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Geopolitics

What A Nuclear Deal Could Mean For Iran's Broken Economy

Ordinary Iranians are hoping for a speck of economic relief and nothing more, if Tehran can sign a nuclear deal with world powers that could alleviate longstanding sanctions.

Photo of traffic on a road in Tehran

Red light on Tehran's Mousavi Street

Roshanak Astaraki

-Analysis-

As the fate of talks on Iran's nuclear activities remains uncertain, millions of Iranians are hoping, cautiously, that a deal with the West could help alleviate a range of socio-economic problems. Some economic agents hope a deal to renew the 2015 nuclear pact will boost business, travel and spending. Others insist a no-deal is still better than prolonged uncertainty. The question remains, even with a deal that will soften the sanctions on Iran, can Iranians expect even a measure of prosperity in an economy that is restricted, dysfunctional and beset with opaque procedures and massive cronyism?

For over 20 years, the Iranian regime's cat-and-mouse game with the world over its disconcerting nuclear program, suspected money-laundering and support for regional militias and hitmen, have earned it a range of sanctions on Iran's economy and financial system. The regime has furthermore refused to sign the FATF or international pact to block terrorist and criminal finances.


While business sectors have recently become hopeful that a deal is in sight, which could ease many transactions, this is unlikely to have a significant impact on ordinary Iranians' livelihoods, even in the long term.

In recent years, Iran could not legally sell crude oil, its chief export, which it has partly stored inside the country or in hired tankers in countries like China or Malaysia. If sanctions were lifted, it would in principle be ready to place around 100 million barrels of crude oil and liquefied gas onto world markets. The proceeds would certainly relieve a cash-strapped government, but will there be buyers, and can Iran swiftly find itself a niche in the markets?

Backward oil industry, and dynamic markets

While Iranian officials blame sanctions for the massive reduction in oil and gas revenues, Iran's energy sector rather shows a failure over decades to invest in updating production and refinement capacities. The country cannot even meet its own gas needs, so sanctions aside, a dilapidated and indebted energy sector can barely expect to nab market shares from dynamic rivals like Saudi Arabia, Qatar and Iraq.

Regime officials intermittently give contrasting, even dubious, figures on the state of the energy sector. Early this year, President Ibrahim Raisi claimed that in the second half of 2021, the country signed oil deals worth U.S. $14 billion. Days later, the Oil Minister Javad Owji bumped the figure up to "more than $16 billion," and a month later, the National Iranian Oil Company pulled it down to a little over $9 billion.

These years, while Tehran was busy meddling in regional politics, countries like Qatar and Saudi Arabia pumped a part of their massive revenues into their oil and gas industries, for which they are reaping the compounded benefits. Saudi Arabia earned more than U.S. $115 billion from oil in the first six months of 2022. Even Iraq, a country beset with war and civil and political turmoil since 2000, earned some $61 billion exporting crude oil in the first six months of this year.

Iran's economic growth in the past decade has hovered around zero, after posting negative rates in the decade after 2000. In the 1990s, without nuclear sanctions, typical growth rates were around 5% a year. Even after the 2015 pact that reduced its economic isolation, it failed to boost productive activities — though not spending or inflation. The latest inflation figure given by the state statistics agency was 55% a year, though independent observers suspect the rate is higher.

Photo of Iran's Minister for Foreign Affairs Mohammad Javad Zarif holding a draft of the nuclear agreement in Vienna Javad Zarif

Iran's former Minister for Foreign Affairs Mohammad Javad Zarif holding a draft of the nuclear agreement in Vienna back in 2015

Mehdi Ghassemi/DPA/ZUMA

Anything for ordinary Iranians?

Iranians were delighted with the alleviation of sanctions after the first nuclear pact in 2015, but with the dismal political and economic experiences of recent years, do not expect a revived deal to entail significant liberalization or palpable benefits. Iran's regime has wasted billions of dollars on expansionism, repeatedly suppressed peaceful protests and deepened an already marked rift between state and people. Talk of another pact brings little joy to ordinary folk.

