- Elections in Iran on 26 February for parliament and the Assembly of Experts will gauge public sentiment and provide an early test for reformist politicians, just weeks after the lifting of international sanctions related to Iran’s nuclear programme.
- The disqualification of large numbers of candidates by the Guardian Council since mid-January reflects the factional nature of Iranian politics and the structural and institutional advantages enjoyed by conservatives, who will retain the capacity to undermine President Hassan Rouhani’s reformist agenda regardless of the outcome to the vote.
- Competition between hardliners and reformists and the protection of vested interests ensures that political risks and barriers to entry will continue to impact foreign investment in several key sectors.
The lifting of nuclear-related sanctions against Iran on 16 January marked a major political victory for Rouhani, who had promised during his 2013 campaign to reduce the country’s international isolation and boost the economy. The 26 February elections will be a key gauge of the political benefits the nuclear deal has brought Rouhani and other pro-modernisation forces in Iran.
Iran’s deeply factional 290-member parliament, the Majlis, is currently dominated by a conservative coalition known as ‘Principlists’ who account for around 120 seats. This group favours less government intervention in the economy and has cooperated with Rouhani on some reforms. Conservative realists, led by the Steadfast Front, account for roughly 40 seats and have clashed with Rouhani on the nuclear talks and several other issues. The centre-right coalition also includes ‘hardline radicals’, or ‘neo-principlalists,’ who hold about 75 seats. This faction saw its public standing damaged by corruption and economic mismanagement under the presidency of hardliner Mahmoud Ahmadinejad, but still benefits from established ties to elites in the Guardian Council and other powerful institutions of government.
The pro-modernisation camp in parliament holds around 40 seats and includes reformist lawmakers aligned with ex-President Mohammad Khatami and figures associated with former Prime Minister Mir Hossein Mousavi and former Speaker of Parliament Mehdi Karroubi, who remain under house arrest following the disputed 2009 election. Reformists, marginalised in the suppression of the post-2009 election uprising, have allied with President Rouhani’s centrist allies in an effort to re-exert their influence. The Assembly of Experts, which is responsible for selecting a new Supreme Leader should the 76-year old incumbent Ayatollah Ali Khamenei die or become incapacitated, is also currently dominated by conservatives.
Parliament in play
The balance of power in parliament will be vital to the prospects for Rouhani’s economic agenda, which includes sensitive economic reforms and relies heavily on foreign investment. There have been multiple episodes in recent years that are indicative of the extent of hostility between hardliners in parliament and the reformist government, including the impeachment of Rouhani’s science minister in August 2014, intense questioning of other members of the president’s cabinet, and belligerent rhetoric directed at the president. Conservative lawmakers have attempted to undermine the president’s agenda by challenging him on budgets and cabinet appointments, and parliament has sought to expand beyond its traditional purview to have a larger say in Iran’s foreign policy.
The strength of conservative influence across Iran’s complex and overlapping political institutions will undermine efforts by reformists and centrists to consolidate their power both in the upcoming election and in the longer term. More than three times as many candidates registered for the current election cycle than compared to the 2012 vote, suggesting excitement among reformists following the nuclear deal. However, candidates for public office in Iran are subject to an ambiguous vetting process overseen by the Guardian Council, which disqualified more than 7,000 of the 12,000 parliamentary candidates, including many reformists and moderates. The Council, which also approved just 166 of the 801 candidates for the Assembly of Experts, barred many candidates – including Hassan Khomeini, the grandson of the founder of the 1979 revolution, Ayatollah Khomeini - for being insufficiently loyal to the regime or underqualified.
Pro-modernisation politicians have largely been side-lined since the 2009 uprising that followed the disputed re-election of Mahmoud Ahmadinejad. The recent disqualification of large numbers of reformists reflects hardliners’ determination to limit gains made by their rivals on the back of the nuclear deal. Conservative elements dominate non-elected bodies like the Guardian Council, as well as the judiciary and security services and a similar mass ban on reformists in 2004 contributed to a conservative victory in subsequent parliamentary elections. Given the institutional barriers confronting pro-modernisation forces in Iran, reformists and centrists are only likely to make modest gains in the vote.
