbek officials have yet to issue statements on the crisis, Uzbek editors and bloggers have been quick to label Putin a “savage,” a “criminal,” and a “bandit,” who has “lost his mind” and “spit on international law.” Political commentators have questioned the slow response to the new crisis from the Uzbek Ministry of Foreign Affairs and have also wondered about the risk posed by deepening economic ties with Russia.

Uzbekistan does not share a border with Russia—perhaps a silver lining of being one of just two double landlocked countries in the world. But the Ukraine crisis does have a bearing on Uzbekistan’s place in the political and economic order in West Asia. As Putin takes a more confrontational approach with the West, he may begin to see Mirziyoyev’s hedging of its relations with Russia as an afront, putting Uzbek elites with strong ties to Russia in a difficult position.  

Moreover, if Western countries place Russia under significant sanctions as is expected, the consequences for the Uzbek economy could be profound. Russia hosts 3 million migrant workers from Uzbekistan, whose remittances shore Uzbek household consumption. As the rouble comes under pressure and as the economy falters, these workers, already struggling due to Russia’s general economic malaise, will see their employment prospects diminish and the value of their earnings erode. The devaluation of the rouble would also hit Uzbekistan’s economic elite who maintain assets in Russian banks. Moreover, financial sanctions placed on those banks could see a significant portion of Uzbek wealth effectively frozen.   

Over the last five years, Uzbekistan has been one of the few former Soviet republics to enjoy political stability and economic prosperity. That alone sets Uzbekistan apart. But the country’s political and economic agenda is also unique given the ways in which it has sought to modulate Russian influence. Putin’s invasion of Ukraine vindicates that agenda, but it will also stoke fear. Among Putin’s complaints about Ukraine is that its leadership “preferred to act in such a way that in relations with Russia they had all the rights and advantages, but did not bear any obligations.” One can imagine a similar charge being made against Uzbekistan.

Photo: Kremlin.ru

How the UAE will Underwrite the Iran Deal's Success

As negotiations on the restoration of the Iran nuclear deal reach their “final stage,” doubts persist about whether the lifting of US secondary sanctions will really boost Iran’s economy. Iranian leaders are seeking “guarantees” that they will accrue the economic benefits promised under the Joint Comprehensive Plan of Action (JCPOA), citing both the disappointing experience of sanctions relief between 2016-2018 and the pall that has been cast by President Donald Trump’s unilateral withdrawal from the agreement.

Doubts around the JCPOA’s economic prospects revolve around whether European companies will bother to engage the Iranian market given the challenging experience of the last few years. But there is another trade relationship that arguably matters more for the future of the JCPOA.

The United Arab Emirates (UAE) did not play a significant role in Iran’s economic recovery during the period of sanctions relief between 2016-2018. This is notable because in the period leading up to the imposition of financial sanctions on Iran in 2012, the UAE was catching up to the European Union as one of Iran’s top trade partners. In the ten years from 2001 to 2011, UAE trade with Iran rose at twice the pace of European trade, rising from $2.2 billion to $24.2 billion. In the same period, EU trade with Iran rose from $12.8 billion to $36.8 billion.

According to data published by IRICA, Iran’s customs authority, UAE trade with Iran peaked in 2011 at $24 billion. That same year, data from Eurostat shows that EU trade with Iran also reached an all-time high at $36 billion. To put it another way, the volume of Iranian trade passing through the UAE was equivalent to two-thirds of Iran’s direct trade with the whole of Europe. During the first decade of the millennium, Iran underwent significant industrial development enabled by the forces of globalisation. Iran lacked a global port and global banks. But its proximity to the UAE offered a conduit to global markets. Dubai was to Iran what Hong Kong was to China in the 1990s—the world’s gateway to a fast-growing economy.

After the imposition of financial sanctions in 2012, both EU and UAE trade with Iran took a hit as the Iranian economy was thrust into a recession. EU trade with Iran averaged just $10.6 billion per year between 2012 and 2015. UAE trade fell less dramatically, given that a large portion of Iranian exports to the UAE, destined for third countries, is comprised of food and consumer goods that fall outside of the scope of sectoral sanctions. The value of UAE trade with Iran averaged $15.3 billion in this period.

In January 2016, the implementation of the JCPOA saw the lifting of a wide range of UN, US, and EU sanctions on Iran. EU trade with Iran rebounded sharply as Iranian exports to Europe rose, driven by oil sales. Iran used its euro-denominated revenues to purchase European goods, especially industrial goods. EU trade with Iran rose to $23 billion in 2017, still down compared to the 2011 peak, but a marked improvement over the period prior to the implementation of the JCPOA. By contrast, trade with the UAE did not rebound. Total trade between the UAE and Iran averaged $14.4 billion from 2016 to 2018—slightly lower than the trade volumes in the period before sanctions relief.

This is the overlooked aspect of why Iran’s experience of JCPOA sanctions relief was underwhelming. While trade with Europe failed to return to its pre-sanctions peak, the greater constraint on Iran’s economic recovery was that trade facilitated through the UAE did not really rebound at all. Consequently, Iran’s ability to engage with all of its trading partners remained diminished. Iranian and foreign companies seeking to do business in the aftermath of sanctions relief could not avail themselves of the most obvious and efficient financial and logistical channels to do so. 

For the last decade, UAE relations with Iran have been strained. The UAE was quick to support the multilateral sanctions on Iran, with Abu Dhabi reigning in Dubai-based banks and companies that had long profited from their links to Iran. Under instruction from the UAE central bank, commercial banks closed the accounts of Iranian companies and Iranian nationals. Multinational companies that had used their UAE-based subsidiaries to conduct business with Iran shifted their operations (Turkish banks emerged as an alternative financial channel for trade with Iran, especially for the European trade that persisted in the sanctions period). The UAE gave tepid support to the Obama administration’s efforts to constrain Iran’s nuclear programme but felt excluded from discussions around the possible impact of the deal, which seemed poised to tip the regional balance of power in Iran’s favour. On January 2, 2016, a crowd attacked the Saudi embassy in Tehran. Two days later, and just ten days before the JCPOA was formally implemented, the UAE downgraded its diplomatic ties with Iran. Over the next year, Mohammed bin Zayed, crown prince of Abu Dhabi, joined with Mohammed bin Salman, crown prince of Saudi Arabia, to push back on Iranian influence in the region. By the end of 2018, following a unilateral withdrawal from the JCPOA, the Trump administration had reimposed secondary sanctions on Iran in full, with the full support of UAE leaders.

In May 2019, the same month that Trump revoked a set of waivers permitting Iran to sell limited volumes of oil to its historic customers, four tankers were damaged in an attack off the coast of Fujairah. The attack, attributed to Iran, was the first incident in a series of escalations that constituted Iran’s response to the Trump administration’s maximum pressure sanctions. Just a few months later, the UAE dispatched a delegation to Iran to discuss maritime security. Leaders in Iran and the UAE eventually came to realise that renewed dialogue could help avoid a spiralling regional security crisis. In December of last year, Tahnoon bin Zayed, brother to Abu Dhabi’s crown prince and the UAE’s national security advisor, visited Tehran. The maturation of this diplomacy has been supported by economic engagement. Over the course of the last two years, the UAE has taken steps to reprise its role as a facilitator of Iran’s trade links, emerging as a key intermediary in Iran’s oil exports to China, despite these exports taking place in violation of US secondary sanctions.

Back in 2019, as the first signs of renewed economic diplomacy emerged, I argued that “Abu Dhabi can’t afford to keep Iran out of Dubai.” The argument still holds true. Dubai and the wider UAE have performed an economic miracle, emerging from the desert as a global center of trade and finance. But as a new analysis from the IMF makes clear, further growth and greater resilience will require regional economic integration. While the IMF report limits its discussion to GCC countries, a restoration of UAE-Iran trade to pre-sanctions levels would be an enormous catalyst for growth. UAE leaders are aware of this fact. In a statement jointly issued with the United States, GCC leaders declared that “deeper economic ties after the lifting of US sanctions under the JCPOA are in the mutual interest of the region.”

When it comes to the prospects for renewed sanctions relief, the increasingly constructive relations between the UAE and Iran must be taken into account. If the UAE plays an active role in facilitating increased trade with Iran following the restoration of the JCPOA, the rise in trade could compensate for any diminished rebound in trade between Europe and Iran. More optimistically, if UAE banks are instructed to resume support for Iran-related transactions, the increase in available foreign exchange liquidity and the multiplication of the available payment channels could have a dramatic impact on the full range of Iran’s bilateral trade relations. Where European and Asian banks may remain hesitant to facilitate trade, UAE banks can step in as intermediaries, taking on the burden of the compliance requirements. They will have enough business to justify the costs of working with Iran.

While the normalisation of UAE-Iran ties remains tentative, UAE leaders aware of the role they can play as underwriters of the restored nuclear deal. The Biden administration, eager to consolidate the restored JCPOA, will likely encourage the UAE to reprise its role as Iran’s primary gateway to the global economy, with the U.S. Department of Treasury and U.S. Department of State engaging directly with UAE regulators and companies to help them navigate the new compliance landscape. The potential is enormous. UAE-Iran trade grew at an annualised rate of 28 percent between 2001 and 2011. Had this growth been sustained for just five more years, total trade would have exceeded $80 billion. What matters most for the long-term viability of the nuclear deal is not whether trade with Europe will return to pre-sanctions levels, but whether revitalised trade with the UAE can accelerate Iran’s reintegration into the global economy.

Photo: WAM

How to Think About Getting Foreign Firms Back into Iran

When the Joint Comprehensive Plan of Action (JCPOA) was adopted in July 2015, a wide range of companies began to explore commercial opportunities in Iran, anticipating the lifting of international sanctions that would follow about six months later. But the initial rush of commercial interest never became a cascade—while a significant number of foreign companies did commence or resume operations in Iran, there was no larger, second cohort that followed. Companies that did attempt to enter the Iranian market faced significant legal and financial challenges. The experiences of these companies deterred other entrants. Then, a little over two years after the lifting of sanctions, President Donald Trump made good on a campaign promise and withdrew from the Iran nuclear deal, unilaterally reimposing US secondary sanctions. The companies that had rushed into Iran quickly rushed out.

This history poses a dilemma for Iran’s negotiators as they seek to restore the JCPOA. While “modest progress” has been made during the 8th round of negotiations, one sticking point continues to be Iran’s demands around not only how US secondary sanctions will be lifted, but whether additional non-nuclear sanctions will be imposed by the US. In a recent interview, Iranian foreign minister Amir Abdollahian stated, “We demand guarantees that include not imposing any new sanctions, and not reimposing sanctions after lifting them under any pretext.”

Articulated this way, Abdollahian’s demand is problematic. Can Iran, with its reputation as a missile proliferator, proxy supporter, and human rights violator, really expect that the US won’t impose any new sanctions? The answer is no, but it is likely that Abdollahian knows this. His comments point to a legitimate concern as to whether sanctions relief commitments can be considered credible if sanctions imposed for transgressions beyond the nuclear file make it harder to conduct the trade and investment explicitly envisioned in the nuclear deal. For example, if the US were to maintain a tempo of human rights sanctions designations in the period of JCPOA implementation, it would contribute to a chilling effect that may deter companies and banks from proceeding with the trade and investment envisioned in the JCPOA, even if those sanctions are targeted on specific non-commercial actors. Of course, the US and Europe are not going to take sanctions, now the primary tool of Western statecraft, out of their toolkit. So how should the negotiators in Vienna balance the need to deliver economic benefits to Iran with the realistic expectation that coercive measures will continue to be used for non-nuclear reasons?

Timur Kuran’s seminal work on cascade theory—much of it completed in collaboration with Cass Sunstein—can help answer this question. Cascade theory is a heuristic that can be used to analyse a wide range of situations in which private preferences, perceptions, and thresholds combine to determine whether band wagoning will take place. While cascade theory has most often been used to analyse the decisions of individuals, it can also be applied to the commercial decision-making of firms. Firms can be understood to have their own preferences and thresholds, which are shaped by the perception of risk, whether commercial, legal, or reputational. For example, this body of research includes work on “reputation cascades” that influence political decision-making by corporations, and cascades observed in the decision making of investors in capital markets.

Along these lines, cascade theory offers a way to understand how the application of sanctions can lead to changes in firm behaviour. Major sanctions enforcement actions, such as the fines levied on a series of European banks by the Obama administration between 2012 and 2014 for knowing violations of US primary sanctions, can serve to change perceptions of perceived risk among other firms. These fines contributed to “de-risking” among many banks and multinational corporations which opted to limit their exposure to jurisdictions in which sanctions have been imposed, even in cases in which their commercial activities remained clearly compliant. In such a situation, cascade theory helps us understand how enforcement actions can serve as a signal to firms. In the cases in which the newly perceived risks exceed the firm’s threshold, behaviour is likely to change. One type of cascade occurs when companies decide to withdraw from risky jurisdictions. By 2016, responding to heightened regulatory risk, 75 percent of major banks reported having reduced their correspondent banking connections, a trend which predominantly saw major American and European banks limit ties with banks in the Global South.  

The global trend of de-risking is an example of cascading among firms, triggered by the punitive and deterrent power of sanctions and related enforcement actions. But cascade theory may also be insightful examining the inverse situation—what happens when policymakers decide to lift sanctions on a country, and seek to encourage firms to engage in trade and investment? In recent years, there has been increased focus on the “credibility” of sanctions relief—while American and European governments may lift sanctions, the move does not necessarily lead to the envisioned trade and investment, compromising the diplomatic agreements in which sanctions relief is a critical part of the negotiated quid-pro-quo.  

The sanctions relief afforded to Iran in January 2016 as part of the implementation of the JCPOA did not lead to a cascade. While an initial cohort of multinational companies did re-enter the Iranian market, many companies, and especially banks, opted not to reengage, perceiving that the risks remained high. The lower-than-expected level of economic engagement that followed from the implementation of the JCPOA arguably made it less costly—both politically and economically—for President Donald Trump to unilaterally withdrawal from the agreement in May 2018, at a time when Iran remained in full compliance with its nuclear commitments.

