May 29, 2024
Economy

How clerics crippled the Islamic Republic


Biden did not lift economic sanctions but he put a coherent offer on the table to do so in exchange for Iran’s nuclear compliance, says Macaire. “There was apparently an understanding of Iran backing down a bit on its nuclear programme in return for tacit acceptance of more oil exports.”

But the toll of sanctions was about much more than oil and the issues have been compounded by massive political mismanagement.

“The real problem with the Iranian economy is that it is completely opaque. There’s very little accountability and certainly no transparency,” Ansari says.

“The economy is essentially run by a bunch of non-accountable religious foundations who bear no relation to the regular government.”

Foreign businesses cannot invest because they are not able to look at company accounts, he adds. “Nobody in Iran invests in Iran.”

Under President Akbar Rafsanjani, who ruled from 1989 to 1997, and Mohammad Khatami, who took over until 2005, the economy was fairly well run, according to Ansari. But this changed under President Mahmoud Ahmadinejad, who was in charge from 2005 to 2013.

“Ahmadinejad was the one who transferred a lot of assets away from regular government and into the more revolutionary organs of government between 2005 and 2013. The country has never really recovered from that,” Ansari says.

Ahmadinejad abolished the organisations which audited the economy and handed many assets and financial legal power to the Supreme Leader, Ali Khamenei, and the Revolutionary Guards (IRGC). Today, around 40pc of Iran’s economy is estimated to be effectively under the control of the IRGC in some form.

This opaqueness was a major block to international investment even during the years of the JCPOA, Ansari says. Although sanctions were lifted, the US had banned business relations with the IRGC and it was impossible for businesses to navigate this. 

“There is no Companies House in Iran,” he says. “Nobody knows what is going on. It is very difficult to do your due diligence.”

From the mid-1990s to 2012, annual investment in Iran more than tripled. In the decade after 2012, it halved. This means that Iran’s manufacturing sector, the lifeblood of its economy, is on the brink of decline, Batmanghelidj says.

Iran’s economy managed to stay afloat despite Western sanctions because of the resilience of its non-oil manufacturing sector, which makes up 32pc of Iran’s GDP, nearly double that of the oil and gas sector, says Batmanghelidj.

The sector survived by adapting. Iran shifted from European to Chinese suppliers, or sourcing goods through Turkey and the UAE. Firms build up stocks to weather future shocks. Companies began to build more machinery at home. This is how Iranian GDP returned to growth.

But sanctions killed investment and technological advances. In the decade up to 2012, Iranian industrial production was growing at an average rate of 13pc per year. In the following decade, growth averaged just 1pc per year.

“When it comes to economic development, standing firm is falling behind,” Batmanghelidj says.

Iran Khodro, the largest state carmaker, is still producing a Mercedes Benz truck that was designed 62 years ago after a new deal with Daimler collapsed when Trump withdrew from the JCPOA.

Writing for the Financial Times in March 2022, Iran’s finance minister Ehsan Khandouzi said the government would reverse the “recent mushrooming” in the government’s budget by increasing tax revenues and government investment.



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