Look to East, Relations with West: Dynamics of Power Groups in Iran

From Daily Summary of 12 May 2023

Benefiting hardline groups with greater political power and helping them to drive their opponents from the scene, the “look to the East” policy, an alternative to normalization of relations with the West, may bring with it challenges for the Nezam. Recent commentaries explore how Iran’s alignment with the East limits the ability of the Nezam to improve relations with the West because such relations endanger the principlist domination of the regime, yet it also fuels military ambitions among some hardliners that could drag the Nezam into conflict.

Mahmud Sari’olqalam, a prominent international relations analyst, theoretician, and advisor to former president Hasan Rouhani, does not perceive Iran’s turn to the East to be ideologically driven, but attributes it to the structure and relations of centers of power in Iran. He explains that a normalization of relations with the West would change the structure and relations of power groups within Iran. While Iran’s military presence in the region has been a main concern for the West, a rapprochement with the West would entail curbing the power of influential hardline groups in the country, bringing about a major change in the power structure of the Nezam. As Sari’olqalam portrays it, the zero-sum equation of power in Iran would mean a complete surrender of power for these hardline military groups—presumably a reference to the IRGC. On the contrary, an expansion of relations with Eastern powers would not disturb the power structure for the Nezam and could hold promising prospects for consolidating its political infrastructure in a competition of power with other groups and with reformist administrations. Meanwhile, the hardline groups that seem to be driving the look to the East, because they see any rapprochement with the West as an existential threat, may find the old frameworks constraining their power. Ali Shamkhani, secretary of the Supreme National Security Council (SNSC), recently warned about a change in Iran’s military doctrine by pointing to the current geopolitical climate in international relations. In the belief that the status quo benefits the Axis of Resistance, he warned against any change in the resistance doctrine from defense to offense as destructive, putting the axis in a position of weakness. Shamkhani was not the only official who rejected change in Iran’s military posture. Mohammad Zahra’i, head of the Construction Basij, also noted recently that an offensive approach had no place in the Islamic Republic’s military doctrine. The two senior military officials employed a warning tone toward any potential change of military doctrine to a more offensive policy.

Challenging the hardliners’ tendency to gloat over changes in the world order and the “decline of the West,” Shamkhani argues that a change in the world order is not intrinsically positive and could create conditions for the Islamic Republic’s decline or even destruction. He emphasizes that a change in the old global order could mean a stage of anarchy in the world in the short term until the new order of power manifests itself. In such a destabilizing international climate, Shamkhani underlines the fact that the “doctrine of resistance” does not mean the Islamic Republic would have any part in forming the new world order but would simply employ the current factors to its benefit. Shamkhani’s envisioning of the future of the Axis of Resistance implies a rejection of Iran’s alliance with Russia and China as the potential emerging world powers, which seems to be the dream of Iran’s hardline groups. Such a rejection of Iran’s move beyond a deterrence policy by senior military officials clashes with the promotion of ambitious military policies by hardline groups, which push for an alliance with Russia.

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Hardliners’ Unease with Revival of JCPoA

From Daily Summary of 11 May 2023

Criticism by Iran’s hardliners indicates a sense of concern in their camp that senior authorities among the country’s decision-makers may be inclined to revive the JCPoA. Days after the fifth anniversary of the U.S. withdrawal from the 2015 nuclear deal, the conflict between its ultra-hardline opponents and supporters is as lively as ever, suggesting that the warnings about the activation of the trigger mechanism, the devastating impacts of sanctions, and the dire economic conditions, which often appear in the arguments of the pro-JCPoA circles, are not convincing enough for the other side.