As the P5+1 and Iran continue to seek the restoration of the nuclear deal, Iranian negotiators have demanded that the world powers intervene to ensure that sanctions relief occurs “in practice” and not simply “on paper.” The difficult history of the JCPOA makes clear that successful implementation of sanctions relief requires cascading, and the design of implementation policies ought to consider how those policies will impact the perceptions and thresholds of firms. Adapting from Kuran’s general model, it can be stated that firms with different preferences and risk appetites will have different market entry thresholds (T). To illustrate this variation, we can create the following threshold sequence, notating the thresholds for ten firms:

A = (0, 20, 20, 30, 40, 50, 60, 70, 80, 100) 

In this sequence, Firm 1 (T1=0) is willing to begin conducting business in Iran immediately after the lifting of sanctions.  At the other end of the sequence, Firm 10 (T10 = 100) will never enter the Iranian market. But the thresholds of other firms are responsive to a value we can call S, the proportion of firms that have already entered the market. For example, Firm 2 (T1=20) will only enter the market when at least 20 percent of firms have done so—a condition not met by the market entry of Firm 1 (T1=0), the entry of which means that S=10. Under such conditions, there is no cascade—the thresholds of most firms remain too high.

The variation in thresholds across such a sequence reflects the trade-off between external and internal payoffs faced by firms. For example, even if the external payoffs represented by entering a formerly sanctioned market are clear, such as new revenue streams, the internal costs may remain too high for the firm to decide to act on the evident economic opportunity. In this way, the internal payoff can itself be expressed through a threshold sequence comprised of the departments necessary to make a firm-level decision. For example, a firm’s decision to operate in a formerly sanctioned market will typically require buy-in from the business development department, the finance department, the legal department, and often the board of directors. Top executives and individuals in legal and compliance roles in firms conducting business in sanctioned jurisdictions can be held personally liable for compliance failures. These individuals have among the highest thresholds for supporting a business decision to work in a market like Iran and can veto the plans of other departments willing to pursue the opportunity, in effect setting the threshold for the firm. Broadly speaking, engaging in business shortly after the lifting of sanctions requires evaluating a trade-off between the external reward of previously untapped business opportunities with the internal cost of onerous operational and compliance requirements. Additional sanctions designations made after the lifting of JCPOA-related sanctions will inherently impact these trade-offs.    

Policymakers seeking to encourage commercial activity following the lifting of sanctions must therefore try to increase the external rewards and minimise the internal costs. This can be done through a series of policy interventions that go beyond the simple lifting of sanctions. If the sanctions relief implemented “on paper” results in a threshold sequence given by A, then we can conceptualise a different threshold sequence for sanctions relief implemented “in practice,” which we can call A*: 

A* = (0, 10, 20, 30, 40, 50, 60, 70, 80, 100)

In this sequence, as in sequence A, Firm 1 (T1=0) is ready to engage in business simply because sanctions have been lifted. But let’s assume that some new policy intervention has caused the threshold of Firm 2 (T1=10) to fall from 20 to 10. This means that the decision of Firm 1 to enter the market will trigger Firm 2 to do the same because S=T2. That small change is also sufficient for A* to become a cascading sequence, as the decision of Firm 2 triggers market entry by Firm 3 and so forth until nine-tenths of the firms are active, with Firm 10 (T10=100) the only holdout. But, if some subsequent policy intervention, such as the application of new sanctions, causes the threshold of Firm 4 (T4=30) to rise, the cascade will be interrupted because S will longer be equal to T4.

What the sequence A’ illustrates therefore is that the policy intervention needed to trigger a cascade does not necessarily need to be so significant as to shift the thresholds of all firms in the sequence. Rather, it should be targeted to create a change in behaviour among those firms whose decision to enter the market would trigger the cascade. Policymakers seeking to make sanctions relief commitments more credible can therefore use cascade theory to conceptualise different sets of interventions intended to encourage more companies to engage in trade and investment in formerly sanctioned jurisdictions more quickly.

These interventions ought to focus on calibrating the external and internal payoffs. First, to change external payoffs, policymakers, including in Iran, must seek to make the economic benefits of early market entry more significant. Presently, being among the early movers after the lifting of sanctions means contending with high costs of doing business. These costs include higher transaction fees and risk premiums related to banking services and financing, or surcharges related to the importation of equipment or technology necessary to operate local facilities or infrastructure. These costs could be reduced through incentives, such as grants and loans that would see the state shoulder some of the costs and financial risks in the initial period of sanctions relief, increasing the external payoff. While some European countries did seek to provide state-backed credit lines to support companies aiming to engage in trade with Iran, the operationalisation of these credit lines was clumsy, meaning that no facilities were available to companies even two years after the lifting of US and EU sanctions, and that there was no impact on the perceived external payoff.  

Second, policymakers will also need to address the internal costs that can keep companies from pursuing the opportunities afforded by sanctions relief. Practically speaking, these interventions would reduce the perceived legal risks of commercial activities in formerly sanctioned jurisdictions. Here, policymakers should provide greater legal clarity around the activities made permissible following the lifting of sanctions and provide opportunities for firms to confirm, for example through the solicitation of so-called comfort-letters, the specific permissibility of their planned activities beyond the blanket guidance currently provided by regulatory authorities. Moreover, there should be an effort to reduce the threat of personal liability around inadvertent sanctions violations. Finally, the possible impact of additional sanctions designations, such as sanctions imposed after the implementation of the JCPOA on human rights grounds, need to be considered in the context of the trade-off between internal and external payoffs. If Western governments decide that a sanctions designation must be made, the impact of that designation on internal payoffs needs to be considered. Of course, targeted sanctions imposed on human rights grounds are not intended to interfere with the broad implementation of the JCPOA, and so the unintended consequences ought to be mitigated, most likely by ensuring that the external payoff continues to outweigh the internal risks. Such an approach will increase the likelihood that firms perceive a better trade off in conducting business in formerly sanctioned jurisdictions—this will lead to a more favourable threshold sequence, in which there is a higher probability of a cascade.

Designing policy interventions to make sanctions relief more credible and effective will be crucial not only for the restoration of the nuclear deal, but also for the long-term viability of sanctions as a tool of economic statecraft. Cascade theory is a compelling heuristic to understand how such interventions will need to influence firm behaviour to create the conditions necessary for an increase in trade and investment in post-sanctions environments.

Photo: IRNA

The Case for Optimism on Iran in 2022 and Beyond

Back in October, I was given a piece of advice. I was having coffee with an admired journalist who has covered Iran for many years. This was before the Raisi administration had decided to restart the nuclear talks—the journalist and I were discussing the growing concern in Western capitals that Iran would never return to the negotiating table. I did not share this concern.

I explained to the journalist that given the way in which the Raisi administration had talked about its goal of lifting sanctions and given the direction of its regional foreign policy, I had little doubt that the talks would resume. Across the table there was some polite nodding, but eventually I was offered some well-intentioned advice, a nugget for a naïf. I was told to be careful about being optimistic, because if I was wrong too many times “people would stop listening” to me. The conversation has bothered me for months.

Of course, the nuclear talks did restart five weeks later—a minor vindication. But in the subsequent weeks, in conversations on the likely trajectory of the talks, officials and journalists told me again and again that I was the only optimistic person they had spoken to. Most of the coverage and commentary on the negotiations struck a decidedly pessimistic tone. More articles were written about “Plan B” than there were about “Plan A”—there was startlingly little analysis on what it would take to make the talks successful, but ample analysis of how to plan a new pressure campaign or military strikes. The assumption was that the talks would fail, leading either to an Iranian nuke or a regional war. Grim stuff.

So far, the talks have not failed, though it seems that the only policymakers actively seeking to inject some optimism in the talks are the Iranian delegation and Russia’s chief negotiator, Mikhail Ulyanov, whose Tweets read like the encouragements of a cheerful uncle. Western officials have pointed to “modest progress” in the talks but have so far failed to declare with any conviction that the restoration of the JCPOA is actually achievable. Most of the Western messaging insists that “time is running out” and implies failure is likely because Iran wants the talks to fail.  

I recently came across a quote adapted from Dennis Gabor, who won the Nobel Prize in Physics in 1971. Gabor suggests that “the best way to cope with the future is to invent it.” The future is inherently uncertain and as human beings we are uncomfortable with uncertainty—if we cannot see what lies around the corner, we are hardwired to be wary. As Gabor notes in his 1963 book, Inventing the Future, from which the quote is adapted, the typical approach to dealing with this uncertainty is to try and “predict” the future. We tend to evaluate what could happen and prepare ourselves accordingly. But Gabor’s insight is to remind us that the future is, to a significant degree, what we make it. We have a capacity for invention.

Yet, for those working on policy issues on Iran or the wider Middle East, it is prediction, not invention, that appears to be the primary focus of their intellectual outputs. This is a major reason why the outlook for the region is always so grim. Prediction rewards pessimism. Consider the meteorologist, whose job it is to predict the weather, but who has no means to influence whether the sun shines or the rain pours. If the meteorologist predicts sunshine, and then it rains, those who were drenched in the unanticipated downpour will rue him and his forecast. If it happens one too many times, they will stop listening to his forecast altogether. But if the meteorologist predicts rain, and it ends up being a bright and sunny day, few will complain that they had prepared for gloomy weather by taking along an umbrella.

If I were a meteorologist, I would heed the advice I was given in October. It makes sense—if your sunny forecast is wrong too many times, people will stop listening to you. But I am not a meteorologist, and prediction is not the extent of how I can cope with the uncertainty of the future. Policymakers, policy experts, and even journalists—who shape how we think about complex problems and who chronicle the effectiveness of attempted solutions—have forgotten, at least in the case of Iran, that they have a capacity to invent the future.

Over the last few months, I had been speaking to Western officials and making the case for optimism. Each time I set out the facts that support my generally optimistic outlook, I am told “that is an interesting theory.” Implicit in this response is a surprising discomfort with the theoretical. The officials are characteristically diplomatic, but I can sometimes tell that they are asking themselves “what planet is this guy living on?”

The funny thing is that I am, “in a sense I am unable to explicate further,” on a different planet. Writing about the ways in which scientists may differ in their interpretations of observable phenomenon, Thomas Kuhn, the 20th century’s foremost philosopher of science, writes that “the proponents of competing paradigms practice their trades in different worlds.” Kuhn’s observation makes clear that while most policymakers and analysts might understand the factual basis for my optimistic outlook, the existence of a plausible theory suggesting that the future may be better is not seen as a sensible way to cope with uncertainty. Given the fraught history of Iranian foreign policy, having low expectations makes sense. The story of the Iran nuclear deal is a story of profound disappointment—at least so far. But even if low expectations help those of us working in this space to cope at some personal level, it is difficult to see how pessimism serves us if we are professionally committed to fixing things.

In 2018, when the Trump administration withdrew from the JCPOA, European governments scrambled to find some means to preserve the economic benefits of the deal for Iran. The reimposition of US secondary sanctions was going to have a major impact on Iran’s links with the global financial system, and this was quickly identified as a problem for continued trade and investment. The EU and E3 began discussing whether some kind of “special purpose vehicle” could be established to facilitate payments for trade absent direct banking links. Over the next two years, working first with Axel Hellman, and then Sahil Shah, I wrote some of the first detailed policy briefs exploring how such a special purpose vehicle could work. These briefs helped, in a small way, to shore up the case for the establishment of INSTEX, a novel state-owned trade intermediary.

As with many inventions, the early iteration of INSTEX unfortunately failed. It has not had any real impact on Iran’s ability to trade with the world in the face of US secondary sanctions. There are numerous reasons for this failure, but I find it fascinating that implicit in a lot of the criticism of the INSTEX project is the idea that it was foolhardy for European officials to try to invent something new. As INSTEX faltered in its initial stages, eliciting criticism, pessimism crept back in, and this has prevented European governments from giving the project adequate support. Imagine if Thomas Edison, when working on the incandescent light bulb, was so perturbed by the failure of his first prototype that he questioned whether an electric light can be created at all. When it comes to Iran policy, setbacks have a troubling tendency to lead policymakers to reject optimistic scenarios, even when those scenarios remain theoretically possible. To put it another way, when policies fail, policymakers change their interpretation of the facts, rather than tweaking their policies. As the INSTEX project lost momentum, European officials began to speak more forcefully and negatively about Iran’s missile program and its nuclear escalations—the future looked uncertain, and pessimism seemed the easier way to cope.

But when it comes to Iran policy, what is easy, is not always what is best. This is precisely why there are so few new ideas about what US and European policy on Iran should look like. There is no positive vision for what Iran’s place in the world should be in five, ten, or fifty years. There is little effort made to create new tools or craft new strategies that could help bring about some new vision of the future. Sure, repeating pessimistic predictions is the intellectually and emotionally easier means of coping with an uncertain future. But to pursue optimistic invention is the better means.

As we look forward to 2022, the case for optimism on Iran is clear. This case does not depend on some newfangled set of facts or observations. Iran is thoroughly analysed and reported upon—the facts are well-known. The case for optimism rests instead on how we choose to interpret these facts and whether we marshal them to find new, innovative, and inventive pathways for policy, or whether we choose instead to make dire predictions and gird ourselves accordingly. In this sense, the choice we face as those working on Iran policy is not about choosing between Plan A or Plan B—it is much bigger than that. The choice is about whether we want to live on Planet A or Planet B.

In 2022, I’ll be tinkering away on Planet A. It’s a different world.

Photo: IRNA

Iran’s Water Protests are Not About Water

On November 8, a group of local farmers arrived in the city of Esfahan to protest in front of the offices of the official state news agency and the regional water authorities. The protestors called on the government to release water into the Zayendeh River, which has laid dusty and bare for months, a reoccurring phenomenon. Over the next days, the farmers continued their demonstration in the dried-out beds of the river, camping out close to one of downtown Esfahan’s iconic bridges.

But what started out as a small-scale protest action by farmers from east Esfahan quickly turned into the Ebrahim Raisi administration’s largest popular challenge since taking office in August. On November 19, a day after negotiations between the Esfahan Farmers’ Union and the regional government broke down again, thousands of city-dwellers suddenly joined the farmers to demand that the Zayandeh River be filled up.

