Iran’s new cabinet will be facing old problems

We consider two indicators to capture the economic shocks in Iran: the market exchange rate of USD to Iranian rial and the price index of the Iranian stock market. The importance of looking at both indicators is that the first one is the anchor of inflationary expectations in Iran, and the second one is the best indicator available publicly for capturing the private sector’s response to a shock.

The plots below capture these indicators for the days leading to and after the sudden deaths of the president and foreign minister Hossein Amir-Abdollahian. Based on these indicators, Iran’s economy did not experience any shocks.

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Facing economic sanctions for most of the past decade, the Iranian economy is now more dependent on imports than before. This observation is in contrast with how Iranian authorities and some policy analysts in the US describe the Iranian economy as resilient against sanctions by tapping into domestic resources (e.g., Chapter 4 of the book How Sanctions Work by Narges Bajoghli et al., 2024). The term resistance economy coined by Supreme Leader Ali Khamenei is used in such contexts to prove the point. But, if the economy was truly more independent and self-sufficient, why do the economic indicators show considerably more sensitivity to internationally significant news compared to the domestic shocks? While Raisi’s death had little impact on the value of the Iranian currency, heightened tensions with Israel in April resulted in a sudden boost for the dollar in Tehran’s currency markets.

Promoting domestic production and becoming more self-sufficient require some fundamental conditions, such as a healthy private sector, protection of people’s rights, and institutional integrity. Since the inception of Islamic government in 1979, constitutional errors as well as repeated malpractices have compromised these basic prerequisites for improving the economy.

Among the constitutional deficiencies that directly lead to budget deficits and inflation is the lack of independence of the Central Bank of Iran (CBI) as the authority responsible for the implementation of monetary policies. The governor of CBI shall be assigned or removed by the president. In the most recent version of the CBI’s governing law, nine out of ten voting members of the Supreme Council, the body responsible for the IR’s monetary policies, are either directly or indirectly assigned and removed by the president. This creates a conflict of interest as the government’s budget is financed by the money supply under the control of the central bank. Lack of independence for CBI means that each administration could draft a fiscally unbalanced budget, and CBI would compensate for the deficit by printing more money. This is one of the reasons that all governments since 1979 have drafted budgets with considerable fiscal deficits that favor their social policies and ambitions, only to exacerbate inflationary forces.

Privatization is another example of constitutional errors combined with malpractices by corrupt actors. Article 44 of the IR’s Constitution specifies that all major industries shall be owned by the government. That led to approximately 80% state ownership of Iran’s economy after the revolution. Twenty-five years later, in 2004, the article was amended to distribute the ownership of infrastructure and backbone industries among the private sector, cooperatives, and the state. Despite all the efforts of every government since 2004, the latest figures presented by members of chambers of commerce and other officials, as well as the CBI’s research, suggest the government, along with the office of supreme leader, and the public sector constitute between 60-80% of the economy.

Given that privatization has remained on paper for almost two decades of official proclamations, we could safely assume it is not an objective actively pursued by the authorities. Looking at the preconditions and impunities that Ali Khamenei offered to a task force he initiated in 2022 for the same purpose captures the realities and his true intentions for privatization. He assigned the vice president at the time, Mohammad Mokhber, to lead the privatization task force. While the majority of the members of the task force, including Mokhber himself, have on-going criminal cases in the IR’s courts for corruption, they are provided with judicial impunity, no parliamentary oversight is allowed, and there will be no transparency on price discovery mechanisms or accepting bids from the public.

In such a context, no single president could change the course of the country or the public’s perception of the economic conditions. It appears that some of the candidates in the recent presidential race had come to terms with this lack of power. Take the president-elect, Masoud Pezeshkian, who in his televised debate simply stated that he is nominated to execute what the Supreme Leader will envision and order. He did not even try to present any economic plans during his campaign.

The economic mismanagement in the Islamic Republic (IR) does not originate from any particular administration, nor is it corrected by successive governments. Over the past forty-five years, the IR has consistently made errors that have worsened the livelihood of the people year after year. Such malpractices, rampant corruption, and constitutional barriers to economic growth have inevitably led to a loss of public trust in the institution of the IR.

One consequence of this distrust is that inflationary expectations are anchored to the market exchange rate of the USD rather than the Central Bank of Iran’s interest rate adjustments. Similarly, the economy does not react to domestically disruptive news in the same way it responds to internationally significant events. While public distrust renders almost all economic policies of the IR ineffective—regardless of whether the government is reformist or conservative—the international community's role becomes increasingly significant for the Iranian public.

Given its inherent weaknesses, Iran’s economy is more vulnerable to foreign sanctions. The economy is more than ever dependent on imports. The agricultural sector is threatened by serious drought and water mismanagement. The industrial sector is worse off than a decade ago due to chronic negligence in investing in fixed capital formation, and the private sector is rapidly declining due to unequal competition with IRGC-affiliated actors that have deep pockets and benefit from influence over state institutions. Therefore, sanctions that target oil exports and revenues are effective in limiting the Islamic government’s ability to project power in the region and engage in domestic repression.

