Total’s Iran Deal Gives Rouhani Space to Push Reform

Hassan Rouhani. Photo: Getty Images.

Total’s agreement to re-enter Iran after an absence of five years is a major boon for former US president Barack Obama’s landmark nuclear deal reached in 2015 between Iran and the P5+1. The deal is significant because it signals Total’s confidence in the Iranian market in spite of growing anti-Iranian rhetoric in Washington, Riyadh and Abu Dhabi, which aims to further isolate Iran and actively discourage international businesses from investing in the country. As an energy deal, it is not groundbreaking, and is unlikely to unlock the floodgates and lead to an early rush of international businesses entering Iran. But it does carry with it an opportunity to embolden President Hassan Rouhani’s economic reform agenda and strengthen the hands of the moderates.

For the Rouhani government, this deal comes at a critical juncture. Having been reelected with a renewed mandate to build on the economic opening offered by the nuclear deal, Rouhani has faced domestic criticism from conservative elites and the wider population for overpromising the trickle down effect of investment gains. Rouhani’s economic vision is predicated on the belief that foreign financial and technical investment can help diversify the Iranian economy and promote domestic employment, which remains stubbornly high.

Rouhani originally hoped to obtain over $50 billion in annual investment. His plans however have been stymied by the Trump administration’s criticism of the nuclear deal and increased rhetoric against the Islamic Republic’s regional activities, both of which have highlighted the geopolitical risks of doing business in Iran. With Iranian compliance officially confirmed by Washington though, Rouhani has a small four-year window of opportunity to translate his promises of economic reform into reality.

Rouhani’s domestic rivals, including members of the Iranian Revolutionary Guards Corps (IRGC) and hardliners close to the Iranian Supreme Leader Ali Khamanei, are already circling and criticizing the president’s economic strategy. The IRGC, already subject to US sanctions, has long maintained a strong influence in Iran’s economy and remain cautious about Rouhani’s reliance on Western investment. They fear that such investment will translate into greater meddling in Iranian domestic affairs, thereby eclipsing their influence.

Rouhani has been directly challenging the IRGC’s economic influence, even surprisingly publically challenging their economic monopoly just last week. Without continued international investment momentum similar to the scale and prestige of this Total deal, the president’s wings and reform agenda might be clipped.

Although unrelated, the changing political environment in the Gulf, which has seen Saudi Arabia and the UAE adopt a much more aggressive foreign policy, will present business with a new set of political risks, previously associated with other regions of the Middle East. The UAE has already made clear to a handful of international companies that in seeking new opportunities they will have to choose between Qatar and the Emirates.

It is an uncomfortable choice, especially for international oil companies such as Total, which are heavily invested throughout the Gulf. Given Saudi Arabia and the UAE’s new found confidence – following the rapid ascent of crown prince Muhammed bin Salman and the election of Donald Trump to the US presidency – it is highly likely that both Saudi Arabia and the UAE will start pressuring businesses into making a choice: you’re either with or against us. In other words, those European companies invested in Gulf Arab states and waiting to move into Iran will now have to factor Saudi and Emirati prejudices into their investment decisions.

At the same time, Total’s willingness to wade into Iranian waters sends a positive signal to cautious international companies who are curious about the Iranian market, but concerned over US policy opacity. Small European banks – none with a presence in the US – will manage the deal, thereby carefully avoiding the risk of violating US sanctions. And despite continued uncertainty over forthcoming US Congressional sanctions designed to contain Iran’s military activities in Syria and its ballistic missile program, the Rouhani administration will maintain compliance in order to remain attractive, minimize risk and keep deals similar to Total’s coming to Iran.

For Rouhani to succeed, other large-scale investment agreements and greater international banking links between Tehran and the world should follow. The time is now for European governments and international companies to ignore distractions from Washington and the Gulf countries and encourage economic reform in Tehran. Doing so could open the door to wider political change. Without broader European support, those hoping that Rouhani can bring about an Iranian perestroika will lose out on a unique moment for economic gain with wider consequences for Tehran and the region.

Dr Sanam Vakil, Associate Fellow, Middle East and North Africa Programme and Dr Neil Quilliam, Senior Research Fellow, Middle East and North Africa Programme.

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