Geopolitics

As Iran's Economy Tanks, Leaders Remain Defiant

The leaders of the Islamic Republic say the economy will soon improve. But the numbers — the result of sanctions but also decades of economic mismanagament — paint a far more dismal picture.

In Tehran on Oct. 10
In Tehran on Oct. 10
Roshanak Astaraki

-Analysis-

While Iranian officials trumpet the country's strength abroad, its economy continues to tailspin. And yet, rather than sound the alarm, Supreme Leader Ali Khamenei is sending a much different message. Sanctions on Iran, he recently said, will "make the economy truly resistant."

Khamenei acknowledged that people are living in difficult conditions but suggested that things will improve if "officials work day and night" and state management is "strong, comprehensive and untiring." Rather than look abroad, he added, Iran needs to focus on domestic production and stop being distracted "with the noises made by the louts controlling the American people."

The supreme leader is not the only official whose comments are unrelated to realities. Just one day after Khamenei's speech, President Hasan Rouhani said that Iran's economic conditions were better than Germany's. He also vowed that things will improve within months, despite his government's own negative numbers on exports and a worsening trade balance.

Iran needs to focus on domestic production.

It's unclear right now which productive foundations or management skills could activate such improvements. Iran's vast oil revenues have been pumped into the economy for 40 years now, though not to boost production so much as to meet expenditures, pay for the regime's ideological goals or to be pocketed by cronies, insiders and so-called "saboteurs."

Four decades of corruption and mismanagement have destroyed economic foundations in industry, production, farming and trade. Add to these the impact of sanctions targeting the country's primary source of revenue (crude oil exports), and the result is that the Iranian leadership has nothing left to do but wait — for the United States presidential election on Nov. 3.

With rising inflation and despondent declarations by the head of the Central Bank, Abdolnaser Hemmati, it is not clear how Iran's top leaders can entertain prospects of boosting production and thwarting the U.S.

Hemmati visited Iraq recently for the first time in four months. The stated purpose was to release "startling sums' of Iranian money blocked in Iraq. The visit, however, proved fruitless. Repayment, he explained, has been hindered by "complicated banking issues between the two countries."

Iranian President Hassan Rouhani speaking in Tehran on May 27, 202 — Photo: Iranian Presidency/ZUMA

Iraqi officials later confirmed this and declared that Iran could use the money to import basic goods not subject to international sanctions, like food and medicines.

Foreign Minister Javad Zarif made his own cap-in-hand visit — in his case to China — to release blocked funds there. But the man the regime terms its "general of diplomacy" also returned with nothing more than vague promises.

Iran used to earn more than $100 billion in crude sales and a few billion dollars in non-oil exports. Now it is begging China and Iraq for a few billion. The blocked money is valued at around $40 billion, and Iran has been making lucrative concessions to these states. Even so, those governments hesitate to set up payment mechanisms.

The Tehran-based business paper Jahan-e San'at reports that China is blocking $20 billion in Iranian money, and that India ($7 billion), South Korea ($6 billion), Iraq ($2 billion) and Japan ($1.5 billion) are doing so as well. Iraq also owes the Islamic Republic money for gas and electricity purchases that are not being paid because of sanctions on Iran.

Iran used to earn more than $100 billion in crude sales. Now it is begging China and Iraq for a few billion.

Meanwhile, the government insists that it has been injecting $50 million a day into Iran's forex market to shore up the local currency, which has been steadily depreciating against the U.S. dollar. But specialists say the government is doing nothing of the sort with exchange rates.

Some believe Rouhani's economic team has effectively abandoned the economy in recent months, and with its coffers empty and elections on the horizon, implementing its own, extreme version of laissez-faire economics.

Ayatollah Khamenei likes, in turn, to present a rational and calculating picture of the state and its decision-making apparatus. And yet, this same state cannot control the price of staples like eggs. Production has been dormant for years, and sectors like farming and industry are effectively bankrupt.

The regime that vowed to make Iran into a "great power" has yet to bridge a yawning gap between its strategic and economic ambitions, on the one hand, and its productive capabilities and elementary management skills, on the other.

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Geopolitics

Erdogan And Boris Johnson: A New Global Power Duo?

As Turkey fears the EU closing ranks over defense, Turkish President Erdogan is looking to Boris Johnson as a post-Brexit ally, especially as Angela Merkel steps aside. This could undermine the deal where Ankara limits refugee entry into Europe, and other dossiers too.

Johnson and Erdogan in NYC on Sept. 20

Carolina Drüten and Gregor Schwung

-Analysis-

BERLIN — According to the Elysée Palace, the French presidency "can't understand" why Turkey would overreact, since the defense pact that France recently signed in Paris with Greece is not aimed at Ankara. The agreement covers billions of euros' worth of military equipment, and the two countries have committed to come to each other's aid if they are attacked.

Although Paris denies this, it is difficult to see the agreement as anything other than a message, perhaps even a provocation, targeted at Turkey.