US National Security Advisor Jake Sullivan and Secretary of State Antony Blinken hosted Israeli National Security Adviser Tzachi Hanegbi and Strategic Affairs Minister Ron Dermer for a US-Israel Strategic Consultative Group (SCG) session.

Recent reports from the International Atomic Energy Agency (IAEA) have amplified concern for joint efforts against the threats Iran poses not only in the Middle East but globally.

Iran now possesses 30 times the stockpile of uranium allowed under the 2015 Joint Comprehensive Plan of Action (JCPOA), with significant increases in uranium enriched up to 60%. The UN's nuclear chief said Iran was "weeks not months" from a nuclear weapon earlier this year.

Senior representatives from the foreign policy, defense, and intelligence sectors of both nations “discussed developments with respect to Iran’s nuclear program, and discussed mutual coordination on a series of measures to ensure that Iran can never acquire a nuclear weapon,” according to a White House statement.

The SCG meeting, the first since March last year, came after a postponement due to tensions between Israel and the Biden administration over arms supplies amidst Israel's conflict with Hamas in Gaza.

The renewed dialogue reflects growing Israeli concerns over Iran’s efforts to weaponize components of its nuclear program.

Iran is currently backing a proxy war across the region. Both US and Israeli targets have been in the line of fire as well as a commercial shipping blockade in the Red Sea region which has led to the deaths of seamen and the taking of dozens more hostage.

In Europe, Tehran-backed terror plots have been revealed including attempted murders and kidnappings of Iranian dissidents and Jewish and Israeli targets.

Ten out of the twenty-four members of the council want Zakani to be sacked and are reportedly lobbying with the others to gain the required majority for unseating him.

A speech by Narjes Soleimani, daughter of the late Revolutionary Guards Quds Force commander Qasem Soleimani, at the council’s Sunday session has become the focal point of the controversies.

In her speech, Soleimani who heads the Council’s monitoring committee questioned Zakani’s performance in the past three years, and referring to his candidacy in the recent snap presidential elections, said the capital needed a mayor who “did not constantly yearn to be somewhere else”.

The conflict among the councilors is deeply rooted in the political rivalry between Parliament Speaker Mohammad-Bagher Ghalibaf and Saeed Jalili, who has close ties to the ultra-hardliner Paydari (Steadfastness) Party and its ally, Jebhe-ye Sobh-e Iran (Iran Morning Front).

Zakani withdrew his candidacy in Jalili’s favor before the election causing accusations that he became a candidate only to assist Jalili as his attack dog against other candidates in the debates.

Zakani repeatedly claimed before the elections and during the debates that he had ended the municipality's rampant corruption that had flourished during his predecessors’ tenures.

However, fresh allegations have surfaced about widespread corruption in Zakani's administration. Referring to allegations of bribery in the Municipality, Soleimani said the mayor had seriously failed the council in remedying deep-rooted corruption. She had earlier told the reformist Ham Mihan newspaper that there were numerous reports of bribery and that the Council had launched an investigation into the matter.

Last week, a pro-Ghalibaf journalist published a video clip in which a municipality manager, identified only by his last name, Afsouni, accused Zakani’s adviser, Saeed Sadrzadeh, of demanding 400 gold coins and $450,000 to secure him the position of development deputy for District One of Tehran, the city's most affluent area.

The allegation, that no municipality official has so far denied, sparked a new wave of popular support for a petition launched in March for Zakani’s dismissal and a counter-petition by his supporters that urges him “not to yield” to political rivals’ pressure.

Zakani’s tenure as Mayor of the capital has been plagued by several major controversies in the past few months including an outcry over his plans to construct mosques in public parks and a secretly concluded $2 billion agreement with a Chinese firm to import transport and traffic surveillance equipment. Soleimani was among the councilors who strongly criticized the deal.

Some critics have alleged that these mosques are meant to serve as Basij militia bases and facilitate their suppression of protesters across the capital. Zakani insists that details of the Chinese deal cannot be made public for national security reasons.

Narjes Soleimani who is married to Abouzar Khazraei, the former editor of the municipality-owned Tehran Emrouz newspaper and a close ally of Ghalibaf has come under fire from Zakani’s supporters some of whom accuse her of “betraying” her father by taking Ghalibaf’s side.

Soleimani, who was not a politician, ran in the council elections in 2020, apparently despite the strong objection of some family members including her sister, brother, and paternal uncle. She came third with around 350,000 votes.

Since 2012, Soleimani has been a member of a charity founded by Ghalibaf’s wife Zahra Moshirolestekhareh. The controversial charity of which Soleimani’s husband is a CEO was itself at the center of a land grab and corruption case in 2021.

Vance, a Republican senator from Ohio, has aligned himself with key conservative positions on Middle East policy.

Should Trump be elected president, a return of a maximum pressure campaign on Tehran will make a return, said Jason Brodsky, the policy director of United Against Nuclear Iran.

"I believe that the second term of the Trump administration would witness a return of the maximum pressure campaign and strong deterrent actions against the Iranian regime," said Brodsky.

Vance, like Trump, has been a vocal critic of the Iran nuclear deal, referring to it as “a disaster.”

