June 11, 2015

Deal or No Deal, Iran’s Economy Will Continue to Grow

unnamedWashington, DC – “The official response of [Iran] to sanctions has been framed as the Economy of Resistance, but essentially, it is a blueprint for economic reform,” said Dr. Bijan Khajehpour, Managing Partner at the Vienna-based Atieh International Consultancy, speaking at the Wilson Center last week on the economic significance of a nuclear deal for the Iranian economy.

Under the administration of President Hassan Rouhani, Iran has implemented a number of reforms intended to reduce its vulnerability to U.S. and multinational sanctions and to prepare for a more business-friendly environment should the sanctions be removed as part of a nuclear deal.  According to Khajehpour’s projections, the reforms have had an impact: if the sanctions remain in place, he predicted Iran’s economy would grow at a respectable annual rate of 4-5% over the next few years; while if the sanctions are lifted, Iran’s economy would achieve a 7-8% annual growth rate over the medium term.  In both cases, the impact of sanctions on Iran would be diminished considerably.

Khajehpour chalked this up to the fact that sanctions were not alone in causing significant damage to Iran’s economy over the last few years.  In fact, Khajehpour noted that some economists estimate that only 20% of Iran’s economic problems can be attributed to the sanctions. Contra popular belief, Iran’s economic downturn, Khajehpour said, was also the result of government mismanagement, corruption, and Ahmadinejad’s brand of populist economic policy – all of which the Rouhani administration has begun to reverse.

The Rouhani government, Khajehpour said, is committed to ending Iran’s economic isolation whether a nuclear deal can be reached or not. If a comprehensive agreement falls through, Iran will seek to expand ties with Russia and other trading partners in Asia, Khajehpour noted, while also hoping to convince a reluctant Europe to slowly resume ties with the Iranian market. However, if a nuclear deal is reached and sanctions on Iran are lifted, then Iran will seek to reintegrate in global and regional economies, especially by resuming trade ties with European partners.

If there is a deal, the most immediate impact for Iran will be a psychological boost as a major burden will feel as if it has been lifted. Nonetheless, because Iran has been isolated for so long, its economy will likely struggle to adapt to working in a highly competitive globalized environment. Iran’s burgeoning private sector, which has not had to deal with much competition thus far, might prefer to see a more phased approach to the opening up of the economy.

Khajehpour said he advises his foreign clients, “ if you are looking at Iran and you don’t want to transfer technology, don’t bother.” The Iranian firms want to have a mutually beneficial relationship with foreign investors instead of just having their country’s natural resources exploited. The Iranian government seeks to enhance the capabilities of domestic firms instead of just creating a dependency on foreign capital and expertise — in line with the Supreme Leader’s philosophy of an “Economy of Resistance”.

Khajehpour also tackled a question on what Iran would use its restricted funds held in overseas accounts for should they be repatriated back to Iran as part of a deal. One major concern is that, once sanctions are lifted and Iran has access to all of its funds held abroad (which amount to about $120 billion), it will provide fuel to further adventurist policies in the region. However, Khajehpour said, the lifting of sanctions would actually diminish the revenues of such bad actors because they no longer would have a monopoly on what commodities went in and out of Iran.

In the end, Khajehpour doesn’t think either side “will seek to escalate” the situation, in the event that a deal were to fall through. The Iranian side is committed to ending the country’s isolation and, while a comprehensive deal is preferable, they are prepared to move forward in piecemeal fashion if they are unable to reach a satisfactory agreement.

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