While Iran stands to gain much from the removal of US sanctions placed on it, so does India, which will watch the Iran-US negotiations closely.
The incoming Iranian President, Ebrahim Raisi, who was sworn into office on 5 August, faces many challenges. For one, the country’s economy is in an abysmal state. While for two years it witnessed negative growth, for 2020-21 it is estimated that Iran will grow at 1.5%.
The inflation rate for three successive years beginning 2018 has been over 30 per cent and estimated at over 40 per cent for 2021. Food prices in urban centres have risen by 70 per cent and 80 per cent for specific commodities such as cooking oil, milk, sugar, imported rice and eggs.
Recently, there have been widespread protests due to water shortages, resulting in the deaths of a number of protesters. While the protests began in the south-western province of Khuzestan, they soon spread to other provinces, including Lorestan. In June 2021, livestock farmers held protests in a number of Iranian provinces including Esfahan, Fars, Yazd and Khorasan Razavi, demanding lower prices for animal feed and higher prices for their products.
Some Reasons For Iran’s Current Economic Plight
Iran’s most recent economic woes began with the Trump Administration’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the imposition of US sanctions. Even during his last weeks in office, Trump, under pressure from Gulf Co-operation Council (GCC) countries and Israel, followed a course that his Secretary of State, Mike Pompeo, called a ‘maximum pressure policy’.
The Covid-19 pandemic has only exacerbated Iran’s challenges. Some of the direct outcomes of the sanctions are a drop in Iran’s oil exports (between 2018-19 oil exports fell by 90 per cent), and the rise in prices of commodities. While the incoming President laid out his vision for reviving the country’s economy during the election campaign. some of his plans seem unrealistic, given Iran’s fiscal challenges. While some of the issues he has emphasised are increased subsidies for health care and generation of jobs, so far there has been little emphasis on revenue generation in his vision.
Top Iranian economists have provided suggestions for pulling Iran out of the current mess. The economists identified priority areas that Raisi needs to focus on, including financial resources, energy, natural resources, the environment and public services. The economists also informed Raisi that he needed the advice of economists with varied ideological leanings and that Iran could not afford isolationism of any sort. The economists, in this context, suggested that there is no escape from negotiating a deal with the US, since without the removal of sanctions, the country’s economy would be hamstrung.
One of the biggest advantages for Tehran, if the US were to remove its sanctions, would be Iran’s ability to raise oil exports but also revive other trading relations. The Biden Administration had said that it was willing to remove sanctions on certain sectors and in June 2021, sanctions on certain officials and certain energy companies were removed.
The US’s Iran Policy and the China Factor
It is noteworthy that the US is toying with the idea of imposing sanctions on China’s purchase of oil from Iran, in case Raisi demands that the JCPOA negotiations, which have been going on in Vienna since April, are restarted.
The recent attack on an Israeli-managed oil tanker has also been blamed upon Iran by not just Israel, but also the US and the UK. It is not just Israel which has warned of retaliatory action, but the US as well.
It is likely that Raisi will be a tougher negotiator than the current President, Hassan Rouhani, but given Iran’s current economic situation, any harsh economic measures by the Biden Administration or other retaliation for the attack on the oil tanker, against Iran will be counter-productive and only raise anti-US sentiment in Iran, thereby leaving little space for Iran to actually negotiate with the US. It would also push Iran closer to China. In recent years, one of the reasons for growing Tehran-Beijing relations has been the Trump Administration’s Iran policy. A strong example of that was the 25-year strategic agreement that both countries signed in March 2021. The agreement provided for US$400 billion ($546 billion) worth of Chinese investment in Iran and also sought to strengthen security ties between both countries.
If the US and Iran can find common ground, the removal of sanctions will enable Iran to revive its economic relations with a number of countries, which will boost its economy. That will ensure that Iran is not totally dependent upon China. There has been opposition from some quarters against the 25-year agreement signed by Iran and China, including from former Iranian President Mahmoud Ahmadinejad, who called the agreement a ‘suspicious secret deal’.
One country with which Iran’s ties could witness an upswing due to historical linkages and growing convergence in recent years is India. While, after the Trump Administration’s withdrawal from the JCPOA, India has been cautious about economic ties with Iran, it has paid closer attention to them since the Biden Administration took over. Indian Foreign Minister S. Jaishankar met Raisi en route to Moscow and also spoke to Iranian Foreign Minister Javad Zarif. India has also been showing greater urgency with regard to the development of the Chabahar Port project in recent months.
For Iran-India economic ties to improve, New Delhi needs to follow an independent policy and also de-hyphenate its ties with Iran from Tehran-China ties. There is talk of China joining the Chabahar Project. India also needs to put forward its economic and strategic interests in Iran categorically.
In conclusion, the revival of Iran’s economy will depend upon a number of factors. First, the incoming Iranian president needs to follow a flexible foreign policy. Second, Biden should not fall into the trap of following a “maximum pressure” approach vis-à-vis Iran, due to the influence of countries like Israel.
India, like many countries will closely follow the trajectory of Iran’s economy and hope that the sanctions placed on it are removed at the earliest, so that New Delhi can revive its economic links, including oil imports, and accelerate work on the Chabahar Project.