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Suzanne Maloney's Blog

What Rouhani's Week in New York Means for Nuclear Diplomacy with Iran

The following article was originally published by Iran@Brookings.

Suzanne Maloney

      Last week's New York visit by Iranian president Hassan Rouhani fell short of any expectations that might have been set by his historic American debut only a year ago. While there was plenty of pageantry — prime-time interviews, gala dinners, and sober speeches before august institutions — Tehran's annual American charm offensive fell short of the hype and historic breakthroughs that marked his September 2013 trip. Even more disappointing was the fact that the rare appearance of senior Iranian officials on American soil failed where it mattered most, in catalyzing new momentum on the stalled nuclear talks.

 
            These dashed hopes should not overshadow what Rouhani's New York trip did accomplish: it clarified for Americans and the world that Iran's strategy is to play out the clock on the approaching deadline for securing a comprehensive deal and to wield its role in the intensifying regional turmoil as leverage in securing more favorable terms. This strategy, while perfectly rational from an Iranian perspective, is almost certain to produce a disastrous outcome for Iran, the region, and the world.
 
What a Difference a Year Makes
 
            This September was always going to suffer by comparison to 2013, when Rouhani arrived in New York for United Nations General Assembly meetings fresh off his surprising electionand brandishing a strong early mandate for diplomatic outreach on the nuclear issue and beyond. That visit was a tour de force of affirmation and celebration, with an expertly crafted crescendo of ingratiating overtures that culminated in an unprecedented telephone conversation between President Barack Obama and Rouhani during his final moments in New York.
 
            This time, consistent with the dire regional context and his public character throughout his long career in Iran's security bureaucracy, Rouhani bared a more censorious style and less silky rhetoric. Instead, he scolded the West for "strategic blunders" that had caused the region's many woes, and suggested that Iran's assistance against regional extremists could be had for the small price of flexibility on the nuclear issue.
 
            In turn, he was received by his American interlocutors with a slightly harder edge. A record is tougher to defend than the mere promise of action, and journalists' questions often become more pointed when one of their own has been targeted. Instead of the patronizingly giddy praise for the Iranians' social media savvy, this year the CEO of Twitter took a highly public shot at Rouhani, encouraging him to make the technologies available to all of his citizens. (The latter move prompted a fitting counter response by Iranians, who launched a social media campaign to press Twitter to grant Iran-based users access to account verification services.)
 
A Deadline Looms, But a Nuclear Deal Remains Out of Reach
 
            Still, the tougher tone on both sides would simply be the stuff of atmospherics had the talks on the nuclear issue made meaningful progress. With less than two months before the expiration of the already extended deadline for the nuclear diplomacy, the negotiations that took place on the sidelines of UNGA represented the last best chance to overcome the stalemate on the core concern that has divided the parties since the outset — how to constrain Tehran's capacity to enrich uranium. Unfortunately, it appears to have been an opportunity lost, largely because of Iranian obduracy on the issue of enrichment. This is hardly the only outstanding issue; in reality, so long as any piece of the deal remains in play, none of the tentative arrangements brokered on particular elements — such as the Fordow enrichment facility or the Arak heavy water plant — can be considered definitive.
 
            U.S. officials are allergic to any conversation that contemplates the failure to get a deal by November 24, arguing that any public contemplation of what might follow is a distraction that dilutes pressure on Tehran for quick compromise. Increasingly, this is a futile concern; the expectation that the deadline will pass without a deal is already creeping into the policy discourse, as a new article by former White House official Gary Samore forecasts.
 
            And in any case, the insistence on avoiding any discussion of a potential failure is quite the opposite of American intentions. For their part, during a host of public and private meetings in New York featuring Rouhani or his talented foreign minister, Mohammad Javad Zarif, the Iranians openly acknowledged the prospect that the deadline will not be met. Timing hardly seems to be a motivating factor at this point. In a breakfast with reporters, Rouhani noted that "if there [is] no final agreement, there will perhaps be another way to go." 
 
The Islamic Republic and the Islamic State
 
            In addition to the Iranians' lack of urgency on the impending deadline, another aspect of their approach to the nuclear negotiations came through loud and clear during the New York visit — namely, the linkage that Tehran sees between the nuclear deal and regional instability.
It was inevitable that the question of Iran's stance toward the violent group that has dubbed itself the Islamic State (also known as ISIS) would arise during the delegation's New York visit. After all, Zarif arrived only a week after President Obama addressed the nation about the threat posed by ISIS and immediately following a conference led by U.S. Secretary of State John Kerry to formalize an international coalition against ISIS. Out of deference to Washington's regional allies, particularly Saudi Arabia, Iran was pointedly not invited to that gathering — despite the front-line role Iranian forces have already played in driving ISIS out of several Iraqi positions.
 