The government’s initial response to the mass demonstration was conciliatory and supportive. State media broadcasted the Friday rally widely. Officials came to speak to the protestors directly, expressing their sympathy and promising to address the problem promptly. The minister of energy even formally apologised to the farmers, saying he felt “ashamed” that the government had failed to provide enough water.

Soon enough, the tone changed. Within days, security forces moved in, cracking down on the remaining protestors. Police brutally dispersed the protestors and destroyed their tents. On social media, images of farmers drenched in blood circulated widely.

In theory, water protests should have broad popular support in Iran. Not only is the country mostly arid and semi-arid, but Iranians have also suffered from worsening draughts and environmental degradation provoked by climate change, government mismanagement, and economic sanctions.

In reality, however, solidarity has been hard to obtain as ordinary Iranians, state organisations, and political elites compete fiercely about how to share the country’s increasingly scarce water resources.

Many of these rivalries are long-standing, and they broke out again following the Esfahan protests. In the capital of the neighbouring Chaharmahal and Bakhtiari province, hundreds of residents and farmers took to the street to protest against the Esfahan protestors’ demand for more water. The Chaharmahal protestors argued that their province, located in the mountainous Zagros region of southwestern Iran, already supplies too much water to the dry central plateau region, of which Esfahan is part. In turn, Esfahan farmers deployed an old tactic: they sabotaged the water pipes headed to the even drier Yazd province, arguing that “their” water is unjustly being diverted elsewhere. 

This nasty and zero-sum type of group politics has become deeply entrenched in Iran over the past two decades. In this configuration, Esfahan province has certainly emerged a winner. Its rural residents earn on average about a quarter more than peers in the Zagros region or Khuzestan, which is home to the Karoon, the largest river in Iran. Moreover, Esfahan’s urban and provincial elites have been successful in turning local distributional conflicts over water use into demands for more water from the Zagros. Farmers from eastern Esfahan have long complained about excessive water use by the city of Esfahan. Regional authorities have used these protests to claim more water from upstream provinces.  

Yet, rather than being diverted to eastern Esfahan, much of that extra water has gone into urban consumption and toward large-scale steel manufacturers in the region. These inefficient and wasteful factories, mostly built before the 1979 revolution, are heavily subsidized by a central government keen to maintain a degree of self-sufficiency in steel production.

It is perhaps unsurprising that, following the November 19 demonstrations, much of the debate on social media centred on Esfahan’s privileges. One popular Twitter user argued that “Esfahani greed is what has turned the Zayendeh River into an issue. Esfahanis do not only want [to produce] steel but they also expect the water of Khuzestan and Chaharmahal to be transferred to this industry. If we are to believe you, you should protest in front of the Mobarakeh and the Esfahan Steel Companies.”

Rather than blaming specific individuals, entities, or social groups, many other activists accused the “water mafia” for the opaque and mean-spirited machinations of the country’s water politics. Seyyed Yousef Moradi, an environmental activist from Yasuj, commented that: “Even though you think that people from the Zagros Mountains are simple, we are not ignorant. We understand that a ten day sit-in in Esfahan for water provision, with the wide-spread support of media and the government, is a part of the water mafia’s plan to justify projects to transport water from the deprived provinces of the Zagros.”

The term “water mafia” is also popular among the country’s political elites, who are keen to avoid direct confrontation among each other, and fear turning the conflict into an ethnic struggle between the Persian majorities of the central plateau and the Arab, Lor, and Bakhtiari minorities of southwestern Iran.  

Indeed, while Esfahan’s relative wealth and power is undeniable, upstream provinces and groups do not lack political representation. In the past, the local elites in the Zagros and Khuzestan have often supported their constituents’ protests about water rights. For instance, in early 2014, the local MP and the local representative of the Supreme Leader came to the support of several thousand people who had gathered in Shahr-e Kord, the capital of Chaharmahal province. The protestors demanded a halt to construction work on tunnels designed to transport water to the central plateau.

Following similar protests in Khuzestan in the summer of 2016, Ayatollah Abbas Ka’bi, the province’s representative in the powerful Assembly of Experts, issued a fatwa prohibiting the transfer of water from Khuzestan to the central plateau for agricultural or industrial purposes. When rumours circulated last July that these water tunnels had been officially opened—thus breaking the religious ruling—protests flared up across the province. Initially, Ayatollah Ka’bi supported the protestors and called the demonstrations legitimate. He turned quiet when, as protests continued and spread over the next days, security forces decided to crack down violently.

The July protests in Khuzestan and the November protests in Esfahan are intimately related. The Esfahan protests, and the Esfahan Farmers’ Union’s failure to reach an agreement with the government over the Zayendeh River’s fate, is at least partially the product of recent struggles in Khuzestan and the Zagros to prevent the transfer of water to Esfahan. Because water in Iran is not a public good, the protests are not really about water. Rather, what protestors are fighting for is access to the government. Protestors want the government to enable their consumption of water.

For their part, state authorities are locked in a delicate balancing act. Strapped of cash in the face of a severe US-led sanctions regime, the government has not been able to cough up the investments necessary to update the country’s outdated irrigation systems and water infrastructures. While security forces are eager to crack down on what they perceive as disturbances and unrest, many other state elites are caught between, and often on the side of, various social groups and their competing demands for water.

In order to make water resource management in Iran more efficient, fair, and equitable, the country needs to move beyond its current form of interest group politics. Unfortunately, there are few indications that the broad-based solidarity such a movement requires is in the making. As a result, it is likely that water protests will continue to flow.

Photo: IRNA

GCC States Bet on Nuclear Deal as They Seek Better Relations with Iran

Iranian foreign policy has been in high-gear over the last week. As Iranian negotiators made their way back to Iran’s capital from the seventh round of nuclear talks in Vienna, the UAE’s top national security adviser Sheikh Tahnoon bin Zayed Al Nahyan arrived in Tehran. Al Nahyan’s visit is the latest example of the significant shift underway in the foreign policies of Iran’s Arab neighbours, including in their views of the Iran nuclear deal.

In a recent joint statement, the US and GCC declared that the restoration of the Joint Comprehensive Plan of Action (JPCOA) would “pave the way for inclusive diplomatic efforts to address all issues that are necessary to ensure sustainable safety, security, and prosperity in the region.” The GCC was far from unified in its support for the nuclear deal when negotiations were first underway between 2013-2015. Oman was instrumental in facilitating backchannel talks between Iran and the United States. Qatar and Kuwait were vocal supporters of the diplomatic process once it became public. But Saudi Arabia, Bahrain, and the UAE, maintained a cautious position on the nuclear deal and criticised the negotiations for failing to address Iran’s missile program and regional activities. Behind these criticisms was a more fundamental fear that a rapprochement between Iran and the United States would alter Washington’s relationships with its traditional partners as they had not been extensively consulted in the lead-up to the negotiations. The JCPOA appeared poised to tip the regional balance of power in Iran’s favour.

Nevertheless, all six GCC states officially welcomed and endorsed the JCPOA following the Camp David Summit hosted by President Obama in May 2015. The joint statement issued by the US and GCC after the summit highlighted security cooperation and security assurances with a particular focus on “countering Iran’s destabilising activities.” Still, the GCC member states “affirmed their strong support for the efforts of the P5+1 to reach a deal with Iran,” noting that “such a deal would represent a significant contribution to regional security.” In addition, they “reaffirmed their willingness to develop normalised relations with Iran should it cease its destabilising activities.”

President Obama aspired for dialogue between the GCC states and Iran, and stated that the “purpose of security cooperation is not to perpetuate any long-term confrontation with Iran or even to marginalise Iran.” He also suggested that Saudi Arabia should “share” the region with Iran. This encouragement, however, led nowhere.

Saudi Arabia, in particular, attempted to hamper the implementation of the JCPOA. Just days before the official implementation day of the agreement on January 16, 2016, Saudi Arabia executed a prominent Shi’a cleric which resulted in protests in front of the Saudi diplomatic missions in Tehran and Mashhad. In response to the ransacking of the embassy by protestors, Saudi Arabia cut off all diplomatic and commercial ties with Tehran and pushed other countries in the region to follow suit. The tensions continued to rise and any hopes for regional dialogue faded with the end of the Obama presidency. Divisions amongst the GCC states toward Iran and the JCPOA deepened when President Trump took office.

While Oman, Qatar, and Kuwait attempted to facilitate or mediate talks between Tehran and Washington in an attempt to stave a deeper regional crisis, the UAE, Saudi Arabia, and Bahrain supported the Trump administration’s “maximum pressure” campaign against Iran, launched following the US withdrawal from the JCPOA. Over the next few years, rising tensions between Iran and the US increased the risk of conflict in the region.

Key flash points included a series of attacks on tankers in the Persian Gulf, including off the coast of Fujairah in May 2019. Later, in September of that year, there was an attack on Saudi Arabia’s most important oil processing facilities in Abqaiq and Khurais. These attacks were attributed to Iran and its proxies. But there was no clear US response to these attacks and the UAE and Saudi Arabia realised that they can no longer solely rely on an American security guarantee. Trump’s escalatory Iran policy had become a liability.

The election of Joe Biden created a new political reality for the Middle East. During his campaign, Biden made clear that his administration would seek a return to mutual compliance with the JCPOA. He also called Saudi Arabia a “pariah” state, indicating that Saudi influence would be diminished in Washington. Biden also committed to reducing the US footprint in the Middle East.

Responding to these shifts, Saudi Arabia and the UAE have pursued a de-escalatory approach in their foreign policy. They ended the more than three-year long blockade on Qatar at the Al Ula Summit, participated in the Baghdad Conference for Cooperation and Partnership, and increased their back-channel talks with Tehran. These bilateral and multilateral diplomatic developments were unimaginable just a few years ago.

The UAE has been most adamant about repairing diplomatic ties with Iran. Al Nahyan’s visit follows a steady tempo of exchanges over the last two years. In November, Iran’s new deputy foreign minister, Ali Bagheri Kani, travelled to Abu Dhabi to meet his Emirati counterparts—they agreed to open a new chapter in bilateral relations. A few days later, the Iranian and Emirati foreign ministers had a phone conversation where expansion of bilateral ties was stressed.

Saudi Arabia and Iran have held several rounds of talks in Baghdad that included key officials from both countries. Progress has been limited, but if continued, these talks could yield some much-needed results. A small goal would be the resumption of formal diplomatic ties. A bigger goal would be an end to the war in Yemen.

But the diplomacy now underway can have more than just political dividends. During meetings held in Riyadh in mid-November, the political directors of the E3 and the US Special Envoy for Iran welcomed their “regional partners’ efforts to deescalate tensions and promote dialogue in the region” and “underlined that enhanced regional dialogue and a return to mutual compliance with the JCPOA would… allow for more regional partnerships and economic exchange.” The potential for economic exchange was reiterated in a subsequent statement, in which the GCC officials discussed their efforts “to build effective diplomatic channels with Iran,” and affirmed that “deeper economic ties after the lifting of US sanctions under the JCPOA are in the mutual interest of the region.” Last month, Rob Malley, Biden’s Iran envoy, also talked about the notable interest in economic engagement with Iran that had come through in his discussions with GCC officials. Moreover, given that the attacks stemming from Iran’s response to “maximum pressure” focused on economic infrastructure, the linkages between security and economics dividends are clear.

The GCC states’ acknowledgement they can benefit from JCPOA-related sanctions relief suggests that regional diplomacy has reinforced trust in the nuclear talks. The nuclear deal has an important role to play in the emerging framework for regional diplomacy. That bodes well for the deal’s future if it is successfully restored.

Photo: IRNA

Trade, Not Investment, is Iran's Sanctions Relief Must-Have

Last week, the seventh round of the negotiations over the fate of the JCPOA saw Iran table an initial proposal on sanctions relief. The proposal led to complaints from Western officials that the Iranian negotiators were being unreasonable. Iranian officials responded by insisting their proposals were “pragmatic.” The initial exchange suggested to some that disagreements over sanctions relief issue are going to prove the intractable because what Iran wants—significant investment—is impossible for the P5+1 to guarantee. Gérard Araud, former French ambassador to the United States and an astute observer of the nuclear talks, tweeted that “Even if the JCPOA was restored, no Western company would dare invest a cent in Iran.”

Even if the JCPOA was restored, no Western company would dare invest a cent in Iran, no Western bank would finance any deal in Iran with the threat of the return of US sanctions in 2025. Once was enough. The Iranians know it.

— Gérard Araud (@GerardAraud) December 3, 2021

Araud is rightly concerned. Western companies will be reluctant to invest in Iran due to fears that a Republican president could reimpose sanctions in 2025, putting their investments in jeopardy. In the months following the implementation of the JCPOA in January 2016, a flurry of big-ticket investment deals were announced. These deals became the symbols of the economic benefits of sanctions relief and of Iran’s moves towards normalised economic relations, namely with Europe and China. The deals included planned investments in Iran’s oil fields by Total and CNPC, the joint ventures planned by PSA Group and Volkswagen in Iran’s automotive sector, and Novo Nordisk’s decision to build a manufacturing plant in Iran, among others. But following President Trump’s decision to withdraw from the nuclear deal, essentially all European and Chinese efforts to invest in Iran unravelled (the Novo Nordisk project, with its humanitarian dimension, proved a rare exception).

For the P5+1, a significant technical interventions will be necessary to create conditions conducive to foreign direct investment. But, the economic value of the nuclear deal does not actually hinge on increased foreign direct investment, which was primarily sought by Iran as a commitment mechanism for technology transfer.

But for most Iranian manufacturers, the ambition is not to produce high-technology products. Rather, the ambition is to use high-technology equipment to more efficiently produce the wide range of basic goods that can be sold in the domestic and regional markets. Iran will receive most of the benefits on offer from sanctions relief when Iranian manufacturing firms can purchase new equipment from foreign suppliers that can be used to increase the quality and quantity of output. Such purchases represent a critical example of domestic investment deferred due to sanctions related pressures.

