Iran’s Economy

By | Updated Nov 15, 2016 6:29 PM UTC

For a decade, the U.S. and other major powers squeezed Iran’s economy to force it to rein in its nuclear program. That’s over, at least for the moment. Now what? An unshackled Iran has plenty going for it. Like its immense oil reserves, its relatively well-educated workforce, a wider range of industries than most oil exporters and a president determined to liberalize the investment climate and revive the nation’s fortunes. Yet hardliners within the Islamic regime threaten to derail his agenda. And investors were jittery over U.S. sanctions that are still in place even before Donald Trump was elected to the U.S. presidency Nov. 8, threatening to take a tougher position on Iran. At stake is more than Iran’s gross domestic product. Its prosperity will affect the role the country plays in the world’s most volatile region.

The Situation

In his campaign, Trump at various points advocated “dismantling,” renegotiating or toughly policing the 2015 agreement Iran made with world powers limiting its nuclear program. International sanctions were lifted in January after inspectors certified that Iran curtailed its program as promised under the deal. Iran’s moderate president, Hassan Rouhani, has been courting global companies with the aim of doubling foreign direct investment in 2016 to about $15 billion. Overseas oil and construction companies as well as airplane and car manufacturers like Airbus and Peugeot Citroen inked early deals. After Iran complained that a U.S. restriction on dollar-denominated trades involving the country inhibited the sealing of additional agreements, the U.S. relaxed some rules in October. A sweeping 1995 U.S. ban on trade and investment, triggered by concern about Iran’s links to terrorism, has kept most U.S. companies on the sidelines. However, Boeing gained U.S. government approval  to sell jetliners to Iran. 

 

The Background

The Pahlavi monarchy that ruled Iran from 1925 transformed a small agrarian economy into a booming one that included both manufacturing and major oil production. Industrialization and an influx of rural Iranians into the cities led to cultural tensions that were among the factors that provoked the 1979 revolution. Subsequent leaders have never quite settled on the appropriate shape of the economy in an Islamic state. At first, much of the economy was nationalized. Starting in the late 1990s, the country’s leaders tried privatization. Many assets, however, ended up either with the Revolutionary Guards, Iran’s premier security corps and the most powerful economic actor in the country, or with its affiliated corporations or religious charities. Elected in 2005, President Mahmoud Ahmadinejad took a populist turn, expanding credit, spending freely and handing out $15 a month in cash to every citizen. These policies fueled inflation just as sanctions began to bite. Rouhani was elected in 2013 promising to end Iran’s economic isolation. 

The Argument

Can Iran’s economic revival succeed, and should the rest of the world want it to? The International Monetary Fund expects gross national product to grow by at least 4.5 percent in 2016. Trump's presidency could put the brakes on. To reimpose international sanctions on Iran would require the cooperation of other world powers. But the U.S. alone could disrupt foreign investment there by again tightening rules on dollar-denominated trades. The U.S. could also argue that Iran has violated the nuclear deal; in the case of a breach, sanctions are supposed to snap back. Inside Iran, increased tensions with the U.S. could embolden Iran’s radical theocrats, who are skeptical of Western capitalism and rankled by Rouhani’s opening to foreign investment. Some in the U.S. and Europe think that supporting Iran’s economy — about the size of Austria’s — is the best way to boost political moderates represented by Rouhani. They say that better integrating Iran into the global economy will create incentives for the country to abide by the nuclear agreement and other international norms. Skeptics argue that such thinking underestimates the commitment of Iran’s leaders to expanding their power in the region. They say an Iran with more money is just a more dangerous Iran, better able to support allies such as Syrian dictator Bashar al-Assad as well as militant groups like Hezbollah, Hamas and Iraq’s Shiite militias.

The Reference Shelf

  • A Council on Foreign Relations brief explains divisions within Iran over the economy.
  • The U.K. government publishes a guide on doing business in Iran.
  • A Foreign Affairs article examines implications of the end of sanctions on Iran’s economy.
  • A Project Syndicate commentary explores economic challenges after Iran’s 2016 elections.

First published April 18, 2016

To contact the writer of this QuickTake:
Kambiz Foroohar in New York at kforoohar@bloomberg.net

To contact the editor responsible for this QuickTake:
Lisa Beyer at lbeyer3@bloomberg.net