What future for the Iran nuclear deal under Rouhani 2.0?

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Iranian ballot paper

On May 19, about 45 million Iranians participated in the twelfth presidential election since the 1979 revolution, in which the incumbent President Hassan Rouhani gained a strong majority of votes. The election was widely perceived as a referendum on the achievements of Rouhani’s administration, with a particular focus on the 2015 nuclear deal, which constituted the centrepiece of his first mandate. His victory indicates that the majority of Iranian people are in favour of continuity regarding the country’s stance towards the international community and the commitments to the nuclear deal. But much of Iran’s posture during Rouhani’s second mandate will depend on the US approach towards the country.

Since his electoral campaign in June 2013, Rouhani made the resolution of the nuclear impasse his main goal and portrayed the lifting of sanctions (more specifically, those related to presumed illegal nuclear activities) as crucial for the recovery of the Iranian economy. Following the announcement of the Joint Comprehensive Plan of Action (known as the JCPOA) in July 2015, his administration thus committed to ensuring that Iran abided by its end of obligations by constraining key nuclear activities in line with the agreement while also working towards yielding the economic benefits many Iranians anticipated following the lifting of sanctions.

During his first term, Rouhani’s government managed to reduce inflation from 35% to a single digit figure (about 9.5%) and led the growth rate to reach about 6% after years of recession. It also brought back oil exports and production to pre-sanctions levels and drastically increased foreign direct investments. But despite these achievements, unemployment is still high: in fact, it has increased by 1.4% compared to last year, while non-oil-sector growth remains slow. Furthermore, international investments remain low compared to expectations, mainly because of the hesitation among large financial institutions to deal with Iranian entities, despite the sanctions relief.

The nuclear deal and its impact on the Iranian economy became one of the main topics discussed during the campaign by the six shortlisted candidates running for president. Both moderates and conservatives highlighted the need to continue implementing the JCPOA: even the harshest critic and strongest rival of Rouhani, the conservative cleric Ebrahim Raisi, stated that “the nuclear deal, despite its shortcomings, is a national document”.

This means that opposition to the deal, which was advanced by the conservative camp up until late 2015 and led to the creation of “The Solicitous” (Delvapasan), is largely gone. What remains is the criticism of its indirect implications.

In March, the Supreme Leader Ayatollah Ali Khamenei proclaimed that this will be the year of “resistance economy”, with the focus being on increasing production and creating jobs. He also criticised the economic policies of Rouhani’s government, saying that they had fallen short and “do not meet people’s expectations and mine". In April, Khamenei also called on presidential candidates to be less reliant on Western investments, instead investing in national capabilities and domestic capacities to resolve the most urgent economic issues. This inevitably piled pressure on the incumbent before the May elections, given that his budget and his policies heavily relied on attracting foreign investment and technology transfer.

During the electoral campaign, the criticism towards the administration’s record on the economy front continued. Raisi accused Rouhani of adopting a policy of “begging” towards the West without managing to improve the living standards  of the Iranian people. He stated that the nuclear deal “was like a cheque that the government has been unable to cash". Similarly, the mayor of Tehran, Mohammad Baqer Qalibaf, said the agreement only benefited the wealthiest 4% in the society, not the remaining 96%, and accused the government of relying on foreign investors over local manufacturers.

The results of the elections demonstrate that, faced with the choice between a “resistance economy” and the opening of the Iranian market to foreign investments, the Iranian people opted for the latter. This means that the government de facto obtained a confidence vote over the nuclear deal as well as over its ability to help improve the country’s economy. As such, Iran is unlikely to reverse its commitments to the JCPOA under Rouhani’s second mandate. What the administration will be pressured to do, on the other hand, is to make sure that the Iranian people feel the economic benefit deriving from the deal.

The government will likely continue to try and attract international companies to invest in Iran. To do so, it will carry on with the attempts to reform the country’s banking system, expand the private sector and diminish the role and presence of the Revolutionary Guards in key sectors of the Iranian economy, a tall order which will require the backing of the Supreme Leader and will provoke significant domestic in-fighting.

At the same time, Rouhani will also aim at addressing the remaining issues that cause hesitation among banking institutions to deal with Iranian entities. To this end, during his campaign, he pledged to secure the lifting of US non-nuclear sanctions (which are still in place against Iran and lead financial institutions to fear violations and heavy multi-billion dollars fines) through talks with his American counterpart.

Whilst the Trump administration is no longer advancing its line about the need to rip up the nuclear agreement or renegotiate its terms, it’s clear that it will carry out a policy of pressure against Iran. During his recent trip to Saudi Arabia and Israel, the US president repeatedly warned against  "the threat posed by Iran" because of the possibility of it acquiring nuclear weapons and its behaviour in the region. Since February, the new administration also adopted a number of additional non-nuclear related sanctions against Iran to condemn its missile tests and alleged support for the Houthis in Yemen – where a bloody has been raging for years with direct Saudi involvement.

Rather than negotiating the lifting of non-nuclear related sanctions with Rouhani, Trump is thus likely to actively discourage global investment in Iran. Whether, despite that, the Iranian president will continue to ensure Iran’s commitment to the nuclear deal remains to be seen. What is clear is that, from an Iranian point of view, the future of the nuclear deal mostly depends on what posture the US will adopt towards its commitment under the JCPOA and, more generally, towards Iran.