The industrial equipment on which Iranian factories depend is overwhelmingly imported from just two sources: the European Union and China. This trade can be tracked by looking at the relevant chapters of the so-called Harmonized System used by customs agencies categorise goods. Chapter 84 covers equipment such as boilers, pumps, turbines, furnaces, freezers, ovens, pulleys, cranes, forklifts, and other machinery that would be seen on a factory floor. Chapter 85 covers electrical equipment such as motors fuses, switches, lasers, heaters, magnets, batteries with various industrial applications. Looking at European and Chinese exports to Iran across these two categories offers a measure of whether Iranian factories are proving able to maintain or upgrade the equipment on their assembly lines. What’s clear is that sanctions significantly reduced European and Chinese exports of these goods to Iran, with significant consequences for Iranian productivity. Between the first quarter of 2018, prior to Trump’s withdrawal from JCPOA, and the last quarter of the year, by which point US secondary sanctions had been reimposed in full, Iran’s industrial output fell by 20 percent.

Part of the drop in production can be attributed to reduced demand. But many manufacturing firms also struggled to maintain output given difficulties not only in importing raw materials and intermediate goods, but also the parts and equipment necessary to keep assembly lines running at high capacity. Moreover, it wasn’t the wind down of foreign investment that was responsible for the drop in production—few investment projects had broken ground. Rather, it was disruption in the availability of European and Chinese industrial goods that saw Iran’s manufacturing sector regress.

In 2016, the first year of sanctions relief, European industrial exports to Iran averaged EUR 250 million per month. Over the first 8 months of 2021, the monthly average has been just EUR 80 million. That means, on an annualised basis, Iran is importing about EUR 2 billion less industrial goods from Europe than prior to the reimposition of US secondary sanctions.

The trends are similar when looking at Chinese exports to Iran. In 2016, average monthly exports to Iran totalled about USD 453 million. Over the first 10 months of 2021, the monthly average has been just USD 241 million. On an annualised basis, that is a difference of about USD 2.5 billion.

Looking at the European and Chinese data together suggests that sanctions relief could be worth around USD 4.8 billion in additional annual industrial exports to Iran from its two largest suppliers, if trade returns to pre-sanctions levels. A significant portion of the goods imported in these two categories are purchased as part of fixed capital investments by Iranian manufacturing companies, meaning that Iranian firms can be expected to invest billions of dollars in their own production capacity if sanctions are lifted and European and Chinese exports rebound.

Such a rebound is probable. For European and Chinese companies, the decision to enter the Iranian market as a supplier is far less risky than the decision to enter as an investor. Even with concerns that JCPOA implementation may falter again in 2025, the data from 2016-2017 makes clear that trade in industrial goods can rebound quickly, even in an environment where banking challenges and legal ambiguities persist. Many European and Chinese companies will be able to make lucrative sales to Iranian customers within the 2-3 year window in which sanctions relief is basically assured, especially those suppliers who are currently selling to Iran while US secondary sanctions remain in place.

Importantly, the fact that trade in industrial goods can rebound in a short period of time does not mean that the benefits will be short-lived. Equipment like pumps and furnaces have lifespans up to 20 years. Many Iranian factories are hampered with old equipment. Sanctions relief would enable these firms to finally upgrade old equipment, much of which was installed in the early 2000s during which Iranian industry underwent a critical development phase characterised by the installation of European manufacturing equipment. Should more Iranian companies be able to avail themselves of the opportunity to invest in new industrial equipment following the restoration of the JCPOA, Iran industrial output would benefit from higher productivity and greater resilience for a decade or longer, a fact that makes sanctions relief, even if cut short by political events, fundamentally attractive.

Economically speaking, trade, not investment, is the key for robust Iranian growth in the years immediately following restoration of the JCPOA. Attracting foreign direct investment would of course maximise Iran’s developmental outcomes, and has a crucial role to pay should Iran aim to return to its pre-sanctions growth trajectory, but such investment is not essential for Iran’s short-term economic recovery. The primary goal for the P5+1 should be to ensure that trade rebounds as quickly and robustly as possible. Here, the provision of trade finance is important and technical work will need to be done to ensure that global export credit agencies can serve companies that wish to sell equipment to Iran. Still, finding solutions to extend billions in trade finance will prove far easier than facilitating billions in foreign direct investment in the short term.

Politically, facilitating foreign direct investment would usefully demonstrate that the P5+1 is making good on economic commitments set forth in the JCPOA. On one hand, the Raisi administration would surely welcome more intensive efforts on the part of Western governments to ensure foreign investments can materialise, particular in sectors where such investment is really necessary like the energy sector. On the other hand, the fact that trade, and not investment, is the real economic must-have will suit the Raisi administration just fine. President Raisi is unlikely to make Western foreign investment a major target of JCPOA implementation given the emphasis on economic self-reliance that colours his administration’s economic planning and the reluctance to undertake deeper structural reforms on which many foreign investors will insist. But by focusing on trade, Raisi will have a compelling story to tell—sanctions relief will enable Iran to buy the industrial goods that will undergird the country’s economic resilience for the next two decades.

Photo: IRNA

For Iran, the JCPOA is Worth Restoring, Even if Trump Returns

The Raisi administration appears poised to resume negotiations over the US re-entry into the Joint Comprehensive Plan of Action (JCPOA). But there remain many critics of the JCPOA in Iran who question whether restoring mutual compliance with the nuclear deal makes sense given that a Republican president might once again tear up the agreement in 2025. It is a reasonable fear. Trump has an iron grip on the Republican party and has shown interest in running for president again. Other aspirants to the Oval Office, such as Nikki Haley and Mike Pompeo, are decidedly Trumpian in their views, including towards Iran. Given the JCPOA’s nature as a political agreement, there is no way for Biden to provide a legal guarantee that future administrations will remain in the deal.

But if Iranian leaders are concerned that the “economic war” might resume in 2025, they ought to remember that they are in an economic war right now. What the restoration of the JCPOA represents, therefore, is an opportunity for a ceasefire. The spectre of a Republican president taking office in 2025 reduces the likelihood that this ceasefire will become a durable peace. Still, the possibility of the deal’s future demise does not negate the certain benefits of sanctions relief on offer now. Political leaders and parties frequently pursue policies that might be overturned in the future because they wish to reap the benefits for as long as they can. In rare cases, reputational concerns may dissuade political actors from adopting a policy that is bound to be overturned—such an outcome may be viewed as a failure of implementation, as was the case in the Rouhani administration’s experience with the JCPOA. But this reputational concern is probably less significant for Iran’s new president, Ebrahim Raisi, given the political consolidation and electoral engineering that brought him to office. On the other hand, not pursuing a genuine opportunity to secure sanctions relief will likely deepen social grievances. The Raisi administration has consistently signalled that it will “definitely seek to eliminate and lift the tyrannical sanctions.”

This framing helps us reconsider the primary role of the “objective guarantees” sought by Iran’s negotiators as they prepare for a seventh round of talks over the restoration of the JCPOA. Iran is not seeking guarantees to eliminate the risk that the nuclear deal is undone by a future American president. Rather Iran needs to guarantee that it gets significant benefits from the deal for the remainder of Biden’s term—the period of approximately three years during which mutual compliance would not be in doubt. Should the deal be implemented successfully during this period, Iran will be able to achieve two things.

First, Iran can seek to maximise the economic benefits of sanctions relief, providing Iranian companies and households a much-needed reprieve after a decade of economic stagnation. The period of boosted growth, even if limited to about three years, will provide companies and households a chance to either make long-delayed investments or replenish their savings. In both cases, companies and households will be increasing their resilience in the face of any future economic crisis, including one precipitated by reimposition of sanctions. At the same time, the Iranian government, with the benefit of more fiscal space and renewed access to its ample reserves, can bolster the welfare state and rein in inflation, giving those Iranians hardest hit by the recent years of economic recession a chance to recover.

Second, Iran can use the period of sanctions relief to make its economic system more resilient in the face of future shocks. Trump’s reimposition of secondary sanctions taught Iranian leaders harsh lessons about the impacts of unilateral sanctions on the country’s trade relations and the mechanisms behind those impacts. With these lessons in mind, Iran can work to gird its economy against the exogenous shock of sanctions. Iranian policymakers have been remarkably successful at building a “resistance economy,” relying in large part on the grit of Iranian businesses and households. But when it comes to economic war, rebuilding defences is best done under a ceasefire.  

It is true that the uncertainty over the long-term future of the JCPOA may diminish the economic benefits in the short-term. As Darya Dolzikova wrote in an analysis for the Bourse & Bazaar Foundation published in January, “the possibility of another snapback of US nuclear-related and secondary sanctions on Iran under a future change of administration in Washington will also discourage businesses investment.” But Dolzikova’s analysis also made clear that this is a problem that can be addressed as part of the deal’s implementation. Iran has cited the “verification” of sanctions relief as a key demand for this reason. While there may be a smaller pool of companies willing to do business with Iran, a greater proportion of those companies that are interested in conducting trade or making investments should be able to see their projects through. For Iran, successful sanctions relief does not mean that one hundred oil companies or one hundred automakers flock to the Iranian market, but rather that the likes of Total and Shell and Peugeot and Volkswagen, thwarted in their previous attempts to invest in Iran, are able to get to the stage of ribbon cutting this time around.  

Despite these challenges, the economic benefits of sanctions relief are not in doubt. As Bijan Khajepour has projected, by the Iranian calendar year ending in March 2025, Iran’s economy would be 13.5 percent larger if sanctions were lifted than if they remained in place. It is difficult to project exactly what sanctions relief will entail for the Iranian economy—but the outcome will certainly be an improvement over the economic malaise of the status quo. American negotiators should make clear to their Iranian counterparts that they wish to help deliver these economic dividends. In doing so, they would be building a kind of “sanctions relief wall” that can help protect the nuclear deal from any economic war waged by a future Republican administration.

Finally, we should be careful about overstating the probability that the JCPOA will be torn-up in just a few years. There is no guarantee that Trump nor another Republican will win. Even if they did, there is no certainty that they will focus their political energies on undermining the nuclear deal. By 2025, the political context could be dramatically different. Given the current trajectory of regional diplomacy, it is possible that US partners in the Middle East will lobby against an unwarranted US withdrawal from the JCPOA, which would again destabilise the region, threatening the achievements of the regional diplomacy underway today, however meagre those achievements might be. Looking at the trajectory of American politics, it is very possible that Democratic and Republican hawks will be laser-focused on China in the next few years, with Iran ceasing to be the lightning rod it was in the final years of the Obama administration. Plus, if the regional dynamics continue to improve and attentions turns towards China, it is reasonable to expect that fewer think tanks and lobbying shops in Washington will be agitating against the deal.

In deciding to let the US back into the deal and restore mutual compliance with the JCPOA, Iranian policymakers are weighing the certainty of a meaningful economic reprieve against the prospect that the reprieve will be cut short. Trump’s return in 2025 is a possibility that Iran must face. Lifting the “tyrannical” sanctions is an opportunity to prepare.

Photo: IRNA

UAE Earns Big as Iran Sells Oil to China

Leaders in the United Arab Emirates are eyeing an economic windfall should the Biden administration succeed in its effort to return to the Joint Comprehensive Plan of Action (JCPOA). But they have not waited for the lifting of sanctions to begin earning billions from Iran. 

During a press conference on Monday following consultations in Abu Dhabi, US Special Envoy for Iran Rob Malley told reporters that “all” of the Biden administration’s regional interlocutors had made clear they would seek “to find ways to engage Iran economically consistent with the lifting of sanctions that would occur” if the JCPOA were restored, a step that would also require Iran to return to full compliance with its nuclear commitments under the deal.

Malley added that should Iran and the P5+1 manage to restore the nuclear deal, it “would also allow countries in the region to develop closer ties economically with Iran.” Malley had understood from his conversations with GCC counterparts that this was “one of [their] goals.”

The comments were notable in light of recent developments in bilateral trade between the UAE and Iran. At first, the UAE was fully on board with the “maximum pressure” sanctions imposed by Trump on Iran in 2018 and so far maintained by Biden. In the Iranian calendar ending March 2019, roughly one year following the Trump administration’s decision to withdraw from the JCPOA and reimpose secondary sanctions on Iran, Iranian imports from the UAE declined 30 percent from around USD 8.2 billion to USD 5.7 billion, while exports to the UAE declined 11 percent from USD 6.7 billion to USD 6 billion. In this period, UAE leaders sought to tamp down on the burgeoning trade between the UAE and Iran, principally channelled through Dubai. Iranian companies and businesspeople were essentially hounded out of the country, as customers severed relationships and banks shut accounts. 

But in 2019, the first signs of a change in policy began to emerge. Fearing a further deterioration in the regional security situation after limpet mines were detonated on commercial vessels in the Gulf of Oman in May and June of that year, the UAE opened a tentative dialogue with Iran. Trump’s Iran envoy, Brian Hook, traveled to Abu Dhabi in September 2019 to try and keep the UAE on board with the maximum pressure strategy. One month later, reports emerged that the UAE had released USD 700 million of Iranian assets that had been frozen as part of the UAE’s support for the U.S. sanctions campaign. A thaw in economic relations was underway.  

In the Iranian calendar year ending March 2021, total Iranian imports from the UAE exceeded USD 9 billion, back to pre-sanctions levels. In the first five months of the current Iranian calendar year, imports have totalled over USD 5 billion, meaning that total annual imports are on course to exceed USD 12 billion by March 2022. The UAE is a major re-export hub, meaning that Iran sources goods from a wide range of countries from suppliers in the UAE. The growth in Iranian imports from the UAE has been so rapid that the Arab entrepôt has now replaced China as Iran’s top import partner. 

In an interview in September, Farshid Farzanegan, head of the Iran-UAE Joint Chamber of Commerce, attributed the UAE’s rise as Iran’s top import partner to increased purchases of agricultural commodities from Dubai-based traders and an overall decline in China-Iran trade. But he also notes that the growth in imports is taking place despite continuing challenges in cross-border banking between Iran and the UAE related to the fact that US secondary sanctions remained in place. Moreover, the recovery in Iranian exports to the UAE has been comparatively modest—total exports are on track to be just USD 4.5 billion this year, still below their pre-sanctions levels. So how is Iran able to buy so much more from the UAE?

