Beneath Saudi officials’ tough talk on the Regional Headquarters Program lies a strong desire for constructive engagement with top global firms and attracting greater inflows of foreign investment.
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Uncertainty about the future of the Iranian economy increased as demonstrations erupted across the country in November in the deadliest political uprising since the 1979 revolution. Iranians took to the streets in response to an abrupt decision by the government to introduce gasoline rationing and increase prices by 50%, and the government’s heavy-handed response resulted in the deaths of hundreds of people and arrests of thousands. Although the demonstrations were prompted by the rise of fuel prices, the root of the protests was in much deeper grievances. Lack of political and social freedom and policies of the Islamic Republic that favor regime loyalists have contributed to the rising level of discontent among Iranians. Mounting economic pressure caused by U.S. sanctions, costly military activities of the Islamic Republic across the region, and corruption have also been key factors for the widespread dissatisfaction leading to the latest uprising. Some senior officials, including Supreme Leader Ayatollah Ali Khamenei, blamed foreign powers and called the protests a U.S. conspiracy against the establishment.
The latest unrest in Iran raised a question that has been asked frequently since the U.S. government tightened nuclear-related economic sanctions on Iran in 2011: Are sanctions achieving their goals? The underlying assumption for the U.S. government, under the administrations of President Donald J. Trump and former President Barack Obama, was that economic pressure would worsen economic conditions, pushing the economy to the verge of full-scale collapse and pressuring the Iranian regime to capitulate to U.S. demands. So, is the regime moving toward that point?
Although the sanctions are targeted at state entities and officials, as they tightened, the livelihood of Iranian citizens overall has worsened. The reimposition of U.S. sanctions in 2018 has caused increased unemployment and inflation in Iran. Iran’s youth unemployment is about 30%. A report issued in 2018 by the Iranian Parliament warned that rising unemployment can threaten the future stability of the country. And, while inflation is historically high, wages have remained mostly unchanged. The administration of President Hassan Rouhani launched a “livelihood program” in November aiming to offset the negative impacts of fuel subsidy cuts by providing financial support for low-income Iranians. However, the government handouts have not adjusted for inflation. For example, a low-income Iranian household with five or more people will receive 2,050,000 Iranian rials (under $20) a month, which is sufficient to buy less than 9 pounds of red meat. The government payments are too small to make any significant impact on people’s livelihood.
Despite the pressure from sanctions, the government has been fairly successful in shielding itself from a dire impact. The stated goal of the most recent U.S. sanctions was to reduce Iran’s oil exports to zero. The government has announced that by the end of the next Iranian fiscal year in March 2021, its budget will be set completely independently from oil revenue. To offset the revenue lost by the decline in oil exports, Rouhani’s government has introduced a reform program to increase tax income.
The government is planning to implement regulations that will end tax evasion by high income earners. For example, businesses and doctors’ and lawyers’ practices are now required to have bank card readers to prevent cash transactions that are difficult to monitor by tax authorities. Moreover, new tax regulations will be implemented in 2020 for second homeownership and rental income, and taxes will be imposed on owners of unoccupied properties.
There is some speculation over the future of economic activities in Iran that are taxable by the government. Uncertainty and inflation have slowed the market over the past year. For example, the number of property sales in September 2019 decreased by 73% compared to September 2018. A significant number of Iranians have moved their assets to Turkey, where Iranians are the second largest foreign property buyers: In 2019, Iranians bought 89% more houses than in 2018, and 640% more than in 2017. The number of people visiting shopping malls and chain supermarkets has visibly declined across the country. Most household income is spent on necessary items, mainly food. The market for secondhand electric appliances has expanded over the past two years because of the price difference from new products. Purchasing power in the gold and jewelry market has declined as much as 70%. The price of locally manufactured vehicles has increased by nearly 300%, negatively impacting the car market.
Despite the government’s revenue decline, so far, Iran’s strategies in the region have remained unchanged. The seizure of oil tankers, downing of a U.S. drone, and attacks on Saudi oil facilities have been clear signaling of Iran’s unchanged, or perhaps even tougher, position.
Iran’s “maximum response” has prompted its key regional rivals to take a more proactive approach toward rapprochement. Moreover, by threatening uranium enrichment, Iran has been pursuing its maximum response strategy to pressure Europe, hoping to ultimately divide Europe’s policy from that of the United States. As a result, just days after the latest protests in Iran, six European countries (Finland, Belgium, Denmark, the Netherlands, Norway, and Sweden) announced they will join the special purpose vehicle Instex (Instrument in Support of Trade and Exchanges) that was created by Germany, France, and the United Kingdom to facilitate trade with Iran. Because Instex is not a bilateral trade agreement with a European Union country, the EU’s human rights clause does not apply to negotiations around Instex. These clauses have been an important element of EU bilateral agreements and aim to promote democracy and human rights through the EU’s external action. Including such clauses allows the EU to take measures such as unilateral suspension of trade commitments in times of crisis, in case of serious breaches by the other party. The clauses cover democratic principles and rule of law and they aim to open a path to dialogue and cooperation on human right issues. Nevertheless, such an announcement, so soon after the response of government security services led to the deadliest protests in the history of the Islamic Republic, is widely perceived as a positive outcome for Iran.
All in all, the impact of sanctions has been far more negative on the people than it has been on the government. The administration had to implement polices to rapidly decrease government expenditure (ending subsidies) and generate non-oil revenue (raising prices). Naturally, such practices are socially controversial, but the establishment has managed to control social tension with severe violence. Living conditions have worsened as inflation, unemployment, and a general sense of hopelessness across Iranian society is on the rise. The government, however, is confident that the shock is now behind it, and that the “maximum response” to U.S. “maximum pressure” has gained more bargaining power for the establishment and the way forward for the Islamic Republic will be a lot smoother. For the people, however, this is the beginning of even harder economic and social conditions.
is a non-resident fellow at the Arab Gulf States Institute in Washington. She is the Marie Curie Fellow at the German Institute of Global and Area Studies working on Iran’s economic diversification and economic resilience strategies.
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