Iran, a Journey Through the “Great Change”
Expectations and risks of the Rouhani Era
Marina Forti 27 May 2015

It is true that, at the moment, it is easy to come across groups of foreign businessmen in the Iranian capital’s grand hotels. A couple of American business delegations were greeted with significant surprise, since only two years ago such visits would have been unthinkable in view of the long history of hostility between the United States and the Islamic Republic of Iran. However, seeing that this did not prevent the two countries from resuming political contacts and starting negotiations, why should it prevent businessmen from exploring trade and investment opportunities?

It is not only the press that is persuaded of this. According to entrepreneurs, political analysts and even money-changers, everyone seems persuaded that Iran is on the eve of a trade and business boom. The Tehran Stock Exchange is preparing to manage a “flood of investments” after the nuclear agreement is signed.

Expectations are high, extremely high. This is understandable. When Hassan Rouhani became the President of Iran in August 2013, he inherited a county that was isolated at an international level, internally divided and with an economy on the brink of the abyss, experiencing negative growth, inflation at 42%, an impoverished middle class and widespread corruption. Oil exports had collapsed. And the social climate was suffocating following the dark years of Mahmoud Ahmadinejad’s presidency, especially after his contested 2009 re-election and the repression of a protest movement the likes of which had never been seen in post-revolution Iran.

Nowadays instead everyone has high expectations. Negotiations on Tehran’s atomic programme between Iran and the six world powers are close to succeeding. If the understanding reached in Lausanne in April should become a definitive agreement at the end of June, this will mark a historical turning point, and may pave the way for new political cooperation going well beyond the nuclear issue between Iran and other powers. The path is still a bumpy one. However, in the meantime, “respect for Iran has returned to diplomatic circles” as a satisfied entrepreneur in Tehran observed with satisfaction. The agreement will result in sanctions being removed, although the timeline has not yet been clarified.

President Rouhani has often said that the country’s affluence and development are linked to an agreement on the nuclear programme, since once sanctions are removed, it will be possible to “remove obstacles to financial activities, create jobs and provide the young with opportunities.” Rouhani repeated these words commenting the Lausanne agreement and this is what everyone expects.

In a country with 75 million inhabitants, in which two-thirds of the population is under the age of 35, unemployment is close to 20 % of the active population and over 25% among the young. Re-launching the economy is as urgent as internal freedom. Elected almost two years ago with the broadest national consensus seen since the days of the revolution, President Rouhani has visibly changed the social atmosphere in Iran, although state culture and freedom, as well as human rights, are still the object of political clashes between his government and other centres of power controlled by the system’s more extremist currents. However, without economic revival it will be hard to meet the expectations of this nation of young well-educated people who are immersed in the globalised world.

Years of inflation and negative growth have impoverished the middle classes. A few days ago the head of the state’s welfare system admitted that over one third of Iranians live below the poverty threshold. In saying this he quoted the World Bank’s statistics, stating that this affects 30% of those living in urban centres and 40% of those in rural areas. In 1978 (on the eve of the revolution) 40% of Iranians lived below the poverty threshold; this figure fell to 20% in 1997 and to 11% in 2005 (the year in which Ahmadinejad was elected for the first time), then it started to rise again. It is always controversial to define the poverty threshold, but the Labour Ministry has established it at 12.5 million rials a month for a family of five, the equivalent of about 350 euros (36.000 rials equal one euro). Minimum wage is however even lower, at about 10 million rials, about 280 euros. Ali Reza Mahjoob, a former reformist MP and head of the official organisation of workers, has reported that 90% of workers live below the poverty threshold. Iran too has its working poor.

“Rouhani has given rise to many expectations, but that is his weak point” says political analyst Amir Moeb-Bian, a moderate conservative (he describes himself as being “loyal to principles”), the most orthodox current in the Islamic Republic, but one that has always criticised former president Ahmadinejad). “Rouhani has said that once the nuclear issue is resolved, all the rest will fall into place too, but it is not that easy. A politician must be able to manage expectations or optimism will turn into disillusion,” says Moeb-Bian, who I met in Tehran in the small offices of his Arya News Agency, a political think tank and centre for strategic studies. Rouhani’s power, he said, will be controlling the various interest groups and political parties, while remaining super partes. “He must be the representative of moderation against radicalism.” But these are strictly political arguments; in order to meet the country’s expectations, admits Moeb Bian, the president’s priority has to be the economy.

