Iran's President Hassan Rouhani replies to a questions during a news conference on the sidelines of the 69th United Nations General Assembly in New York September 26, 2014 (Reuters).

November 17, 2014

Iran's Economy of Resistance: Implications for Future Sanctions

 Executive Summary

Economic sanctions have not changed Iran’s nuclear policy, although they have pressured Tehran to engage in negotiations. The Iranian economy, however, has contracted severely, partly because of the sanctions, but mostly as a result of former President Mahmoud Ahmadinejad’s bad economic policies.  President Hassan Rouhani and Supreme Leader Ayatollah Ali Khamenei have identified restoring Iran’s economic health as a top priority for the regime.  They fear that popular frustration about economic opportunities could cause street protests, similar to those that followed the 2009 presidential elections, and threaten the regime’s survival. 

Iran’s leaders see economic sanctions as part of a larger attempt to destroy their regime and Westernize Iranian society.  They discuss the sanctions as part of the “soft war” supposedly being waged by the West against the Islamic Republic through television, the internet, and targeted Western media outlets like BBC Persian and America’s Radio Farda. Government institutions have gone so far as to identify a “cultural NATO” that supposedly directs and supports these efforts to undermine the morality, religiosity, and national loyalty of the Iranian people.  They explain that America’s military failures in Iraq, Afghanistan, and around the region have deprived the U.S. of any hard-power capability to coerce Iran, forcing it to turn to soft power—or rather, “soft war.”  Iran’s economy, culture, and media environment, therefore are simply new fronts in the Islamic Republic’s war with the West.

Having defined Iran’s economic crisis as a security problem, the regime is seeking economic solutions within a security framework.  Khamenei announced the “Economy of Resistance” doctrine as his “soft war” response to sanctions, thus subordinating Iranian economic policymaking to a national security doctrine.

The Resistance Economy doctrine is intended to make the Iranian economy resistant to all external economic shocks in the long term, including Western sanctions and global financial crises. Iran’s economic plans currently aim to boost foreign investment in order to develop the energy sector, as well as to build a “knowledge economy” around Iran’s information technology sector. Creating the necessary space for the private sector’s growth means a fundamental transition away from a state-dominated economy. Reforming the domestic financial market and preventing integration with the international financial system serves to reduce vulnerability to global crises while establishing a self-sufficient system of capital flow. Tehran is taking measures to boost ties with Beijing and Moscow in order to insulate Iranian trade against Western economic pressures, but both China and Russia have proven to be unreliable trading partners. 

Rouhani and Khamenei appear to disagree on the degree to which Iran should be integrated into the global economic community under the Resistance Economy doctrine.  Rouhani speaks of economic normalization in a way that suggests strong economic ties to the rest of the world, including the West. Khamenei, however, remains highly suspicious of such ties, fearing that they would leave Iran vulnerable to renewed economic pressure over time. 

The President and Supreme Leader also appear to disagree somewhat about the need to have the current sanctions lifted in order to proceed with Economy of Resistance policies.  Rouhani and his technocratic allies argue that Iran’s economy is in such dire straits that it is unlikely to improve without an influx of Western cash and technology.  Khamenei, on the other hand, never ceases to express skepticism that the West will lift sanctions even if a nuclear deal is made.  The Resistance Economy, therefore, is ostensibly designed to work even if sanctions remain in place, although it seems that Rouhani has little confidence that it can do so.

Rouhani is almost certainly right.  It is nearly impossible to imagine the Resistance Economy doctrine succeeding in the long run while sanctions remain in place because they hamper sustainable growth.  Rouhani, as a result, is positioning Iran to take full advantage of any sanctions relief by internally restructuring the economy to reduce Iran’s susceptibility to the continuation or re-imposition of sanctions in the long term. 

Rouhani’s efforts to “sanctions-proof” the Iranian economy raise the stakes for the West in the current nuclear negotiations.  It has long been an article of faith among advocates of sanctions relief that the West could re-impose economic penalties on Iran should Iran fail to abide by the terms of a nuclear deal.  We can no longer take that assumption on faith.  Rouhani may succeed in using significant sanctions relief to harden Iran against future sanctions enough to make them unattractive to the West, particularly if he is also able to build meaningful economic linkages between Iran and the world. The West must therefore approach the prospect of a “final” nuclear deal that significantly reduces sanctions pressure on Iran as the beginning of the end of sanctions as an effective tool of policy toward Tehran. Such an agreement can transform future relations between the Islamic Republic and the West.