After the first pact, very little of the monies the regime earned or recovered were spent on projects serving the public interest. A lot of it seems to have vanished, as far as Iranians can discern. The last government, headed by President Hasan Rohani, claimed it "revived" the economy somewhat in the years of the nuclear pact, but beyond a revival of oil exports, there was little movement in the real economy, beyond hydrocarbons. Which is why, as soon as U.S. President Donald Trump ditched the multilateral pact in 2018, the economy slid back into its "natural" state of stagflation! It is unlikely the Raisi government will spend any windfall earnings more productively than its predecessors.

Would a nuclear deal bring Iranians back?

His government owes the Central Bank billions of dollars, some of which was inherited from the Rohani presidency. In this an eminently opaque system, nobody knows exactly how much is owed, though some estimates put it in excess of Saudi Arabia's first-semester oil earnings. In spite of its falling revenues, the government recently raised pensions.

Perhaps part of the problem with a cash injection in the economy is the ineffective supervision of its expenditure. The budget for the year 2022-23 foresees 40% of earnings from the sale of 1.4 million barrels of crude oil to be paid to the National Development Fund, an organ under the orders of the Supreme Leader. His decisions are not subject to parliament scrutiny.

And the country has its ideological expenses, like paying foreign militias and allies. According to a former lawmaker, Heshmatollah Falahatpisheh, so far Iran has paid U.S. $20-30 billion to the ruler of Syria, Bashar al-Assad. An estimate from the United Nations put its annual expenditures in Syria in the civil-war years after 2011 at six billion dollars.

Self-sanctions

The Iranian economy's structural obstacles are effectively another set of sanctions, as obstructive as the foreign sort. Many economists claim these "self-sanctions" may have harmed economic activity even more. These problems include cronyism and murky monopolies that restrict supplies and raise costs for ordinary businesses. Removing sanctions will not lead to competitive business practices, or cut bureaucracy inside Iran.

Could it reverse the flow of capital leaving the country? Iranians may have taken out up to U.S. $10 billions' worth of hard currency in the Persian year to late March 2022, in spite of restrictions on all money flows. Millions of trained and educated Iranians have left the country in the past decade. Would a nuclear deal bring them back?

Beside the pact, Iran would have to sign the FATF, or it cannot hope to return to international financial circuits. There is a mountain of economic woes in Iran, unrelated to Western sanctions. A pact, if signed, is likely to relieve the pressure on the regime, but is it enough to revive a dormant economy that must sustain millions of workers and households? Right now, the only ones rubbing their hands at the prospect of the "economic opening" being touted in Tehran are the wheelers and the dealers and Revolutionary guards with a finger in every pie and on the pulse of every lucrative activity in a dilapidated Iran.

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Geopolitics

Smaller Allies Matter: Afghanistan Offers Hard Lessons For Ukraine's Future

Despite controversies at home, Nordic countries were heavily involved in the NATO-led war in Afghanistan. As the Ukraine war grinds on, lessons from that conflict are more relevant than ever.

Photo of Finnish Defence Forces in Afghanistan

Finnish Defence Forces in Afghanistan

Johannes Jauhiainen

-Analysis-

HELSINKI — In May 2021, the Taliban took back power in Afghanistan after 20 years of international presence, astronomical sums of development aid and casualties on all warring sides.

As Kabul fell, a chaotic evacuation prompted comparisons to the fall of Saigon — and most of the attention was on the U.S., which had led the original war to unseat the Taliban after 9/11 and remained by far the largest foreign force on the ground. Yet, the fall of Kabul was also a tumultuous and troubling experience for a number of other smaller foreign countries who had been presented for years in Afghanistan.

In an interview at the time, Antti Kaikkonen, the Finnish Minister of Defense, tried to explain what went wrong during the evacuation.

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“Originally we anticipated that the smaller countries would withdraw before the Americans. Then it became clear that getting people to the airport had become more difficult," Kaikkonen said. "So we decided last night to bring home our last soldiers who were helping with the evacuation.”

During the 20-year-long Afghan war, the foreign troop presence included many countries:Finland committed around 2,500 soldiers,Sweden 8,000,Denmark 12,000 and Norway 9,000. And in the nearly two years since the end of the war, Finland,Belgium and theNetherlands have commissioned investigations into their engagements in Afghanistan.

As the number of fragile or failed states around the world increases, it’s important to understand how to best organize international development aid and the security of such countries. Twenty years of international engagement in Afghanistan offers valuable lessons.

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