How Iran Hopes the Nuclear Deal Will Revive Its Economy

President Hassan Rouhani at a press conference. Wikimedia Commons/Creative Commons/Meghdad Madadi

Rouhani’s first target is the country’s corrupt banking system.

From the beginning of his presidency, Hassan Rouhani and his team considered the Joint Comprehensive Plan of Action (JCPOA) negotiated between Iran and several world powers in July 14, 2015, to be a first step in a grander plan to normalize Iran’s international relations with the outside world. As I explained in my previous analysis, managing terror and limiting overt kinetic actions by the Revolutionary Guard and the Quds Force are only second in importance to the project of normalization. The third is economic recovery, including bank reforms and establishing a strong linkage with foreign capitals and internationally accepted standards of banking.

When running for office in 2013, President Rouhani promised to reform an economy ravaged by years of mismanagement, corruption, populist policies and sanctions. Indeed, hope of economic betterment drove popular support for the nuclear deal. Within days of signing the JCPOA, President Rouhani declared, in an open letter to First Vice President Eshaq Jahangiri, his intention to heal the economy by focusing on the banking system. The economic pledges have been popular enough to give Rouhani an edge in the 2016 parliamentary election.

After analyzing systemic problems, the administration concluded that the cornerstone of the economic recovery should be a reform of the banking system, which operated for decades “with low capital adequacy requirements and inadequate regulatory and supervisory mechanisms.” As a result, the banks have been hobbled by a large inventory of nonperforming loans and have lacked capital for extending credit to business. Valiollah Seif, the governor of Iran’s Central Bank, commented that financial mismanagement left Iran’s financial system in “tatters.” The Banking Overhaul Plan, signed into law by Rouhani in July 2016 was designed to remedy the situation. An official government website promised “to get financing for short and medium-term projects back on track, provide a cash cushion to tackle bad loans, promote competition, reorder the money market by regulating the army of uncertified credit and financial institutions, and increase banks’ lending power by raising their capital.”

Much as the law was appreciated, it did not go far enough to secure Foreign Direct Investment (FDI). Indeed, normalizers hoped to cash in on the JCPOA’s promise of FDI, especially as the country’s critical oil and gas sectors had badly degraded under years of mismanagement and sanctions. But, as Seif put it, Iranian banks are too outdated for attracting FDI, because they have fallen behind international norms and standards. The central bank governor’s somewhat oblique reference was to the 1999 UN International Convention on the Suppression of the Financing of Terrorism.

The Financial Action Task Force (FATF) is an international watchdog created soon after, to monitor compliance with the convention. On February 19, 2016, the FATF described itself as “particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system.” In addition to advising member states to guard against all transactions with Iran, the FATF also recommended that members continue to apply countermeasures, such as enhanced due diligence on transactions and systematic reporting requirements.

For the custodians of the normalization project, the FATF’s strong language was a reminder of what they knew all along—namely, that Iran would not be able to access the FDI market without joining the convention, since renamed the Terrorist Financing Convention (TFC). On August 4, 2015, Iran’s parliament voted to join the 1999 convention. On March 5, 2016, the Guardian Council approved the legislation, paving the way for a membership application. As a rule, states participating in the TFC are required to enact national legislation that criminalizes acts of terrorist financing.

In the past, the Revolutionary Guard unequivocally opposed such legislation, but the post-JCPOA period presented them with some complex choices. As president, Ali Akbar Hashemi Rafsanjani (1989–97) helped transform the Revolutionary Guard from a strictly military organization into a leading economic and political entity. Rafsanjani’s privatization policy let the Revolutionary Guard take control of several confiscated companies and established their signature Khatam al-Anbiya Construction Headquarters. They have subsequently branched out into agriculture, mining, telecommunication, transportation and import-export services. The Principlist Mahmoud Ahmadinejad, who came to power with the help of the Revolutionary Guard, dramatically increased their economic standing. More than half of his cabinet members were either Revolutionary Guard veterans or people with ongoing ties to the organization. The Revolutionary Guard was awarded hundreds of no-bid government contracts and billions of dollars for construction and energy programs.