            Most of the attention paid to Rouhani's UNGA speech focused on his sanctimonious scolding of Washington and the world for the failure to pay heed to his warnings a year ago about extremism. Both Rouhani and Zarif insisted that Tehran can play a central role in combatting the rise of ISIS and other jihadist forces, and deprecated the still-evolving American strategy for its reliance on air power.
 
            However, the most significant aspect of their remarks on ISIS was the fairly unsubtle suggestions that "avoidance of excessive demands in the negotiations by our counterparts"could open the doors to Iranian assistance. Once again, as in so many previous iterations of the U.S.-Iranian flirtation (Iran-contra, goodwill-begets-goodwill), a quid pro quo is being dangled before Washington; for the small price of nuclear concessions, Iranian assistance against ISIS can be bought. "If our interlocutors are also equally motivated and flexible, and we can overcome the problem and reach a longstanding agreement within the time remaining," Rouhani cajoled in his UNGA speech, "then an entirely different environment will emerge for cooperation at regional and international levels, allowing for greater focus on some very important regional issues such as combating violence and extremism in the region."
 
UNGA Is Over, and So Is Rouhani's Honeymoon
 
            The attempt at linkage and the lack of urgency evident in the public remarks of Rouhani, Zarif and other Iranian officials last week suggest that Tehran is playing hardball. However, it is a dangerous bluff. Rouhani's government has begun to rehabilitate Iran's economy and restore some confidence among its people that the country is no longer headed toward a precipice; the rise of ISIS has reinforced its sense of regional primacy.
 
            However, this renewed sense of swagger should not be mistaken for actual leverage.Tehran has infinitely more to lose from the failure to secure a deal. Washington does not want to contemplate alternatives to diplomacy, and in the current chaotic environment, Obama is even less likely to move quickly toward a military solution to the nuclear impasse than ever before.
 
            Still, sanctions remain a devastating tool, and one that is only too tempting for a recalcitrant American Congress. Despite strains on the sanctions regime as a result of Ukraine and new threats to energy supplies, international adherence remains robust, simply because existing measures force the world to choose between doing business with Tehran and doing business in the United States. That cost-benefit assessment for most international firms won't change until the legal framework does — in other words, until there is a comprehensive deal. In the absence of one, the tightening of sanctions, and the corresponding toll on ordinary Iranians, is almost an inevitability.
 
            As for the campaign against ISIS, it would be a grave mistake to barter nuclear concession for an Iranian assist in that battle. That's not to disregard Tehran's formidable capabilities and its existing influence among crucial constituencies in both Iraq and Syria. However, the logistical and institutional barriers to direct bilateral cooperation on both sides remain steep, and ultimately Iran's interests — as identified by its leadership — will govern its campaign there, not some spurious tradeoffs in the nuclear talks.
 
            Iranian negotiators, like their American counterparts, have domestic politics to consider, particularly the hardliners who will resent every hint of compromise from revolutionary dogma. From this corner, the president's performance in New York mostly drew plaudits at home, with one notable exception — his meeting with British Prime Minister David Cameron, whose government remains a much cherished bête noire for Iranian hardliners. (Rouhani has since denounced Cameron for implying that Tehran was "part of the problem" in Iraq and Syria.)
But a deal that satisfies the maximalist imperatives of hardliners in either capital is not a viable construct. The U.S. explicitly conceded this last November, and President Obama himself made a strenuous case for the interim deal and its hard-fought compromise of continuing Iranian enrichment over howls of opposition from Congress and U.S. regional allies. He has largely won the point; the demand for zero enrichment has mostly faded from the debate.
 
            Obama's political courage has not yet been matched in Tehran. Iran's leadership remains intent on  retaining its core nuclear infrastructure, and there is no political force willing or capable of pushing back publicly against the hardliners' wildly inflated definition of Iran's interests and requirements. Ironically, for much of the eight years that preceded his election to the presidency, Rouhani was that voice of reason, constantly prodding his predecessor to avoid boxing Iran into a corner.
 
            Today, as a president who lacks ultimate authority over nuclear policy and most other sensitive matters, Rouhani is trying to box Washington into a false choice between accepting Iran's unacceptable terms or seeking an even less attractive alternative to diplomacy. The Obama administration and its partners in the P5+1 should resist this ruse. The world cannot want a deal more than Tehran does, and we cannot pay any price to get one. In the end, the costs of continuing the impasse are felt hardest by the Iranian people, at least those who were not present at Rouhani's lavish closing reception at the New York luxury restaurant Cipriani last week.
 
Suzanne Maloney is a senior fellow at the Saban Center for Middle East Policy at the Brookings Institution. She is the author of “Iran’s Long Reach” (2008). Follow her on Twitter @MaloneySuzanne
 
Click here for the original posting on Iran@Brookings.  
 

