Iran’s Economic Liberalization Hangs on a Looming Internal Confrontation

Bottom Line: As we have mentioned previously, the 14 June election in Iran has markedly changed the political landscape and increased the chances for economic liberalization and growth, and there is one particular policy move that could make or break this.

Analysis: The unexpected victory of the pro-business faction associated with former president Hashemi Rafsanjani has the potential to drastically change the business climate in favor of domestic and foreign capital in the medium- and the long-term. The Rouhani-Rafsanjani strategy for political consolidation rests centrally on an open door policy towards foreign investment which has not been witnessed in the Islamic Republic for well over three decades-including the period spanning Rafsanjani's 8-year-long presidential terms in the late 80's and early 90's.  While many challenges still lie ahead-notably the opposition of the hardline elements in the Revolutionary Guards and elsewhere-there are reasons to be optimistic about this very outcome. First, for the first time after the 1979 revolution, the radical Right is in disarray while the Reformist-Pragmatist camp is on the ascendancy. Second, the Guards are themselves split. Third, the economic crisis has reached a point where many centrist and conservative forces like the powerful traditionalist clergy and bazaar merchant class who used to be hostile to foreign and western capital are now openly clamoring for it. A critical test case is the new draft law for foreign partnership in the energy sector which envisages hitherto unprecedented provisions favoring FDI.

Recommendation: In the short-term we should expect political turmoil and instability as entrenched hardline forces would try to put up resistance against the onslaught. The success of political and economic reforms hinges in no small measure on the outcome of this confrontation. With the treasury virtually depleted and the nuclear talks reaching a decisive turning point, the looming confrontation should be measured in months rather than in years.