WASHINGTON – Iran’s economy is showing signs of foundering just as the country prepares to inaugurate its first new president in eight years, with Western sanctions cutting ever deeper into the Islamic republic’s financial lifelines and increasing pressure for a nuclear deal with the West.
New data show accelerated financial hemorrhaging across multiple sectors, from plummeting hard-currency reserves to steadily falling oil exports, Iran’s main source of foreign cash. U.S. officials and analysts say the tide of bad news will complicate the task awaiting Hasan Rouhani, the incoming president, but it could also increase Iran’s willingness to accept limits that will preclude it from developing nuclear weapons.
Although many Iran experts believe that the chances for a bargain remain small, recent warnings about the economy from within the regime suggest that Iran’s leaders may be looking for a way out, analysts say.
“The Iranian elite now publicly admits that the economy is in serious trouble, and this president was elected with a mandate to do something about that,” said Clifford Kupchan, a former U.S. State Department official and a private consultant on the Middle East. “Despite Iranian rhetoric, that can only make the prospect of a deal more attractive.”
Rouhani, a cleric and a moderate within the clique of conservative advisers to Supreme Leader Ayatollah Ali Khamenei, will assume the presidency Sunday at a critical juncture in the country’s decade-long struggle with the West over its nuclear policies. The Obama administration, which has imposed a succession of increasingly harsh economic sanctions on Iran over the past two years, hopes to find a more accommodating negotiating partner in Rouhani, who campaigned on a promise of a more pragmatic foreign policy.
But the White House has been repeatedly outflanked by Congress as lawmakers from both parties have pushed for tougher sanctions even before Rouhani takes office. Brushing aside warnings from U.S. diplomats, the House on Wednesday voted 400 to 20 to adopt measures intended to further decimate Iran’s economy by virtually shutting off the export of Iranian oil.
“If President Rouhani truly has the will and authority to make a bold gesture on Iran’s nuclear program — such as suspending enrichment — he has a small window of opportunity before this bill becomes law,” said New York Rep. Eliot Engel, one of the sponsors of the legislation.
An Iranian government spokesman Friday called the punitive measures “counterproductive” and said they lessen the chance of a nuclear deal.
“There is no doubt that such decisions will unnecessarily complicate the current situation between the two countries,” said Alireza Miryousefi, a spokesman for Iran’s diplomatic mission to the United Nations in New York.
The grim economic reports contrast with a relatively buoyant atmosphere in Tehran on the eve of inaugural festivities for Rouhani, who scored a surprise victory over a slate of more conservative politicians in June’s presidential election. In speeches after his win, he repeated his promises to expand political and social freedoms for ordinary Iranians, reversing policies that defined the eight-year tenure of his predecessor, the deeply unpopular Mahmoud Ahmadinejad.
Rouhani’s aides also have leaked the names of several key Cabinet appointees, a slate dominated by veteran bureaucrats and pragmatists who are more accustomed to dealing with the West. Yet his advisers have sought to temper expectations about how quickly relief can come, accusing Ahmadinejad of covering up the true extent of the economic crisis.
“The main domestic issue will be dealing with a bad economy,” said Hassan Beheshtipour, a Tehran-based analyst. “Unemployment, high prices, inflation and domestic production are the challenges Rouhani will face.”
Analysts in both Iran and the West agree that the key to improving the economy is finding a way to ease the pressure of sanctions. The only economic bright spot in recent weeks has been a stabilizing of Iran’s currency, the rial, which gained ground based on speculation that Rouhani will have a better chance of achieving a rapprochement with the West.
Throughout Tehran, Iranians who voted for Rouhani said they expect him to honor his promises of “moderation” in diplomacy and in domestic politics.
“I voted for Rouhani and think we have to give him at least three months to see how he is going to implement the promises he has made,” said Bahman Khalafi, 46, who works in marketing.
The sanctions have been blamed for slashing Iran’s oil exports and undermining the value of the rial. But in recent months, new Western restrictions and tougher enforcement have significantly deepened the pain.
Iranian officials last month reported an inflation rate of 45 percent — compared with 32 percent earlier in the summer — while also acknowledging that the economy is set to contract for the first time in three decades.
Iran’s oil exports, which had declined nearly 40 percent by the end of last year, have taken a further hit in recent weeks as Tehran’s remaining Asian customers have cut back on purchases of Iranian crude. And a draft analysis by the economic research firm Roubini Global Economics estimated that Iran’s foreign currency holdings are declining at a rate of about $15 billion a year as Tehran is forced to tap into savings to meet its current budget needs.
Worsening matters for Iran, banking sanctions are preventing the government from accessing some of its remaining overseas reserves, said Mark Dubowitz, director of the Foundation for Defense of Democracies, a Washington-based think tank that cosponsored the Roubini study.
“Iran is in serious trouble,” Dubowitz said. Noting that Rouhani won the election in part because of popular discontent over the regime’s economic policies, Dubowitz said the “burden now is on Mr. Rouhani to persuade the supreme leader to compromise.”
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