The Irrational Exuberance About the Iranian Economy

The Irrational Exuberance About the Iranian Economy

“You’re so happy!” I couldn’t help but smile at Kaveh as I climbed into the backseat of an old, white Iranian Peugeot taxi on a warm May evening in 2014. By any measure, my friend should have been stressed: He had spent the last 90 minutes winding his way through Tehran’s congested traffic trying to find me. The Iranian capital’s infamous crush of Peugeots, Kia Prides, and motorbikes is often endearing for a newcomer to the city, but, for any resident, an hour-and-a-half of driving through the smog and congestion of Tehran’s narrow streets is normally a recipe for a nervous breakdown. But when I saw him nearly two years ago, Kaveh wasn’t just calm, he was beaming. “I’m just happy to see you here,” he replied simply as he climbed back into the taxi.

Five years had passed since the last time I had seen Kaveh in Iran amid the Green Movement, the storm of protests that engulfed Tehran in the wake of then-President Mahmoud Ahmadinejad’s contested 2009 re-election. Like so many Iranians, Kaveh, a consultant in Iran’s private banking and aviation industries, was disheartened by the subsequent crackdown and dispirited by the economic hardship in the years that followed. In that time, the Islamic Revolutionary Guard Corps (IRGC) had deepened its influence over major sectors of Iran’s economy; firms affiliated with the guard, such as its engineering arm Khatam al-Anbiya, were moving in to replace the major international energy companies that were fleeing the country. As Iran became more economically isolated due to sanctions, corruption reached unprecedented levels.

Speaking with Kaveh in 2014, all this seemed like an eternity ago. Hassan Rouhani had been president for almost a year, and Iran and the group of six world powers — the United States, France, Britain, China, Russia, and Germany — had inked an interim nuclear agreement in Geneva. For the first time in years, Kaveh no longer felt hopeless about the future of his country. Members of the business community, like him, believed Rouhani had the political grit necessary to fight corruption and bring economic change. The prospects of a nuclear deal had them revitalized, he told me. Kaveh had become a senior executive at a private aviation firm and was especially excited because sanctions for aviation had been relaxed; his company had launched talks with a European firm to buy new airplanes. International delegations were trickling in for business talks, and there was even talk of trade with America, Kaveh said excitedly.

Two years later, in 2016, Kaveh’s attitude has again shifted. Although there are glimmers of hope on the horizon of the Iranian economy, he tells me true change will take longer than he once thought. An aesthetic shift is underway in Iran, with refurbished mansions opening as five-star hotels in historic cities like Kashan and luxury boutiques such as Bulgari and Roberto Cavalli now dotting northern Tehran. Hotels in the Iranian capital are constantly booked with business travelers looking for investment opportunities. Inflation, which peaked at 40 percent as Rouhani took office in 2013, is on the decline and today stands at about 13 percent.

But the economy still suffers from deeply ingrained systemic problems that will take years to overcome. Youth unemployment is more than 25 percent, and though Tehran is peppered with new high-rises and construction projects, many remain incomplete, as the country endures the sector’s longest slowdown in recent history. Prices for basic foodstuffs remain high; the currency remains weak and is expected to depreciate further by summer as the government promotes exports.

In the run-up to this week’s parliamentary elections, Rouhani has tried to inject a sense of hope among a population disappointed by the lack of immediate economic improvement many thought would come with the historic nuclear accord. But the fact is that many Iranians’ expectations for change greatly outpaced the economic reality: The Iran deal finalized last July will allow the country to harness its vast economic potential in the long term, but average Iranians won’t feel change in their daily lives for some time to come.

“We knew in the business sector … it would take five to 10 years to rebuild what was devastated during the embargo period,” said Alireza Azimzadeh, whose legal advisory firm, Persia Associates, facilitates negotiations between international companies and local Iranian firms. “We’ve had so many [business] meetings that sometimes we’re overwhelmed. But the population at large isn’t directly involved like us, so they don’t feel that.”


Iran is trying to grease the wheels of economic progress. In October 2015, the government launched a $7 billion stimulus plan to boost its sluggish economy by providing credit to local manufacturers and low-interest auto loans to lower-income Iranians. A new low-interest credit card with a cap of $3,000 was introduced to help government employees purchase locally made home appliances.

“The government is … giving the impression that life is getting better after the nuclear deal,” said a veteran Tehran-based analyst. “Whether or not [these economic incentives] are happening because of the deal is irrelevant. Even if it’s not true, the innuendo is the government can do these things now that the deal is done.”

Rouhani shored up these initiatives in January with widely publicized trips to France and Italy, where he signed roughly $50 billion in prospective business deals, including a roughly $27 billion agreement with Toulouse-based Airbus to boost Iran’s long-ailing aviation sector with the lease or purchase of at least 114 airplanes. Iran’s leading auto manufacturer, Iran Khodro, also sealed a $440 million joint venture with PSA Peugeot Citroën, with plans to turn Iran into a manufacturing hub for the French automaker.

Re-entry to Iran by even one international oil major — such as France’s Total, Royal Dutch Shell, or Japan’s Inpex Corp — would have a huge impact on public morale and improve Rouhani’s standing ahead of presidential elections next year. The European Union has lifted its embargo against purchases of Iranian oil, and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a Belgium-based private financial clearing and communication system used by most international banks, has reconnected with many of Iran’s banks.

