An Iranian vendor selling fabrics at the Grand Bazaar in Tehran on September 29, 2021, waits for customers. Iran's foreign investment is almost non-existent and many people struggle to make ends meet. Photo: AFP / Atta Kenare

As the Raisi administration continues to refuse to chart a clear path for the resumption of the stalled nuclear talks with world powers in Vienna, and the removal of the daunting sanctions on Iran remain improbable, things are getting worse for the average Iranian.

The naked truth about the oil-rich country is the unchecked entrenchment of poverty has been worsened by the government’s soaring budget deficit and the withdrawal of foreign investors who once helped prop up different sectors of the economy.

In 2019, and in a bid to incentivize the influx of foreign capital and resources into Iran, the moderate Rouhani administration proposed an initiative whereby international investors lending credit to Iranian banks and financial institutions worth $250,000 or more, or investing a similar amount in Iran’s infrastructural and industrial projects, would be granted five-year residency permits as well as other educational, healthcare, employment benefits and public services. 

Now, in a rare admission of the failure of the ambitious plan, Iran’s deputy minister of interior Babak Dinparast revealed in late September that after more than two years, “not even a single” foreign investor has signed up to benefit from the scheme, and that it hasn’t paid off as first thought.

The precarity of Iran’s economy and the Islamic Republic’s intractable tensions with the international community, including the West and its Asian and regional partners, have been enough to drive a wedge between foreign investors and a market of 85 million consumers, which could otherwise be lucrative and appealing for any financier and entrepreneur. 

When the Joint Comprehensive Plan of Action – the Iran nuclear deal – was agreed in July 2015 and underwritten by the UN Security Council, Iran’s economy was given a facelift and foreign investors, retailers, manufacturers, small and medium-sized enterprises (SMEs) and even banks and financial institutions that previously dodged Iran rushed to plow their assets and funds into the country and momentous contracts were signed.

People walk past the stand of French oil and gas company Total on May 6, 2014, during Iran’s annual International Oil, Gas, Refining & Petrochemical Exhibition in Tehran. Photo: AFP / Atta Kenare

The French energy giant Total SA signed a US$4.7 billion deal to develop production in the South Pars Gas Field. The multinational car manufacturer Groupe Renault signed an investment deal valued at €660 million to churn out 350,000 vehicles a year at a factory outside Tehran. 

The Italian transport operator Ferrovie dello Stato (FS) signed a contract to design and build two high-speed rail lines in Iran with an investment of $5.65 billion in export credits. And of course, there came the celebrated $16.6 billion deal between Tehran and the American aircraft manufacturer Boeing to export 80 new passenger jets to Iran and a hefty $25 billion contract with Airbus for purchasing 118 modern planes.

These, and numerous other opportunities, were torpedoed when the former US President Donald Trump discarded the JCPOA in May 2018 and reinstated massive sanctions, blindsiding Iran and the European signatories of the accord who unanimously pilloried him for his imprudence and his parade of unilateralism. 

Iran suffered meteoric economic shocks afterward. The national currency, the rial, lost more than 70% of its value in three years, and the US dollar is presently traded for 275,000 rials in the official market.

Together with Iran’s chronic economic ailments that have been the hangovers of years of mismanagement and neglect, the country is now a deserted island and foreign investors see no point in embracing the risks of setting foot in a heavily sanctioned, corruption-ridden economy.

Despite its indispensable potential and its vital geostrategic position, Iran finds itself stripped of the luxury of foreign investment, and even though officials tend to sugar-coat the state of the national economy in their public pronouncements, facts and figures point to a serious crisis simmering insidiously that has brought the financial system to its knees.

According to the World Investment Report 2021 put out by the United Nations Conference on Trade and Development (UNCTAD), Iran was able to attract only an infinitesimal $1.3 billion in Foreign Direct Investment (FDI) in 2020, down from $1.5 billion in 2019. In 2017, one year after the full implementation of the JCPOA, the FDI inflow in Iran added up to $5.01 billion. But now, that promising trend has been upended dramatically. 

Indeed, Iran boasts a sizeable and diverse economy with a GDP the International Monetary Fund estimates corresponds to $682 billion as of 2021, larger than those of Israel, the United Arab Emirates, Norway, Malaysia and Singapore. 

But that’s not the whole picture, and the vastness of Iran’s economy should be chalked up to the buoyancy of domestic production and home-grown enterprises, particularly in the realms of agriculture and mines, and an energy sector that is, after all, the linchpin of Iran’s survival, even under the sanctions rendering oil and gas exports sluggish. 

Otherwise, it is beyond question that Iran’s economy is a distraught one, and of course markedly uncompetitive, marred by byzantine bureaucratic hurdles, corruption and nepotism that scare off investors not used to such convolutions. 

An Iranian man waits to receive a meal at a fast-food roadside restaurant near the city of Kashan about 130km south of Tehran during a holiday in 2020. Photo: AFP / Morteza Nikoubazl / NurPhoto

The Davos-based World Economic Forum, in the latest version of its Global Competitive Report released in 2019, ranked Iran 99th out of 141 countries surveyed in determinants of productivity, equality and openness. A year earlier, Iran had been ranked 88th.