The answer probably has to do with the decline in China-Iran trade. Over the course of the last year, China has significantly increased its purchases of Iranian oil. These purchases, which are made in direct defiance of US secondary sanctions, are not reflected in the data produced by China’s customs authority. This is because Iran is not delivering oil directly to China. Iran’s deliveries are intermediated, meaning that the oil is taken to a third country, before being transferred onto tankers that deliver to Chinese refiners. When this oil arrives in China, it is declared as an import from the country serving as the waypoint. The two biggest countries playing that role are Malaysia and the UAE. 

Looking at customs data for Chinese oil imports, the rise in imports from Malaysia and the UAE occurs precisely around the time that China begins to reduce direct imports of oil from Iran. At first glance, it might seem that China is simply buying more oil from existing customers as Iran ceases to be an option. But the volumes being purchased from Malaysia and the UAE are so great that the oil cannot come from the production of those two countries—it must be Iranian oil. 

The amount of oil China is importing from Malaysia, estimated by dividing the monthly value of declared imports by the average monthly oil price is 94 percent higher so far in 2021 than it was in the six months leading up to the Trump administration’s full imposition of sanctions on Iranian oil in May 2019. Looking to the UAE, the same figure is 31 percent higher. Looking across the two periods, the crude oil price is just 4 percent higher meaning that the surge in the value of Chinese imports is not merely a function of higher oil prices.

The inclusion of Iranian oil in the Chinese customs data is even clearer when comparing that data to OPEC estimates for Malaysia and UAE oil exports. According to OPEC, Malaysia exported an average of 280,000 barrels per day of oil in 2020, the equivalent of just over 100 million barrels over the whole year. Based on the 2020 average market price of USD 41.75, China’s declared oil imports from Malaysia, which are valued at USD 13.6 billion, are the equivalent of 330 million barrels (some of this total is Venezuelan oil, also being imported by China via Malaysia). Doing the same calculation, the UAE’s export total, as reported by OPEC, is about 880 million barrels in 2020. The barrel equivalent of total imports declared by China is 290 million, meaning that China would account for one-third of all UAE oil exports—an implausible proportion. 

Looking back to the significant trade deficit Iran is running with the UAE, the likeliest explanation for how Iran is able to finance this deficit, which may total nearly USD 8 billion in this Iranian calendar year, is that it is drawing on revenues related to the UAE’s role as an intermediary in oil sales to China. Iran is clearly not spending the money it is being paid by Chinese customers in China—there has been no rise in Iranian imports of goods from China in the period in which we know China has increased its purchases of Iranian oil. Rather, that hidden surplus in China-Iran trade is being spent, at least in part, in the UAE, and thereby making a direct contribution to the UAE economy during a critical period of post-pandemic recovery. Facilitating Chinese purchases of Iranian oil also allows the UAE to reduce the risks of regional escalation. Iran has repeatedly threatened to prevent exports by the UAE and other producers if its own exports are blocked by sanctions. 

So it should be no surprise that GCC leaders told Malley that they seek to deepen economic engagement with Iran if the US lifts secondary sanctions. They have already increased economic ties to levels approaching those last seen before US sanctions were reimposed, even while sanctions remain in place. The thaw in economic relations between the UAE and Iran is an overlooked aspect of the recent developments in regional diplomacy and could prove an important driver for continued talks in bilateral and multilateral formats. The recent growth in trade also suggests that there has been a fundamental shift in the attitudes of Emirati policymakers, who rebuffed President Obama’s request for an increase in Arab diplomatic and economic engagement with Iran made during the 2016 US-GCC summit. In this way, the shared interests of Iran, China, and the UAE appear to be giving the Biden administration new and much-needed space to pursue diplomacy. 

Photo: Chinese Foreign Ministry

Iran’s Emboldened Workers Press New President for More Concessions

In the third week of September, teachers in dozens of towns and cities across Iran took to the streets, calling on the new president, Ebrahim Raisi, to fully implement existing labour laws. The authorities responded quickly and positively, promising to work on an implementation plan. But the teachers are not ready to back down. In an interview conducted for this article, a leader of the main teachers’ union said his organization will continue to use a “carrot and stick” approach to ensure that the Raisi administration makes good on its promises.

The latest nationwide demonstrations by teachers are part of a bigger protest wave that has gripped Iran over the past year. In the first few months of the year, pensioners mobilised in Tehran and other major cities. In July, residents of the southern province of Khuzestan protested water shortages. Between June and August, contract workers across Iran’s oil sector staged intermittent strikes and demonstrations. These protests are unlikely to let up. A wide range of social groups have been mobilising—organising locally, regionally, and nationally—to express socioeconomic grievances. 

As these protests have continued, the Raisi administration has defied predictions that it would quickly impose order on Iran’s restless society. Raisi was elected president in June after extensive electoral manipulation and a record low turnout. But that Iran’s new leadership came to power with little regard for the electorate has not dissuaded protestors from making demands of state authorities. According to one protest tracker, September—Raisi’s first full month in office—saw one of the highest number of protest events in the past year.

Raisi has been forced to grapple with the promises made by his predecessor, Hassan Rouhani. Rouhani launched his first term with a vow to bring inflation under control and spend government resources prudently. He exited office last August having promised financial support to a wide range of groups and sectors. Rouhani’s commitment to inflation reduction was sincere and, initially, successful. After carefully and painstakingly negotiating sanctions relief and rebalancing the economy between 2013 and 2017, his successes were quickly undone by the twin shocks of the Trump administration’s reimposition of sanctions in May 2018 and the onset of the COVID-19 pandemic in February 2020. Realising that fiscal prudence would not be enough to shore the Iranian economy, Rouhani decided to direct spending towards his core constituents, namely the urban middle classes.

As Djavad Salehi-Isfahani has shown, Tehran and urban areas were largely spared the rapidly rising poverty rates seen in Iran’s rural communities after 2018. To prevent further slides in the incomes of pensioners and public sector teachers—two important middle class segments generally aligned with reformist politics—the Rouhani administration consistently increased the budget share allocated to education and social security. As Kevan Harris observes in a recent report, education and social security together accounted for over 55 percent of the 2021-2022 budget, up from less than 45 percent just four years earlier. The more the Rouhani administration intervened to support the welfare of key constituencies, the more groups such as teachers and pensioners became emboldened, increasing their demands as the deteriorating economic situation eroded their incomes. Protest activity grew despite the growing risk of state repression. 

Still, Rouhani’s constituents suffered despite his targeted interventions. Public sector teachers saw their real wages fall by over 40 percent between March 2018 and March 2021. Middle class workers employed in the public sector suffered significantly as government spending ran out of steam. Private sector wage workers, such as those in the construction sector, have fared comparatively better as their wages rise with inflation.  

Faced with discontented workers and limited fiscal space, the Raisi administration has sought to blame their predicament on Rouhani’s recklessness, rather than the deteriorating economic situation. Hardline politicians argue that Rouhani deliberately loaded up on financial commitments in his final days in office in order to put a stick in the spokes of the Raisi government. Parliament member Ahmad Hossein Falahi recently complained that “unfortunately in the final days of the Rouhani administration a lot of things got done. This is because the managers of the previous government aimed to impose a number of policies on the incoming administration, despite the fact that the Plan and Budget Organization was supposed to safeguard this year’s budget.” Falahi added that this has created a dangerous “mentality” whereby social groups invoke Rouhani’s generosity to bargain with the Raisi government.

It is true that in his final months in office, Rouhani made a number of concessions to protesting workers that seemed extraordinarily generous given the state’s emptied coffers. For example, striking oil workers won significant concessions right before Rouhani left office. Contract workers did most of the protesting and the Rouhani administration responded by forcing employers to increases wages for contractors. But Rouhani went further and also increased the salaries of more than 100,000 workers directly employed by the oil ministry. Promises were also made to improve working conditions.

Teachers were another group benefiting from extraordinary generosity in the final months of the Rouhani administration. The 2021-2022 annual budget, approved in spring, doubled the money allocated to the education ministry’s payroll costs. Given current inflation rates, this budget increase raises the wages of public sector teachers by a massive 25 percent in real terms—the largest one-year pay increase teachers have received in at least two decades. After years of resistance, the government also suddenly agreed to several other long-standing demands about job benefits.

Still, despite the accusations now being made, it more likely that an exhausted Rouhani administration, realising it would soon leave office, relaxed its commitment to austerity, submitting more easily to bottom-up pressure for increased spending. The Raisi administration is now faced with the difficult task of managing the fiscal obligations it has inherited. The choice facing Iran’s new president is whether to prioritise the demands of constituencies that have shown a capacity for sustained protest, or whether to redirect spending in favour of workers in the judiciary, police, and military who are among his core constituents. With next year’s budget negotiations coming up soon, Iranian workers have the government on the back foot.

Photo: IRNA

Tracing the Duality of Iran’s New Central Banker

The appointment of Ali Salehabadi as Iran’s new central bank governor reflects the generational shift underway in Iranian policymaking—he was born just one year before the revolution that led to the establishment of the Islamic Republic. But beyond tapping youth, Iranian president Ebrahim Raisi, has also, at least on paper, appointed an individual with technocratic credentials and managerial experience. Since 2014, Salehabadi has served as the CEO of the Export Development Bank of Iran (EBDI). From 2006 to 2014, he led the Securities and Exchange Organisation, Iran’s capital markets regulator. In that role Salehabadi was largely successful in driving the development of the Tehran Stock Exchange, despite then-President Mahmoud Ahmedinejad’s skepticism of capital markets development.

Salehabadi holds a PhD in Financial Management from the University of Tehran. He is a faculty member at Imam Sadeq University, where he completed his master’s degree. His affiliation with Imam Sadeq University, which is shared by economy minister Ehsan Khandoozi and social welfare minister Hojjatollah Abdolmaleki, firmly places Salehabadi in the network of “revolutionary experts” from which Raisi has drawn his cabinet members focused on economic policy.

Perhaps even more so than Khandoozi or Abdolmaleki, Salehabadi’s education and subsequent experience have given him a grounding in both conservative political thought and liberal economic planning. As journalist Fatemeh Bahadori observed in a profile of Salehabadi published last year, “in his books and articles, you can see the combination of these two [educations].” It is this duality that has enabled Salehabadi to hold senior positions in state entities during both the Ahmadinejad and Rouhani administrations. Now, as Raisi pursues syncretic policymaking by his revolutionary experts, Salehabadi finds himself in the most important role in Iranian economic policy.

The Central Bank of Iran (CBI) is on the frontlines of the “economic war” that Iran currently faces. U.S. sanctions policy has directly targeted the operations of Iran’s central bank through designations and measures intended to interfere with the bank’s routine operations, especially the management of the country’s foreign exchange reserves. Salehabadi replaces Abdolnasser Hemmati, who oversaw the response in Iranian monetary policy to the reimposition of sanctions following his appointment in July 2018, just a few months after the Trump administration’s decision to withdraw from the Joint Comprehensive Plan of Action and to reimpose secondary sanctions on Iran.  

Hemmati, who left the central bank during his ill-fated run for the presidency earlier this summer, was largely successful in steering the bank through the sanctions-induced crisis. He implemented a centralised foreign exchange market that streamlined the repatriation and sale of currency by Iranian exporters for the benefit of Iranian importers. He also embarked on economic diplomacy, engaging officials in China, Iraq, and South Korea to pursue greater access to the foreign exchange reserves frozen as part of the Trump administration’s maximum pressure sanctions.

These efforts helped defend the value of Iran’s currency, and by extension alleviated inflationary pressures, at least for a time. Salehabadi will need to continue using the playbook set out by Hemmati—there are few better options. In the current environment, in which the Biden administration has maintained maximum pressure sanctions, Iran’s central bank lacks the policy space to fully shape Iran’s macroeconomic conditions. Exogenous forces, particularly the impact of sanctions on the country’s balance of payments, will determine Iran’s economic prospects—the central bank’s role is to mitigate the damage caused. 

Salehabadi appears to understand the mitigation strategies that are necessary. While leading EBDI, he had a hand in the Rouhani administration’s efforts to shore the economy, particularly as the Trump administration’s sanctions hit oil exports and access to foreign exchange reserves. Today, Iran retains ready access to just 10 percent of its foreign exchange.

Salehabadi has highlighted the role of non-oil exports in providing Iran resilience in the face of sanctions. In an October 2019 statement reflecting on Iran’s first year weathering Trump’s maximum pressure sanctions, Salehabadi highlighted the role that non-oil exports played in supporting the country’s economy. “Simultaneously with the intensification of sanctions and the reduction of oil revenues, there was a belief that non-oil exports could meet the country's foreign exchange needs, and fortunately this has been largely achieved through the repatriation of foreign exchange,” he noted. EBDI was also one of the banks through which money from the National Development Fund of Iran, the country’s sovereign wealth fund, was lent to Iranian exporters in order to support private companies during the economic downturn. As part of this strategy, Salehabadi helped facilitate increased lending to “knowledge-based” exporters, as part of the Rouhani administration’s wider strategy to achieve greater economic resilience through diversification.  

Raisi made big economic promises during his presidential campaign and also vowed to fulfil these promises within a “resistance economy” model, which is largely focused on boosting domestic production. But production can only rise in step with demand, and at a time of diminished domestic consumption, increased exports remain the best option for Iran’s economy to return to sustained economic growth. As such, truly restoring policy space for the central bank will require the lifting of sanctions.

Here, Salehabadi has experience that could help Iranian negotiators address the thorny problems surrounding the implementation of sanctions relief, especially the restoration of correspondent banking with a wider range of trade partners. While European export credit agencies favoured cooperation with private sector Iranian banks, Salehabadi was nonetheless involved in negotiations around increased bilateral banking ties during his time at EBDI. Despite initial enthusiasm, European export credit agencies ultimately failed to extend financing for trade with Iran due to the reluctance of European banks to process the related payments—a failure that cannot be repeated if sanctions relief commitments made under a restored nuclear deal are to be successfully met.

