Citizens International

Rouhani’s greatest win on the verge of becoming a liability

Iranian President Hassan Rouhani gives a news conference on the sidelines of the 69th United Nations General Assembly in regard to a long-term nuclear agreement at the United Nations Headquarters in New York, Sept. 26, 2014.  (photo by REUTERS/Adrees Latif)

Rouhani’s greatest win on the verge of becoming a liability

The United States and Iran had little trust in one another when it came to negotiating the Joint Comprehensive Plan of Action (JCPOA). Yet, Iran provided some comfort when it implemented steps necessary to ease sanctions. Four months after Implementation Day for the JCPOA, Tehran is struggling to show tangible and substantive economic benefits.

Iran’s leadership, and increasingly the political elite and middle class who supported the nuclear negotiations, is accusing the United States of undercutting the JCPOA by not taking adequate steps to allow for Iran’s re-entry into the global economy. Unless such perceptions (or misperceptions) are addressed, the base of support in Iran for the JCPOA and additional engagement with the West is likely to shrink.

The nuclear deal was based on a quid pro quo in which all sides would obtain real benefits. In January, Iran finalized substantive modifications to its nuclear program while enhancing the ability of world powers to monitor and verify its future nuclear activities. In return, Iran was provided sanctions relief as a means of reconnecting to financial and commercial networks, particularly in Europe. Easing sanctions was not, however, an end in itself. Rather, Iran’s side of the bargain was to be provided the opportunity to inject new life into its economy.

Sanctions have been eased, but Iran’s ability to realize post-sanctions opportunities has been impeded and over-promised. Undoubtedly, Iran’s domestic policies and self-induced political risk are hampering commercial appetites for investing in the country. There is a growing perception across Iranian society, however, that the US position has been calculated to preserve Iran’s economic isolation in response to outstanding regional security concerns and the longstanding enmity between Tehran and Washington.

Major banks, including the World Bank, are hesitant or unwilling to provide cover for deals with Iran. In private conversations with Al-Monitor, representatives from European banks noted that a looming fear when considering financing business with Iran is that they might jeopardize their business interests in the United States or inadvertently run afoul of existing or future complex US primary sanctions against Iran. European banks are also concerned that the US Congress will impose fresh secondary sanctions over Iran’s non-nuclear-related behavior. In addition, the post-2008 US restrictions on dollar-denominated transactions with Iran — transactions necessary for processing most major deals — pose serious impediments for European investors.

These challenges have meant that the flow of money into and out of Iran remains largely paralyzed. US Secretary of State John Kerry has admitted that Iran has been unable to access much of its own unfrozen assets in offshore accounts. Back-to-back visits by foreign officials and hundreds of trade delegations to Iran have culminated in stacks of agreements that have little prospect of materializing insofar as they lack financial backing.

The banking deadlock is also affecting transactions between Iran and Asia. In advance of a visit by Prime Minister Narendra Modi to Tehran this month, India is reportedly struggling to convince European banks to process a one-off euro repayment of debt owed to Iran for oil imports worth $6.5 billion.

Although the US administration has taken some positive measures to ease the concerns of Europe’s banking sector, these steps have so far failed to sufficiently reassure companies that they will not be explicitly or implicitly penalized for permissible business with Iran. Moreover, these efforts have not neutralized the degree of political pressure that was put on Europe’s private sector against doing business with Iran over the past decade.

Iran’s private sector, which fought hard to survive the sanctions and spent the last two years preparing for a reopening with Europe, has been left disappointed. At the Europe-Iran Forum in Zurich earlier in May, several Iranian business executives told Al-Monitor on condition of anonymity that they recognize internal problems relating to Iran’s opaque business structures and that the outdated banking systems are far from appealing. They also believe, however, that Western sanctions greatly contributed to these conditions by shutting Iran out of global financial reforms and providing fertile ground for the black market and the growth of the Islamic Revolutionary Guard Corps’ reach into the economy. They see these factors as only exacerbating the length of Iran’s economic marginalization.

Ordinary Iranians have gotten a psychological boost from the political opening accompanying the nuclear deal and welcome the distance from the shadow of war. They continue, however, to face huge economic hardships and to see the benefits from the nuclear deal as lopsided. While recent parliamentary elections ought to have boosted President Hassan Rouhani’s confidence in regard to the JCPOA, several political advisers close to his administration told Al-Monitor that he is under severe scrutiny from opponents as well as supporters to show economic dividends from negotiations with the West.

The domestic demands on Rouhani have empowered opposition groups to resurrect the populist sentiments of former President Mahmoud Ahmadinejad. This faction has begun laying the groundwork to challenge Rouhani in the 2017 presidential elections by appealing to skeptics of the West and lower-income constituents. In this light, the recent $2 billion compensation ruling by the US Supreme Court against Iran’s offshore assets has further ignited anti-Western sentiments at a time when the Iranian economy is stagnant and confronting low oil prices. These conditions have provided the best ammunition for Rouhani’s opposition to challenge the heart of the government’s economic pledges.

Meanwhile, Iran’s moderate political elite — which paid a high political price in defending the nuclear deal at home — is left wondering if the United States can deliver. Iranians who believed an opening with the West would improve the economy and strengthen the middle class are also losing faith. Before the JCPOA, many members of the middle class blamed their economic isolation on Iran’s leadership. Growing numbers of Iranians have now begun to point the finger at the United States and Europe for falling short of their commitments and continuing to restrict Iran’s financial mobility.

In short, the credibility of the United States is being severely questioned by Iran and Iranians. This will undoubtedly have a ripple effect on Tehran’s openness to deal with the West on non-nuclear portfolios, in particular on de-escalating regional conflicts. Europe and the United States must thus actively work with Iran to find creative solutions to more rapidly reconnect Iran to European financial platforms. In the coming year, with presidential elections in the United States and Iran, both ends of the bargain under the nuclear deal must be meaningfully delivered to ensure that it will be a lasting legacy.