How Eased Sanctions Bring Reform in Iran

 /  Dec. 14, 2017, 10:02 p.m.

Hassan Rouhani

On March 6, 2016, in an apparent victory for Iran’s reform-minded president, Iranian billionaire Babak Zanjani was sentenced to death. A few years earlier, when sanctions against Iran were at their height, Zanjani had made himself one of the most powerful men in Iran by helping the hard-line militantly anti-West Revolutionary Guard (IRGC) become the driving economic power of the country. When President Hassan Rouhani came into power in 2013 with the determination to reform the economy, Zanjani was arrested on corruption charges. The arrest and death sentence of one of the IRGC’s foremost allies marked the beginning of Rouhani’s effort to undermine its grip on Iran’s economy.

Though primarily a branch of the military, the IRGC gained economic clout because of the nuclear sanctions, as it was able to evade sanctions while legitimate businesses could not. As a result, it gained control of an estimated 25 percent of the economy indirectly through subsidiaries and trusts that own businesses, the largest being a construction firm called Khatam-al Abiya, which employs approximately 1.5 million Iranians. These organizations, especially Khatam-al Abiya, benefit from large government infrastructure contracts which allow the IRGC to maintain a grip on the Iranian economy.

Since his election, Rouhani has been promising to bring change by reforming and legitimizing the Iranian economy. He is determined to open the Iranian economy to foreign investment, promote free competition, and diversify the oil-dependent economy. And, as displayed in his personally seeing to Zanjani’s downfall and his recent fabrication of charges to arrest staunch IRGC supporters, Rouhani will not let anything get in his way. With the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran Nuclear Deal, Rouhani is able to achieve his goal and more legitimate businesses now have a chance at succeeding, as sanctions on them have been lifted. Though the deal was signed in 2015, it is only recently that his effort to reintegrate Iran into the world economy has been able to pick up steam.

Foreign investors are returning to Iran, and thus are now building up the ability of Iran’s economy to reintegrate with the West and stand without the IRGC. Last year, Iran was able to bring in foreign direct investment in the oil and gas sector. In November 2016, the French oil firm Total signed a $4.8 billion agreement to work with the Chinese state-owned oil company CNPC to invest in the development of Iran’s South Pars gas field. When the sanctions were still in effect, Khatam-al Anbiya completely controlled the South Pars oil and gas region because its foreign competitors could not do business in Iran. This is the first time a Western firm had invested in Iran’s oil sector since the sanctions were instituted. In December 2016, this shift of economic control away from the IRGC continued when the multinational oil and gas company Royal Dutch Shell signed an agreement to work with Iran to develop its oil fields near the Iraqi border. In December 2016, Rouhani awarded a major shipping project to a South Korean firm over Khatam-al Abiya, further demonstrating the IRGC’s loss of clout.

Rouhani has even worked with the IRGC to lessen its involvement in the economy by limiting its power to only certain broader development projects. In reforming and opening the economy to the West, Rouhani is sapping the economic clout of the IRGC.

Though Ayatollah Khamenei, Supreme Leader of Iran, originally laughed at Rouhani’s goal to reform Iran, now he is finding unusual common ground with the President. Khamenei repeatedly tried to stop the negotiations leading up to the nuclear deal before he eventually publically supported it. Until recently he was hostile to further economic integration with the West, which he viewed to be an opening to US infiltration. Now, Khamenei is supporting Rouhani’s efforts to reform the economy because he sees the practical necessity of foreign investment, which can only be achieved by decreasing the IRGC’s grip on the economy; foreign investors are unwilling to do business in a country where a corrupt military group has monopolistic control over large sectors of the economy. And because the IRGC is in Khamenei’s domain of power, not Rouhani’s, his support is crucial to the reform effort.

The JCPOA gave Rouhani the ability to begin prying the Iranian economy out of the IRGC’s control. Despite the challenges of corrupt IRGC-owned businesses, inflation, oil dependence and sanctions, Iran has developed strong industrial, service, and agricultural sectors. If Iran’s economy could shake off the IRGC’s corruption and attract foreign investment through increased transparency, the economy could flourish which would increase the quality of life of the Iranian people. A less powerful and wealthy IRGC would also mean less funding for Shi’a extremist terrorism throughout the Middle East. But now, President Trump is threatening to tear up the JCPOA and reinstate sanctions against Iran. This would undermine Rouhani’s push to reform Iran’s economy and would allow Khamenei to push the Revolutionary Guard and Iran in a more isolationist direction. Though Rouhani showed solidarity with the IRGC after Trump threatened to designate it as a terrorist organization and reinstate sanctions, he is reluctant to say that such statements violate the JCPOA. However, if broad sanctions—in direct violation of the JCPOA—against Iran were to be announced, Rouhani’s effort to take away the economic power of the IRGC would fall apart. Legitimate companies would lose the ability to conduct business in Iran, which would once again empower the IRGC and Iranian hardliners.

Claire Potter is a Staff Writer for The Gate. The image featured in this article is licensed under the Creative Commons. The original image can be found here.

Claire Potter

Claire Potter is a first-year potential political science major at the University of Chicago interested in journalism and international relations. On campus, she is a member of the Women in Public Service Project and is a Fellows Ambassador at the Institute of Politics. In her free time, she enjoys hiking, reading, and exploring the city.


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