Of course, the policy space afforded to CBI is also a function of the bank’s independence. Hemmati was an adept political operator and mostly succeeded in insulating CBI from the political attacks that dogged the Rouhani administration in its second term. This independence also improved the perception of bank among Iran’s business community. Hemmati made clear that financial corruption was a systemic problem in Iran and implemented policies to reduce opportunities for corruption. During his bid for the presidency, Hemmati claimed to have “dried the roots of corruption” while at the bank. While that claim is probably an overstatement, Hemmati himself was never implicated in a corruption scandal.

It remains to be seen whether Salehabadi, who is both young and drawn from conservative networks, will be able to assert his own independence and that of the bank. But what is clear is that a great deal is riding on his tenure. In a sense, Salehabadi’s success in steering Iran’s economy back to sustained growth would legitimate “revolutionary expertise” as the new dualism in Iranian economic policymaking.

Photo: IRNA

Here's What Iran Wants From Sanctions Relief

Back in February, Iran’s Supreme Leader, Ali Khamenei, set out an early condition for new negotiations over the fate of the JCPOA. In a major speech outlining Iran’s “final” stance on U.S. reentry into the nuclear deal, Khamenei declared that sanctions relief must be implemented “in practice” and not just “on paper.” Iran would also “verify” that sanctions relief commitments had been met before fulfilling its own commitments under the restored agreement.

Khamenei’s demands were shaped by the bitter experience of the Trump administration’s withdrawal from the JCPOA and unilateral reimposition of sanctions. The issues surrounding sanctions relief and Khamenei’s demands hung over six rounds of negotiations in Vienna. They are again being cited as a possible reason for the Raisi administration’s slow return to the nuclear talks. But what exactly Iranian leaders envision for verifiable sanctions relief has been unclear.

A new report, published by the Office of the Deputy for Economic Research of the Majlis Research Center, the influential research body of the Iranian parliament, offers the first detailed assessment of what verified sanctions relief might look like. The report, entitled “Verifying Sanctions Relief,” does not represent the official position of the Raisi administration, but given the timing of its publication and the affiliation with parliament, it likely represents an emerging consensus about how best to meet Khamenei’s demands while also assuaging the concerns of Iranian parliamentarians who feel the JCPOA is inherently unfair. Many of the details in this new report are drawn from an April 2021 report published by the same research centre that also looked at issues around the verification of sanctions relief. But the new report is more detailed in its diagnosis of the problem sanctions verification seeks to address and the mechanisms that should be used.

In particular, the report aims to address the perceived imbalance between paragraphs 26 and 36 of the JCPOA. Iran interprets paragraph 26 to allow it to lessen its commitments under the deal if sanctions relief is not fully implemented—an interpretation that is disputed by the P5+1. Paragraph 36, meanwhile, allows any party to trigger the dispute resolution mechanism and begin the process of “snapback” of sanctions—a provision that Iran considers a tool for the West to renege on the deal. Additionally, the report outlines an asymmetry in the ways in which Iran’s nuclear commitments under the JCPOA and the sanctions commitments of the P5+1 are overseen and implemented. Unlike nuclear commitments, sanctions relief commitments lack a verification and monitoring mechanism, can be obstructed, are slow to implemented, and can be undone unilaterally through snapback. The report summarises this asymmetry in the following table (translated here):

To address this asymmetry, the report calls for measures to be taken in three broad areas. What is striking about these measures is their practicality. The report basically calls for a more institutional and technical approach to sanctions relief in which a checklist provides Iranian policymakers an ability to assess the implementation of sanctions relief on an ongoing basis. As part of this approach, the report also sets out targets for oil exports and bilateral trade with Europe.

New Verification Body

The report calls for the designation of an Iranian body or institution to oversee verification of sanctions relief. This could be the Supreme National Security Council or it could be a new body established with its own staff and active secretariat. The body would have three tasks:

1. Observe and assess the actual impact of sanctions removal.

2. Establish a mechanism so that any Iranian person or entity can submit a complaint about issues related to sanctions relief.

3. Prepare an action plan for decreasing nuclear commitments in the event that other parties to the JCPOA renege on their commitments. Actions might include ceasing the voluntary application of the Additional Protocol, producing uranium metal, increasing enrichment above 20 percent, or expanding the number of operational IR6 centrifuges.

Verification Checklist

The new verification body would perform its mission in accordance with a defined “checklist.” The checklist would have two sections. The first section relates to specific actions and targets related to American and European sanctions relief commitments. The stipulations include:

1. Iran should be able to export oil and gas condensate according to its rightful market share of 2.5 million barrels per day (bdp) with an initial target of 2 million bdp.

   This target is feasible—during the sanctions relief afforded Iran under the JCPOA in 2016-2018, Iran exports hovered between 2 and 2.5 million bpd.

2. Iran should be able to increase bilateral trade with key European partners and conduct normal banking transactions to facilitate that trade. The report stipulates an initial monthly target of $3 billion in transactions with EIH Bank in Germany, rising to $4.2 billion. Monthly transactions with the French branch of Tejarat Bank are targeted at $1 billion, rising to $1.5 billion.

   Here, the report has highlighted Iranian-controlled financial institutions in Europe as the key conduits, perhaps reflecting how in recent years Europe-Iran trade has been increasingly run through smaller European banks without Iranian ownership or management. While the report stipulates “transactions,” the targets here are high when likely trade totals are considered. Even if we interpret that key Germany and France-based banks may process most EU-Iran trade, the total initial transaction volume envisioned of $48 billion is significantly higher than the total value of EU-Iran trade in 2016 following the lifting of sanctions. That year, bilateral trade reached just over EUR 20 billion. While the transaction targets could include foreign investment in Iran, it is unlikely that either EIH or Tejarat Bank can scale-up to handle the envisioned volumes.

3. Iran will also seek to verify a range of sanctions lifting measures taken by the Biden administration. This includes the removal of executive orders issued by “two American presidents,” a likely reference to Trump and Biden that suggests a desire for non-nuclear sanctions designations, such as the Foreign Terrorist Organization designation of the Islamic Revolutionary Guard Corps, to be lifted. In addition, the report calls for the update of the website of the Office of Foreign Assets Control (OFAC), the sanctions enforcement body of the U.S. Department of Treasury. OFAC is to cease publishing notices, advisories, and fact sheets that dissuade trade with Iran and should increase the issuance of licenses and exemptions to ease trade

   This stipulation that means the report authors understand U.S. primary sanctions will continue to pose a challenge for Iran’s engagement with the global economy.

The second section of the checklist focuses on ongoing efforts to decrease the risks of doing business with Iran once sanctions have been lifted. These stipulations reflect the perception in Iran that following the lifting of sanctions “on paper” in January 2016, the Obama administration took a lackadaisical approach to supporting the normalisation of global trade and investment in Iran. The continued characterisation of Iran as a high-risk jurisdiction is seen to have hampered economic engagement. Therefore, the checklist would require:

1. The removal of all measures that have presented Iran as a jurisdiction with high risk of money laundering and adoption of measures to normalise economic relations with Iran.

2. Changing the basis of guidance to banks issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) from risk-based to rule-based.

3. Maximal removal of sanctioned individuals and entities from the SDN list and a substantive review of SDN and non-SDN sanctions lists.

4. Removal of statements by OFAC and other institutions that dissuade humanitarian trade and maritime trade with Iran. In addition, there should be new licenses issued to all banks that hold Iranian oil revenues in order to ensure the timely release of frozen assets.

5. A written commitment from neighbouring countries not to take action against foreign entities willing to engage Iran economically.

6. Official statements proclaiming that medium and long-term economic engagement with Iran is permissible and refraining from any action that would damage engagement with Iran.

Notably, the report does not indicate that Iran would make progress on key measures such as implementation of the Financial Action Task Force (FATF) action plan that would substantially change the perceived risk associated with engaging with the Iranian financial system. While the demand that FinCEN changes its guidance from risk-based to rule-based is unrealistic, it does point to a desire for a more prescriptive approach from the U.S. government that may create a basis for reciprocal regulatory reforms in Iran. Here, the report is pointing to the issue of over-compliance by international banks, which deem the risks and costs of transacting with Iran, even in support of clearly permissible trade, to be too high. FinCEN’s risk-based guidance essentially places the burden on financial institutions to determine the appropriate level of due diligence, putting bank managers in an uncomfortable position where minimising risk means maximising administrative burdens. A more prescriptive approach, like the rule-based approaches taken by some European regulators, may reduce the incidence of over-compliance by eliminating the uncertainty around just how much due diligence is required to mitigate anti-money laundering or counter-terrorist financing risks.

Ongoing Monitoring

Finally, the report envisions that the verification of JCPOA-related sanctions relief will be take place on an ongoing basis. The verification body would produce a quarterly report that would certify that Iran is benefiting from sanctions relief in accordance with the checklist. This monitoring function would track developments in five key sectors: baking and finance, transportation and logistics, oil, gas, and petrochemicals, aviation, and industry and mining. The body would also consult across government and with the private sector. As part of its report, the body would offer its recommendation as to whether Iran should remain in the JCPOA, decrease its commitments, or cease participation. The quarterly reports would be used by Iran to inform its engagement with the JCPOA Joint Commission. Interestingly, the report envisions an Iranian body tasked with verification and does not outline the creation of an international third-party body that would be the true analogue for the IAEA. This may reflect a lack of trust that the third-party body would be impartial.

Outlook for Negotiations

As the Raisi administration has delayed its return to the Vienna negotiations, fears have grown that Iran will not continue the talks where they left off in the sixth round, instead returning to the table with new and unreasonable demands. But there is little to indicate that Khamenei’s “final” stance on the talks have changed since February, meaning that the key unknown is how reasonable Iranian negotiators will be in seeking to secure his core demand for verified sanctions relief. To this end, the new report from the Majlis Research Center should be reassuring. While some of the demands are unreasonable, for example the high targets for Europe-Iran trade and the insistence on changes to how FinCEN provides guidance, they are undeniably technical. Should this report reflect an emerging consensus about how to “improve” the JCPOA not by changing its terms, but by improving its implementation, then the outlook for negotiations may be less dire that many predict. A focus on technical shortcomings rather than political or strategic flaws indicates that Iran sees the value of a restored JCPOA but wishes the benefits to be assured and durable. Should the Biden administration be prepared to acknowledge the shortcomings in the sanctions relief provided to Iran between 2016-2018, there are ways in which verification can be addressed within the context of the deal.

Photo: IRNA

Iran Gains Prestige, Not Power, By Joining China-Led Bloc

Last week, after fifteen long years in political limbo, Iran’s application to join the Shanghai Cooperation Organisation (SCO) was finally approved. Iran first showed interest in the Chinese-led organisation in 2004, when it achieved non-member observer status. Although it first sought full membership in 2008, China and other member-states remained wary, primarily due to the impact of U.S-led multilateral sanctions, which made further political and economic entanglement with Iran a risky proposition. While India and Pakistan were admitted in 2017, continued instability in American policy towards Iran kept Sino-Iranian rapprochement on the back-burner. Since the Biden administration began to signal that it was open to negotiations with Iran, China made a renewed push for improved relations, culminating in the signing of a bilateral Comprehensive Strategic Partnership agreement with Iran in May of this year.

Despite these developments, Sino-Iranian relations remain limited and although Iran’s accession to the SCO—which may take up to two years to complete—appears significant, the move is unlikely to substantially change Iran’s geopolitical position. Despite Iranian rhetoric, the SCO is by no means an anti-Western alliance and is unlikely to furnish Iran much beyond symbolic support for its regional and international objectives. Iranian membership is also not a guarantee of increased Chinese investment or favourable policy decisions. In terms of dividends, Iran will have to make do with propaganda, prestige, and nationalist theatre for international and domestic audiences. 

The Iranian government has touted membership in SCO as a means of opposing the United States and ending Iran’s diplomatic and economic isolation. Iranian President Ebrahim Raisi was unrestrained in his comments at the SCO Summit in Dushanbe, the capital of Tajikistan. “The world has entered a new era,” Raisi said, where “hegemony and unilateralism are failing.” He painted Iran’s membership in the SCO as emblematic of an increasingly multi-polar world, where smaller powers could work in tandem to limit the influence of larger powers. More to the point, he called on member states to support Iran’s civilian nuclear program and resist sanctions, which he called a form of “economic terrorism.” 

Compared to the Iranian side, the Chinese press was more reserved. A report from Xinhua emphasized the SCO’s ability to foster a “regional consensus” and to connect Iran “to the economic infrastructure of Asia.” The news was presented alongside developments related to Afghanistan and Tajikistan, and while described as a “diplomatic success,” Iran’s membership was not cast as a key outcome fo the summit. Raisi’s exhortations to resist American unilateralism were not reported on at all. Xi Jinping’s summit address did not even mention Iran by name.

Despite the lofty rhetoric of the Iranian president, there are few ways in which the SCO will be able to directly confront American hegemony. As noted by Nicole Grajewski, the SCO is “governed by consensus, which limits the extent of substantive cooperation” between states with divergent policies and competing objectives. It also lacks any legal mechanisms to enforce its decisions or punish member-states that violate its policies or have conflict with other members. Far from the “anti-NATO” it has been portrayed to be, the SCO is more a “forum for discussion and engagement than a formal regional alliance.” Two of the eight present members, India and Pakistan, are close U.S allies, and neither China nor Russia are keen to openly challenge the U.S in the Middle East or Central Asia.

In short, Iran will gain the ability to participate in these discussions, but not in a way that is likely to strongly influence the organization or its policies. China and the rest of the member-states will be keen to avoid alienating the Arab states that see Iran as a regional rival. In a move that seems targeted directly at balancing this concern, Saudi Arabia, Qatar, and Egypt were also admitted during the Dushanbe summit as “dialogue partners,” joining nations like Turkey and Azerbaijan. While not full members, the presence of these voices will limit how much sway Iran will have at future SCO summits.

