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Iran’s membership in Asian security body won’t solve sanctions problem

While the news that Iran will gain full membership in the Shanghai Cooperation Organization is a psychological victory for the sanctions-hit country, it will take much more to achieve lasting economic impact.
A picture shows daily newspapers on sale at a kiosk in the capital Tehran, on Sept. 18, 2021. Conservative and reformist newspapers showed rare unity in welcoming results of a conference yesterday in Dushanbe, Tajikistan, where members of the Shanghai Cooperation Organisation endorsed Iran's future membership in the bloc.

The recent announcement that Iran would start the process of becoming a full member in the Shanghai Cooperation Organization was celebrated in the media. On the Iranian side, a heated public debate is taking place on what this development means and whether it was an achievement of the previous or the current administration. There are also debates about the potential economic upside of the step, which a number of parliamentarians have opined will open up new economic opportunities for Iran. Many inside and outside Iran may also see the development as more proof that Iran is pivoting East, but the key question is how this process will address the country’s highest priority: the economy.

In the absence of substantive policy shifts that could positively impact the economy, the administration of President Ebrahim Raisi has focused on “injecting positive news” into business and society. To put an economic spin on the development, upon his return from the SCO Summit in Tajikistan, Raisi criticized the government of former President Hassan Rouhani for “hinging vaccine purchases and SCO membership on the adoption of measures to exit the Financial Action Task Force (FATF) blacklist.” He is trying to create the impression that Iran has moved beyond the FATF hurdle and has achieved things that were considered impossible in the previous administration. However, Iran is still on the FATF blacklist and a failure to address that issue will limit Iran’s ability to benefit from any international agreement, including an SCO membership.

Raisi supporters will certainly continue to present the SCO-related developments in Tajikistan as a major foreign policy achievement to maintain the positive momentum. It is also expected that the competing factions and their media organs will exchange claims on credit for Iran’s membership, 15 years in the making. However, the agreement in Tajikistan was only the starting point of Iran’s admission process, which will take years. So, the victory does not have short-term practical consequences for the country’s economy.

Will there be an upside in the medium term?

According to the SCO’s secretariat, the main goals of the organization are “strengthening mutual confidence and good-neighborly relations among the member countries; promoting effective cooperation in politics, trade and economy, science and technology, culture as well as education, energy, transportation, tourism, environmental protection and other fields; making joint efforts to maintain and ensure peace, security and stability in the region; and moving toward the establishment of a new, democratic, just and rational political and economic international order.”

Once full membership is achieved, there will be opportunities to cooperate with other SCO members on a broad range of security-related issues. But while improved security parameters would help a country like Iran advance economic imperatives, a lot more is needed.

Consequently, the best way to analyze the real short- to medium-term impact of this emerging membership is to assess what Iran actually needs and what the SCO membership could offer.

The top priority for Iran is to rid itself of the severe economic impact of external sanctions, which explains why Raisi called on the SCO to “develop structures and mechanisms to fight sanctions as a group.” By referring to “sanctions and economic terrorism,” Raisi tried to tie Iran’s top priority with one of the SCO’s main goals. Raisi also stated, “Unilateral sanctions are not against only one country. As has become evident in recent years, sanctions have targeted more independent countries, especially members of the organization.”

Bundling sanctions and security is certainly an intelligent way of getting the SCO’s attention, but what realistically could be achieved would be a medium to long-term process of consultation within SCO to address the issue. No one would expect a quick remedy from the organization to address Iran’s current trade and financial bottlenecks caused by external sanctions.

Looking beyond sanctions, Iran needs productive investment and economic impetus. Nothing suggests that Iran’s SCO membership would compel the leading members — China, Russia and India — to go beyond what they are already doing for trade and investment with Iran. After all, the political will of governments will have a limited impact and investors and enterprises in these countries will be driven by commercial interests and legal feasibility, especially the impact of sanctions. 

The one institution that could offer Iran advantages is the SCO Interbank Consortium, which includes banks from member countries and focuses on providing funding for infrastructure projects, basic and high-tech industries, export-oriented sectors and social projects. Evidently, once a full member, Iran would also join the consortium and in due course secure some funding for its infrastructure projects. However, it will be a give and take and it will hardly add much value to the country’s need for investment with an immediate effect. Furthermore, similar to other development banks in which Iran is an active member, banking sanctions and FATF restrictions could impede any real benefit to the Iranian economy. One banking related aspect that will open new doors for Iran is the fact that SCO members are all working on developing central bank digital currencies with the objective of connecting them together. Once that network of digital currencies starts to operate, there will be new opportunities for transacting funds between the member states.

Finally, Iran needs export markets. In this matter, SCO membership won’t add much value either. Iran has already developed a trade strategy focused on immediate neighbors. Presently, China is Iran’s top trading partner, India among the top five and Russia one of the fastest growing trading partners. As such, Iran’s already existing free trade agreement with the Eurasian Economic Union is potentially more valuable with regard to export potential than a future membership.

All in all, there will be limited short- to medium term economic impact from the recent announcements regarding Iranian membership in the SCO — a view that a number of economic experts have also expressed. At the same time, the psychological impact on a country that has witnessed an array of negative developments due to the economic decline of the past few years may generate some positive momentum. However, the economic realities on the ground will catch up soon and remind the authorities that major policy shifts will be needed to achieve a positive outcome for the Iranian economy.

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