Will Falling Oil Prices Kill Iran's Economic Recovery?

October 8, 2014 Topic: EconomicsNuclear Proliferation Region: Iran Blog Brand: The Buzz Tags: Oil

Will Falling Oil Prices Kill Iran's Economic Recovery?

Collapsing crude revenues could hurt Rouhani—and force Khamenei to show his true colors in the nuclear talks.


Oil prices have been tumbling for weeks—they were at twenty-seven-month lows this morning and fell further throughout the day. That’s good news for consumers—and bad news for producers. But the man who should be most uneasy is Iranian president Hassan Rouhani. He had promised an “economic boom” and lower inflation, and has even suggested that Iran has the potential to be one of the world’s ten largest economies within thirty years. And he’s had some successes. Iran’s economy isn’t zipping and inflation is still extreme, but he has calmed the widening gyre of economic chaos that former president Mahmoud Ahmadinejad had stirred up and worked to reduce Iran’s economic isolation.

Getting the Islamic Republic’s budgets in order required serious austerity measures. Now even the shrunken budget may be in danger. The current budget, in effect until March of next year, was designed for an oil price of $100 and oil exports of 1.5 million barrels per day. Iran has struggled to hit the latter target—in June, as oil prices were peaking, it came up a few thousand barrels a day short, and then fell more the next month. Now it might have trouble hitting the former, too. Brent crude oil, whose prices tend to hug Iran’s main crudes, hit a low below $91 today (it had been over $113 in June); the futures market anticipates $93-$94 per barrel for many months to come. Compound that with the difficulty Iran has making straightforward, efficient cash transactions under the sanctions regime, and one cannot help but wonder whether Tehran will struggle to get hard currency, to sustain its expenditures, to control inflation, or to get that “economic boom.”


Rouhani will have trouble delivering on his promises, and that will weaken him at home. Conservative elements in the Majles will intensify their criticism—and more moderate conservatives may join the fray. In the longer term, Rouhani would also have to worry that reformist enthusiasm may fade. Reformists have always been split on whether to change the Islamic Republic from within—and thereby dignify it with their participation—or to withdraw from the system. Rouhani has already lost some of his shine among reformists, particularly for his recent claim that Iran would not imprison journalists. Economic weakness could compound that trend. Would a reformist majority after the 2016 Majles elections—already not a sure thing, especially if the vote is not fair—slip away?

The most pressing issue in Iranian politics isn’t the economy. The nuclear negotiations, which are coming to a head as the current interim deal is set to expire next month, are. A successful nuclear deal would bring huge, sustained economic benefits. Western money would rush in. Western expertise would help Iran boost its oil production and thus the government’s budgets. And such a major political and economic success would enormously strengthen Rouhani’s hand and create a chance of big gains at the ballot box for his fellow travelers. A sagging oil market thus increases the opportunity cost of not making a deal. Iran has less leverage at the negotiating table. Seen from beneath an accountant’s green eyeshades, an agreement now looks more likely and more likely to be favorable to the West.

But the accountants don’t run Iran. Supreme Leader Ali Khamenei does—with the backing of a tangle of ideological and economic interests that stand to lose if a deal makes Iran more open to the West. And cutting a deal has always been the wise move from a purely economic standpoint. The nuclear facilities have been expensive to build, and the international response to them has been even costlier for Tehran. The only serious economic benefit they offer—the potential for nuclear energy—would take decades of construction and many billions more dollars to realize, and could have been done with foreign help for a much lower price. A bit of red ink on the spreadsheets might not be enough to make the ayatollah fold.

Khamenei also isn’t deeply invested in Rouhani’s political fortunes. Sure, he let Rouhani run, and then let Rouhani win. He’s backed the nuclear negotiations. But he’s also allowed withering criticism of Rouhani’s administration in the Majles and the hardline press. He’s let the Majles impeach one of Rouhani’s cabinet members. He’s publicly questioned the utility of the nuclear talks, and drawn red lines that limit Iranian flexibility. He won’t go into panic mode if Rouhani’s poll numbers drop a few points.

Further, to the extent that the nuclear talks also require negotiation between Rouhani and his allies on one side and Khamenei and the hardliners on the other, a weak oil price cuts into Rouhani’s leverage. So while a deal has become more likely when seen from an international lens, it’s become less likely when seen from a domestic politics lens. Thus, if oil prices hold around their current low levels, we’ll get a chance to see just how eager Khamenei and his allies are for a deal.

John Allen Gay, an assistant managing editor at The National Interest, is coauthor of War with Iran: Political, Military, and Economic Consequences(Rowman and Littlefield, 2013). He tweets at @JohnAllenGay.