Officially, the Turkish government is unruffled, saying the pact doesn't represent a military threat. But the symbolism is clear: with the U.S., UK and Australia recently announcing the Aukus security pact, Ankara fears the EU may be closing ranks when it comes to all military issues.

What will Aukus mean for NATO?

Turkey has long felt left out in the cold, at odds with the European Union over a number of issues. Yet now President Recep Tayyip Erdogan is setting his sights on another country, which also wants to become more independent from Europe: the UK.

Europe's approach to security and defense is changing dramatically. Over the past few months, while the U.S. was negotiating the Aukus pact with Britain and Australia behind the EU's back, a submarine deal between Australia and France, which would have been worth billions, was scrapped.

The EU is happy to keep Erdogan waiting

Officially, Turkey is keeping its cards close to its chest. Addressing foreign journalists in Istanbul, Erdogan's chief advisor Ibrahim Kalin said the country was not involved in Aukus, but they hope it doesn't have a negative impact on NATO. However, the agreement will have a significant effect on Turkey.

"Before Aukus, the Turks thought that the U.S. would prevent the EU from adopting a defense policy that was independent of NATO," says Sinan Ülgen, an expert on Turkey at the Brussels think tank Carnegie Europe. "Now they are afraid that Washington may make concessions for France, which could change things."

Macron sees post-Merkel power vacuum

Turkey's concerns may well prove to be justified. Outgoing German Chancellor Angela Merkel always argued for closer collaboration with Turkey, partly because it is an important trading partner and partly because it has a direct influence on the influx of migrants from Asia and the Middle East to Europe.

Merkel consistently thwarted France's plans for a stricter approach from Brussels towards Turkey, and she never supported Emmanuel Macron's ideas about greater strategic autonomy for countries within the EU.

But now she that she's leaving office, Macron is keen to make the most of the power vacuum Merkel will leave behind. The prospect of France's growing influence is "not especially good news for Turkey," says Ian Lesser, vice president of the think tank German Marshall Fund.

Ankara fears the defense pact between France and Greece could be a sign of what is to come. According to a statement from the Turkish Foreign Ministry, the agreement is aimed "at NATO member Turkey" and is damaging to the alliance. Observers also assume the agreement means that France is supporting Greece's claims to certain territories in the Mediterranean which remain disputed under international law, with Turkey's own sovereignty claims.

Paris is a close ally of Athens. In the summer of 2020, Greece and Turkey were poised on the threshold of a military conflict in the eastern Mediterranean. Since then, Athens has ordered 24 Rafale fighter jets from France, and the new pact includes a deal for France to supply them with three frigates.

Photo of French President Emmanuel Macron and Greek Prime Minister Kyriakos Mitsotakis on September 27 in Paris

French President Emmanuel Macron and Greek Prime Minister Kyriakos Mitsotakis on September 27 in Paris

Sadak Souici/Le Pictorium Agency/ZUMA

Erdogan’s EU wish list

It's not the first time that Ankara has felt snubbed by the EU. Since Donald Trump left the White House, Turkey has been making a considerable effort to improve relations with Brussels. "The situation in the eastern Mediterranean is peaceful and the migrant problem is under control," says Kalin. Now it is "high time" that Europe does something for Turkey.

Erdogan's wish list is extensive: making it easier for Turks to get EU visas, renegotiating the refugee deal, making more funds available to Turkey as it continues the process of joining the EU, and moderniszing the customs union. But there is no movement on any of these issues in Brussels. They're happy to keep Erdogan waiting.

Britain consistently supported Turkey's ambition to join the EU

Now he is starting to look elsewhere. At the UN summit in September, Erdogan had a meeting with British Prime Minister Boris Johnson at the recently opened Turkish House in New York. Kalin says it was a "very good meeting" and that the two countries are "closely allied strategic partners." He says they plan to work together more closely on trade, but with a particular focus on defense.

 Turkey's second largest export market

The groundwork for collaboration was already in place. Britain consistently supported Turkey's ambition to join the EU, and gave an ultimate proof of friendship after the failed coup in 2016. Unlike other European capitals, London reacted quickly, calling the coup an "attack on Turkish democracy," and its government has generally held back in its criticism of Turkey.

At the end of last year, Johnson and Erdogan signed a new free trade agreement, which will govern commerce between the two countries post-Brexit. Erdogan has called it "the most important treaty for Turkey since the customs agreement with the EU in 1995."

After Germany, Britain is Turkey's second largest export market. "Turkey now has the opportunity to build a new partnership with the United Kingdom and it must make the most of it," says economist Ali Kücükcolak from the Istanbul Commerce University.

Erdogan is well aware of this, as Turkey is in desperate need of an economic boost. Inflation currently stands at 19%, and the currency's value is consistently falling. Turks are feeling the impact on their daily lives: food and rent are becoming increasingly expensive, while salaries remain unchanged.

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