And however eager the Iranian leadership may be to capture the interest of international investors, the World Bank Group doesn’t agree that doing business in Iran is easy when measuring parameters such as the convenience of operating businesses, setting up locations, accessing finance, handling day-to-day operations and being assured of a secure business environment.

That is why in the Doing Business 2020 report, the World Bank identified Iran as the 127th country out of 190 states researched in terms of their regulatory policies for business and investment, testifying to the disproportionate government overreach in business activity and the legal burdens foisted on the private sector. Even the war-stricken West Bank and Gaza fare better in this ranking than Iran.

The Iranian leadership is certainly aware that without diplomatic engagement and a push to have sanctions removed it is impossible for the national economy to recuperate from its many woes and to get foreign investment to pour in again. 

It also knows well that compliance with the legislation recommended by the Financial Action Task Force (FATF) on money laundering and terrorism financing is one of the keys to reconnecting with the global economy and a shortcut to sidestepping the interminable isolation that has plagued the nation. 

But over the past two decades, politicking by influential parties and individuals in the camp of conservatives who have usually dominated the key nodes of power and have a vested interest in the persistence of Iran’s incongruities with the outside world has taken a toll. Some have even cashed in on the sanctions by cementing their economic monopoly at home that has helped preclude Iran from being integrated with the world economy.

Most experts believe that without the effective termination of the sanctions as a sequel of revived JCPOA negotiations, any economic recovery for Iran would be a pipe dream.

“Under the current tight sanctions regime, it is inconceivable to think of any major foreign investments in Iran, especially those with longer-term time horizons which are critical for the well-being of Iran’s economy in the long run. Most major foreign companies, including the Chinese, have significant stakes in the US and EU markets and would not want to jeopardize their dealing with the US and EU markets over-investing in Iran,” said Amin Mohseni-Cheraghlou, an assistant professor at the Department of Economics in the American University.

Since coming to power, President Ebrahim Raisi and his officials have been vehemently touting the idea of “strategic partnerships” with Russia and China, insisting Iran will not limit its foreign trade options by waiting for the sanctions to be removed so that the European Union and maybe the United States embark on smooth, regular business with Iran. 

Russian President Vladimir Putin and then Iranian President Hassan Rouhani at a meeting of the Supreme Eurasian Economic Council in Yerevan on October 1, 2019. Photo: AFP / Alexei Druzhinin / Sputnik

But the reliability of China and Russia as Iran’s “friends in need” is also being called into question by analysts who speculate that both China and Russia prioritize their national interest when mulling trade with Iran rather than Iran’s desperate need for goods and money, and will be ready to pivot away from Tehran if it suits their long-term vision.

“There is a lot of question on Iran’s ability to increase exports, beyond energy products, to China. Russia’s economic ties to Iran are also limited, as it is a major gas competitor and unlikely to be a source of future support for that industry,” said Karen Young, a senior fellow and the director of the Program on Economics and Energy at the Middle East Institute in Washington, DC.

“Iran backs itself more into a corner by relying on Russia and China for long-term economic growth prospects. The Chinese will want cheap energy and flood the Iranian market with cheap goods. Continued sanctions actually work in China’s favor,” she told Asia Times.

Rachel Ziemba, a geo-economic expert and an adjunct senior fellow at the Center for a New American Security, told Asia Times Iran is lucky to have a dynamic private sector, which can function as an incubator of its economic perseverance, but even the success of the private sector hinges on the removal of the sanctions and also the choices the government makes.

“Sanctions have reinforced the role of the government, the degree of inter-party lending and the role of the Islamic Revolutionary Guard Corps in the economy. However, the private sector has taken strides to improve data, make suggestions and suggest reforms including more alignment with FATF regulations,” she said.

“Iran has a resilient private sector which has continued to survive if not necessarily thrive through these shocks, and the government’s reliance on privatization efforts could provide some opportunities for local if not global investors, but it depends on the choices government actors made.

“To the extent they choose self-reliance and are forced into trade with regional actors, it will be difficult to achieve meaningful foreign investment,” she added.

Yet, the complexity of Iran’s economic maladies doesn’t mean there are no solutions that can be thought of. In spite of the endemicity of corruption and pervasiveness of conflict of interests working in tandem with misguided fiscal policies and the penetration of ideological dogmas in governance, economists sat that with reforms, Iran’s economy can be overhauled, if the new conservative administration is actually interested in making it happen.

“Attracting foreign investment would require a host of reforms and policy changes. Chief among them is the re-establishment of political and macroeconomic stability. The priority is to ease sanctions pressures in a sustained manner. That, alone, can bring back some degrees of political stability,” said Saleh Sahabeh Tabrizy, an economist and associate professor at the University of Oklahoma, Price College of Business.

“Second, Iran must get its fiscal house in order, finding a sustained solution to its growing budget deficit. At the same time, the Central Bank of Iran must be given enough independence and a clear mandate to gradually lower the inflationary pressure. These are extremely challenging tasks, but such fiscal and monetary reforms can bring back some degrees of macroeconomic stability,” he told Asia Times.

“Once political and macroeconomic stability are re-established, Iran’s economy can leverage foreign direct investment to diversify its manufacturing exports in an environmentally sustainable manner. Such investments could be beneficial to Iran’s economy as long as they are made by a well-diversified group of origin countries and do not crowd out domestic private investments.”