 Furthermore, despite its own rhetorical commitment to facilitating trade, economic, and cultural ties between members, the SCO’s success in these fields has been limited. In terms of tangible projects, the SCO has mostly stuck to regional security initiatives like counter-terrorism intelligence sharing, cross-border efforts to fight drug trafficking, and joint military exercises. While the organization has lately attempted to re-brand itself as an economic development platform, it still lacks any institutions for multilateral development finance. Beijing and Moscow also have divergent interests when it comes to major issues like free trade zones, and questions remain as to whether the organization can function as an actual forum for holding practical negotiations between member states, rather than “simply becoming their vehicle for norm-making power projection.”

China and Iran have set ambitious targets to increase trade for nearly a decade, but bilateral trade remains modest despite repeated commitments, discussions, and international summits. There remain substantial barriers to investment. Chinese investors have been urged for years to invest in Iran’s free economic zones in Maku, Qeshm, and Arvand, but investment remains limited. While China is more than happy to ignore sanctions when it comes to oil imports, outside this strategic trade, Chinese firms remain unconvinced that the profit is worth the risk of doing business, and privately grumble about the difficulty of working with Iranian partners. Iranians also face disruption and competition from Chinese goods and services, leading to popular discontent and political blowback from Iranian companies that have profited from the absence of both Western and Chinese competitors. Although there is no question that there is vast potential in economic co-operation between China and Iran, these are not minor issues, and there is little reason to believe that the SCO will provide a forum to address the barriers.

The SCO provides an impressive stage for China and Iran to enact their shared opposition to Western sanctions, hegemony, and unilateralism. But the realities of international political economy and the conflicting agendas of the body’s member states means that joining the SCO is unlikely to empower Iran in a meaningful way.

Photo: Government of Iran

Introducing the New Leaders of Iranian Economic Policy

This research was compiled by the Bourse & Bazaar Foundation for The Iran Primer.

President Ebrahim Raisi has prioritized improving Iran’s faltering economy. He took office in August amid a fifth wave of COVID-19 cases, recurring blackouts, and a currency depreciation. The economy subsequently contracted after five months of growth. Iran also remains under U.S. sanctions. To address these economic challenges, Raisi will need to surround himself with competent managers.

Raisi’s predecessor, Hassan Rouhani, staffed his economic team with several experienced technocrats who were largely apolitical. His veteran oil minister, Bijan Zanganeh, and central bank governor, Abdolnasser Hemmati, were instrumental in mitigating some of the economic damage inflicted by U.S. sanctions.

Raisi’s economic team, however, is mostly drawn from conservative networks, including those tied to the Islamic Revolutionary Guard Corps (IRGC). Many members of Raisi’s team were vocal critics of the Rouhani administration. Some of his appointees are relatively unknown even in Iran. Nevertheless, all of Raisi’s picks to lead ministries responsible for the economy were approved by Parliament, the Majles, which is dominated by conservatives.

Aside from his cabinet, Raisi’s economic policy will be influenced in part by his appointed advisors. These include Mohammad Mokhber, an economist and former manager of SETAD, a business conglomerate under the control of Supreme Leader Ayatollah Ali Khamenei. Mokhber was appointed as first vice president. Masoud Mirkazemi, who was a trade minister and later oil minister under hardline President Mahmoud Ahmadinejad (2005-2013), was tapped to lead the Planning and Budget Office. A former IRGC commander, Mohsen Rezaei, who ran against Raisi in the 2021 presidential election, was appointed as vice president for economic affairs.

Raisi’s new cabinet is largely composed of men he has deemed “expert, efficient and revolutionary.” The emphasis on “revolutionary” reflects a politicisation of economic policymaking that emerged during Hassan Rouhani’s presidency (2013-2021). As Iran faced multilateral and unilateral sanctions, advocates for diplomacy and the 2015 nuclear deal sought the lifting of sanctions to boost economic prospects.

But many hardliners, including Supreme Leader Ayatollah Ali Khamenei, prefer to look inward to solve Iran’s economic problems. They promote the “resistance economy” model in which Iran would seek to neutralize the impact of sanctions. These lawmakers and officials favor reducing dependence on imports by raising domestic production and replacing foreign technologies with those made at home. Should imports be necessary, they support increased trade with Russia and China as opposed to Western countries, which they consider unreliable.

With Raisi in office, the proponents of the resistance economy are in control of both the legislative and executive branches. The question is to what extent they can implement the resistance economy model given its inherent limitations. As a pragmatic move, Raisi’s team may also push for the lifting of U.S. sanctions and reintegration into the global economy, which were priorities of the Rouhani administration. The following are profiles of Raisi’s cabinet ministers responsible for managing the economy. 

Ehsan Khandoozi

Ehsan Khandoozi was confirmed as Minister of Economic Affairs and Finance. Born in 1980 in the northern city of Gorgan, Khandoozi holds a bachelor’s degree in Islamic knowledge and economics from Imam Sadeq University. He also has a master’s degree and a doctorate in economics from Science and Research Branch of the Islamic Azad University. Khandoozi is an assistant professor of economics at Allameh Tabatabai University as well as the director of the Islamic Economics Group in the same university.

handoozi has served as:

• secretary of the Economic Council of the Islamic Republic of Iran’s Broadcasting (IRIB)

• director of the Center for Economic Research Parliament (2013-2018)

• a member of the research council to the Tax Affairs organization

• a member of the Ministry of Economic Affairs and Finance’s think tank

• economic adviser to the Secretariat of the Expediency Council

• a member of the Board for Deregulation and Facilitation of Business Licenses

In 2020, Khandoozi was elected to Parliament representing Tehran. He became the vice chairman of the Economic Committee and a member of the Transparency and Justice watch board of the Majles. As a lawmaker, Khandoozi was a vocal critic of Rouhani. He focused on tax policy, including capital gains and what to do about empty houses; reorganizing the central bank, amending the audit organization law; reforming the budget structure, and dealing with audit organizations and business licensing arrangements. He also sought amendments to the laws regarding industrial free trade zones and led a caucus focused on business and economic issues in Parliament. The following are remarks from Khandoozi on key issues:

On U.S. sanctions:

• “My proposal is that the 11th Parliament establish an expert committee with representatives from relevant commissions instead of taking ‘rushed, ad-hoc and symbolic’ actions… [Responding to] the [U.S.] sanctions room, requires an anti-sanctions room.” (June 2020)

On the 2015 nuclear deal:

• “Experience has shown that if sanctions are lifted completely, the U.S. Treasury Department will be able to prevent us from profiting from our foreign exchange and other economic transactions by intimidating and indirectly threatening Iran's trading partners. Accordingly, and given this concern, which has been proven many times, it should be possible to verify the lifting of sanctions in the coming weeks and months by determining measurable indicators.” (August 2021)

On the Raisi administration’s economic priorities:

• “It is suggested that the government’s economic headquarters control inflationary expectations in the short run and focus on controlling the exchange rate. The priority is with macroeconomic stability and preventing the decrease of public purchasing power.” (August 2021)

• “The most important priority of the ministry of economic affairs and finance is helping create macroeconomic stability and sustainable control of inflation.… Record high inflation and decrease in per-capita income has created a large gap between households’ income expenditure, made it harder for people to afford to eat, and jeopardized the livelihoods of different population groups.” (August 2021)

On controlling inflation:

• “From day one I will do my best for financing the fiscal deficit through non-inflationary methods, controlling the record-high liquidity growth, managing the foreign exchange market and [saying it twice to emphasize the point] managing the foreign exchange market.” (August 2021)

On financing the fiscal deficit:

• “One urgent action in the field of public finance is transiting from this year’s fiscal deficit with minimum macroeconomic cost. Given the economic costs of borrowing money from the Central Bank, the most important actions to be taken are: 1) demand creation for government bonds, which is easily doable and its instructions will be communicated soon; 2) facilitation of selling of government’s assets,…; 3) enhancing the role of the treasury in overseeing monetary operations of the Central Bank; 4) development of the debt markets; 5) diversification of Islamic financial bonds and increasing their liquidity; 6) compilation of bond issuing timetable plan, and lastly, a public debt management bill.” (August 2021)

On the tax system:

• “Unfortunately, our tax system is known by three characteristics: a low level of tax revenue (in comparison to) GDP, high tax evasion, and the main burden of tax being on the transparent and law-abiding groups and producers.” (August 2021)

On Financial Action Task Force (FATF) reforms:

• “As long as there are sanctions, reviewing and approving the FATF (reforms) will not cure the pain. Meeting the demands of the FATF makes our economic life even more difficult under sanctions. In my opinion, during these extraordinary times, the passage of these two remaining bills and the full implementation of the requirements of the FATF is not a defensible decision… The FATF is a very minor issue in our economy today. It is a false premise to think otherwise as some people are constantly talking about the FATF.” (March 2021)

Javad Oji

Javad Oji was confirmed as Minister of Petroleum. Born in 1966 in Shiraz, some 500 miles south of Tehran, Oji has a bachelor’s degree in petroleum engineering from Petroleum University of Technology. He has been employed by the petroleum ministry since 1969 and worked as the Deputy Minister of Petroleum and CEO of the National Iranian Gas Company during President Mahmoud Ahmadinejad’s second term (2009-2013).

In replacing the wily technocrat Bijan Zanganeh, Oji brings to the job good relationships with members of the Majles. During the Ahmadinejad administration, Oji signed the second contract covering gas imports from Turkmenistan to the Sarakhs region in 2009. He also established a mechanism with Iran’s northeastern neighbor to exchange goods as payment for the imported gas to circumvent sanctions.

Gas export contracts with Pakistan and Iraq followed in 2010 and 2013 respectively. Oji was also responsible for implementing a targeted subsidy program to support gas transmission for the National Iranian Gas Company in December 2010.

During his long career, Oji has served as:

• chairman of Iran Gas Development Engineering Company

• chairman of the Board of Supervisors of Production and Gas Refineries

• chairman of the Board of Directors of Petrochemical Industries Investment Holding

• a member of the Board of Trustees of the University of Petroleum Industry

In 2020, Oji was sanctioned by the U.S. Treasury for serving as managing director of Sina Energy Development Company (SEDCO). SEDCO was sanctioned for being owned or controlled by Bonyad Mostazafan, a powerful foundation allegedly controlled by Supreme Leader Khamenei. The following are remarks from Khandoozi on key issues:

On the Raisi administration’s plans for oil and gas:

• He promised to increase oil sales and stated: “Considering the political developments with China, the numbers [exports] will be much higher than the current situation.” (August 2021)

• “We should not always seek to sell crude oil … We must pursue the discussion of complementary petrochemical chain development, which will lead to both employment and income generation, and requires very low investment.” (August 2021)

On natural gas production and diplomacy:

• “In the field of gas supply and consumption, operational solutions can overcome the challenge of negative gas balance…. Some solutions in the gas supply sector are short-term and some are long-term. First, we must make maximum use of the unused capacity of the country's gas refineries. In the fields that supply these refineries, due to the pressure drop that has occurred for them, we can compensate for the drop in production by drilling wells and maintaining production as well as by installing pressure boosting stations and unused capacity. We can bring gas refineries back into the orbit.” (June 2021)

• “Another solution for the gas supply issue is pursuing diplomatic efforts. We can increase the country's share in the gas trade by effectively communicating with neighboring countries, which are the world's gas leaders. It is not only the matter of gas exports, but also about gas imports, swaps, and transit. If our neighbors transit their gas through Iran, it will bring income to the country, and we can activate new capacities in the country's gas supply sector.” (June 2021)

Seyyed Reza Fatemi Amin

Seyyed Reza Fatemi Amin was confirmed as Minister of Industry, Mine and Trade. Born in 1974 in the northern city of Shahroud, Fatemi Amin has a bachelor’s degree in electronic engineering from Ferdowsi University. He also has a master’s degree in economics and social systems engineering from Iran University of Science and Technology. As of 2021, he was in the process of obtaining a doctorate in strategic knowledge management from the University of National Defense. His views on industrial and trade policy are anodyne, but he appears to support replacing imports by upgrading Iran’s industrial structure using subsidies for advanced technologies.

Amin has held several important executive and managerial roles, including:

• deputy minister of development, planning and technology in the Ministry of Industry, Mine and Trade during Ahmadinejad’s second term

• member of the Board of Representatives of both the Tehran and Iran chambers of commerce, industries and mines

• consultant and director of investments and partnerships of Astan Qods Razavi (November 2017-March 2020), a major foundation sanctioned by the U.S. Treasury in 2021

• deputy of Astan Qods Razavi (January 2019-2021)

The following are remarks by Amin on key issues:

On unemployment:

• “The issue of today's unemployment is the issue of unemployment of university graduates. With basic production, mining and business work we cannot create jobs for these graduates. We have to turn to economic drivers: electrical and electronic industries, industrial machinery, and production of automobiles and transportation equipment.” (August 2021)

On the automobile industry:

• “In the automobile industry we do not have any technical problems. The problems are three things: no competition in industry, low production, and revising and reforming managerial and economic structures.” (August 2021)

On economic development:

• “One of my main concerns is balanced development. We must provide fair distribution of resources and opportunities for all the people of Iran…. Balanced development is not just about industry, mines and trade. We should also train and improve human resources in different areas in the country.” (August 2021)

On the business environment:

• “80 percent of the problems in the business ecosystem are not beyond three issues: social insurance, tax and financing.” (August 2021)

On inflation:

• “Inflation is the chronic disease of the Iranian economy. Treating this disease requires two, two-and-a-half, or three years.” (August 2021)

Hojjatollah Abdolmaleki

Hojjatollah Abdolmaleki was confirmed as Minister of Cooperatives, Labor and Social Welfare. Born in 1981 in Shahr-e Rey, just south of Tehran, Hojjatollah Abdolmaleki holds a master’s degree in Islamic education and economics from Imam Sadegh University as well as a doctorate in economics from the University of Isfahan. He is a faculty member of Imam Sadegh University, as well as the deputy of employment and self-sufficiency and member of the Board of Trustees of the Imam Khomeini Relief Committee. He also serves as a member of the Central Council of the Popular Front of the IRGC.

