Iran File

Forthcoming U.S. sanctions sound death knell for the Rouhani Administration

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Forecast: The reimposition of U.S. sanctions against Iran on November 5 will embolden regime hardliners and weaken President Hassan Rouhani’s politically-moderate platform. U.S. sanctions will place greater pressure on Iran’s already heavily-strained economy, possibly resulting in the reignition of widespread anti-regime protests. Hardliners may leverage the perceived failure of the Joint Comprehensive Plan of Action (JCPOA), the reimposition of U.S. sanctions, and public discontent with the Rouhani administration to push for the removal of additional senior officials from office, possibly including Rouhani himself. Rouhani’s political failure increases the chances that a hardline president will succeed Rouhani in 2021.

Europe will not deliver the economic guarantees that Iran has demanded in exchange for remaining in the JCPOA. Senior Iranian officials, including Supreme Leader Ayatollah Ali Khamenei, demanded that the UK, France, and Germany offer Iran “economic guarantees” in return for Iran’s continued commitment to the nuclear deal following the May 8 U.S. withdrawal. Iranian leaders called on European nations to continue their participation in investment projects in Iran and to continue purchasing Iranian oil despite the reimplementation of U.S. sanctions lifted under the nuclear deal. European companies, including Total S.A., Maersk, Peugeot, and Siemens, announced that they will cease their financial activities in Iran to avoid U.S. secondary sanctions. The EU’s revision to its 1996 Blocking Statute against U.S. secondary sanctions is insufficient to persuade European firms to continue doing business in Iran. European companies are unwilling to sacrifice more secure and lucrative economic activities with the U.S., and EU actions to remain economically engaged with Iran have been meager. Rouhani campaigned and was reelected as president in 2017 on the promise that the JCPOA would bring international, primarily European, investment into Iran’s economy. The loss of Western investment in Iran marks a political failure for Rouhani and his reformist agenda.

U.S. sanctions may reignite protests aimed at the regime instead of the West. Economic grievances have fueled several different protest movements since the outbreak of widespread, anti-regime protests in late December 2017. The reimposition of U.S. sanctions on Iran’s energy sector on November 5 will place additional pressure on Iran’s heavily-strained economy. U.S. sanctions will reduce the regime’s oil revenue and likely prompt the further devaluation of the Iranian rial. The rial has fallen by over 400 percent since October 2017. The rial’s rapid devaluation has sparked nationwide protests in recent months and prompted internal calls for changes to Rouhani’s economic team. Merchant-class protests in Tehran in late June 2018 started after the rial dropped to 93,000 to the U.S. dollar. A second round of economically-focused protests began after the rial fell to a new low of 111,500 to the dollar in late July 2018. The rial has since weakened even further to a record low of 189,000 to the dollar in late September. Protests following the coming U.S. sanctions could quickly devolve into politically-charged, anti-regime demonstrations. The Islamic Republic will likely organize and sponsor anti-U.S. and -Western protests in response to U.S. sanctions, but spontaneous anti-Western protests are unlikely.

Hardliners actively block financial reforms that Iran desperately needs. Hardliners continue to stymie Rouhani administration attempts to pass legislation that would satisfy European concerns over Iran’s money laundering and terrorism financing. The legislation's implementation would bring Iran into compliance with Financial Action Task Force (FATF) items and potentially remove Iran from the FATF blacklist. Iran’s hardline-dominated Guardian Council has inhibited the approval of the legislation and may continue to do so until Parliament approves watered-down versions of such legislation. The Guardian Council sent two FATF-related pieces of legislation back to Parliament and the Expediency Discernment Council to alleviate concerns raised by the Guardian Council on October 10. The current status of the legislation is still pending. The EU’s failed attempts to maintain economic ties with Iran will not to elicit concessions from regime hardliners on this matter. Implementation of these financial and banking reforms would necessitate financial transparency and regulations that would harm the illicit activities and corruption of the hardliners and the IRGC. Both groups will therefore continue to oppose them.

Hardliners will weaponize forthcoming U.S. sanctions to politically destroy Rouhani. Hardliners have leveraged Iran’s failing economy and the Iranian people’s discontent to attack the Rouhani administration in recent months. A hardliner-led campaign following Tehran’s Bazaari protests in late June 2018 resulted in the removal of four Rouhani administration officials from office, including former Central Bank of Iran (CBI) head Valiollah Seif and former Economic Affairs and Finance Minister Massoud Karbasian. Seventy parliamentarians recently *signed a motion to restart the interpellation of Industry, Mines, and Trade Minister Mohammad Shariatmadari. Hardliner pressure also resulted in Parliament questioning Rouhani on August 28 over several economic grievances. The questioning signified that hardline elements in Iran are prepared to force the removal of Rouhani administration officials and also possibly Rouhani himself from office. Emboldened hardliners may call for Rouhani’s interpellation and accuse him of breaching Iranian laws, an effort hardliners *failed to advance during his questioning in late August.

Principlists’ attempts to discredit Rouhani and reformists may ease the election of a hardline president in 2021, already likely given the cyclical nature of Iranian politics. Iran’s presidency, similar to the U.S.’s, historically swings between conservatives and reformists every eight years (Iranian presidents can serve only two four-year terms in a row). The potential accession of a hardline president will likely diminish reformist efforts to implement economic reforms that could help the Iranian economy and people and likely increase the IRGC’s role in the economy.