Following influential diplomat Abolfazl Zohrevand, who expressed concern about “a group inside the country trying to resume negotiations through Oman,” Sa’idi Jalil took the opportunity in a speech at the University of Tehran to emphasize that “prescribing the JCPoA as a solution for problems would be like repeating a bitter experience.” The speech was interestingly at a commemoration ceremony for an anti-JCPoA cleric who had died in a car accident while on his way to an event to criticize the nuclear talks in June 2015. This memorial ceremony and the persistence in calling the dead cleric a “martyr” in his path for awareness raising may indicate the deep hostility towards the nuclear deal among the hardliners—a hostility that may not necessarily be seen as ideological. In recent days, the IRGC outlet Basirat examined what it described as Washington’s inconsistent responses to the likelihood of the resumption of talks, especially after July 2022, to warn “the decision-makers in the country’s foreign policy apparatus” to understand the nature and reasons behind the Americans’ vague and contradictory behavior. The outlet also urged authorities to realize that the White House’s persistence in linking the revival of the JCPoA to non-nuclear issues undermines, in a fundamental manner, the prospects of a sustainable agreement which would ensure Iran’s economic benefits. One could interpret this as a warning by the IRGC to the Iranian negotiators that any agreement that would restrict Iran’s missile or regional activities would not be tolerated by the IRGC, which showed with its missile tests that the JCPoA—whether the letter or the spirit—would not restrict the Revolutionary Guards and their mission. The conservatives’ concern about the West’s alleged “hidden” objectives for infiltration and ultimately regime change through the JCPoA is also evident in hardline outlets like Javan, adding to the reasons for further resentment toward the agreement.

Although the reformist outlets’ increased attempts to justify the need for the revival of the JCPoA have contributed in part to the nervousness among the conservatives, Foreign Minister Hosein Amir-Abdollahian’s visit to Oman in which he was accompanied by Ali-Asghar Khaji—who attended secret talks with Jake Sullivan in Oman in 2012—strengthened suspicions about the mediation of the Omanis and the resumption of talks with the Americans. The conservative outlet Farhikhtegan, which apparently is not bothered by the likelihood of direct talks between Tehran and Washington, interprets it as evidence that the trigger mechanism is no longer on the agenda and the White House is no longer interested in maintaining the status quo; therefore, Washington is still trying to revive the JCPoA as its only remaining option. An article by U.S.-based analysts Ali Va’ez and Vali Nasr in Foreign Affairs magazine has caught the conservatives’ attention in Iran. Furious with the reformists for republishing the article and failing to disclose the two analysts’ “relations” with the U.S. government, conservative outlets describe it as an attempt by the U.S. to wrap the failure of its Iran policy in colorful language, hijack Iran’s achievements, which took place without the JCPoA, in the form of a new agreement, and simultaneously pacify the Iranian opposition groups and overthrowers. Va’ez, who has spoken of the West’s attempts to activate the snapback mechanism and the improbability of the revival of the JCPoA, is at the center of attention in reformist outlets but is viewed by the conservatives as the agent of a “pressure campaign” against Iran. Reformist pundits like Esma’il Germai-Moqaddam and Abbas Abdi have offered other perspectives for Iranian authorities to look at with respect to the JCPoA. Gerami-Moqaddam, for example, suggests that officials must apply the same approach they had in the resumption of relations with Saudi Arabia in their relations with the U.S. and engage in direct talks. Abbas Abdi partially blames Iran and its failure to protect the “spirit” of the JCPoA to conclude that with or without Donald Trump as president, the nuclear agreement would have collapsed because it contrasted with certain principles in Iran. According to Abdi, the JCPoA would open debates on questions about applying a similar approach to regional issues and would also raise the issue of normalizing economic relations with other countries, i.e., allowing investments by all JCPoA parties in Iran’s oil and gas sectors or other fields like auto imports. Although Abdi refuses to name the groups or entities that used the JCPoA in their political games or prevented its revival prior to the election of Ebrahim Ra’isi as president, he does not shy away from stressing that if the agreement had been revived, the 1401 protests would not have happened. Regardless, he argues that Iran’s foreign policy must undergo reforms to rely more on engagement without which he finds development and growth impossible, emphasizing that engagement and dialogue do not mean surrender.

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Assessment of Economic Indicators for Hyperinflation

From Daily Summary of 13 May 2023

More economists are joining the chorus of voices to warn about a new round of inflation, which is paving the way for Iran’s economy sinking into hyperinflation.

