Iran - Scripting a New Era

Global Centre Stage

If the expressions of interest in doing business with the Islamic Republic noticeable in the European business circles is anything to go by, then Tehran is likely to be overwhelmed with offers -- from oil, through transport and manufacturing, to service sectors (including tourism). Should that be sustained in the medium to long term, Iran’s principal problem in the post-revolutionary era – investible capital and technology infusion – would both be taken care of.

The Islamic Republic of Iran appears to have crossed a major threshold with the conclusion of the Joint Comprehensive Plan of Action (JCPOA) signed in July 2015. Considered a major source of instability in its neighbourhood by the international community, and suffering from crippling international sanctions on account of its nuclear programme for more than half a decade (over and above a severe sanctions regime maintained by the United States for more than three decades), Tehran has begun its long awaited rehabilitation in the international community, and in particular its return to the global economic order. While many of the sanctions it used to suffer from are still in place (such as those slammed by the USA since 1979, those on account of its human rights record and even those that the US Congress had legislated independent of the president), in principle Iran is no longer being considered the international pariah as it was for nearly two decades. Geopolitically, its support is now being sought earnestly to help stabilise a very unstable Middle East, having a major stake to thwart the ascendancy of the Da’ish (Islamic State) in the region; economically it is being courted for its huge reserves of oil and gas.

So far as Iran is concerned, this development could not have come at a better time. Although Iran had lived with the US and other international sanctions in varying degrees ever since the Islamic Republic was set up in 1979, the sanctions regime that was introduced after the discovery of some aspects of its nuclear programme in 2003 had proven to be disastrous for the country. In particular, the tightening of the sanctions after 2010, in the background of the global economic slowdown, was on the verge of pushing the country’s economy into a nosedive. Growing disaffection among the Iranian people was beginning to grow to a level where it could even have threatened the stability of the Islamic regime itself.

The removal of the sanctions in January 2016 upon satisfactory compliance with the JCPOA, therefore, has helped Tehran embark on a new era – not simply because more than $110 billion of frozen assets have become available overnight. Both in the realm of the geopolitics of the Middle East and Iran’s domestic politics and economics, this timely rehabilitation of Tehran is likely to prove highly significant in the short and medium run.

The Landmark Nuclear Deal

The landmark nuclear deal signed between Iran and the P5+1 (five Permanent members of the UNSC plus Germany) group of countries, signed in July 2015 committed the international community to remove economic sanctions that were imposed on Iran 2006 onwards in a bid to thwart its suspected nuclear weapons programme -- a charge that Tehran had consistently denied. Such removal would be conditional upon Iran restricting those aspects of its nuclear programme that had generated such suspicion.

Under the terms agreed to, Iran will reduce its installed enrichment centrifuges from over 19,000 to keep only 5,060 operational. All of these will be first-generation (i.e. less efficient) centrifuges; none of the more advanced models can be used for at least 10 years, and R&D into more efficient designs will have to be based on a plan submitted to the IAEA. All nuclear enrichment activity has to be limited to the plant at Natanz; the second facility at Fordow (buried deep within a mountain and thought to be impregnable to conventional air strikes) will cease all enrichment and be turned into a physics research centre. It will not produce or house any fissile material for at least 15 years. Iran has further agreed to reduce its stockpile of low-enriched uranium (which can be spun further into weapons-grade material) from 10,000 kg to 300 kg for the next 15 years. Iran’s alternative plutonium path to a bomb has also been blocked with the proposed redesigning of the heavy-water reactor at Arak. Its original core, which could have produced weapons-grade plutonium, will be removed and destroyed. No other heavy-water reactor will be built for 15 years.

The JCPOA authorises IAEA inspectors to inspect any facility, declared or otherwise, as long as it is deemed to be ‘suspicious’. Such powers for the IAEA will remain in place indefinitely, and are a lot more sweeping than those under the normal safeguard agreements associated with the Nuclear Non-Proliferation Treaty (NPT). Most significantly, if the United States charges Iran with significant non-performance of its commitments, previous Security Council sanctions will be restored, unless a new, veto-able Security Council resolution is adopted that maintains the suspension of sanctions.

