Why is Rouhani backing off from those profiting from sanctions?

Is Rouhani's softer tone against those who've benefited from the sanctions on Iran a tactic to win them over — or is he just giving up?

al-monitor Iranian President Hassan Rouhani speaks after returning from the annual United Nations General Assembly, in Tehran, Sept. 29, 2015.  Photo by REUTERS/Raheb Homavandi.

Topics covered

sanctions, reformists, jcpoa, iran deal, iran, hassan rouhani

Nov 16, 2015

TEHRAN, Iran — Economists in Iran are encouraging the administration of President Hassan Rouhani to take a softer position on those who accumulated questionable wealth between 2005 and 2012, when the country enjoyed oil revenues totaling a record $700 billion — amid harsh sanctions. Indeed, some economists are now warning that capital flight will be exacerbated should the administration not allow this “new social class” to play a role in the Iranian economy.

The advice appears to have been heeded by Rouhani. In an Oct. 12 address in the northern province of Mazandaran, he moderated his previously harsh tone toward the “dealers of sanctions” — a term referring to the individuals and influential firms affiliated with military and political organizations that made astronomical profits while the country was under crippling economic sanctions.

During his visit to the northern city of Sari, the moderate president reassured the “dealers of sanctions” that they will not make a loss when the external pressure is removed. “I swear to God: You will not make a loss. You, too, will enjoy the benefits of the sanctions relief. Don’t worry, your business won’t become stagnant,” said Rouhani, obviously to those opposing the Joint Comprehensive Plan of Action — the historic July 14 deal with six world powers that it set to put an end to nuclear-related sanctions by early 2016.

Indeed, the remarks can be interpreted as a fresh attempt by moderates to calm the domestic political atmosphere, which has been tense after the hammering out of a diplomatic resolution to the 12-year-long nuclear dispute with the West. However, it could also be an indication that the Rouhani administration has failed to push back the “economic mafia,” and is now begging for the latter’s participation in the revival of the ailing Iranian economy.

Rouhani’s efforts to avoid an increase in capital flight, however, is not a new trend in post-revolutionary Iran. The establishment has increasingly altered its anti-capitalism ethos over the years, providing a safe haven for those loyal to the rulers to gain wealth. Formerly disapproved of “capitalists” are now publicly hailed for contributing to job creation. In this vein, Rouhani may now intend to take maximum advantage of billions of dollars of hidden capital to boost the lackluster economy.

Although there is no official estimate of the extent of the capital held by individuals and firms loyal to the previous government of President Mahmoud Ahmadinejad, Saeed Leylaz, a Tehran-based political and economic analyst, says the figure is hovering around $500 billion — well more than Iran’s entire nominal gross domestic product. In an interview with leading economic magazine Tejarat-e Farda, Leylaz claimed that “some 20% of the national wealth is owned by about 100,000 families.” He believes that the Rouhani administration is too weak to ignore this powerful group, and therefore has to come to a compromise with it, arguing that such huge capital could benefit society — regardless of who owns it. Leylaz and other like-minded Reformist economists say the role of the “dealers of sanctions” in the economy should be redefined, but are warning that the small community, if confronted, is powerful enough to organize destructive campaigns against the Rouhani administration.

Yahya Al-e-Eshaq, a former president of the Tehran Chamber of Commerce, shares these thoughts, and says certain state-linked firms should be allowed to continue business — but in a fair and competitive manner. “They must avoid rent-seeking, and their unlimited access to information must be denied,” he emphasized. This prescription would mean that people such as detained sanctions tycoon Babak Zanjani, currently on trial for fraud and economic crimes, should be freed — a decision that some believe would enable him to repay the $2.8 billion he is accused of pocketing during Ahmadinejad’s tenure. Zanjani is one of the middlemen who were allegedly co-opted by the previous government to circumvent oil sanctions in exchange for huge commissions. Leylaz says such businessmen must be freed and given another chance to repay their debts, arguing that putting them on trial would only scare capital.

However, as claimed by some media outlets, it appears that the Rouhani administration has found that stopping individuals engaged in fraud — some of whom are backed by military-related groups — is an effort that will fall in vain. Thus, it would be a better idea to focus on helping make the murky business environment more transparent by deregulating industries and boosting oversight.

If given the green light by Rouhani, these notorious firms can act more transparently and even be provided with the opportunity to create joint ventures with smaller private companies to finance major projects — a type of cooperation that has not yet materialized due to the fear that the real private sector feels from the influential state-linked firms.

Al-e Eshaq, the former head of the Tehran Chamber of Commerce, says the real private sector fears that the companies affiliated with political and military organizations abuse their influence and harm its interests. In this vein, it is argued that if the latter were not the case, the private sector would gladly forge partnership with state-linked firms, just as it has done with multinational investors. Indeed, the capital raised by consortiums consisting of Iranian private and state-linked firms could greatly address the government’s financial woes.

Regardless of why the Rouhani administration has taken a softer line on “dealers of sanctions,” it is a good idea to let them spend profusely on manufacturing, rather than trade and speculative activity. Yet, Rouhani and his team will in the coming years continue to face the challenge of how to adopt production-friendly policies. Indeed, the “new social class” has gotten used to easy money from rent-seeking, cheap loans and low tariffs as well as monopolistic and oligopolistic practices. Changing this habit won’t be easy.

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