The skyrocketing inflation of food prices in the report released by the Statistical Center of Iran (SCI) has prompted economists and experts to voice concerns about indications of a new wave of inflation. Research by an institute for commercial research affiliated with the ministry of industry shows that after Lebanon, Zimbabwe, and Rwanda, Iran ranked as the country with the highest inflation in food prices in the period from March 2022 to March 2023. Mas’ud Daneshmand, an economist and member of the Iran Chamber of Commerce, believes Iran is moving toward triple-digit inflation. Mehdi Pazuki, an economist, says the stats released by SCI are not precise and under-report inflation, which he puts at above 50 percent. Experts point to the composition of liquidity in Iran’s economy, the recent stock market crash, persistently high inflation rates of above 50 percent, and the government’s exhaustion of financial resources to warn the public and policymakers that the economy is entering a new phase of inflation and potentially hyperinflation. Ali Sa’dvandi, an economist, pointed to a stream of liquidity that continues to infuse other markets. He warned that the outflow of liquidity from the Tehran Stock Exchange after the recent crash was lubricating a move toward hyperinflation. For the first time in years, Mahdi Ghazanfari, chief of the executive board of Iran’s National Development Fund (NDF), in effect the country’s rainy day reserves, released previously confidential figures to draw attention to its shrinking resources. Ghazanfari said that the NDF, which at one time held $150 billion, has had $100 billion withdrawn by successive presidential administrations, and a further $40 billion allocated to mandated finances, leaving only $10 billion in the fund. The critical state of available funds in the NDF points to the severity of Dutch disease in Iran’s economy. In particular, Iran’s broken banking system is another engine generating liquidity in the economy. The banking system’s role in expanding liquidity has been amplified by successive executive branch budget deficits and the command economy’s penchant for mandating the financing of programs with little regard for the value of an independent banking system. In turn, this has ensured that banks suffer from low capital adequacy rates. The banking system, moreover, is not the only victim of the Islamic Republic’s lack of financial discipline. Iran’s broken social security system is another burden on the economy, demanding a major share of the government’s annual budget to operate, while the government itself is the main debtor to the social security system. Another indicator presaging higher figures of inflation is the growing ratio of money to near money (highly liquid non-cash assets such as certificates of deposit or marketable securities, etc.) in the composition of liquidity, which facilitates the higher speed of circulation of funds between the markets, generating liquidity shocks.

Meanwhile, economists with different political leanings have differing views of the factors causing inflation. Hardline outlets and economists closer to the administration downplay the impact of liquidity and propose solutions involving the exercise of a command economy in the markets, suppressing prices and currency exchange rates. On the other hand, a high number of economists close to reformist or centrist political groups do not hesitate to call intractable growth of liquidity the main contributor to the persistent, inflationary state of the economy.

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Will FATF Pose Challenges to Economic Relations with Riyadh?

From Daily Summary of 14 May 2023

Conservative outlets are celebrating the economy minister’s participation in the Islamic Development Bank’s annual meeting in Jeddah as a “new economic chapter in the Islamic World,” but some are not convinced that the Arab countries in the region would expose themselves to sanctions, given Iran’s non-adherence to the FATF regulations.

The Islamic Republic of Iran joined the Islamic Development Bank (IsDB) in March 1989 and is the third largest shareholder in IsDB’s subscribed capital with a total amount of ID 4.17 billion (8.25 percent of total IsDB subscribed capital). In his speech at the IsDB’ annual meeting, Iran’s Minister of Economy Ehsan Khanduzi spoke of Iran’s preparedness to share its technical knowledge and experience in various fields such as biotechnology, aerospace, medicine, stem cell, oil, gas, and dam construction and hoped that the bank could, in exchange, provide financial support for private and science-based companies in the bank’s member states. Khanduzi also spoke of the 13^th administration’s plans for increasing Iran’s capital share in the IsDB. Perhaps a more important meeting for Khanduzi occurred on the sidelines of this event with the Saudi Finance Minister Mohammed al-Jadaan—one that was described by Khorasan newspaper as the first step towards signing an economic agreement between Iran and Saudi Arabia. The two ministers “hoped” that rapid steps would be taken to remove the economic and trade barriers between the two countries.

Since the beginning of Tehran-Riyadh negotiations until the signing of the initial political agreement in February 2023, economic transactions have totaled an anemic $15 million, but Iran’s Trade Promotion Organization hopes to increase the number to $1 billion in the short term and $2 billion in the mid term. A report in conservative outlet Quds Online is not oblivious to the challenges like the banking sanctions and the need for increasing Iranian products’ quality to compete with fierce rivals like Turkey in Saudi markets. Without offering a solution to banking sanctions, the outlet hopes that “pilgrimage diplomacy” would bring in 3 million visitors from the Persian Gulf states to cities like Qom and Mashhad to boost the tourism industry in Iran.

