Iran’s dire economic straits are beginning to dawn on new President Ebrahim Raisi – and it’s not immediately clear ex-judiciary chief has a viable solution in sight.
The new leader, who earlier said he would not be beholden to foreigners in deciding his economic policies – reference to the US sanctions that have crippled Iran’s economy since 2018 – is now reaching out for help.
Raisi has galvanized his foreign envoys to engage in so-called “economic diplomacy”, a new government buzzword he first aired on the campaign trail that is apparently central to his plan for reviving the nation’s fortunes.
That’s because domestic-driven economic options are limited. US sanctions have taken Iran’s economy to the brink, seen most visibly in a sky-high inflation rate that hit 36.5% in 2020, the same rate as in 2019. As of June 2021, the rate had hit 43% over the last 12 months. Economic growth is expected to hit 2.1% this year, according to the World Bank.
Restricted access to foreign exchange reserves and limited external financing sources, key drivers of the inflationary surge, will make Raisi’s vague stimulus plans all the riskier without clear external income streams.
These include plans to provide low-interest loans to poor households, build as many as four million new homes in a country of 85 million, and health care and rent subsidies.
Ebad Ebadi, writing for the Atlantic Council think tank in July, said while these policies sound good on paper, the reality is that they are unlikely to happen in the near-future. He said Raisi’s promise to bring down inflation to single digits by 2024 would be “difficult, if not impossible” with all the promised state spending.
On the surface, there is certainly potential for more foreign economic engagement. In a presidential debate in early June, Raisi lamented that Iran is surrounded by 15 neighbors whose aggregate imports amount to some US$1 trillion annually while Iran’s share of their markets is less than $20 billion.
During his confirmation hearing, new Foreign Minister Hossein Amir-Abdollahian said that there should be an economic dividend to all diplomatic engagements. He said “economic diplomacy and international trade will comprise nearly 40%” of the Raisi government’s and foreign ministry’s affairs.
The buzzword is coming from on high. In his first public meeting with new cabinet members on August 28, Supreme Leader Ayatollah Ali Khamenei also accentuated the need for “economic diplomacy”, noting other countries where the president reputedly takes the lead in advancing foreign trade via consultation with counterparts.
But nowhere in any of the remarks have Iranian authorities presented a credible plan for how they plan to convince nations to violate US sanctions and thus run the risk of losing access to lucrative US markets to trade with Iran.
When former US president Donald Trump walked away from the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in May 2018, he reinstated harsh sanctions on Iran and warned nations that trade with Tehran they will not be allowed to do business with the US.
Although Trump’s new sanctions didn’t win the backing of the United Nations or European Union, almost all countries have complied for fear of losing access to US markets. Significantly, the Biden administration has stood by the sanctions until a new nuclear deal is struck. That new deal is not clearly on the horizon under the hardline and anti-US Raisi.
Sanctions have hit Iranian fuel exports, the traditional backbone of the economy, particularly hard.
Before Trump reimposed sanctions, Iran’s oil exports were as high as 2.8 million barrels per day, with countries across Asia and Europe importing Iranian fuel to the tune of $62.7 billion per year. But exports plummeted to a paltry 300,000 barrels per day in 2020, hitting a 40-year low.
Meanwhile, Iranian funds locked by sanctions in banks across 21 countries are now estimated at somewhere between $100-120 billion. The Islamic Republic has been hard-pressed to access even small tranches for humanitarian purchases exempted from the sanctions.
Even Iran’s strategic partner China is holding as much as US$20 billion of its assets, which it has no stated plans to repatriate. Instead, Beijing is seeking a barter trade arrangement that would allow Tehran to import critical commodities in exchange for oil.
The sanctions, apart from their harsh humanitarian consequences, have by any measure decimated Iran’s foreign trade and investment.
According to the International Monetary Fund, Iran recorded a trade deficit of $3.45 billion in 2020. One year earlier, before the sanctions fully bit, the Islamic Republic recorded a trade surplus of $6.1 billion.
Sanctions relief, on the other hand, could quickly unleash an economic boom in Iran.
In 2016, after the JCPOA was signed and an earlier round of sanctions was lifted, Iran’s economy grew a whopping 13.4% and reintegrated with global economic and financial systems.
A year after the sanctions were re-imposed, Iran’s economy contracted by 6.78%, the rial currency lost 50% of its value against the dollar, and foreign direct investment (FDI), which had climbed to $3 billion in 2016, fell to $905 million.
Economic and financial analysts now estimate Iran’s derelict infrastructure, roads, transportation, aviation, agriculture, automotive, metals and energy sectors need at least $300 billion in new foreign investment to bounce back and restore competitive production.
Between July 2015, when the JCPOA was first agreed, and May 2018 when it was scrapped by Trump, foreign investors from Britain, France, Germany, Italy, Spain, China, India, Japan and South Korea announced 91 projects worth $18.1 billion in Iran.
But the reimposition of the sanctions meant only a few of them came to fruition.
“The leadership of the Islamic Republic is certainly aware of the role of sanctions in asphyxiating Iran’s trade ties with the world,” said Steve Hanke, professor of applied economics at Johns Hopkins University.
“That said, the leadership would have to be delusional if they thought they could convince other nations to engage in sanctions-busting trade.
“I don’t think the leadership of the Islamic Republic is naive or ignorant about the realities facing Iran’s economy. A big part of the economic diplomacy buzzword is the fact that it is a buzzword. It’s designed to be spin rather than reality,” he said.
“Indeed, there’s a huge gap between the leadership’s rhetoric and reality. And I am certain they are aware of the gap,” Hanke, an economic advisor to former president Ronald Reagan, added.
Younes Zangiabadi, a foreign policy researcher and executive vice president of the Canada-based Institute for Peace & Diplomacy, believes the Raisi administration will reach to Russia and China, including through a 25-year strategic partnership deal with Beijing and full membership of its Shanghai Cooperation Organization (SCO).
However, he says these developments will take time to bear fruit while Iran needs “urgent economic relief” to cope with pressing problems ranging from hyperinflation, high unemployment, currency depreciation and rising poverty.
“Nothing like the revival of the Iran nuclear deal can bring about quick economic relief for the Islamic Republic as it provides access to about $50 billion to $100 billion of its frozen assets abroad and allows Iran to export more oil, which all would be crucial in bringing some stability to the Iranian economy in the short-term,” Zangiabadi told Asia Times.
Others say it would be folly for Iran to assume it can hedge its bets by relying on Russian and Chinese assistance.
According to businesspeople involved in trade with Russia and China, no banks or financial institutions in either country is currently willing to take the risk of processing financial transactions with Iranian entities due to fears of US retribution.
“Russia and China are not economic lifelines that can shield Iran from the sanctions in the long run,” said Reza Ramazani, professor of economics at Saint Michael’s College in Vermont.
“Both of these countries are only motivated by self-interest, trying to take advantage of the crisis in Iran and help their own economy. And the two countries, especially China, have been looting Iran’s natural resources for many years.
“However, it is clear to me that the removal of the sanctions is the most important factor for Iran’s economy to rebound and recover from its steep recession, aggravated by the Covid-19 crisis,” he added.