 

Iran’s Economy in the Shadow of Regional Upheaval

Suzanne Maloney

       Iran’s stability is once again in question, as historic protests sweep the Middle East and revive the flagging fortunes of its own opposition movement. Expectations of the Islamic Republic’s inevitable demise are further fueled by the revolutionary state’s own vulnerabilities.
 
       Political elites are constantly at war with one another. Much of the clerical estate is alienated from theocratic rule. The merchant community has fought both the encroachments of the state and tax obligations. And youth– who represent more than two-thirds of the population – are simply fed up with the lack of opportunities and the stultifying social and cultural restrictions. Since the disputed June 2009 presidential election, a new homegrown opposition movement has emerged, led by political revolutionary stalwarts and propelled by millions of ordinary Iranians who took to the streets for six months.
 
       Iran’s economic predicament has particularly provoked popular frustration with the post-revolutionary regime. Iran boasts the world’s second largest reserves of oil and gas. But revolution, war, sanctions, and internal philosophical differences over economic policy have dramatically eroded per capita income.
 
      Iran today suffers from a wide range of economic problems. It has failed to create enough jobs, particularly for new entrants to the labor market. Inflation has reached epic rates in recent years. It has a chronic overreliance on petroleum revenues. Sanctions have raised the cost, time and inconvenience of almost all international transactions. It has underdeveloped capital and financial markets. And growth rates, which tanked as a result of the global economic slowdown, have been exacerbated by maladroit government interventions.
 
      Yet just as the regional upheaval threatens to infect Iran, the Islamic Republic may be on track to alleviate one of the most significant dimensions of its economic Achilles’ heel. In late 2010, the government embarked on sweeping economic reforms that eliminate state subsidies on a range of essential consumer goods – including bread and gasoline – and provide modest cash payments to every Iranian household.
 
      The subsidy reforms are still in the first of many phases. Yet its surprisingly smooth launch may help insulate Iran from the sort of economic grievances that helped spark the Tunisian uprising in December and have contributed to the broader phenomenon of revolutionary mobilization that has spread across the region. Oil revenues have also had a major boost since the spike in oil prices as a result of unrest in Libya and Bahrain. So Iran’s economic prospects may now be decreasing even as the impact of multilateral sanctions over its nuclear program intensifies.
 
      Technocrats across Iran’s political spectrum fully understood that the state’s spending on subsidies –estimated at about $100 billion per year – was seriously inefficient and created damaging distortions within the economy. Among other problems, Iran’s domestic energy consumption exceeded almost any country on the planet. The government estimated about 30 percent of subsidized bread was either thrown away or smuggled out of the country.
 
      Several Iranian leaders supported subsidy reform. Bt neither reformists nor conservatives were eager to push forward a program that would entail price hikes on key commodities. By contrast, President Mahmoud Ahmadinejad seemed to welcome the opportunity for a major policy initiative, and began pressing for a dramatic reform plan in mid-2008.
 
      After a prolonged, acrimonious battle with the Iranian parliament, the reforms were formally launched after a long delay in December. They included quadrupling the price of gasoline as well as a range of other goods. To offset the shock, the government distributed approximately $77 to each Iranian household several months earlier, in bank accounts that were locked until the price increases were implemented.
 
      Ahmadinejad’s program is hardly an example of perfect policymaking. The opaque implementation, particularly sparse information about new prices until the last moment, has fueled uncertainties corrosive to healthy economic planning or growth. Legitimate concerns about inflation remain, particularly with the next round of payments due to overlap with Iran’s annual New Year’s bonuses (in March) and shopping season. Iit remains unclear whether the poor, who were disproportionately disadvantaged by the price subsidies, will see meaningful improvements in their standard of living, particularly as consumer products become more expensive.
 
      The program also entails a profoundly interventionist role for the government, perpetuating a longstanding flaw in the Iranian economy. The state (and perhaps most important for domestic politics, the Ahmadinejad presidency) remains firmly in control of the economy. Government decisions – about how to invest budget savings and which industries or firms should get financial support to offset price rises – will shape the future of the Iranian economy.
 
      The result is unlikely to favor a truly liberalized market economy, given Iran’s track record and Ahmadinejad’s heavily politicized policies. The regime has also used the program as a pretext excuse to intensify repression against its internal critics, repeatedly warning that public protests over price increases would be considered treason and dealt with harshly.
 
      Iranians reacted with resignation when price increases went into effect in January, whether cowed by threats or convinced by the long debate between Ahmadinejad and parliament over the reforms’ scope and timing. Implementation has reportedly faced a wide variety of small-scale problems, particularly as cash payments were based on voluntary household surveys.
 
