He has a dream.

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Iran Hard-Liners Hate Foreign Investment, So You Shouldn't

Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London.
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U.S. Secretary of State John Kerry is making a lot of people in Washington even madder than usual. He's been encouraging European banks and companies to invest in Iran -- which certainly is weird, given the history between the U.S. and the Islamic Republic.

As the former George W. Bush administration official Elliott Abrams put it on Thursday: "There is simply no defensible reason for an American official, much less our top diplomat, to concern himself with how much investment and profit Iran can eke out of the nuclear deal."

Except that there is. Increasing foreign trade and investment for Iran was part of the mix in the 12-year negotiation over Iran's nuclear fuel program, from start to finish. It was resisted by the Iranian Revolutionary Guard Corps and other hard-line factions in the Tehran regime because they feared foreign influence that could undermine their control. So it's at least defensible to ask western treaty opponents why, if they think foreign investment would help the Revolutionary Guard conduct its military adventures, the Revolutionary Guard doesn't want it.

Twelve years ago, I went to Iran to figure out whether the incentives European negotiators were using -- with the backing of the Bush administration -- to persuade the regime in Tehran to stop manufacturing nuclear fuel could work. The answer was no.

That wasn't obvious at the time. The offer went roughly like this: The Iranians would permanently mothball their fuel program and, in exchange, get access to top-of-the line civilian nuclear technology, along with trade privileges and additional investment from the European Union, then Iran's biggest economic partner. Western diplomats were convinced that this would work. They pointed to the huge demographic bulge for which the regime needed to create jobs, or risk revolt. Investment and technology transfer would create those jobs.

But this was 2004, when Supreme Leader Ali Khamenei was feeling decidedly insecure. The U.S. had declared Iran part of an "axis of evil" and then invaded Iraq, parking 150,000 troops on Iran's doorstep. Moreover, if reformist President Mohammad Khatami's engagement with the West and its investors delivered prosperity, Khamenei's revolutionary regime risked losing its credibility. At the same time, the price of oil was climbing, making foreign funding less vital.

As a result, the most powerful man in Iran didn't want foreign investment and was hardly going to trade much away for it. The big contracts Khatami's government signed with foreign investors were getting shut down and taken over by the Revolutionary Guard -- in one case, using tanks. Soon, Khatami would be replaced by President Mahmoud Ahmadinejad and the nuclear talks would go into deep freeze.

That hasn't happened this time. Khamenei agreed to a nuclear deal and, for now at least, has reined in the hard-liners who oppose it. That's because he wants the investment.

"Everything is different," said Cyrus Razzaghi, President of the consultancy Ara Enterprise, whom I also met back in 2004. "This time there is no threat to Iran's security -- Iraq is now our biggest export market, and Iran and the U.S. even have a common enemy in Islamic State. Plus the oil price is low and the economy has taken a beating from sanctions. We have a real chance."

Just as important, says Razzaghi, is the difference between Khatami and today's president, Hassan Rouhani: "Khatami was a super nice guy, but a philosopher. Rouhani is the ultimate pol, the ultimate insider." As a result, Rouhani has been much more successful at keeping Khamenei on his side.

Now it is a substantial swath of the U.S. Congress and the Washington foreign policy community that doesn't want investment to flow into Iran. Khamenei is showing signs of impatience, because the economy still hasn't benefited much from the lifting of sanctions while Rouhani may be growing too strong politically after winning parliamentary elections in February. When Khamenei delivered his annual address to mark the Iranian new year, in late March, he lambasted the U.S. for keeping sanctions in effect and criticized Rouhani for working with the "arrogant" Americans.

Although Iranian oil production returned to pre-sanctions levels this week, European banks are still refusing to clear transactions. That's because they fear that the U.S. Treasury Department may fine them for transgressing U.S. sanctions that remain in place, even after the nuclear deal lifted international sanctions. The inability to clear large transactions has so far made most agreements on foreign investment projects moot.

Iran's irreconcilable conservatives are crowing, reminding Iranians that they'd always argued that the U.S. would never let Iran benefit from the lifting of sanctions and had dismissed the nuclear deal as a ruse. Their hope is that the nuclear deal unravels and a discredited Rouhani fails to get reelected next year, leaving the presidency open for one of their own.

This is why Kerry is trying to persuade Europe's big banks to go ahead and work in Iran -- as the nuclear deal envisaged they should be able to do. So far, they have not been convinced. The U.S. has hit many of them with large fines for clearing Iranian dollar transactions for Iran in the past, at a previous time when the U.S. had sanctions on Iran but European governments did not. Who knows what the next U.S. president might order the Treasury to do.

There is, of course, an element of good-cop-bad-cop theater to Iranian politics, but the tussle for power is genuine. Kerry's best defense of his advocacy for investment in Iran is that America's most implacable enemies in the regime want him to fail.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Marc Champion at mchampion7@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net