Rouhani’s agenda at risk
Rouhani has said he hopes to attract USD 30-50 bn in foreign direct investment annually to achieve growth rates of 8 percent, but his economic programme is likely to encounter resistance regardless of the election’s outcome. Iran’s economy has been damaged by years of sanctions, a lack of investment and chronic mismanagement. Inflation was last below 10 percent in 1990 and unemployment averages roughly 10 percent for the general workforce and 25 percent for the burgeoning youth population. Under pressure to address these economic challenges, Rouhani has already implemented austerity measures and announced more competitive contracts for the oil and gas sector in order to attract new external investment. Attempts in the 2000s to increase the role of foreign and Western companies in Iran’s oil sector were undermined by clashes with conservative lawmakers and rulings from the Guardian Council that earlier contracts offered to international companies were unconstitutional. Rouhani’s outreach to Western oil companies, including the offering of a new contract model that offers more attractive terms, may emerge as a future source of tension with hardliners.
The president has also called for deeper structural reforms, including a major privatisation drive that would reduce the government’s role in the economy and improve transparency. Yet the failure of past privatisation efforts illustrates the political and institutional barriers to reform. A December 2010 parliamentary report reviewing an earlier privatisation drive ordered by the Supreme Leader concluded that of USD 70 bn worth of assets divested since 2006, only a 13.5 percent share was transferred to the private sector, with the remainder handed to parastatal organisations. The failure of past privatisation efforts reflects the strength of entrenched interests in Iran, who benefit from the centralisation of economic and political power among well-connected elites.
Opening up the economy to greater foreign participation not only risks inflaming tensions with vested interests but exposing domestic companies to greater external competition for which they may be unprepared. The influential Islamic Revolutionary Guard Corps (IRGC) views economic liberalisation and greater foreign investment, particularly from the West, as both an ideological threat and competition to its extensive economic holdings. A Western diplomat cited in an August 2015 Reuters report, estimated that the IRGC has annual revenues of USD 10 -12 bn from affiliated companies in the extractive, transport and construction sector, among others. In announcing the arrest of an Iranian-American businessman employed at Crescent Petroleum Co by the security services, the Wall Street Journal reported in October 2015 that the IRGC had warned Iranian business officials with ties to foreign companies against disturbing its economic interests. More aggressive action, including threats against business personnel by the security services, or attempts to undermine investment deals by challenging the legality of contracts in conservative-dominated courts, could impede Rouhani’s economic agenda.
Implications for businesses
Given Rouhani lacks the authority to challenge the IRGC directly, he may seek to leverage his popularity into forcing the Guards and other factions into a compromise that allows them to maintain economic holdings in some areas in exchange for reducing them in others. Such an agreement might see the president able to implement some reforms open the economy up to greater foreign investment, but it could also increase the reputational risks for investors given the IRGC remains subject to unilateral US sanctions. The US Treasury has warned companies to ensure that they are “not knowingly engaging in transactions” with the IRGC but the opaque operating environment in Iran will make due diligence difficult. Although France’s Peugeot announced on 28 January it plans to invest USD 436 mn in Iran’s domestic auto sector, large fines imposed against European banks for violations of the previous sanctions regime by the US may slow European capital investments in Iran.
The lifting of sanctions and the Rouhani administration’s campaign to attract greater FDI have created considerable opportunities for foreign businesses, but the political risks of operating in Iran will remain elevated for the foreseeable future. The ongoing power struggle between reformists and hardliners will see political and regulatory uncertainty persist, and there is a continued threat that foreign businesses will be targeted directly in an attempt to undermine liberalisation. Those opposed to Rouhani’s reforms will benefit from ambiguous laws that block investments deemed to threaten national security or domestic industries. Under the terms of the Foreign Investment Promotion and Protection Act, domestic courts are the final arbitrators of disputes, with no mechanism to enforce judgements in international courts, thus weakening investor protections. Provisions that allow for sanctions to be re-imposed on Iran for violations of the nuclear deal, as well as continued unilateral US sanctions, also create considerable uncertainty, a situation exacerbated by the outsized role played by the state in the economy. It remains unclear how aggressively the US will now enforce its sanctions, and the lack of clarity will see many investors maintain a cautious approach despite the scale of potential opportunities.