Red carpet with welcome on the mat: Opening doors to the international community

Successful conclusion of the JCPOA, and the end of the sanctions regime, has allowed Iran to open its doors to the international community yet again, and may even have set in motion a thaw in Iran-US relations. In a January 2016 development that is highly symbolic, US servicemen captured upon straying into Iran’s territorial waters were released the very next day by the Islamic Revolutionary Guards Corps (IRGC), following a phone call from John Kerry, US Secretary of State, to Javad Zarif, his Iranian counterpart -- something that would have been considered impossible even six months back. Strategically, this amounts to a major turn of the geo-political kaleidoscope of the Middle East. Although Iran’s Arab neighbours and Israel fear this to be the beginning of Iran’s ascendancy in regional politics, Tehran appears to be sharply focused instead in mending her relationships around the world.

Since July 2015, there has been a flurry of bilateral visits to and from Tehran. Russia and China, the two powers that had maintained high levels of contact with Tehran all through the sanctions regime over the past decade, were among the quickest to move in with official visits. Long before the international community pronounced its satisfaction with Iran’s abiding by the JCPOA, President Putin removed sanctions (imposed under US pressure) on uranium export to Tehran, and lifted the suspension of sale of five S-300 missile systems to the Islamic Republic before his visit in November 2015. In January 2016, Xi Jinping took back from Iran accords that pledge to push their bilateral trade past $600 billion, presumably in recognition for being the only country that remained unflappable in the light of the debilitating sanctions regime from 2010 and continued to buy crude from, and refine oil for, the Islamic Republic.

President Rouhani’s maiden visit after the removal of the sanctions is no less significant, since the EU eagerly awaits the return of Iranian oil to the European market, which it is believed will ease the pressure there that Europe has experienced since one of its chief suppliers, Syria, began to implode. Tehran is equally keen on re-entering the European market, to make a return to the earlier sanctions regime just that bit unwelcome in the European capitals.

However, it is perhaps Tehran’s overtures to New Delhi that is most revealing. India had been importing up to a fifth of its energy from Iran for a long time before the sanctions regime kicked in. Even as India’s import of Iranian crude and export of refined petroleum back to Iran declined, India remained engaged in negotiations over the Chabahar port, and building railway links between the port and Afghanistan. Tehran today is keener than ever that New Delhi should remain involved in the Islamic Republic, principally to offset Beijing’s relentlessly growing influence in the country.

The pattern that emerges from all this seems to argue that Tehran is trying its best to hedge its bets in the international arena, by not being too close to any one country, or market. Such even-handedness would be crucial to the most important task before Iran today -- rebuilding the Iranian economy.

Not simply oil: Rebuilding the Iranian economy

Although it has the fourth largest reserves of oil in the world, and second largest of natural gas, Iran has always tried to develop its economy as to not be completely dependent on its energy exports. Iran before the revolution had successfully built up one of the three most industrialised economies in the entire Middle East, borrowing technology from the West, powered with her oil revenue. The Islamic Revolution of 1979 disrupted the trajectory by disturbing Iran’s ties with her most important source of hardware and technology, the USA, and thereupon with some of the European powers in the course of the war with Iraq. The eight-year long Iraq-Iran war left the country badly damaged, and since then the Islamic Republic has badly struggled to rebuild the economy. Unfortunately for Tehran, the eighties and the nineties were years of low oil prices, thus preventing sufficient resources from being generated. Furthermore, given the continued US hostility towards the Islamic Republic, it was not always easy to establish normal economic ties with industrialised countries of the West, particularly if it involved technology transfer.

