Which direction? The presidential elections and Iran’s trade strategy

Bijan Khajehpour

Iran will soon have a new president and, judging from the conduct of the Guardian Council in rejecting many mainstream and reformist candidates, there is a high likelihood that the next president will be closely affiliated with the faction known as the hardliners. With respect to Iran’s foreign trade, the question is whether the emerging change of government will impact the country’s overall strategy. In this context, it is necessary to take a closer look at how various parameters impact trading patterns and policies and how the election will influence the relevant processes and dynamics.

The shaping of trade policy in Iran

Iran has a very complex power structure, with continuous bargaining processes and fluid power relations. The executive branch is an evolving power center, not just because of elections, but also because of processes such as privatization, decentralization, and the changing role of the government, which has moved from being the biggest economic player in the 1980s and 90s to one that is continuously torn between regulatory and economic functions. Complicating this intricacy is a growing culture of various corrupt networks competing for economic interests. In a speech on May 26, supreme leader Ayatollah Khamenei pointed to the presence of an “import mafia”, which confirms the existence of these corrupt elements in the power structure.

The above attributes have led to a politicization of economic and trade decisions. In addition to the complexity of the country’s power structure, Iran’s trade strategy has been shaped by three other drivers: revolutionary ideals (such as the desire to reduce dependency on western sources of technology as well as promote trade among Islamic nations), technocratic priorities (including the need to secure modern technologies and investments for key industries such as petroleum, telecom, automotive etc.) and the desire to reduce the country’s vulnerability to external sanctions.

The latter driver has underpinned the “resistance economy” strategy, which contrary to the general assumption does not call for Iran to isolate itself from the global economy, but rather promotes domestic capacity building including expanding Iran’s export potential. Of note is also the fact that Iranian politicians consider it so important to have a good relationship with the business community. As such, it was not a coincidence that the frontrunner in the presidential race, Ebrahim Raisi, decided to make his first campaign event a meeting with the principals of the Chamber of Commerce.

Is there a trade strategy?

The amalgamation of the various factors has generated a trade strategy, which was formulated by the government in 2019. The plan comprises targeted import substitution and an expansion of trade with immediate neighbors, including Russia and the Eurasian Economic Union (EEU). The stated objective in 2019 was to double the value of exports sent to 15 immediate neighbors by March 2022. Another goal was to reduce reliance on Western sources of technology by diversifying import sources. Iran later expressed a desire to enter into long-term strategic partnership agreements with China and Russia in order to generate the needed foreign direct investment.

In the meantime, important cornerstones of the mentioned plan have fallen into place:

• Iran signed a framework agreement with China in March 2021 that will pave the way for greater investment and trade interaction with the Asian superpower;
• Iran and the EEU have signed a preferential trade agreement that has facilitated unprecedented growth in their mutual trade. Incidentally, the most recent data suggest that Russia has replaced Germany as Iran’s main European export market.
• Tehran has also expanded trade with immediate neighbors and pursued various infrastructure projects to increase connectivity with neighboring markets. The latter not only promote regional trade, but also position the country as a transit hub for many markets. However, as seen in the case of the Chabahar port, the expansion of infrastructure will require international investments, which China is offering (in the absence of other major investors).

The Latest Trade Figures

In the last Iranian year, which ended on March 20, 2021, total foreign trade excluding crude oil exports amounted to $73 billion, marking a 14% decline compared to the previous Iranian year. In those 12 months, Iran’s non-crude exports stood at $34.5 billion compared to $38.5 billion of imports. Exports and imports declined by 17% and 12% respectively compared to the previous cycle. This decline can be explained by two parallel phenomena: first, the economic impact of the pandemic, and second, the bottlenecks that external sanctions have created for trade and financial transactions. Though non-crude trade figures point to a trade deficit of $4 billion, once crude and condensate exports are included the overall trade balance enters positive territory.

Based on the above data, in the mentioned 12 months, the top five export markets for Iranian products were China, Turkey, Iraq, Afghanistan, and the UAE. The top five sources of imports for Iran were China, the UAE, Turkey, India, and Germany. Evidently, compared to a decade ago when the European Union was the largest trading partner of the country, Iran has moved on to consolidate intensive trade with China as well as grow trade with immediate neighbors.

At the same time, Iranian experts project trade figures to improve in the current Iranian year, both because of a gradual post-Corona normalization of regional and global trade processes as well as an anticipated lifting of sanctions through the revival of the nuclear deal, the Joint Comprehensive Plan of Action (JCPOA). A third factor that will enhance trade opportunities in Iran will be the expected release of the country’s hard currency funds that have been stranded internationally due to banking sanctions. However, to benefit from these funds, the country will also need to normalize banking relations with the world – a process that will extend beyond the lifting of sanctions.

The end result of all this is that Iran’s top trading partner is now China, followed its immediate neighbors, i.e. UAE, Iraq, Turkey and Afghanistan. Another neighbor, Russia, represents the fastest emerging trading partner. It should be noted that the absence of the EU in the top trading partners is a consequence of external sanctions and not of a deliberate strategy on the Iranian side.

The outlook: going East or going global?

No matter who has ruled the country, Iran has always had high economic and trade ambitions that require considerable investments. The idea of Iran having an isolated and weak economy does not fit into any of the worldviews of the political establishment. However, as shown above, the overall orientation can be shaped by internal and external factors – and both of these could change in 2021.

Internally, the upcoming change of government could shift the balance of power between various factions and networks. A hardline victory would empower their preferred strategy, which is to deepen economic cooperation with Russia and China and maintain a strategic distance to western powers. Should Abdolnasser Hemmati be the surprise winner, there would potentially be a continuation of the current strategy.

Externally, a potential revival of the JCPOA and the lifting of sanctions would create new opportunities to expand Iran-EU trade. However, there would be three obstacles, namely:

• a potential Raisi presidency, which would put pressure on Iran-EU relations, not only because of the Iranian pivot to the East, but also because of Raisi’s poor track record with regards to human rights;
• the hesitation of many European enterprises to engage with the Iranian market in anticipation of potentially new Iran-US tensions;
• a mismatch between the expectations of Iranian businesses and the approach of European companies to the market.

Consequently, even if the JCPOA is restored, chances are that the current strategy will remain in place, with China continuing to be Iran’s top trading partner and Iran’s immediate neighbors occupying the other top spots.

The key nuance that needs to be appreciated is the fact that a hardline president will potentially attach greater significance to Russia as a strategic partner. Iranian hardliners have left little doubt that they view Russia as Iran’s natural “strategic partner”. In their analysis, while China is a strong trading partner and source of technology, Russia is the power that will provide Tehran with critical technologies in the fields of weapons, nuclear, and security, as well as cooperate with Iran on regional security issues such as in Syria. Incidentally, the first foreign trip of Iran’s hardline Majles speaker, Mohammad Baquer Qalibaf, was to Moscow, where he delivered a message from Ayatollah Khamenei to the Russian side. It was during that visit that Qalibaf quoted Khamenei as emphasizing “strategic relations” with Russia. The hardliners’ confidence in Russia is also reflected in the fact that during the first presidential debate, another hardline candidate, Mohsen Rezaei, hinted that he would follow the Russian approach to privatize the Iranian economy. In contrast, a moderate president would prefer to develop balanced relationships with all global powers rather than limit Iran’s trade interaction to Eastern and regional players.

Dr Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - a Vienna-based international consulting firm. He is also a member of the Advisory Board of the Europe Middle East Research Group (EMERG). He is an expert on geopolitics of energy and the Iranian economy.

On Twitter: @BijanKK