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Iran Yet to Realize Full Economic Potential in Post-Sanctions Era

Iran Yet to Realize Full Economic Potential in Post-Sanctions EraIran Yet to Realize Full Economic Potential in Post-Sanctions Era

When Iran signed an agreement with world powers to limit the scope of its nuclear program in 2015 in exchange for the lifting of international sanctions, President Hassan Rouhani’s administration believed the deal would usher in badly needed foreign direct investment to relieve Iran’s economic woes.

Two years on, the promise of economic renaissance has not fully panned out.

In an interview with World Politics Review, Sanam Vakil, professorial lecturer at the Johns Hopkins University SAIS Europe in Bologna and associate fellow at Chatham House in London, discusses what Iran has achieved since the sanctions were lifted. Excerpts of the interview follow:

WPR: What has been the extent of foreign investment and deals procured by Iran since the end of sanctions, and how do they compare to expectations? What opportunities and obstacles can be expected going forward?

SANAM VAKIL: There has definitely been a large gap between expectation and reality regarding the level of foreign investment in Iran after the nuclear agreement, known as the Joint Comprehensive Plan of Action, was signed in July 2015. In order to increase internal support for the deal…, President Hassan Rouhani’s administration oversold the prospects and opportunities for investment in Iran without addressing the limitations and challenges.

Rouhani called for over $150 billion in foreign investment in diverse domestic industries, believing that investment would not only revive the Iranian economy, but also protect the Islamic Republic by creating a diversified economy that provides greater employment opportunities for its citizens. The obstacles, however, have far outweighed investment prospects and include continuing US sanctions on Iran, which prevent American citizens and companies from engaging in any business in the country.

Moreover, a shift in US policy under the Trump administration … has resulted in greater uncertainty regarding the American commitment to the nuclear agreement. This has increased the investment risk for international companies and specifically for international banks that remain concerned over the long-term viability of the deal and the return of sanctions. In Iran, … macroeconomic and domestic structural challenges have also impeded investment progress. Together, these challenges have limited Iranian investment significantly.

To date, while a number of multinational companies have engaged in large-scale investment in Iran, including Boeing, Airbus, Volkswagen, Vodafone, Renault, CNCP, Siemens, GSK and Total, most of the international agreements signed have been limited to memorandums of understanding, which require months of negotiation before they proceed. Going forward, Rouhani must urgently address economic reforms such as banking sector transparency and exchange rate unification … It will not be an easy job.

What has the domestic political impact of these deals been thus far, and how have they played out in the context of factional disagreements over the need for foreign direct investment and the desire to maintain independence?

As opposed to Rouhani … the Revolutionary Guard are fearful that significant investment and reliance on the West will weaken the Islamic Republic ... This group has limited trust in American intentions... Moreover, because the Revolutionary Guard has significant investments in the Iranian economy, they too have sought to protect their interests and preferential access to government contracts … the Revolutionary Guard are not totally opposed to outside investment. Rather, in order to protect the economy as well as national security from too much western interference and dependence, they seek investment from a diverse array of international investors and countries.

How likely are the increased economic ties we have seen to have a long-term moderating influence, and what factors could help or hinder that effect?

Here there are a number of interconnected issues that one must consider. First, it is important to remember that the agreement signed in July 2015 is only two years old. In the current climate, it still remains a very fragile agreement. With the change in US administration, any previous trust or goodwill built between Washington and Tehran through the two-year negotiation process has gone to the wayside as ideological rhetoric, contending national interests and mutual suspicion continue to drive tensions.

Conservatives in both capitals remain unwilling to bridge the four-decade long divide, thereby adding domestic politics into the mix of regional tensions. In the Middle East, Washington and Tehran share the same goal of expelling … terrorism in countries like Iraq and Syria, but they differ on the means to do so. Tehran sees its actions as defensive … This strategy has put Iran at further odds with America’s traditional regional allies ... With so many interconnected issues at play, it is hard to imagine any short-term moderation.

In the future, any moderating effect from the nuclear deal would not reveal itself immediately, but over time as the impact of trade, foreign direct investment and trust between Iran and the international community grows. Just because this has not happened to the extent that was expected in Tehran, we should not write this effect off just yet. Going forward, we should watch for … a shift in regional political circumstances that could create the conditions for greater regional cooperation.

Rouhani’s vision of an interconnected, economically integrated Iran can help create stronger international bonds that would necessitate moderation.

Ultimately though, it is important to remember that moderation would not necessarily result in pro-American or pro-western policies. The Islamic Republic is built on an ideological foundation of independence, … stability and security. Protecting those ideals will most likely result in differing visions of moderation in Tehran.

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