For years the Iranian economy has been under significant strain. International sanctions combined with governmental corruption and anti-free-market policies have stunted Iran’s economic growth. The Iranian president, Hassan Rouhani, hoped reaching an agreement with the West over his country’s nuclear program would lead to a lifting of sanctions that would spur foreign investment and provide an opening for domestic reforms. However, results have been limited and the economic stagnation continues. Popular frustration led to anti-regime protests in late 2017 with Iranians protesting against political repression and the sputtering economy. The government has taken notice and publicly called for privatization of public industries and for efforts to combat inflation and unemployment. Economic reforms will play a key role in Iran’s domestic and international policy going forward. But for Iran to successfully reform, it must overcome entrenched interests that it relies upon to hold the Islamic Republic together.
In Iran, economic policy is inherently political and the economy is highly regulated. When the Islamic Republic was founded, Ayatollah Khomeini sought to create an economic policy which appealed to the legions of urban poor who had supported the revolution and the middle-class bazaar merchants (bazaaris) who had financed it. Khomeini combined leftist sentiments with religious populism to create economic policies that promoted protectionism and central planning. The urban poor benefited from large entitlement programs, and other policies protected bazaar merchants. Major industries were transferred to the state, the recently formed Islamic Revolutionary Guard Corps (IRGC), or charitable religious foundations called “Bonyads.” The Iran-Iraq War (1980–88), which required all national resources, made this centralization process considerably easier. Today private enterprises in agriculture, trade, small-scale manufacturing, and mining exist, but they play a minimal role in large-scale economic activity.
Privatization has previously failed in part because organizations affiliated with the government usually bought the privatized industries and companies. These organizations included the aforementioned Bonyads and IRGC. Bonyads are semi-private, charitable Islamic foundations that existed before the Islamic Revolution and provide humanitarian aid and other services. However, the Islamic Republic used them to help nationalize the Iranian economy, and Bonyads acquired enormous financial resources in the process. Bonyads control between an estimated 10 and 20 percent of Iran’s GDP, are accountable to no one except the Supreme Leader—who appoints the directors—and are not subject to financial audits. They can also access foreign currency at deep discounts, get special access to credit at state-owned banks, and receive special privileges on import duties and other taxes.
The IRGC has over 125,000 members, and the Supreme Leader appoints its leaders. It serves as the regime’s Praetorian Guard and is motivated by a revolutionary zeal for ideological Shi’ism. However, it also serves as an investment tool for many Iranian leaders. IRGC affiliates dominate heavy industries, including the construction industry, and civilians operating in these businesses are subordinated to IRGC elements. The Guard also has significant control over Iran’s borders and airports and frequently uses its connections to acquire new business contracts at the expense of the private sector.
Private enterprises do exist among the Bazaar merchants, who are an important economic and political force with ties to the Shia clerical establishment going back centuries. Well organized, the merchants are organized by industry, and leadership is chosen by consensus among the elders. They also control several newspapers that are considered their mouthpieces. These merchants tend to support reforms that would allow them to trade with the rest of the world but are wary about allowing too much foreign investment since many believe this would force them to compete with foreign firms.
In the past, the Iranian government has tried to balance these groups when determining economic policy, but international sanctions have made this nearly impossible. Sanctions have had a real effect on the economy, and the Congressional Research Service has estimated that the Iranian economy is around 15 to 20 percent smaller than it would have been if sanctions had not been imposed. Two of the sanctions’ most damaging consequences have been a dwindling of dollar currency reserves and growing inflation. The former has made business on the international market very difficult for small and middle-sized companies. The latter has decreased the value of the rial, dramatically increasing the price of basic household items.
It was into this volatile political mix and a stagnant economy that Rouhani was elected president in 2013. He argued that the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iranian nuclear deal, would spur the economy by lifting sanctions and allowing for foreign investment. Rouhani greatly oversold the deal. Despite his promises to the contrary, most sanctions were not lifted, and in certain cases new ones have been enacted. Also, foreign investment has proven to be lackluster at best. Most foreign companies are hesitant to invest given political uncertainties, and the little investment that has taken place has not stimulated the economy for the middle and lower classes. This has led to discontentment among average citizens, and Rouhani is open to attack from conservative forces who are eager to exploit the situation for their own ends.