Consequently, much of Iranian manufacturing has remained caught in some kind of a time warp. There has been little infusion of fresh technology since 1979, making Iran’s industrial sector often internationally uncompetitive. Iran’s aviation and surface transport industry in particular, totally dependent on imports from the West, languished in absence of spare parts and fresh purchase. Although Iran successfully pursued import substitution during the Iraq war, developing even its own versions of a ‘people’s car’ -- the Khodro and Paikan -- neither of these have any traction among the well-off who are looking for new features, hence resorting to imported cars (which in turn have become impossible to acquire since 2010).

Even more importantly, the technological regime in Iran’s petroleum industry today stands completely outdated in terms of its efficiency. For much of the 1990s, when it was theoretically possible for Tehran to go shopping for fresh technology, it did not have the resources to invest in the oil sector. By the time the oil prices increased exponentially during 2006-09, Iran was denied access to fresh technology due to the international sanctions regime. The oil infrastructure in Iran today is dilapidated; the country was projected to produce by 2015 less oil than it did in 1979. This means Iran’s net revenue falling rapidly, it can no longer invest in its oil sector, precisely when it needs to.

It is, thus, no coincidence that President Rouhani’s first overseas visit in the post-sanctions era took him to, inter alia, France, where the oil major Total is looking at huge investment and exploration opportunities, while Iran is anticipating a major infusion of capital and technology. Iran is also scheduled to purchase some 114 aircraft from the European aviation-major Airbus, and is expected to urge Peugeot to resume its automobile exports to Iran, and maybe even start local production. Tehran is eager to do business with the US as well, having already expressed interest in purchases from Boeing, but American companies are slightly (if unhappily) watchful at present, lest they fall foul of their own Congressional laws against doing business with Iran.

If the expressions of interest in doing business with the Islamic Republic noticeable in the European business circles is anything to go by, then Tehran is likely to be overwhelmed with offers -- from oil, through transport and manufacturing, to service sectors (including tourism). Should that be sustained in the medium to long term, Iran’s principal problem in the post-revolutionary era -- investible capital and technology infusion -- would both be taken care of. Given the country’s existing infrastructure, the Islamic Republic could be well on the way to become yet again a regional economic powerhouse. All of these are possibilities if only the regime refrains from nuclear adventurism in course of the tenure of the JCPOA, i.e. the next 15 years.

The slippery slope: Challenges ahead

It is tempting to argue that having resolve the nuclear imbroglio, President Rouhani is well positioned to push forward with the agenda of economic reforms in the Islamic Republic. It would be advisable to err on the side of caution.

At least two of Iran’s neighbours, Israel and Saudi Arabia, are furious at the prospect of Tehran’s rehabilitation in the global community. Since the rehabilitation is contingent upon Tehran’s responsible behaviour and adherence to the terms of the agreement, and any infringement of its terms mandates automatic reinstating of sanctions, Riyadh and Tel Aviv would maintain pressure on Washington to remain on guard against nuclear adventurism.

Rouhani needs to address the issue of the economy urgently, however, without carrying out most of the necessary restructurings that are already there on the reforms agenda, because of their possible political fallout. The most important of these, for instance, is the need to dismantle industrial and business foundations, i.e. the bonyad-ha, which enjoy costly subsidies from the state and are uncompetitive. The Bonyad-ha represent the real hornet’s nest for the reform agenda, largely because of their connections with the conservative lobby in the Iranian establishment – the same lobby that had thwarted reforms under President Khatami and scuttled nuclear talks in 2003-05 (when Rouhani was his negotiator). The sanctions have hurt badly the social constituencies (viz. the mercantile interests of the bazaar) addressed by the conservative establishment, hence their support of the nuclear settlement so far. If the economy shows clear signs of improvement between the Majlis elections of 2016 and the Presidential one in 2017, the votaries of reform hope to be strengthened. Whether the conservatives would then want to scuttle structural reforms by pushing Tehran towards yet another round of nuclear adventurism (as they had done during the Khatami era) would remain to be seen.

The prospect of steady reform of the Iranian system without going through a regime change is not as unrealistic as it might appear, but neither should its success be taken for granted.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.