Pacific Money

Rouhani to the Rescue in Iran?

Iran’s economy is currently in tatters. Does the new president hold the necessary keys to improving it?

The election of Hassan Rouhani has renewed optimism about the future trajectory of the country among many Iranians. Although the new president will face many challenges, none are more important than fixing the economy in the eyes of many Iranians. But with the country currently facing an economic crisis, is it worth asking whether the new president holds the correct key to unlock all of Iran’s problems?

The State of the Iranian Economy

The Iranian economy is currently suffering. This statement runs contrary to the assessment of the outgoing Ahmadinejad regime. For example, in his last televised interview as president, Ahmadinejad gave a rousing defense of his administration’s handling of the economy. While he sputtered off a list of statistics to back his argument, many if not most of these have been since been disproven.

In reality, Iran’s major economic indicators are poor. Since the U.S. and the European Union began imposing sanctions targeting Iran’s oil and financial industries, Iran’s oil exports have more than halved from 2011 levels. The International Energy Administration estimates that the drop in oil sales cost Iran $40 billion in 2012 alone. Nor does relief appear to be on the horizon. In fact, Reuters reports that Iran’s top oil customers— China, India, Japan and South Korea— cut imports by 22 percent in the first half of 2013, and are likely to initiate further cuts in the second half of the year.

The loss in oil sales has had a profound impact on the Iranian economy. To begin with, this and economic mismanagement has trigged rapid inflation. Most notably, In October of last year Iran’s currency, the rial, was reported to have lost 80 percent of its value since the end of 2011.

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The decline in oil exports has also triggered budget shortages in Iran. This is because as much as 65 percent of the government’s budget is based on oil exports.

Rouhani to the Rescue?

Iran’s economic turmoil briefly stabilized after Rouhani’s electoral victory in June. Indeed, Iran’s rial began to appreciate versus the U.S. dollar, and the price index, which has been extremely volatile in recent months, began to calm down. Still, this brief reprieve cannot mask more persistent problems in the Iranian economy. As late as last month, the Central Bank of Iran said that the country’s yearly inflation rate was approaching 40 percent.

Unlike its predecessor, the Rouhani administration appears to understand the gravity of the problem. Since winning Iran’s presidential election earlier this summer, President Hassan Rouhani and his team have gradually realized that the economic situation they are inheriting is more dire than expected. 

Even before taking office back in July, Akbar Torkan, deputy director of Rouhani’s presidential campaign and one of the closest members of his inner circle, told Iranian media outlets that the economic situation of Iran is worse than previously imagined. Hadi Kahalzadeh, an Iranian economist, agrees, arguing that Iran’s economy is facing a crisis of authority as the government’s credibility has eroded under the previous administration, which has curtailed the power of the state.

In light of this, the market has been waiting anxiously for clues as to what economic strategies the new administration will pursue.  According to Torkan, the most important priority of the new government should be to supply the population with “basic commodities,” which he posits can only be done by improving Iran’s foreign relations and thereby getting international sanctions reduced.

 In addition, Torkan slammed the outgoing Ahmadinejad administration’s budget as “unrealistic.”

“Neither the earnings [revenue] nor the conditions [expenditures] attached to it” correspond to present realities Torkan said in a recent interview. He also accused Ahmadinejad’s government of providing illegal cash-subsides, and said that if the Rouhani government wants to continue Ahmadinejad’s “targeted subsidy program” then it should increase the price of energy again.

Mohammad Bagher Nobakht, an economist at the think tank Rouhani headed for two decades and now the president’s liaison with the Majles, has made very similar statements, slamming the targeted subsidy plan the Ahmadinejad administration spearheaded and calling for improved economic and political relations with the outside world. He believes that such approaches will facilitate the market, create free trade atmosphere and attract direct foreign investment.

Sanctions as a slap in the face to economic authorities

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Thus, it seems that the current administration believes that international sanctions against Iran over its nuclear program and the inefficiency of the Ahmadinejad administration’s privatization plan are the two factors behind the economic crisis.

The first step of the next government must therefore be focused on improving international relations and settling problems associated with Iran’s nuclear program. It seems that the new President, by appointing a cabinet of technocrats known more for their experience than their political views, is attempting to satisfy most factions in the Iranian elite, including the reformists, pragmatists, traditional conservatives and the principlists (neo-conservatives).

Rouhani is also trying to signal to international parties. According to Reuters, Rouhani’s appointment of Mohammad Javad Zarif as the Minister of Foreign Affairs is a “strong signal” which shows “Rouhani wants to open up [international] channels which were closed under his hardline predecessor Mahmoud Ahmadinejad.” Reuters goes on to note that Rouhani is "a former ambassador to the United Nations, and has been involved in secret backroom talks with the United States going back three decades.” There has also been widespread speculation that Rouhani will have the Foreign Ministry take over the nuclear negotiations with the P5+1 (the United States, China, Russia, Britain, France and Germany) grouping, something he advocated in his memoirs. Such a move could see Zarif serve as Iran’s lead negotiator with the international community on the nuclear issue.

Optimistic future?

Is this enough to achieve a breakthrough with the P5+1 that would see a reduction in sanctions against Iran? So far, there have been promising signs.

Last month, European Union Foreign Policy Chief Catherine Ashton—who leads the P5+1 in its negotiations with Iran— convened a meeting with officials from all six nations in Brussels to discuss how to achieve progress in talks on the nuclear issue with the new government of Iran. “We are keen to make concrete progress in the talks following the election of the new president” said Michael Mann, a spokesperson in Ashton's office.

Notably, in a background briefing ahead of the P5+1 meeting last month, a senior U.S. official told reporters that Washington was seeking “direct nuclear talks” with Iran on the nuclear issue.

“We are open to direct talks, and we want to reinforce this in any way [we can],” the official said, according to the Wall Street Journal.

Still, the official cautioned, “But what we are looking for are actions [from Iran] that indicate a desire to deal seriously with the P5+1. Words are not enough. We need a concrete response.”

Notably, the official suggested the U.S. was willing to be flexible in the exact form of a deal and added, “We do believe that Iran has the right to a peaceful nuclear energy program under the NPT once it meets its responsibilities. And all sanctions will be lifted if and when it has met its responsibilities.”

Thus, is a new and brighter future waiting for Iran? Time will tell.

Faezeh Samanian is a Trade Policy and International Relations specialist currently at the Korean Development Institute School of Public Policy in Seoul, South Korea.