It will be years before Iran's economy feels the benefit of the nuclear dealby Christopher de Bellaigue / September 17, 2015 / Leave a comment
Published in October 2015 issue of Prospect Magazine
An Iranian family takes a selfie on the Tabi’at (Nature) bridge overlooking Tehran. © BEHROUZ MEHRI/AFP/Getty Images Now read Bronwen Maddox on how the sanctions work For the members of foreign trade delegations currently on prospecting missions to Iran, drowsy after a rich Iranian lunch and a bellyful of facts about the world’s last big unexploited economy, I recommend a refreshing ride on the Tehran metro. The network is far from extensive, and everyone complains about the Chinese engineering (no, the Iranians don’t like the pervasive influence of Cathay more than anyone else), but the air-conditioning works, classical airs trill pleasantly in the stations, and the division of trains into male and female carriages is regarded as a useful segregation—by the women at least. Down in the loam, furthermore, no one seems crotchety or argumentative as they do above ground. When the trains come, which isn’t very often by western standards, the carriages are full, not just with passengers but also hawkers—dozens of them picking their way among the passengers, droning the virtues of toothbrushes, screwdrivers, mobile phone chargers and deodorants. In general these sellers are treated with indifference by their intended customers, who do not seem to be in a hurry to get to their destinations, but are absorbed in gaming or whatever is playing on their Samsung smartphones. To ride the Tehran metro is to observe precisely the amalgam of apathy and potential that has determined Iranian government policy over the past couple of years, and which will bear down on the country’s future. For all the Iranian ministerial pronouncements that Iran is “open for business” following July’s nuclear deal with the United States and other world powers, it isn’t—not yet. It will probably be well into next year before Iran can claim to have complied with its commitments with respect to reconfiguring and downgrading key parts of its nuclear industry, which many other governments have suspected, despite Iranian denials, was designed to put it within easy reach of nuclear weapons. After that, the International Atomic Energy Agency (IAEA), will need to give its seal of approval. Only then will sanctions begin to be lifted. (The votes of 34 Democratic members of the US Senate by President Obama on 2nd September mean he now has a veto on opposition to the deal from the Republican-controlled Congress). The many layers of sanctions have built up over years—American ones since the 1979 Iranian revolution, and those from the United Nations and European Union from 2006 onwards, as Iran refused to comply with demands to curb its nuclear programme. Much of the wrangling over this deal was in the small print over which sanctions would be lifted and when—and whether they would “snap back” if Iran didn’t comply. The answer is that they will, but Iran has also reserved the right to ramp its uranium enrichment back up again if the west reneges on its side of the bargain. The effects of sanction relief will be felt gradually, and American businesses will continue to suffer constraints in their dealings with Iran due to the continued application of older, non-nuclear sanctions. In the meantime, the government will be able to preserve its plan of mending Iran’s terribly damaged economy only by effective management of popular patience and expectations. The man on the Tehran metro—the underemployed professional passing the time on a transport network that is operating woefully under capacity; the working class lad reduced to selling Chinese pap either because he has been laid off or drought has ruined the formerly well-watered and fertile village whence he comes—is the measure to watch. “Every year between 800,000 and 900,000 young Iranians enter a labour market that can accommodate no more than a quarter of them” There is a myth among the many who dislike the Islamic Republic that its decisions do not reflect the desires of the public. But the secret of the regime’s survival lies in its ability to act on those desires, albeit very conservatively. It was popular dissatisfaction with the country’s growing isolation and impoverishment that persuaded its Supreme Leader, Ayatollah Ali Khamenei, to clamp a clothes peg over his nose and accept severe restrictions to the country’s nuclear programme in return for the lifting of sanctions. Now, answering the same desperate plea for a livelihood from the Iranians who elected him in 2013, the instinctively reformist President Hassan Rouhani is trying to lay the ground for job creation in the short term and economic lift-off over the coming decade. The country’s needs could hardly be more urgent. Every year between 800,000 and 900,000 young Iranians enter a labour market that can accommodate no more than a quarter of them. The World Bank has estimated that Iran needs to grow by at least 5.5 per cent annually and create a million jobs a year in order to reduce unemployment from its current level of around 16 per cent to a more manageable 10 per cent. It needs to do all this at a time when the prices of oil and other commodities on which the economy depends for export earnings have slumped—in part because of the hard landing in China, Iran’s biggest trade partner by far; and domestic demand has faltered. Thanks to Rouhani’s fiscal and monetary prudence—along with the improved diplomatic atmosphere—inflation was brought down to 14.3 per cent in the first quarter of 2015 (from a whopping 42 per cent in the same period in 2013), and Iran’s currency, the rial, has stabilised. But these achievements do not hide the fact that the real economy is receiving hardly any new investment and that the banking system remains crippled by loans that were insisted upon by the previous government, led by President Mahmoud Ahmadinejad, and which will never be redeemed. The popularity of unregulated lending institutions offering ridiculously high rates of interest—essentially pyramid schemes—testifies to the reluctance of the Iranian investor to get anywhere near the real, productive economy. The reaction among equity investors to July’s nuclear deal exemplified the scepticism that nowadays obtains in Iranian life. Some portfolio managers had forecast a 15 per cent bounce in the event of a successful outcome to the negotiations; in the event, the main index of the Tehran Stock Exchange dropped by 5 per cent. As one economist put it to me: “Our steel, cement and tiles are piling up. People have yet to see a single tangible benefit from all the diplomatic achievements.” And yet the procession of European foreign ministers accompanied by business people—most recently Philip Hammond reopening the British Embassy four years after it was ransacked by regime hardliners—continues. The international conferences that are designed to showcase Iran as a destination for investment proliferate and grow. Despite its problems, Iran’s economy is expected to grow by 3 percent this year, even as the country stands still, its oil stored offshore, some $110bn in frozen assets stuck abroad, and the economy still not liberated from the silver-tongued middlemen and “service” providers who were able in the conspiratorial atmosphere of sanctions to spirit billions of dollars out of the country. A year from now, the majority of sanctions will be off, Iran will be selling oil to Europe once more, its companies will be able to send and receive money around the world, and its key industries will be legally investable. Only then will it be possible to gauge the credibility of those government assurances that a country which only two and a half years ago stood on the edge of economic and social implosion is set fair to become the economic powerhouse of west Asia–a country with Russia’s resources, Turkey’s entrepreneurship, and an elan all of its own. Even if, as expected, the re-entry of Iranian oil into the market has the effect of further depressing prices, the country can expect an oil windfall of at least $15bn in the first year after exports are resumed, as well as some $29bn in immediately accessible unfrozen assets. Depending on the new oil and gas contracts that are currently being written, and which the international oil companies hope will offer more attractive terms than the service contracts they signed with Iran in the early 2000s, the oil and gas sector should experience a spurt of investment and productivity. If Iran is able to grow at 3 per cent now, cut off from the world, surely 5.5 per cent will not be beyond it when the playing field is even.