Abdolmaleki considers himself a theoretician of resistance economics. He has written eight books on resistance economics and the Islamic and Iranian models of economic development. During Ahmadinejad’s presidency (2005-2013), Abdolmaleki was a member of the board of directors of the Social Insurance Fund for Villagers and Nomads and was an advisor to the Ministry of Economic Affairs and Finance. He was also a Principlist candidate in the 2016 parliamentary elections, but he did not get enough votes for a seat.

Abdolmaleki has also served as:

• secretary of the Economic Council of IRIB

• Iran’s representative to the World Bank’s International Summit in France (2010)

• secretary of the international “Seminar on World Development Report 2009” (in collaboration with the Ministry of Economic Affairs and Finance and the World Bank in 2010)

• director of the Encyclopedia of Islamic Economics Foundation and executor of the first edition of the encyclopedia (2011-)

The following are remarks by Abdolmaleki on key issues:

On economic openness:

• “Based on economic openness criteria, our economy is more open than the economy of China. The thing is China has not internally sanctioned its production. It has empowered its production. We have suppressed our production based on the international atmosphere.” (May 2021)

On production and use of resources:

• “In the economic revolution of 2021, the owners of agricultural lands have the right to carry out several different activities, including industrial production, livestock, poultry breeding and fish farming — and even construction. Per each percentage change of agricultural land to industrial, livestock or buildings, 12 million additional jobs will be created.” (March 2021)

On unemployment:

• “For 42-43 years since the Revolution we have taken several actions in the field of employment. However, at this moment do we have information on the status of employment and unemployment of our people? If we enter a national ID, can we find out if the corresponding person is employed or unemployed? If they’re unemployed, are they job seeking? If they’re job seeking, which experiences and skills do they have and which job are they suited for? And if they do not have skills, which kind of skills are they talented and gifted in? No, we do not have this information, therefore we cannot properly make plans.” (August 2021)

Aliakbar Mehrabian

Aliakbar Mehrabian was confirmed as Minister of Energy. Born in 1969 in Khansar, about 120 miles south of Tehran, Aliakbar Mehrabian has a bachelor’s degree in civil engineering from Iran University of Science and Technology and a master's degree in economics from the University of Tehran. As of 2021, Mehrabian was pursuing a doctorate in Economics at the Sciences and Research Branch of Azad University in Tehran. His thesis was on “the impact of removal of electricity tariffs on economic growth and household welfare with a resilience economics approach.” Mehrabian has expressed strongly protectionist views, perhaps buoyed by his success at increasing domestic production in industries under his purview.

His managerial and executive experiences include serving as:

• minister of Industry, Mine and Trade during Ahmadinejad’s presidency

• special assistant to president Ahmadinejad and executor of the Mehr Mandegar project (with the aim of implementing hundreds of large projects, especially dams, power plants, water supply, petrochemical refineries, railways, ports, etc.)

• chairman of the Working Group for supporting production of domestic goods.

Mehrabian was also an advisor to Ahmadinejad when he was the mayor of Tehran in the early 2000s. During Mehrabian's tenure as minister of Industry, Mine and Trade (2007 to 2011), Iran’s crude steel production capacity doubled in a staggering leap. Steel production increased by 41 percent. The clinker and cement industry also recorded unprecedented growth. Cement production capacity increased 66 percent from 2007 to 2012. The following are remarks by Mehrabian on key issues:

On self-sufficiency:    

• “Today, we are perfectly self-sufficient in many strategic industries, and we don’t need imports anymore.” (January 2011)

On plans for utilities:

• “Based on the four-year plan and vision in collaboration with different sectors and the private sector, we can add 40,000 megawatts to the country’s electricity capacity.” (August 2021)

• “Based on the compiled plan, the level of utilization of rural drinking water, which is currently below 75 percent, will increase to more than 90 percent after four years.” (August 2021)

• “Based on the latest data, 166 sewage/wastewater treatment plants are active in the country. Therefore, we are trying to increase this number by 50 percent in the next four years.” (August 2021)

Issa Zarepour

Issa Zarepour was confirmed as Minister Information and Communication Technology. Born in 1979 or 1980 in the western city of Eslamabad-e Gharb, Zarepour has a bachelor’s degree in computer engineering from Razi University and a master’s degree in computer engineering (software) from Sharif University of Technology. He is one of two of Raisi’s ministers who have earned degrees abroad. Zarepour completed his doctorate at the School of Computer Science and Engineering at the University of New South Wales in Australia. He holds two postdoctoral degrees in the field of computer networks.

Policies set by the Ministry of Information and Communication Technology have a significant impact on the development of Iran’s digital economy. Zarepour’s predecessor, Mohammad Javad Azari Jahromi, had a reputation for being pro-business. Under Azari Jahromi, the ministry supported the development of a startup ecosystem and the digitalization of major industries. To facilitate growth, Jahromi opposed filtering of social media platforms, which are a major channel for e-commerce in Iran.

Zarepour has been a member of the Faculty of Computer Engineering of Iran University of Science and Technology since 2017. As a university professor and specialist in the field of policy making and macro planning of information technology and cyberspace, he has extensive research experience, including publication of dozens of scientific articles in international journals. He has received several international scientific awards.

From March 2020 until his appointment, Zarepour served as head of the Statistics and Information Technology Center of the national judiciary. He was also the founder and head of Information Technology and the Digital Media Development Center at the Ministry of Culture and Islamic Guidance from the mid-2000s to early 2010s. During Ahmadinejad’s presidency, he served on the Information Technology Commission in addition to acting as an IT advisor to several ministers and government officials.     

Zarepour is an alternate member of the board of the Clean Cyberspace Developers Association (FMP), which describes itself as an NGO that defends widespread web filtering and considers Instagram and Telegram harmful to the national sovereignty of Iran. The following are remarks from Zarepour on key issues:

On the role of big data and data mining in the judiciary:

• “Currently there exists big data on court orders, most of which needs to be made public after applying anonymity and removal of personal data… This valuable database can be used by those who work on social sciences, especially students of law, for data mining, as well as for giving feedback to the judiciary in different areas such as crime prevention.” (July 2020)

On the national internet:

• “National Information Network has been mistakenly understood as disconnected from the global network and internet…. National Information Network, which is globally known as National Broadband Network (NBN), is considered a national achievement for countries and does not mean disconnection from the global network. The issue is, when sending a message, why should the information packages related to the message exit the country, go to Germany, the U.S., and again go through this journey to get back to the country and reach the receiver. This means we have to pay the costs of international bandwidth, and our security and independence will be jeopardized, and if one day something happens, the internet gets disconnected, a ship’s anchor gets stuck, or if anything else happens, all our domestic services will stop working.” (August 2021)

On protecting internet users’ rights:

• “In the virtual space, people are worried about their children and teenagers… In countries where this technology has been created, tools have been foreseen for families to be able to manage their children. In the search engines that we use, there is a safe search option, so that children do not see everything. Unfortunately, we have been negligent of these capacities. In my opinion, we have left people without shelter in this space.” (August 2021)

Attendance in Baghdad Shows Iran's Commitment to Regional Diplomacy

The Baghdad Conference for Cooperation and Partnership, which took place on Saturday, was intended to boost Iraq’s regional profile, gather political and economic support for the country and, most importantly, provide a unique venue for diplomatic engagement between Iraq and its neighbours—Iran, the United Arab Emirates, Qatar, Saudi Arabia, Kuwait, Turkey, Jordan, and Egypt.

The decade since the Arab Spring has been marked by rising tensions in the Middle East. The Baghdad Conference offered a hopeful message that regional actors could move beyond tensions and violence. While it was the first time in recent years that officials from Iran and its Arab neighbours had met in such a multilateral format, the conference was not solely intended to foster reconciliation between Tehran and Arab capitals. Numerous intra-Arab conflicts had threatened regional security and the conference presented an opportunity to begin the mending of those fractured relations.

Such a gathering would have been impossible to imagine even just a few months ago. With the help and support of French president Emmanuel Macron, approval from the Biden administration, and the buy-in of all participating states, Iraq successfully managed to play the role of regional mediator.

Since beginning his term in May 2020, Iraqi Prime Minister Mustafa Al-Kadhimi has made it a priority to facilitate greater regional diplomacy. But the conditions were not right until Donald Trump’s departure from the White House, the end of the GCC rift following the Al Ula Summit, and the commencement of back-channel talks between Iranian security officials and both Saudi and Emirati counterparts. Moreover, the impact of the COVID-19 pandemic, which underlined the interconnectedness of the region and the importance of coordinated economic and public health interventions, made Khadimi’s call for dialogue more convincing.

While the summit itself may have comprised more of symbolism than of substance, the mere presence of officials from the nine countries in the same venue and the numerous bilateral talks that took place on the sidelines provided a foundation for further regional diplomacy.

Last December, I suggested that 2021 could be the year that Iran and the GCC states enter into a robust dialogue. In recent years, Iranian leaders have increasingly focused on regional dialogue, reacting to an overall deterioration in regional security and the increased risk of escalation. In 2019, the Rouhani administration proposed the Hormuz Peace Endeavor (HOPE), a plan of action for regional diplomacy on issues including energy security, arms control, and nuclear non-proliferation. A summit was envisioned as one of the initial components of the plan.

The HOPE plan was not taken seriously by many Arab officials nor analytics, who remained sceptical that the plan put forward by the Rouhani administration had backing from the Iranian deep state, which had taken an interventionist line in the region in recent years. But today, the participation of the Raisi administration in the Baghdad Conference provides evidence that the importance of regional diplomacy is understood even among Iran’s so-called hardliners.

Iran’s new foreign minister, Hossein Amir-Abdollahian, made clear that regional diplomacy would be a cornerstone of the Raisi administration’s foreign policy. Of course, there are competing visions of what such diplomacy should entail. Amir-Abdollahian was unhappy about Syria’s exclusion from the Baghdad Conference, and it is precisely for that reason that his next trip after Baghdad was to Damascus. That the conference took place, however, should encourage Iranian leaders to put grudges aside.  Extended hands will encourage Iran to unclench its fists.

Photo: IRNA

As Iran Faces Domestic Crises, Raisi Must Seek Stability in Foreign Policy

This article was originally published in Persian in the Iranian newspaper Etemad.

The Raisi administration faces numerous challenges. In the domestic sphere, the resurgence of COVID-19, the limping economy, and the spectre of a climate emergency have tested the patience and resilience of the Iranian public, who increasingly doubt the ability of the government to respond to the many crises facing the country. The Raisi administration must make these internal crises its foremost priorities.

But in order to do so, the administration must ensure that Iran’s foreign policy serves to minimise external challenges, so that the capacity of the government can be focused where the needs are most acute. In this regard, the Raisi administration is not unique—governments throughout the region and the world are responding to unprecedented internal crises. The regional and global situation therefore requires a foreign policy doctrine that is rooted in pragmatism and multilateralism. For the Raisi administration, such a doctrine should focus on three priorities. 

 First, Iranian leaders have rightly pointed out that the sanctions relief provided by the P5+1 following the implementation of the JCPOA was imperfect, lacking the necessary “verification.” While trade did rebound, Iran’s reintegration into the global economy was impeded by the hesitance of banks to engage in Iran-related transactions. By the time President Donald Trump withdrew from the JCPOA in May 2018, reimposing secondary sanctions, little foreign direct investment had materialised, and the most important energy and infrastructure projects had yet to break ground. For this reason some Iranian leaders, consider the JCPOA fundamentally flawed. But the Raisi administration must recognise that the only means for addressing issues related sanctions relief is to remain a party to the nuclear deal, ensuring the U.S. renters the agreement, and then demanding greater attention to issues of implementation from the P5+1. There were only 11 months between the implementation of the JCPOA and the election of Donald Trump—too short a time for many of the complex issues surrounding sanctions relief to be solved. Of course, arriving at solutions will also require economic reforms by Iran, such as full adoption of the FATF action plan. These reforms will also take time as they are carefully considered by Iranian lawmakers. Should the Raisi administration move swiftly and confidently to restore the JCPOA on the basis of mutual compliance, there will be at least three years under the Biden administration, and possibly seven years, in order to work with the P5+1 in a multilateral manner to ensure that the trade and investment promised under the JCPOA materialise, returning Iran’s economy to robust growth.

Second, President Raisi needs to expand Iran’s regional policy to more successfully include multilateral diplomacy with Central Asia. One of the most positive developments of the last year has been an upswing in regional diplomacy. Iran has resumed bilateral negotiations with Saudi Arabia and the United Arab Emirates. The recent initiative of Iraqi Prime Minister Mustafa al-Kadhimi to organise a regional summit in Baghdad is an excellent opportunity to build on this recent dialogue in a larger multilateral format. But there have also been important developments to Iran’s northeast, with a growing effort among the Central Asian states to address regional challenges through multilateral formats. Despite the shared interests over regional connectivity, economic development, and security, Iran has yet to participate in these formats in a serious way. The deteriorating situation in Afghanistan will in particular require coordination with Central Asian neighbours. Javad Zarif completed a tour of Central Asia earlier this year, showing the potential for high-level engagement. But the Raisi administration must develop a clearer strategy for multilateral engagement in Central Asia in parallel with its engagement with Arab neighbours, thereby completing a regional policy that encompasses all of West Asia.  

Finally, for the sake of multilateral diplomacy, the Raisi administration must ensure that the Iranian public can access global digital and communications platforms. While the debate in Iran has largely considered it an internal issue, definitive filtering of cyberspace would negatively impact foreign policy in two ways. First, it is important consider that Iran’s most effective diplomats are its own people, who have an outsized impact on the global discourse through their presence on social media platforms. To deny Iranians access to these platforms would prevent Iranians from seeing themselves as global citizens, engaging in a global exchange of ideas, and participating in global commerce. Second, limiting access to cyberspace in the manner proposed would fundamentally change the perception of Iran in the international community, making it more difficult for Iran to engage as an equal and respected party in multilateral formats. In short, should Iran isolate itself in cyberspace it will isolate itself on the world stage.

Iranian has demonstrated remarkable resilience in a period when the country has been isolated and embattled. Because Iran’s strength will not be doubted, the Raisi administration should confidently pursue a foreign policy of pragmatism and multilateralism, ensuring that the country does face the many crises alone.

Photo: IRNA