Former president Trump withdrew in 2018 the United States from the landmark nuclear accord with Iran, known as the Joint Comprehensive Plan of Action (JCPOA), restoring harsh sanctions.

"[Vance] has spoken very critically about the Obama era JCPOA. He has applauded President Trump from withdrawing from that agreement. He has called the Obama era policy of sanctions relief against Iran's regime repugnant," said Brodsky.

Vance has also been a strong supporter of Israel, and supported the relocation of the US embassy to Jerusalem.

“The Iran deal was a disaster, Israel is our most important ally and [former US president Donald] Trump was right to move the [embassy] to Jerusalem," he said according to Israeli local media on July 20 2022 while speaking at a VIP gathering at the CPAC Israel event.

Military action

Despite his tough stance, Vance has also warned against the authorization of military force against Iran.

During an interview with CBS's Margaret Brennan on 'Face the Nation' in October 2023, Vance said he would not support military action against Iran on its own soil in response to rising attacks on US troops in the Middle East.

Brodsky said that aligns Vance with Trump's rhetoric during his first term in office, calling it "peace through strength."

The US strike in Iraq that killed top Iranian commander Gen. Qasem Soleimani on January 3, 2020, did not lead to war, said Brodsky despite fears of it.

Trump himself referred to his decision at the time as one of deterrence rather than aggression.

Iranian-American activist Nick Nikbakht, who is a Trump supporter, told Iran International he's disappointed by the choice of Vance as Trump's running mate.

"I was disappointed as a Trump supporter, as an Iranian American activist, that he will pick him because he doesn't fall in line. And if you kind of separate foreign policy from him, a lot of Republicans, a lot of Trump supporters are not happy with J.D. Vance. He's a flip flopper," said Nikbakht, making reference to Vance once being one of Trump's strongest critics.

“I’m a never-Trump guy, I never liked him,” Vance said during an October 2016 interview with Charlie Rose.

Nikbakht said the news of Vance is 'troubling' and 'dangerous.'

Iran lobby

He pointed to Vance speaking in May at the Quincy Institute, which is an American think-tank that faced accusations of advocating for US foreign policy aligned with the interests of the Islamic Republic.

Arkansas Republican Senator Tom Cotton tweeted that the Quincy Institute is a "hotbed of pro-Iran lobbying."

In Episode 5 of Iran International's 'Eye for Iran' podcast, Ellie Cohanim, a former US special envoy under the Trump administration, weighed in on the issue.

She asserted that the Quincy Institute, co-founded by Trita Parsi, is linked to NIAC (National Iranian American Council). Cohanim further alleged that a law case deposition exposed Parsi's ties to the Iranian government.

Cohanim said she believes Vance was likely unaware of the reported ties.

"So through this chain, we know that Quincy has these links to the Islamic Republic. And sadly, people like Revet Ramoswami and JD Vance spoke at this Quincy Institute conference not too long ago. I'm not sure that those gentlemen are aware of Quincy's ties," she said.

But activists like Nikbahkt see things differently.

"He is perfect for the mouthpieces of the pro-regime lobbyist and propaganda arm. That's the reason he's there. So I would say it's more troubling and dangerous," said Nikbahkt in reference to Vance's recent speech at the Quincy Institute. He said his views are not a representative of all Iranian-Americans.

On social media, Iranian-American activist Sarah Raviani, a visiting fellow with the National Union for Democracy in Iran (NUFDI), wrote that reactions on Vance have been diverse within the community.

She encouraged her followers to watch Vance's Quincy Institute speech, and described her reaction to Vance's stance on Iran as a "surprise."

For years, Israel has frequently struck Iranian-linked targets in Syria, without claiming responsibility in most cases. These attacks have intensified recently amid the Gaza conflict and ongoing clashes with Hezbollah on the Lebanon-Israel border.

However, a security source has told Al Arabiya that Katerji was killed by an improvised explosive device (IED) rather than an Israeli airstrike.

Katerji, known for his close ties to the Syrian government, played a significant role in the financing operations of Iran's IRGC Quds Force and its proxies including Lebanon's Hezbollah, as reported by Al Arabiya.

The prominent businessman was killed instantly in his SUV on the highway linking Lebanon with Syria, an unnamed official from an Iran-backed group told the Associated Press on Monday.

Katerji may have been targeted because he had funded the Syrian "resistance" against Israel in the Golan Heights, as well as because of his links to Iran-backed groups in Syria, Rami Abdulrahman, the director of the London-based war monitor Syrian Observatory for Human Rights (SOHR), told the AP.

Abdulrahman said the precision of the strike indicates a significant security breach within either Hezbollah or the Assad regime's inner circle, suggesting that highly sensitive information had been leaked to Israel.

Katerji's extensive business empire, built with his brother, is currently under US sanctions for "facilitating petroleum shipments and financing to the Syrian regime," according to the US Treasury website.

The UK has also sanctioned the Katerji brothers for "facilitating fuel, arms, and ammunition trade between the regime and various actors including ISIS (Daesh) under the guise of importing and exporting food items, supporting militias fighting alongside the regime," according to the UK Treasury Office of Financial Sanctions Implementation.