Meanwhile, as the G7 finance ministers and central bank governors concluded their meeting in Japan on 13 May, they expressed deep concern about Iran’s illicit financing risk. Reformist journalist Ahmad Zeidabadi argues that the statement, which also emphasized the G7 countries’ commitment to countering attempts to evade and undermine sanctions, was a warning to the Persian Gulf states to avoid extensive transactions with Iran so long as Iran refuses to comply with FATF requirements. In his assessment, following the official re-opening of embassies in Tehran and Riyadh, every time Iran seeks to increase economic relations with Saudi Arabia, the FATF issue will appear as an undeniable obstacle and a challenge for President Ra’isi. If, under pressure from the hardliners, Ra’isi maintains the status quo with the FATF, then his neighborly policy and normalization of relations with the Saudis or other Arab states will not really lead to economic improvement. Although Zeidabadi believes the hardliners are “aware” of the need for acceptance of the FATF as a necessary condition for economic improvement, hardliners still insist that the Ra’isi administration has managed to “achieve a great deal without the JCPoA or the FATF.”

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Iranian Pundits Dismiss Idea To Replace JCPoA with Regional Agreement

From Daily Summary of 16 May 2023

After initially provoking a measure of interest, the idea of replacing the JCPoA with a regional agreement, as proposed recently by U.S.-based analysts Ali Va’ez and Vali Nasr, ended up meeting with disapproval from analysts with various political leanings.

The proposal published by Va’ez and Nasr in Foreign Affairs magazine initially caught the attention of the hardliners, evoking the expected conspiratorial reactions (Daily Summary of 11 May 2023: “Hardliners’ Unease with Revival of JCPoA”). However, reformist-leaning analysts also think it offered too little to Iran in exchange for the nuclear restrictions and regional activities it was expecting. Former diplomat Kurosh Ahmadi, for example, pointed out that economic relief limited to Tehran’s relations with the GCC, where all neighbors are essentially oil exporters and their economies do not complement one another, cannot result in economic strength for Iran. Jalal Khoshchehreh, another analyst in the same camp, is both baffled by the “fundamentally flawed” proposal and upset by his colleagues who initially republished the article with much enthusiasm. Reiterating similar concerns about Iran’s insubstantial trade relations with regional countries, Khoshchehreh argues that replacing an international agreement with a regional one would not be in Iran’s best interest in terms of its global prestige. According to him, so long as Iran does not resolve its issues with Western powers, regional agreements will be of little importance. He also criticizes Iranians ­for failing to offer initiatives of their own, calling it a weakness on the part of Iran. Along the same lines, Hasan Beheshtipur reiterates that the JCPoA was a comprehensive agreement on a much bigger scale than Tehran’s agreement with Riyadh. Although he believes the latter agreement can help boost cooperation in West Asia or revive the Hormuz Peace Initiative, he does not agree with Va’ez and Nasr in comparing it to UNSC Resolution 598. In the conservative camp, analyst Amir-Ali Abolfath is amazed by the Va’ez-Nasr proposal, which seems to have ignored Iran’s 90-percent enrichment levels—as claimed by Western sources—and expects the country to return to the JCPoA’s 3.67 percent in enrichment levels in exchange for sanctions relief for trade with a few countries in the region. Abolfath points out that Iran’s major trade partners in the past decade included Europe, Japan, Russia, China, South Korea, and India. According to him, under the current conditions Iran is hardly going to compromise even in exchange for a total removal of sanctions. Besides, considering the writers’ ties with the Biden administration’s foreign policy team, the conservative analyst points out that their proposal does not necessarily fulfill Iran’s national interests.

It appears most analysts find it virtually impossible to revive the JCPoA in its original form. If the Va’ez-Nasr proposal was in fact a U.S. government trial balloon in the context of a new agreement, Iran would have little interest in it. Tehran has apparently rejected the idea of an interim agreement that would limit its enrichment to 60 percent and allow it to have access to its blocked money, but some believe this may be a new path that could lead to a “final” agreement. The IAEA Board of Governors will meet in June and a resolution against Iran will certainly complicate the revival of the JCPoA, says journalist Parastu Bahrami.

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Meet the New Boss, Same as the Old Boss: China After the Iran and Saudi Deal 

From Daily Summary of 15 May 2023

[🎧 Listen to this article on the PersuMedia podcast]

China continues to tout its economic ties in the Gulf this month, from a new low-carbon steel processing facility in Saudi Arabia to a series of meetings with Iranian officials and media campaigns promoting investment in the Iranian economy. But as investment continues at a rapid pace in Saudi Arabia, Iran has received little but platitudes and diplomatic meetings, showing little has changed since the Iran-KSA agreement vis-à-vis China’s economic engagement with the region. Beyond the Gulf, Egypt saw a surge in Chinese tourists, as China’s continued diplomatic support for Syria’s return to the Arab League signalled China’s growing comfort in its role in the region’s politics.