      By and large, however, the reforms appear to be having the intended effect. Consumption of electricity and gasoline has already dropped substantially. Use of Tehran’s anemic public transportation system has boomed. There are corollary benefits. The banking sector rushed to attract new clients. And initial payouts helped stimulate investment in small-scale entrepreneurship, according to anecdotal reports.
 
      Successful implementation of reforms would represent a policy corrective as monumental as any the Islamic Republic has ever attempted. It would be similar to Iran’s reversal in the 1980s on family planning policies, which helped turn around skyrocketing (and economically unsustainable) birth rates.
 
      The new program has the potential to spur a virtuous cycle of economic liberalization. It could help strengthen the banking sector, increase private savings and investment, reduce smuggling and other black market activities, and rationalize deep distortions in the manufacturing and other sectors. Most powerfully, the reforms could create a sense of individual ownership in the economy by giving Iranians greater control over the spending of the national wealth.
 
      Politically, the program may also help preserve the regime’s hold on power by insulating it from the coercive force of comprehensive international sanctions and assuaging grievances of the poorest strata of Iranians. Although recent regional unrest has been portrayed as largely political, economic grievances helped initiate the movement. The self-immolation by a Tunisian street vendor sparked the upheavals in December.
 
      The sense of disempowerment and frustration over the lack of economic opportunities that is prevalent throughout the Middle East helped fuel a powerful force for social mobilization. If Tehran can successfully navigate those pressures, the regime may succeed where several Arab states have failed, thanks to its two-track strategy of repression and economic inducements to stave off popular dissatisfaction.
 
      Beyond the immediate stability of the Iranian regime, the reform program’s early achievements challenge assumptions about the government’s functionality--or lack thereof. The regime is brutal and nondemocratic, and that many of its policies both at home and abroad are deeply problematic.
 
      But outside observers often indulge in overgeneralization and oversimplification about Tehran. Most media and policy analyses of Iran’s economy rely heavily on a few popular adjectives: mismanaged, disastrous, bloated, failing. These descriptors are broadly accurate, and yet they do not capture the reality or the subtleties of economic policymaking, even as the role of technocrats has been largely devalued under Ahmadinejad.
 
      The subsidy reform program represents a serious and rational response to Iran’s economic predicament which requires a considerable degree of bureaucratic competence over a protracted time period. Millions of new bank accounts were established. Smart card technology was adopted for the country’s gas stations. And a sustained public education campaign was carried out. Implementation has required intensive coordination among a variety of government ministries and private sector organizations, as well as ongoing wrangling with a skeptical parliament.
 
      Despite its manifest flaws, the program receives quiet plaudits from external economists and is being watched closely by other governments struggling to divest themselves of unsustainable benefits.
 
      The decision to embark on such a dramatic, and ultimately risky, reform also offers new insight into Iran’s current leadership, particularly Ahmadinejad, who has championed the program, and Iran’s supreme leader Ayatollah Ali Khamenei, who is the ultimate authority in Iran. Khamenei has never previously demonstrated a subtle appreciation for economic policy. And many across the spectrum of permissible political discourse (including reformers who form the core of the Green Movement) were far more hesitant about embracing such a far-reaching undertaking, largely out of concern about the social and political upheaval that dramatic price rises might entail.
 
      In the external media, the subsidy reform program is typically depicted as a response to mounting international sanctions. That is not strictly accurate. Its embrace dates to the time when Washington’s push for international sanctions had largely run aground. This coincided with the inception of the global economic slowdown and the collapse of oil prices after a five-year boom. But Ahmadinejad and other senior political figures consistently exulted in the worldwide recession; they gave little indication that they appreciated the eventual implications for Iran’s economy. But the economic crisis, as well as the looming constraint of international economic pressure, surely played into the two-and-a-half year debate within Iran’s parliament over whether, how, and when to implement the program.
 
      Recognition of the potential political benefits may be what ultimately spurred Iran to enact reforms. Ahmadinejad can now claim that he has made good on his initial campaign promises to put the nation’s oil money on the sofreh (tablecloth) of the people. And Iran’s government may be less vulnerable, as long as its citizens are counting on a bimonthly cash payout.
 
      Tehran’s ability to take politically risky, economically rational decisions at a time of intense international pressure over its nuclear program is surprising. Its capacity to implement a complex, nation-wide program without massive social dislocations (yet) is a timely reminder that external observers often underestimate the Islamic Republic’s capacity for surprise, self-preservation and sharp appreciation for the costs and benefits of its policy options.
 
 
Suzanne Maloney is a senior fellow at the Saban Center for Middle East Policy at the Brookings Institution. She is the author of “Iran’s Long Reach” (2008) and a forthcoming book on Iran’s political economy since the revolution.
 
 

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