President Rouhani and the New Iranian Economy
Nikolai BOBKIN | 16.07.2016 | WORLD / Middle East

President Rouhani and the New Iranian Economy

Hassan Rouhani’s first presidential administration has entered its final phase. One year from now, in June 2017, Iran will once again choose a chief executive. It is very likely that President Rouhani will hold on to his post for another four years. During his presidency the Islamic Republic has been able to refocus its approach to development, overcoming many years of difficulty caused by confrontations with the United States and the West in general. Three years ago, when Hassan Rouhani was first elected president of Iran, he was pegged as a Westerner, a liberal, and a reformist, but he turned out to be a pragmatist whose political vocabulary centered around a call to «restore the nation’s dignity». Within a short period of time Iran had managed to find an acceptable way to extricate itself from its standoff with the West over the nuclear issue, as well as end its international isolation and the devastating impact of the economic sanctions. Changes took place in the country that would have been difficult to even imagine before Rouhani’s arrival.

* * *

In the summer of 2013 Rouhani was up against serious problems in almost every key sector of the Iranian economy.

Inflation hit a high of 40%, while the value of the Iranian rial dropped by over 60%, sharply lowering the purchasing power of ordinary people. Unemployment in Iran topped 13%, with almost a third of Iranian youth (27%) unable to find work. Hundreds of highly educated professionals left the country. During that period the Iranian public was confronted by what might have been the nation’s most severe socio-economic problems since the 1979 Islamic revolution. The country was desperately short of financial resources, but the negative economic impact of the Western sanctions was not solely to blame.

President Rouhani has publicly acknowledged that many of Iran’s economic problems stemmed from poor governance as well as a lack of societal confidence in state institutions. Mismanagement, corruption, and ambiguous moves by government institutions paralyzed the business operations of Iranian entrepreneurs. As a result, the country was starved for investment and unable to create new jobs.

Rouhani’s team immediately took steps to enforce the Law for the Continuous Improvement of the Business Environment, which had already been approved by Iran’s Majlis, but never invoked by the previous government. Afterward, the state began to take a smaller role in the economy, relatively speaking, plus rights and opportunities were expanded for the private sector and investment guarantees were offered with an eye toward restoring investor confidence.

Nor did the new president forget about the importance of Iran’s integration into the global economy. One of the main tasks of Rouhani’s government was to normalize relations with the West and free the Iranian economy from the regime of international sanctions. Rouhani decided that it was necessary to rein in the American hegemony that was standing in the way of Iran’s economic progress. Rouhani explained that this did not mean abandoning principles, but did require a change in methods. In just a few months, Iranian diplomats led by Minister Javad Zarif had sent out more signals to potential partners in the international arena than had their predecessors over the course of an entire decade. Thanks to Tehran’s efforts, the grievances against Iran’s nuclear program were withdrawn and the resulting deals were formalized by means of a corresponding agreement that was approved by the UN. Finally, the economic sanctions were lifted.

* * *

The Iranian government, with Rouhani at its helm, is working on the nation’s future transformation into a highly developed industrial country. Iran is forging a new economic strategy, moving from an «embattled economy» to an «empowered economy».

The economic picture is incomparably better today than it was three years ago. Inflation has declined from 40 to 10%, and the rial’s exchange rate has stabilized at its level from the year President Rouhani was elected. In June the rate of inflation fell to 9.7% – a record low for the last quarter century!

Iranian business now has room to maneuver and a choice of international partners. Today, Iran is seeking the most favorable terms for its economic cooperation with the outside world.

The country’s main natural resources – oil and gas – remain under state control. When Iran signs contracts allowing foreign companies to explore and develop its oil fields, there is an emphasis on obtaining an increased share for the Iranian side in the bargain (at least 50%). And Iran is now open to foreign participation in 52 projects to explore and develop gas fields, plus another 18 projects at combined (oil and gas) fields.

When it comes to the development of hydrocarbon fields, the Iranians have indicated that they are only willing to work with foreign companies that are able to ensure Iran’s guaranteed right to obtain advanced technology as part of that company’s investment plans. This requirement applies to all partners. For Russia – like for China – no exceptions are being made. Beijing grasped this and has responded quickly and convincingly.

For example, the Chinese have agreed to create a joint oil terminal on the Iranian island of Qeshm in the southern part of the Persian Gulf. Because of the construction of the terminal, the island will become a center for the production and storage of oil. The future terminal will be able to accommodate tankers and store approximately 30 million barrels of oil. This is one of the biggest deals for Iran’s post-sanctions oil industry. China, for its part, also wants to increase the amount of oil it buys from Iran. In June of this year China boosted its oil imports from Iran to a historic high, although in February Saudi Arabia took top honors as China’s biggest oil import partner, with Angola and Russia taking second and third place.

Prior to the introduction of the last sanctions in 2012, Iran exported approximately 600,000 barrels of crude oil to the EU each day. Italy, Spain, and Greece were the biggest customers of Iranian oil. By May, Tehran had regained more than half its level of its pre-sanctions sales to the European Union, shipping over 350,000 barrels per day. At that pace, analysts assumed that Iran would soon regain its lost sales positions in the Old World, but over the first three weeks of June exports did not exceed 280,000 barrels per day.

In Iran’s export strategy its main customers are still Asian – China, India, and South Korea. For example, India imported as much as 505,000 barrels of Iranian oil per day in March, which is 290,000 barrels more than during the previous month. Plus, New Delhi is investing $20 billion in the modernization of the Iranian port of Chabahar the Gulf of Oman.

Attracting foreign investment is a top priority of Iran’s economic policy.

The pragmatism of Rouhani’s government in matters of international economic cooperation is such that Tehran’s foreign policy sympathies – or antipathies – take second stage. For example, Iran has entered into an agreement with the US company Boeing to purchase 100 civilian aircraft. In January, Iran signed a major deal worth $27 billion with Airbus to buy 118 airplanes. The revival of the Iranian air fleet was a top priority for the Rouhani government.

* * *

In 2013 analysts agreed that Iran’s economy would benefit from a new government. However, few believed that it would only take three years to restore normal economic life and return to a scenario of average growth. At that time there was no real basis for talking about a successful end to the nuclear negotiations or Iran’s emergence from the regime of sanctions. However, the Rouhani government’s pragmatism and perseverance in achieving goals has allowed it to overcome the negative momentum of recent years.

The current Iranian leadership is adamant about upholding the values of its Islamic system of governance and reserving its right to conduct an independent foreign policy, while not missing out on the benefits of trade and economic cooperation with the West. «The creation of national wealth and its equitable distribution» is the goal of Iran’s economic policy. It’s easy to see why the Islamic Republic is known as an «island of stability» in the Middle East.

Tags: Iran  Rouhani