WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

by Mahdi Ghodsi
image: iStock.com/racide

• For Iran, the next US president will be a very different prospect from outgoing President Trump. President-elect Biden was a key player in the team that agreed the original Joint Comprehensive Plan of Action (JCPOA) in 2015.
• However, in Iran the hardliners are more powerful now than they were back in 2014, when the JCPOA was being negotiated.
• Therefore, however laudable Biden’s intentions may be, both his administration and that of Rouhani are going to have their work cut out this time.
• Any new deal could be a positive game-changer for Iran’s economy. However, one also needs to be realistic about what can be achieved before summer 2021, when Iran gets a new president of its own.

The outcome of the US election is good news for Iran. No government is more relieved than Rouhani’s about the result of the US presidential election and the defeat of Donald Trump. Under the Trump administration, the US withdrew from the JCPOA and imposed crippling sanctions on Iran’s economy. Iran’s exports of oil dropped from 2.6 million barrels per day (bpd) in May 2018 to between 600,000 and 700,000  bpd today. On top of the sanctions, the COVID-19 pandemic and the resulting border closures have led to a significant reduction in Iran’s exports to neighbouring countries. The large trade deficit and the subsequent panic on the Iranian financial markets caused by the escalating tensions between the US and Iran have resulted in the Iranian rial plummeting against the US dollar – from 42,880 in January 2018 to 317,000 in October 2020. Iran’s economy has shrunk over three consecutive years, and according to a World Bank forecast, by the end of 2020 the country’s real gross domestic product (GDP) is likely to be just 83% of its 2017 level. As the Trump administration leaves office, the Islamic Republic will be hoping that under President-elect Joe Biden, the US will return to the nuclear deal and that the fortunes of the Iranian economy will improve.

History suggests that Biden is as constructive a partner as Iran could reasonably hope for from a US president. Biden was a key figure in the Obama administration, and supported the initial nuclear deal. He expended great efforts to sell the deal to both Congress and the Senate. Using his gifts of persuasion on both Democrats and Republicans in Congress, he managed to steer the decisive votes in the Senate and block a Republican-led move to reject the agreement. While Biden still sees Iran as a security threat to the United States, he may well pursue Obama’s policy of engaging with Iran in credible diplomacy. He still believes that the nuclear deal offers a peaceful solution that will constrain Iran from achieving a nuclear bomb and, as he recently wrote, he is prepared to return to the deal, provided Iran complies fully with it. However, he wants to extend negotiations to other areas of concern, such as human rights abuses, Iran’s missile programme and its network of proxies in the region.

If the US were to return to the JCPOA, that would have a positive impact on Iran’s economy. Initial indications of this are evident in the rial’s gain of about 20% against the US dollar on Iran’s secondary (unofficial) market once the results of the US election became public. A return to full compliance with the nuclear deal will further stimulate export revenues. Exports of oil will boost the economy, as well as providing a larger fiscal space for the government.

However, this will all benefit Iran only in the short run, as its long-term development requires a transfer of technology to its run-down industries and infrastructure, through foreign direct investment (FDI). After the JCPOA was implemented in 2016, multinational enterprises signed numerous memorandums of understanding, which could have benefited Iran to the tune of about USD 200 billion in income and investments. However, they withdrew from Iran when the US imposed secondary sanctions. So long as these companies feel uncertain about Iran’s relations with the US, they will be hesitant about re-entering this large market. What is required is the forging of a major deal that encompasses all outstanding issues between the US and Iran – one that also needs to ensure long-term geopolitical stability.

However, any deal that includes all the issues noted by the president-elect will be complicated to achieve and could take some time. As a result of economic hardship and bad policy decisions by the government, in recent years Iran has witnessed several nationwide protests that have been brutally crushed by the security forces. More than 300 people were killed on the streets in nationwide protests in November 2019, and many protesters were subsequently jailed and tortured. Despite an international outcry, some prisoners, such as the wrestling champion Navid Afkari, have recently been executed. Biden addressed these serious human rights issues during his presidential campaign. However, it will remain a challenging task for his administration to negotiate on human rights abuses, to prevent further such abuses and persuade the Islamic Republic to remedy the situation.

Trump’s policies have been disastrous for Iranian moderates domestically, and will make a new deal much harder to achieve than the first time around. Recent US policies have led to a huge decline among Iran’s moderates. It represents something of an ideological contradiction for the hardliners – now in the ascendancy – to accept rapprochement with the US. The Supreme Leader (who is himself a hardliner) has asked the government to implement policies on the assumption that sanctions may continue for another 10 years. Most importantly, the hardliners sitting in the Guardian Council and the Expediency Discernment Council have isolated Iran’s banking system, by blocking the legislation adopted by the last moderate and reformist parliament and paving the way for Iran to join the Financial Action Task Force (FATF). In February 2020, Iran and North Korea were identified by the FATF as high-risk and non-cooperative countries. According to Rouhani, the Islamic Republic has continued to covertly finance its network of proxies and resistance movements in the region, despite the sanctions.

Despite all the difficulties, the prize of a deal is worth it. A deal with the US on Iran’s regional activities could benefit the country, ultimately allowing it to transform its self-isolation into a strategic partnership with other countries in the region, including US allies. Such a transformation may even come about along the lines of the ‘Hormuz Peace’ initiative proposed by Rouhani. There could be major gains from any rapprochement between the US and Iran that results in a peaceful environment, allowing the Islamic Republic to embark on long-overdue structural reforms. However, given the deep-seated ideological disagreements between moderates and hardliners, such a strategy will depend mainly on the Supreme Leader – and on whether he is prepared to countenance a reduction in his powers by allowing such reform.