Iran’s economy takes heart from mood of détente

There are early signs the Iranian economy is benefiting from President Hassan Rouhani’s improving relations with the West, but any gains could just as quickly evaporate if talks over Tehran’s nuclear ambitions break down. Published in Gulf States News, 17 October 2013

It is still far too soon to talk about a peace dividend in Iran, but there are signs the political optimism sparked by renewed efforts to resolve the nuclear problem has begun to spill into the economy. The stock market has been hitting record levels and the currency is stabilising as people sense that the latest round of international negotiations might add up to more than just idle talk. Allied to that, President Hassan Rouhani’s new cabinet has been taking a far more professional approach to managing the country’s domestic problems.

When the Tehran Stock Exchange’s all-share index hit an all-time high of 65,719.9 points at the end of September, it marked the eighth successive month of gains. That has continued this month, with the main market index, the Tedpix, climbing above the 70,000 mark on 13 October. The rises earlier in the year were partly attributed to the falling value of the Iranian rial against the dollar, which made it easier for some companies to make higher profits in the export market. Now, however, sentiment appears to be driven by the hope of improving macroeconomic fortunes. “Investors remained mostly optimistic as a combination of geopolitical developments, a rebound in global prices and stability in the local FX [foreign exchange] market significantly raised expectations for more profit,” Tehran’s Mofid Securities said in a research note in early October.

As the brokerage house indicated, there has also been good news for the Iranian rial. Before the June presidential election, the black market value of the rial had fallen to more than IR36,000 to the dollar, and its plummeting value was contributing to inflation of more than 100%, according to the US-based Cato Institute’s Troubled Currencies Project. But since the election, the currency has been less volatile and its value has improved. By the end of September, it was trading at IR30,200 to the dollar on the black market. The official exchange rate quoted by the Central Bank of Iran is just under IR25,000 to the dollar.

“Things are looking up and many believe that the new president has the Midas touch,” said one businessman in Tehran. “The defrosting of relations with [US President Barack] Obama has had a positive moral impact on the whole scene.”

Professional approach

Of course, there are still lots of economic problems. Inflation and unemployment are both high, the country is running out of petrol refining capacity and there could be shortages of heating fuel this winter. A rising stock market will benefit some Iranians, and a more stable currency will help more, but the challenges facing Rouhani’s administration reach in to every corner of the economy.

While it is still very early in his term, it seems his government’s approach is having a positive impact on many areas. Many of the reforms may not produce immediate gains but they should mean the economy functions better in the longer term. “We’re seeing a significant change in economic policies and management compared to what happened under [former president Mahmoud] Ahmadinejad. We see better planning, and a cabinet which seems to have a much better understanding of how the economy works,” said Nader Habibi, professor of Middle East economics at the US’ Brandeis University. “They have been very clear about their economic priorities, for example their desire to reform the universal cash subsidies so that the upper middle and upper classes will not receive any. And there has been a remarkable improvement in the management of the oil ministry.”

Other improvements have included reducing the waiting times for ships at Iranian ports, and addressing shortages of some medicines, which were caused, at least in part, by disputes between different state bodies.

To make sure these are more than fleeting gains, movement will of course be required on the nuclear issue, and Rouhani’s ability to deliver change on this policy remains uncertain. There is still considerable pressure within Iran not to bow to US demands and the views that will really count are those of Supreme Leader Ayatollah Ali Khamenei. In a speech to graduating army cadets at Shahid Sattari University on 5 October, Khamenei made a thinly veiled criticism of the phone call between Rouhani and Obama that had taken place on 27 September while the Iranian president was in New York for the UN General Assembly.

“We support what our administration does and its diplomatic efforts and dynamism in this arena,” Khamenei said. “Of course, in our opinion, some of the things that happened in New York were not appropriate, but we are optimistic about the diplomatic team of our dear nation and about our diligent administration. However, we are pessimistic about the Americans... It is an arrogant, unreasonable and untrustworthy government.”

Majors return?

On the other side of the negotiating table, some US politicians have continued to threaten more sanctions and Israel has been trying to ensure that its allies in the US and Europe do not get overexcited by what it sees as nothing more than an empty charm offensive by Tehran.

Nonetheless, the diplomatic mood in the run-up to the meeting between Iran and the six major international powers (known as the P5+1) in Geneva on 15 and 16 October was more positive than usual. Any comprehensive deal is likely to take months rather days or weeks to arrange, but there is at least a sense of momentum that has been missing from these exchanges for many years.

That is encouraging major international oil companies to consider returning to Iran if the opportunity arises. Executives at Shell and Total have been quoted in recent weeks as saying they would be interested in reviving their interest in Iran if possible.

Before that happens, the economy could get a boost from another group. Rouhani’s government is thought to be keen to persuade Iranians living abroad to repatriate their wealth and invest in the economy. It would provide a further endorsement of his new approach, although it could also antagonise some groups within Iran who are keen to protect their privileged positions in what has been a dysfunctional economy. Rouhani may yet find that deft negotiating skills are just as essential in the domestic environment as in the international arena.