For Iran, boosting its economy is the real incentive to cut a nuclear deal – Washington Post

The headlines in Tehran have been trumpeting some good news for Iran’s economy lately. In the first 11 months of the Iranian fiscal year, car production climbed 58 percent and pistachio exports shot up 71 percent. Inflation is high but easing, and after a sharp contraction in 2012 and 2013, the economy is growing again.

But the Iranian economy is still a shadow of what it could be if international sanctions were lifted. There is virtually no foreign investment. Unemployment is rampant, especially among the young. Some of the country’s banks are in precarious positions. Corruption is common among politically connected groups that profit by circumventing international sanctions.

“The economy is not healthy,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech. “It is a bit like a sick man whose leg breaks and then the leg is repaired, but the other stuff is still there.”

The six global powers negotiating a deal to limit the scope of Iran’s nuclear program are hoping that the prospect of ending economic sanctions will entice Iranian leaders to come to an agreement in the next few days. Reports on the talks suggest that one of the remaining disputes is how fast sanctions would be lifted and which ones might remain in effect while Iran proves its commitment on the nuclear front.

The incentives are these: An agreement on Iran’s nuclear program could reopen markets for more Iranian crude oil exports, which Iran’s oil minister has said could rise by a million barrels a day within months. An agreement also might release a portion of the more than $100 billion in oil receipts now locked in accounts beyond Tehran’s control.

All that would have a huge impact not only on Iran but also on world oil prices and the geopolitics of the Middle East, where Iran is propping up or advising allies including Hezbollah in Lebanon, President Bashar al-Assad in Syria, Houthi rebels in Yemen and the government of Iraq in its battle against the Islamic State.

Meanwhile, Iran’s economy is struggling.

“I think that the Iranian economy is hemorrhaging on three fronts,” said Karim Sadjadpour, a senior associate at the Carnegie Endowment for International Peace, pointing to the cost of sanctions, low oil prices and the cost of aiding Iran’s regional allies. “This is not sustainable over long term. Iran’s role in the region is expanding while the economy is contracting. Certainly that is a huge impetus for them to sign a nuclear deal.”

How huge an impetus is difficult to say.

“It is evident that sanctions have been completely counterproductive if the objective was to contain the Iranian nuclear program,” said Seyed Hossein Mousavian, a research scholar at Princeton University who was a member of Iran’s negotiating team on nuclear weapons in 2005. “But if the objective was broader, just to harm the Iranian economy, you can say it has harmed the Iranian economy.”

Since 2005, Mousavian noted, Iran has acquired more centrifuges, more advanced centrifuges, more enriched uranium and a new underground nuclear site.

But Sadjadpour argued that “the most onerous sanctions are directly linked to Iran’s nuclear behavior, which is why Iran has shown a willingness to reassess its nuclear ambitions.” Without that link, he said, there would be no change in behavior. “You haven’t seen Iranians begin to reassess their approach to Israel or their support for Assad or for Hezbollah,” he said.

Economic sanctions are blunt instruments. In South Africa, they lasted years before apartheid ended, and even then, internal rebellion was probably more important. Sanctions on India over its nuclear weapons program were eventually lifted without any effect. Economic sanctions on China after the Tiananmen Square crackdown failed to instill democratic values. And President Obama has called for the end of a half-century-old embargo against Cuba, whose Castro brothers have ruled through 10 U.S. presidencies.

But Obama has made use of economic sanctions against Iran as well as against Russia because of its seizure of the Crimean Peninsula and support for rebels in eastern Ukraine. Those have been much more effective than other sanctions because they have been multilateral — and because plunging oil prices have further hobbled the targeted nations.

In the case of Iran, a series of U.S. and U.N. sanction measures in 1979, 1995 and 2006 were tightened greatly in January 2012 when the European Union imposed an embargo on Iranian oil and a freeze on the assets of Iran’s central bank. “The sanctions that we put in place helped make this opportunity possible,” Obama said in his 2014 State of the Union address.

Richard Nephew, who in February finished a two-year stint as principal deputy coordinator for sanctions policy at the State Department, said that sanctions had brought Iran to the negotiating table, but that the United States the other P5+1 countries could still not dictate terms.

The Iranians “come to these negotiations because they really wanted to solve the nuclear problem,” he said. “They could have done that without sanctions, but sanctions drove them to do that. But if sanctions are about getting people to give up their fundamental national interest, that’s not going to happen.”

The new 2012 sanctions stood out because they went to the core of the Iranian economy — the oil industry.

The International Energy Agency estimates that Iran’s oil exports averaged about 1 million barrels a day last year. The United States has succeeded in pressing some of Iran’s best customers — China, Japan, South Korea and India — to curtail imports of Iranian oil. The IEA estimates that Iran could easily produce 750,000 more barrels a day.

Payments have been held up, too. A Chinese official last year said it owed about $25 billion. An official told an Indian newspaper recently that India owed nearly $9 billion.

“Iran has been severely impacted by sanctions,” said Bryan Plamondon, an economist at the consulting firm IHS. He said that in 2012, the economy contracted about 7 percent and 2 percent more in fiscal 2013. Plamondon said that although the economy grew at a 3.5 percent rate last year, low oil prices would drag the economy back into a recession this year.

According to the International Monetary Fund, Iranian oil revenues were less than half of their 2011-2012 levels even before oil prices dropped by 50 percent.

One major contributor to Iran’s economic slump was the mercurial former president Mahmoud Ahmadinejad. During his eight years as president, Iran earned more than half of the oil revenue it had earned in the previous century, yet Ahmadinejad squandered the money. He built low-cost housing for 2 million people, pumped up energy subsidies for consumers, and pressed commercial banks to back projects that were not viable and were politically motivated. And he paid for all that by ordering the central bank to print money. The results: inflation of about 45 percent and a fear that economic collapse was imminent.

Even the development of nuclear technology, if it were genuinely about civilian needs, would make little economic sense. Iran’s electric power sector is driven by cheap domestic natural gas.

Iranian President Hassan Rouhani took office in August 2013 and overturned some of the policies of his predecessor. He slashed subsidies, boosted taxes and slowed the increase in money supply. Inflation has dropped to about a quarter of the previous rate.

Rouhani’s measures won him broad support, and not only from unemployed youths. Salehi-Isfahani, the Virginia Tech professor, says that even members of the Islamic Revolutionary Guards Corps, many of whom are just hitting retirement age, are worried about their pensions and want a stable economy. The guards’ pension fund was a major investor in the privatized national telecommunications company.

Rouhani also strengthened the economy by agreeing to the Joint Plan of Action to restart the nuclear talks. That has eased restrictions slightly on oil revenue and the auto sector. But his domestic finance measures have been just as important for the economy.

If sanctions were lifted, Iran’s economy could grow at 5 percent to 8 percent a year, Salehi-Isfahani estimates. But without a deal that lifts sanctions, Iran could hobble along.

“Ninety percent of sanctions are still in place,” he said. “It doesn’t mean sanctions are not effective. It means that a country like Iran doesn’t fall apart so easily. It has an industrial base. They find a way of producing what they need. They don’t grow . . . but that’s very different from collapse.”

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