President Hassan Rouhani has struck a grand electoral bargain with Supreme Leader Ali Khamenei and with the Iranian Revolutionary Guard Corps (IRGC) leadership, aimed at securing his re-election in the approaching May 2017 elections. In return, he has agreed to cut the IRGC and Khamenei in on all the pending economic deals that he and his economic minister and oil minister are trying to secure with foreign investors.
Ultimately, Rouhani’s deal aims to co-opt the existing “deep state” apparatus into his reform agenda during his second term as president. It is a dangerous game he is attempting, but it is probably the only realistic option available. Between the IRGC and the Supreme Leader, almost all of the Iranian economy is controlled. At the same time, Rouhani is under immense foreign pressure to carry out reforms that conform to international standards of financial transparency, as a precondition for Iran luring in urgently-needed direct foreign investment.
One month after next year’s presidential elections, the first big test of Rouhani’s gambit will play out, when the Paris-based Financial Action Task Force (FATF) meets to review Iran’s status as a blacklisted nation (along with North Korea). International investors will be closely watching that meeting to determine if now is the time to get in on investment opportunities, based on whether the Central Bank of Iran has succeeded in reforming counter-terrorism financing bans.
President Rouhani has two most trusted allies in his cabinet, both of whom have been under persistent attack from hardline factions in the Majlis and in the IRGC. Foreign Minister Javad Zarif, who was the architect of the P5+1 deal, was forced to appoint Hossein Amir-Abdollahian, a close ally of General Qassem Suleimani – the head of the IRGC’s Quds Brigade – as his Deputy Foreign Minister for Arab and African Affairs . Amir-Abdollahian was the IRGC’s eyes and ears inside the protracted negotiations with the P5+1 countries. In June 2016, immediately after the partial lifting of sanctions, Zarif fired his deputy. But Amir-Abdollahian was subsequently hired as the special adviser to the Speaker of the Majlis, Ali Larijani. On October 2, Zarif was called before the Majlis and pilloried over his dealing with foreign enemies.
Rouhani’s other trusted ally, Oil Minister Bijan Zangeneh, has likewise been assailed by the IRGC for his efforts to establish a uniform Iran Petroleum Contract to lure in foreign investors to rebuild the oil sector.
The most contentious reforms, demanded by the FATF in Paris, involve the Central Bank of Iran, which was blocked during the Ahmadinejad presidency from exerting any control over the vastly expanded shadow banking system. Recently, the Central Bank Governor Valiollah Seif introduced a bank reform bill, formally titled “The Central Bank and Usury-free Banking Reform Bill,” which imposed Central Bank controls and other regulations on the 7,000 unlicensed credit and financial institutions (UFIs) opened during the Ahmadinejad period. The Central Bank has also imposed a 15 percent cap on interest rates and banned the UFIs from offering higher rates to lure funds out of the regulated banking system. The UFIs are dominated by the Khamenei-IRGC circles and have been cited by the FATF as centers for terrorist financing and money laundering.
Rouhani has an ambitious agenda of additional economic reforms, none of which can even be launched before next May’s presidential elections. Minister of Financial and Economic Affairs Ali Tayebnia (another ally) has proposed to revolutionize the dysfunctional system of public subsidies, which go to 90 percent of the Iranian population and have no positive impact on boosting the productivity of the Iranian economy. Those subsidies amount to $13 billion a year. Rouhani and his team hope to reduce those subsidies and reserve them for the poor; the rest of the money could be placed into development funds for infrastructure projects and other investments aimed at boosting the overall productivity of the economy.
To accomplish any of these changes, Rouhani needs to secure the backing of Khamenei and the IRGC. He has taken several steps to secure that de-facto support. The first new oil contract issued since the signing of the P5+1 deal went to the Persia Oil and Gas Industry Development Company, owned by Supreme Leader Khamenei through his son’s conglomerate. The Oil Ministry has named Khatam-al Anbia, the vast IRGC-owned conglomerate, as one of only eight Iranian companies that can partner with foreign oil companies in oil and gas exploration and development contracts. The first new tenders for oil and gas development were announced on October 17; all eyes will be on that process. Some foreign oil giants, including France’s Total, have expressed concern about the continuing grip of the IRGC over the Iranian energy sector, but Rouhani and his allies see no alternative to maintaining that status quo.
While European and American investors may shy away from investments so long as the Principalist-IRGC domination of the Iranian economy is perpetuated, other important nations have indicated that they are ready to deal. India sees the IRGC as allies and is more than ready to expand investment in Iran, regardless of the political internal dynamics. IRGC companies are dominant in the Chabahar port project being bankrolled by India. And a large Chinese ex-patriot community living in Iran a buffer for investments with IRGC entities by Chinese investors. The Chinese are comfortable with Iran’s IRGC-dominated State Owned Enterprises (SOEs) because the Chinese economy, too, is dominated by SOEs with heavy participation from the Peoples Liberation Army (PLA).
The Obama Administration has also weighed in to support Rouhani’s risky grand electoral bargain. This week, the US Treasury Department loosened sanctions on Iran significantly, allowing foreign countries to make business deals with companies and individuals who are on the US sanctions lists. This lifting of the secondary sanctions is monumental. The same set of rules allows foreign companies, including foreign branches of American corporations, to deal with Iranian financial institutions, including two Khamenei-linked banks, Bank Sepah and Sepah International, which are both under United Nations sanctions.
President Obama has staked so much of his legacy on his deals with Iran that he has aligned the United States with Rouhani’s risky gambit. For Obama, obsessed with his legacy, the plan is a win-win proposition. The impact of the removal of key sanctions will not be felt until well after he has left office. He is betting that Rouhani’s re-election next year, even if it comes at the cost of surrendering power to what the Council on Foreign Relations has called the IRGC’s “Iranian Industrial Complex,” will be seen as a feather in his legacy cap.