China’s growing role in Middle East won’t solve Iran’s economic woes
Al-Monitor Pro Members
Dr. Bijan Khajehpour
Managing Partner, Eurasian Nexus Partners, Vienna, Austria
April 13, 2023
Iran’s geostrategic position means that its trade and economy will remain vulnerable to geopolitical shifts. These include regional realities, changes in West-Russia relations as well as West-China ties and shifts in international energy markets. Whether the net effect will be positive or negative will depend on Tehran’s policy responses to the current geopolitical climate. For example, as can be witnessed, Iran is positioned to benefit from China’s growing role as a trusted intermediary in Middle Eastern affairs. How far this process will continue will depend on the interplay between domestic, regional and international processes, but many believe that favorable geopolitical shifts won’t compensate Iran for the economic losses the country has suffered because of the failure to revive the nuclear deal. In the end, what the Iranian economy needs is sizable investments in the next decade and such investments will remain limited as long as Western sanctions persist.
- Geopolitics has historically been a determining factor in how Iran’s trade and economy have developed. Regional and international phenomena such global energy prices, conflicts between various powers and tensions resulting from Iran’s own and other powers’ security agendas have continuously overshadowed Iran’s ability to pursue a consistent development policy.
- In the past decade, geopolitical volatility has increasingly undermined global trade and economic development in general. In the case of Iran, geopolitical factors and risks continue to put pressure on its economy alongside issues such as domestic tensions, mismanagement and external sanctions - all producing an erosive outlook for the economy.
- What Iran’s economy needs more than anything else, is massive investment to generate new economic impetus and reverse the decline of the past decade. Alone the petroleum sector needs an investment volume of $250 billion in the next decade.
- In the past, Tehran’s responses to geopolitical shifts have usually been shaped based on a conspiracy mind and a confrontational approach to what it considers an anti-Iranian Western agenda. It is this attitude in the Raisi administration that has failed to steer the country towards reviving the nuclear deal (also known as Joint Comprehensive Plan of Action, or JCPOA) depriving Iran from its potential economic benefits. Many experts in Iran believe that a continuation of status quo will further marginalize Iran from the benefits of global trade.
- From Tehran’s perspective, the key geopolitical development is the rise of China as a regional peacemaker, accompanied by the decline of the United States. As the positive trajectory of Iran-Saudi relations indicates, Tehran could benefit from China’s growing role. Positive developments such as de-escalation in Yemen have both a positive psychological impact and allow Tehran to use its economic resources more pragmatically.
- On the regional level, another welcome development for Tehran is the visible decline in anti-Iranian policies among Iran’s Arab neighbors, especially the UAE. Many experts view this shift as a consequence of Washington’s declining influence in the Persian Gulf region. At the same time, Israel’s hardline government is preoccupied with its internal and external challenges which could both be seen as a threat or an easing of regional pressure by Tehran.
- In parallel, in what experts term the geopolitical consequences of the Ukraine war, Tehran is faced with new trade and economic opportunities that may compensate for some of the fallout caused by Western sanctions. These opportunities include a growth in the country’s revenues from transit up to growing trade interactions with regional as well as Eurasian markets.
- Amid all the geopolitical shifts, the core question will be whether these developments would be enough to reverse the negative trajectory of the Iranian economy?
Scenario 1: The sum total of the current geopolitical shifts will be to Iran’s detriment
If Iran’s strategists conclude that their focus on immediate neighbors and Eastern powers will be sufficient to attract the needed investment, the medium term impact of their strategic calculus will be negative. In other words, the continuation of Western sanctions, especially restrictions in the banking sector, will deprive Iran of the needed investment levels and will lead to further erosion of the Iranian economy. In parallel, undesirable economic conditions will intensify the existing brain drain and lead to additional costs to the country’s economy.
Scenario 2: There will be a tangible positive impact on the economy
The least likely scenario will be a positive impact on the economy as a result of massive investments by China, Russia and regional partners such as Saudi Arabia and the UAE. Evidently, if such investments emerge due to the mentioned geopolitical shifts, Iran could gradually move out of its current economic crisis and regain a certain degree of economic stability. However, such investments would need to be accompanied by technological and project management capacities that Tehran could attract from among the Iranian diaspora who would only return to the country, if there are overall improvements in the socio-economic and socio-political conditions. A factor that will further complicate this scenario.
The most likely scenario is that shifting geopolitical realities would only partly compensate for the negative impact of Western sanctions. Many experts, including former Iranian ambassador to France Abolghassem Delfi, believe that it is premature to think that the agreement with Saudi Arabia is a substitute for the lifting of Western sanctions. Many stakeholders in the business community have told Al-Monitor that they were hoping to see the revival of the JCPOA to be hopeful about the future of the economy. Notwithstanding, there is an appreciation that improved ties with Saudi Arabia and other regional powers will have a positive footprint. However, at this stage it is a psychological boost for Iran and not a path to a reversal of the country’s economic path. Therefore, various stakeholders will continue to push for de-escalation with the West and a policy that would reduce the negative impact of sanctions. Therefore, it is valid to argue that no short-term economic rehabilitation is in sight and the mentioned geopolitical developments will give Tehran some breathing period, before a new strategy will have to emerge to reduce tensions with the West, especially the United States.
Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - eunepa.com - a Vienna-based international consulting firm. He also sits on the board of the Europe Middle East Research Group. He is considered an expert on geopolitics of energy and the Iranian economy and energy sector.
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