Workers at the Iranian Khodro car manufacturing plant make Iranian car models

How Iran Will Respond to New Sanctions

May 2, 2018 Djavad Salehi-Isfahani

Even before US President Donald Trump began threatening to re-impose sanctions on Iran, foreign investors looking to do business there were wary. Iranian President Hassan Rouhani failed to get his pro-market agenda off the ground, and now international political developments are playing into Iranian hardliners' hands.

PRINCETON – Since December 2017, Iran’s currency, the rial, has lost one-third of its value. And on April 10, the exchange rate’s rapid depreciation prompted the government to halt domestic foreign-exchange transactions and outlaw foreign-currency holdings of more than €10,000 ($12,000).

This government’s move represents a radical change of course, following three decades of relatively liberal economic policymaking, during which the authorities have permitted private-sector foreign-exchange transactions and even capital flight. Iran is not just anxious about the reinstatement of US sanctions after May 12, when US President Donald Trump is expected to make good on his campaign promise to withdraw from the 2015 Iran nuclear deal. Rather, the country is already adapting to a new world in which the prospect of rapprochement with the West is fading.

With the threat of renewed US sanctions having already created a rial crisis, the Trump administration is using the nuclear deal, formally known as the Joint Comprehensive Plan of Action, to try to force Iran to accept more restrictions on its nuclear program, as well as on its ballistic missile program. Given that Iran came to the table to negotiate the JCPOA less than a year after an earlier exchange-rate collapse – by 200% as of October 2012 – it is not entirely unreasonable to believe that the government will bow to Trump’s demands.

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0 Comments on this paragraph, 2 in all 2 Comments on this article

Per Kurowski May 6, 2018

Does that mean they will flagellate themselves voluntarily, imposing additional sanctions on themselves?
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j. von Hettlingen May 5, 2018

Djavad Salehi-Isfahani explains what will happen to Iran’s economy if the Trump administration withdraws from the 2015 nuclear deal. Ordinary Iranians do not feel that the deal has brought any relief from their grievances, blaming President Hassan Rouhani’s government for failing to deliver prosperity after years of hardship. In the absence of an economic upturn “the country is already adapting to a new world in which the prospect of rapprochement with the West is fading.”
The author says crippling sanctions and the financial crisis like the “exchange-rate collapse” in 2012 had forced Tehran to negotiate the Joint Comprehensive Plan of Action (JCPOA). Although “it is not entirely unreasonable to believe that the government will bow to Trump’s demands,” it is doubtful that the leadership can “justify further concessions.” Back in 2012 Iranians were more “optimistic” about reaching out to the West, especially to the US. Given Trump’s intenton to “renege on its commitments under the JCPOA,” their mood today is sombre.
It suits the hardliners that Trump scuttles the nuclear deal, because it would allow them to focus on their “resistance economy” proposed by the Supreme Leader, Ayatollah Ali Khamenei in 2012. They see Rouhani’s “pro-market, pro-globalization reforms” as a thorn in their side. The new economic system will “reduce Iran’s reliance on Westren economies” and boost domestic investment and production. This would strengthen the country’s “resilience against international sanctions.” Iran’s elite Islamic Revolutionary Guards Corps benefits from Westrn sanctions, as it has a monopoly on large sectors of the economy, employing nearly 1.5 million people.
The author says Rouhani “may be forced to change course, by adopting the Khamenei’s “preference for the East over the West,” now that his “hopes for market reforms and closer integration with the West dashed.” Iranians were bullish when the economy “rebounded strongly in 2016, as international sanctions were lifted.” But the “negative growth” in 2017 has also to do with Iran’s chronic structural problems, like its failure “to improve the country’s environment for private investment.”
Apart from sanctions, the author says Rouhani’s team is to „blame for Iran’s lackluster performance.” Although hundreds of thousands of jobs had been created since 2016, they were unable to absorb the “massive youth bulge.” Around 60% of the population is under 30, and “unemployment is now at an all-time high, especially for young, college-educated Iranians.”
The rising discontent – especially over the cost of living – was the main cause for the biggest anti-government protests in December 2017 and January 2018 for nearly a decade. Sluggish growth, inflation, unemployment, declining living standard were painful to bear once hope for economic improvement dissipated. Protesters called for more focus on their grievances rather than on military adventures abroad, like supporting militant groups like the Hezbollah in Lebanon or propping up the Assad regime in Syria.
The problem is that Iran’s Revolutionary Guards have operated with impunity, well beyond the reach of civilian authorities, driving Iran’s sanctions-crippled economy, financing its military forays in the region and enriching the hard-line commanders and clerics. With sanctions lifted after the nuclear deal, and the country opened to competition and foreign investment, the group’s economic dominance was increasingly seen as a liability.
It explains why hardliners seek to undermine Rouhani’s government, which has tried to crack down on corruption. Their aggression and destabilising activities in the region are one of the reasons why the Trump administration wants to change Iran’s behaviour by amending the 2015 nuclear deal. Should Trump do pro-Israeli donors’ bidding and withdraw from the JCPOA, it will deal a blow to the moderate, reform-minded president, Hassan Rouhani, while empowering the hardliners in Iran. This will not bode well for stability in the Middle East, encouraging Tehran’s arch enemies – Israel and Saudi Arabia – to defy Tehran, knowing the US would be on their side.
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