For a decade, the U.S. and other major powers squeezed Iran’s economy to force it to rein in its nuclear program. That ended in early 2016, creating an opportunity for Iran to bounce back. By many measures, it has. Notably, its production of oil has returned to pre-sanction levels. Still, Iran hasn’t reaped as large a dividend as many citizens expected when the country agreed in 2015 to limit its nuclear program and subject it to external inspections. One obstacle has been U.S. sanctions that remained even after every world power lifted its nuclear-related ones. And under President Donald Trump, who opposes the accord, the U.S. threatens to pull the noose around Iran tighter. At stake is more than Iran’s gross domestic product. How the economy has fared under the nuclear deal is an issue in Iran’s May presidential election. Incumbent Hassan Rouhani, a moderate, is being challenged by hardliners more inclined to embrace than dodge confrontation with a freshly hostile U.S.
Since the nuclear deal, Iran’s economy has risen out of recession, but almost all the growth has been in the oil industry, with little of the benefits filtering down to ordinary Iranians. For non-oil businesses, lack of access to finance has been a major impediment. In a January poll, 73 percent of Iranians surveyed said the nuclear deal hadn’t improved their living conditions. Rouhani has courted foreign investors, despite opposition from Iran’s radical theocrats, who are skeptical of Western capitalism. Overseas oil and construction companies as well as airplane and car manufacturers like Airbus Group SE and PSA 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. Still, many potential investors held back, their worries deepened by the election of Trump in November. In his campaign, he promised to “dismantle” the nuclear deal and in April he said Iran was violating its “spirit.” Most American companies were kept on the sidelines by a sweeping 1995 U.S. ban on trade and investment, triggered by concern about Iran’s links to terrorism.
The Pahlavi monarchy that ruled Iran from 1925 transformed a small agrarian economy into a booming one that included both manufacturing and 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.
Should the rest of the world want Iran’s economic revival to succeed? 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 creates 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 report by the International Monetary Fund on Iran’s 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.
- QuickTakes on Iran’s nuclear program and oil industry.
First published April 18, 2016
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