Continued investment will partly depend on the outcome of the elections this week for seats in the Iranian Majlis, or parliament, according to Robin Mills, head of the Dubai-based Qamar Energy, a consulting firm specializing in the oil and gas sectors of the Middle East. “Investors want to understand what the role of political factions in a particular industry will be, how the Majlis will look after elections, and whether it will have an obstructionist agenda,” Mills said.

A friendly parliament would make it much easier for Rouhani, who has faced a backlash from the conservative-dominated parliament and the IRGC for most of his administration, to pass further reforms. He and his government accomplished a major diplomatic feat in negotiating and quickly implementing the nuclear agreement, but his political adversaries have severely criticized his domestic agenda; Iran’s deep state is loathe to the idea that social liberalization may accompany any movements toward economic openness and reform.

Rouhani is surely not pleased that the divisions that polarized Iran after its controversial 2009 election have started to seep back to the surface of the country’s politics. It’s safe to say that potential foreign investors aren’t pleased either.


But Iranian politics aren’t the only thing holding up massive foreign investment in Iran — American politics are playing a role, too.

Game-changing investments can’t materialize until foreign banks feel comfortable facilitating long-term financing and transactions. But for that to happen, Western European banks will need their home governments to get reassurance from the U.S. Treasury Department that they won’t be penalized or cut off from the U.S. banking system for working with Iran, says Nigel Kushner, chief executive of W Legal, a law firm specializing in international sanctions compliance. And that will largely depend on Washington’s assessment of how Tehran is adhering to its nuclear commitments.

In the last decade, European banks have paid billions in fines and settlements for violating U.S. sanctions on Iran, Cuba, and Sudan. In 2014, France’s BNP Paribas paid a record $8.9 billion in fines and was hit with a yearlong ban from conducting U.S. dollar transactions for its oil and gas trade-finance unit.

Kushner predicts a large British bank may enter Iran within the next three to six months, if the United States confirms to the British government that the bank won’t be penalized.

For the time being, only a handful of small European banks are facilitating money transfers for Iran-related trade. Iran’s national Melli Bank is reportedly able to transfer funds to its branch in London, but Iran’s Central Bank has yet to find a bank willing to engage with it to facilitate transactions. So while Iran has enjoyed higher oil sales to new customers since Europe’s oil embargo was lifted, collecting those revenues and more than $4 billion in old oil debts remains difficult, a senior Iranian oil official told Foreign Policy.

“London-based Iranian banks who are subsidiaries of Iranian parent banks are akin to a restaurant that has opened for business and can only serve Coca Cola,” said Kushner. “They are open for business, but there’s little they can do because they do not yet have a correspondent bank they can work with, and they don’t have a bank they can exchange euros or sterling with in any meaningful way.”

It also remains to be seen how the U.S. Treasury Department will ultimately proceed in its dealings with Iran. Will Iran be allowed the same conventional financial freedoms most other countries have, or will the United States encourage transactions through centralized channels on a case-by-case basis? “The expectations were super high going in among all the parties,” said Erich Ferrari, a Washington-based lawyer specializing in U.S. sanctions compliance. “Those have been mollified.”

Rouhani and Oil Minister Bijan Zangeneh have sought to dilute the presence of IRGC-led companies and subcontractors in Iran’s petroleum industry. They replaced many National Iranian Oil Company (NIOC) executives aligned with former Oil Minister Rostam Ghasemi, who led Khatam al-Anbiya before joining NIOC, and have publicly lambasted IRGC-affiliated firms and subcontractors for taking over so many civilian projects without a proper tender. They also criticized Khatam al-Anbiya for the slow progression of key projects, such as the development of the world’s largest natural gas field, South Pars, which Iran shares with Qatar.

Yet the white-collar corruption that became an endemic part of business in Iran hasn’t changed. In 2015, Transparency International ranked Iran’s public sector equally corrupt as war-embattled Ukraine, worse than key trading partners Russia and Pakistan, but brighter than Venezuela, Iraq, and Nigeria.

Some officials and businessmen fear that Rouhani, looking to win a second term in office, no longer has the political will to fight for serious reform. “In order to fight [corruption], you have to bring in new investors to replace them. Mr. Zangeneh originally tried to stop [Khatam al-Anbiya’s] operations in South Pars, but later on he let it go because he didn’t have an alternative,” said a former senior official of the Iranian Central Bank, speaking by phone from Tehran on condition of anonymity. “He thought by stopping the projects, other local private players or big international players would come. But they didn’t.”


When I last spoke to Kaveh, he told me he had left the aviation firm he was working for after his discussions with a European company for new airplanes had stalled on the advice of the company’s European lawyers. The slow pace of change in Iran has been disappointing, he said, but he has come to accept that change in Iran won’t happen the way he imagined: “I was hoping before for something like the old, pre-revolutionary Iran coming back, the Iran that was respected and accepted in the international community.”

Kaveh now likens his feelings for his country and its capital to a scene in Moscow at the end of one of his favorite novels, Doctor Zhivago. In it, author Boris Pasternak describes his native city wavering between a melancholic past and hope for a better future. Achieving the nuclear accord has not alleviated the pain of Iran’s economic and political isolation. But it is a portent of change to come, however slowly. “We are only hopeful,” Kaveh said. “And we talk about hope so much because we need it.”