China and Saudi Arabia go Green…

China’s Baowu Iron and Steel Group has partnered with Saudi Aramco and the Public Investment Fund to jointly build the world’s first green, low-carbon thick plate steel manufacturing plant. The project highlights China’s focus in Saudi Arabia on jointly owned projects and greener, more sustainable technology. Chen Derong, Chairman of China Baowu, highlighted the significance of this project as an exemplar of international collaboration and a model for “mutually beneficial” economic cooperation between China and Saudi Arabia. The project also simultaneously contributes to Saudi Arabia’s two goals of domestic development and becoming a global power.  Amin Nasser, President and CEO of Saudi Aramco, emphasized that the Saudi heavy plate project will enhance the local steel industry, strengthen supply chain localization, generate job opportunities, and promote economic growth and diversification in Saudi Arabia. Yazid Hamid, Vice President of the Public Investment Fund, expressed his confidence that the project will position Saudi Arabia as a prominent global steel industry supplier.

…While Iran Struggle for Attention 

Meanwhile, in Iran business and investment remains low. There are some encouraging signs on the horizon, but we’ve heard it all before. On May 9, Wang Yi met with Mohammad Bagher Zolghadr, secretary of the Expediency Discernment Council of Iran, to (once again) commit to the implementation of the 25-Year Agreement. Yi also linked China’s relationship with Saudi Arabia and Iran to Syria once again, praising the return of Syria to “the big family of the Arab league” and expressing support for Middle Eastern countries “taking their destiny into their own hands.”  Zolghadr also met with other officials, including Liu Jianchao, Minister of the International Liaison Department, where they discussed increasing regional and international coordination between the two countries. 

But What About Those Oil Purchases?

Outside of the official economy, there are reports that Iran continues to sell large amounts of oil to China. While at first glance this may appear like more “mutually beneficial” activity, a closer look reveals a more complicated story. Although China is Iran’s only serious oil customer, the oil is being sold at a heavily discounted rate, a sign of the increasingly desperate state of its political and economic position.  And the fact remains that Iran has no serious oil customers other than China. In fact, much of the oil purchases are likely driven by private Chinese “tea pot refineries,” which are less driven by Beijing’s desire to help out an ally and more by economic opportunism.

It’s not Boeing, but it’s a start

Thought it didn’t stop the international press, there were also several official media reports highlighting events like the 5^th Iran Export Potential Expo, which was held in Tehran on May 10 to promote business partnerships between Iranian companies and international buyers, as well as an in-depth report on the development of Iran’s airline industry that had overt political overtones. Titled “Seeking Development in Adversity,” the article highlighted Iran’s Yasin training jet, and the potential of its aviation industry overall. “Throughout the history of the development of its aviation industry, Iran has long been seeking development in the face of adversity, and has made great progress…It can be said that the successful launch of new weapons and equipment represented by the “Yassin” trainer aircraft is a powerful blow to the sanctions imposed by the United States and Western countries, and it also heralds a new starting point for Iran’s aviation industry.”

Cairo or Bust

Elsewhere in the Middle East, there are signs of China’s continuing diplomatic and economic presence. A surge of Chinese tourists in Egypt have been a boon for the local economy. Abbas Saeed, a 38-year-old Egyptian tour guide, told reporters that since the beginning of this year, the momentum of Chinese tourists returning to Egypt has increased dramatically. “This not only increases the income of Egyptian tour guides and other tourism practitioners, but also promotes the development of tourism in Egypt overall.” Egypt has taken pro-active measures to take advantage of its popularity with Chinese travellers, who are drawn to a country that, like China, has an “ancient civilization.” In order to attract more tourists, the Egyptian tourism department introduced measures to make the process easier, such as visa on arrival. “When we learned that Chinese tourists could return to Egypt, we started various preparations to attract [them],” according to Mohammad Salama, head of the Tourism Office of the Egyptian Tourism Promotion Agency. China is also deeply involved in development and construction in New Alamein City, a major government project designed to support Egypt’s “Vision 2030” development program. Several high-rise apartment complexes are being constructed under the supervision of Chinese companies, which are being touted as a “symbol of Sino-Egyptian friendship and the success of the BRI initiative.”