Rouhani hoped to use the nuclear deal to leverage reforms and force concessions from the Iranian Revolutionary Guard Corps and the Bonyads. Previously, he had been moderately successful, and his efforts led to a decreasing number of government contracts being awarded to government-affiliated organizations. The recent protests and continuing economic challenges have led to renewed efforts to privatize and diversify the economy. To this end, Rouhani has received the backing of the Supreme Leader, Ayatollah Khamenei, who on January 20, 2018, directed the IRGC to exit economic activities that were not relevant to its missions. After this policy change, President Rouhani stated during a press conference on February 6 that “all sectors of the government, especially banks, need to divest their economic businesses” and “this is the only way to save the economy.”
However, such efforts have their limits. Khamenei still believes in a highly protectionist economy where Iran produces most of its goods and is cautious of foreign influence through economic investment. Despite the economic challenges, such protectionism creates a patronage system which keeps important economic industries and their employees dependent upon the regime. Moreover, Ayatollah Khomeini’s revolutionary Shia ideology guides Iranian economic policy, which is actually written into the country’s constitution, and serious reforms would call into question the entire revolutionary ideology.
Economic reforms will thus likely remain limited and continue to be a contentious issue domestically, despite the Supreme Leader’s tacit support. Iran’s economic woes will continue for the foreseeable future as real structural change and a mass lifting of sanctions remain unlikely. At the same time, Iranian hardliners will use economic instability to combat reform and protect their own interests. This can be seen in the recent impeachment of Iran’s labor minister, Ali Rabiei, on August 8, 2018. On one hand, it’s an effort to appease popular discontent, while on the other hand it will hinder Rouhani’s political position.
American policymakers would be wise to consider Iran’s economic situation when attempting to mold policy. Iran’s foreign policy, such as the ballistic missile program and its efforts to expand regional dominance, came under scrutiny during the 2017 protests as many Iranians complained about the money being spent abroad despite economic troubles at home. Policymakers can remain certain that there is a real desire for economic change among the citizens of Iran, but there is also a structural inability to bring about real reforms in the short term. In this light, a policy with regards to sanctions and information campaigns can be shaped with economic challenges in mind and used as a tool to put increased pressure on the Iranian regime. The Islamic Republic believes in a revolutionary Islamist ideology that it has exported through violence and terror. In Lebanon, Syria, Iraq, and Yemen, the regime has stoked sectarian tensions and undermined governments through the sponsoring of IRGC aligned militias. Finally, the Middle East is volatile enough without the threat of a nuclear arms race, which would be inevitable if Iran should get a nuclear weapon.
Some will charge further sanctions will only hurt the Iranian economy and place strain upon the average Iranian. However, many sanctions against Iran are tied to terrorism and human rights abuses. Should Iran stop its nuclear activity tomorrow, it would not mean complete sanctions relief anyway. Secondly, sanctions against Iran have put considerable pressure on the government and its supporters. They were the only thing that brought Iran to the negotiating table in the first place. Finally, in 2017 the Iranian people themselves rose in part to protest a crooked statist system which the Islamists use to enrich themselves. The exportation of terror, the imprisonment of political dissidents, and the corrupt economic exploitation of the Iranian people are the policies of the Iranian government. Sanctions are not a vindictive method of destroying the Iranian people but a tool to bring about a change in the state’s tyrannical policy. Should the Iranian government want relief from sanctions, let it first cease destroying its citizens.
Justin Roy holds a Masters in history from the University of San Diego with an emphasis on Middle Eastern history.
Photo Credit: Bazaars in Tehran closed for protests against the recession on June 25, 2018. By Omid Vahabzadeh, via Fars News Agency, which states its photos are licensed under Creative Commons Attribution 4.0 International License.