For the moment there is no disillusionment. “Rouhani has taken a country that was below zero and brought it back from the brink,” says the owner of a textile company, better known as a film producer. Inflation has now settled at around 15.5%. The frightening fluctuation in the value of the rial is over. The economy shows signs of improvement with 2% growth for the year that ended on March 21st. For next year, official forecasts swing between 2% in the absence of a definitive agreement and 5% if an agreement is signed. “Iran is an important power in spite of 35 years of sanctions. When they are removed the country will flourish,” adds the entrepreneur, expressing a widespread belief.

The fact is that, even if an agreement is reached, the positive impact on the Iranian economy will not be immediate. It will not happen before next March, hence the end of the Iranian year, warned the Governor of the Central Bank, Valiolah Seif, in a rare interview with the Financial Times. The issue does not only involve dismantling the complex network of sanctions currently isolating Iran, but updating the Iranian banking system, adds the banker.

It might prove easier to bring home the tens of billions of Iranian dollars arising from oil exports over recent years, now frozen in foreign banks due to these sanctions. This would provide an injection of liquidity for this government, allowing it to resume investments in infrastructures and productive industries (the president has ordered feasibility studies on how the money could be channelled, said the banker), everything that the Iranian economy has been lacking for the past decade or almost. Economists and politicians in Iran unanimously agree that, even more than sanctions, what the Iranian economy has been suffering from during the last decade consist of years of appalling planning, cronyism, and corrupt management during the past administration.

The economy has also been burdened by the fall in oil prices, the state’s primary source of revenue. In this year’s budget, debated in January, the government had projected an average price of US $72 a barrel, but prices have fallen to $50 (at the moment they have risen to $66). The government now wished to reduce its dependency on oil revenue and is discussing an increase in the quota (now 20%) of export revenue destined to the National Development Fund. What is of immediate importance is the privatisation of a number of large state companies and a reform of the strong subsidy system approved by the Ahmadinejad administration, for example excluding high income earners from cash transfers created at the time to compensate the rise in the cost of petrol.

Over the longer term, however, the state must broaden its fiscal base (very few people pay tax in Iran apart from state employees). To start with the Rouhani government wants to tax revolutionary, religious and military foundations that have economic activities. This announcement is significant since those foundations, which make up for an estimated 40% of the national economy, are one of the pillars of this system and of its consensus apparatus.

The other challenge faced by the government consists of stopping the speculative economy that has grown in the shadow of sanctions. Perhaps the most effective sanction has been excluding Iran from the Swift international money transfer system. Tourists, who have resumed visits to the country en masse, are amazed they cannot use their credit cards. For the past five years, Iranians have had to bypass the Swift code and the cost of transactions has rocketed. Foreign goods have never been missing in shops, but it is thought that 10% of the value of all import-export – goods, machinery, everything – has ended up in the pockets of intermediaries both in Iran and abroad. These are usually people with good relations with those in power and are at times known as “sanction brokers”. In the past year and a half, a number of cases of colossal fraud have emerged, such as the one involving Babak Zanjani, are former favourite of Ahmadinejad’s, accused of having removed about $28 billion from the state coffers.

More than clashing head-on with the sanction “brokers” the government is now pressing them to reinvest in the country. In the meantime it has started to try and put things straight, stopping the cronyism on the basis of which state banks lent enormous amounts to those linked to the previous administration, with no production plans or guarantees the money would be repaid. The government has tried to normalise credit. The textile entrepreneur says that import costs have returned to a reasonable level, while “before, in order to by machinery, I had to pay 100% of the transaction as a guarantee to the bank in Iran and the same amount to intermediaries abroad, to then hope I might recover some of the money.”

Taxing revolutionary foundations and putting an end to the speculative economy will not, however, be possible without support from parliament, the Majlis, currently dominated by the most extremist political currents hostile to Rouhani. For this reason too, the coming elections in the spring of 2016 will be very important, and hence it is important Iranians should see some real improvement in their lives.

Translated by Francesca Simmons



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