Why Iran’s economy is too tainted to succeed

As finance ministers and global economic heavyweights gather in Washington for the annual meetings of the International Monetary Fund (IMF) and the World Bank, Iran’s future in the international financial system will certainly be a topic of intense discussion.  This year’s conclave will be the first since the implementation of the nuclear deal between the P5+1 and Iran in January 2016. 

IMF staff recently concluded a visit to Tehran, and reported that “economic conditions are improving substantially in 2016/2017.”  They added that real GDP is projected to rise by at least 4.5%; oil production has risen to pre-sanction levels; and inflation is being tackled by the application of “ambitious reforms.” 

{mosads}But policymakers and business leaders should not get swept up in the hype surrounding the alleged new Iranian gold rush in the aftermath of the lifting of sanctions.  Iran’s economy remains mired in corruption, hobbled by political infighting; and wanting in transparency, with many key sectors controlled by the Islamic Revolutionary Guard Corps (IRGC)—a terror organization sanctioned by the U.S. and international community. Thus, significant structural impediments to rejoining the international community loom large.

Corruption continues to run rampant in Iran.  In fact, a leading international organization that tracks corruption around the globe ranks the Islamic Republic 130 out of 168 countries on its 2015 Corruption Perceptions Index

Consider the recent news that the National Iranian Oil Company (NIOC) signed its first oil output contract—using a much-anticipated new contractual model to attract foreign investment—with Persia Oil & Gas Industry Development Co.  Persia Oil & Gas Industry Development Co. is an Iranian firm which has been identified by the U.S. Treasury Department as being a subsidiary of Setad Ejraiye Farmane Hazrate Emam (Setad), a financial empire directly controlled by Iran’s Supreme Leader. 

According to a 2013 investigation by Reuters, the group has $95 billion in assets, and the U.S. government has dubbed the conglomerate “a massive network of front companies hiding assets on behalf of… Iran’s leadership.”  If that’s not enough, the NIOC has similarly been listed by the U.S. Treasury Department as an “agent or affiliate” of the IRGC.

This is just one unfortunate example of the historic self-dealing among regime entities that enriches the Ayatollahs and the security establishment at the expense of ordinary Iranian citizens, who are left with only the bill in the absence of legitimate commerce.

At the same time, political infighting continues to undermine confidence in Iran’s willingness to conform to international financial norms.  The Financial Action Task Force (FATF)—the international inter-governmental body whose mission is to set standards for combatting threats to the international financial system—has kept Iran blacklisted alongside North Korea, for ongoing illicit financial activity. 

Despite reassurances from President Hasan Rouhani, Foreign Minister Javad Zarif, and Central Bank Governor Valiollah Seif, Iran remains hamstrung in implementing the Financial Action Task Force’s (FATF) framework for Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT).  According to a report in Al Monitor, hardliners in Tehran are pouncing at the prospect that the IRGC and other security and intelligence services in Iran could effectively be “sanctioned by Iranian banks” in the Rouhani administration’s efforts to remove Iran from the FATF’s list of high-risk jurisdictions.  Another concern, according to media reports, is the disclosure of the country’s banking information to the FATF, which could be used to undermine the Islamic Republic. 

Regime stalwarts have sounded similar alarm bells before in cooperation with the International Atomic Energy Agency (IAEA) over the nuclear file.  A fifth column of powerful domestic forces is already actively trying to undermine Iran’s FATF reform, including Chairman of the Guardian Council and the Assembly of Experts Ayatollah Ahmad Jannati and Senior Advisor to the Supreme Leader and former Iranian Foreign Minister Ali Akbar Velayati.

A glaring lack of transparency should also chill foreign investment in Tehran.  The country ranks 118 out of 189 countries on the World Bank’s Ease of Doing Business Index.  The IRGC—which is pervasive throughout the Iranian economy—controls massive hidden holdings in the automobile, energy, civil engineering, manufacturing, shipping, and telecommunications sectors.  It is virtually impossible to do business in Iran that does not involve the IRGC.   A multinational oil company could therefore unwittingly find itself inking deals with the IRGC-linked NIOC under Iran’s new model petroleum contract, further enabling Iran’s sponsorship of terrorism through support to Hezbollah, Shiite militias in Iraq and Syria, and even Islamic Jihad and Hamas.

In the end, betting on Iran at this juncture could turn into a disastrous gamble, for the mullahs have still not decided whether the Islamic Republic is a revolutionary religious cause or an ordinary nation-state, as Henry Kissinger once suggested.

Jason M. Brodsky is the Policy Director of United Against Nuclear Iran.

The views expressed by authors are their own and not the views of The Hill.


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