More Tests Ahead

Hassan Rouhani was sworn in as Iranian president for his second four-year term in Tehran on August 5.

Rouhani won reelection in May by a wide margin, taking 57 percent of the vote. However, Iran now faces hard challenges and potent threats. He must lead the country to break through the current outside encirclement that is being built by the United States and its Gulf allies, as well as achieve progress in domestic affairs.

Iran’s supreme leader, Ayatollah Ali Khamenei, gave his official seal of approval to Rouhani at a formal endorsement ceremony in Tehran on August 3. In his speech, Khamenei also expressed his expectations for Rouhani to maintain fairness and justice in governance, safeguard the interests of underprivileged groups, strengthen national unity, and protect national dignity and sovereignty. Khamenei’s re- marks could be regarded as general instructions for Rouhani’s policymaking during his second presidential term.

At the endorsement ceremony, Rouhani pledged to continue constructive interac- tions with the international community and safeguard Islamic democracy and the people’s right to vote. His agenda also includes reducing poverty, strengthening social welfare, raising productivity and promoting employment.

External pressure

It is a heavy task for Rouhani’s government to realize economic growth and improvement of people’s livelihoods in the next four years. Especially, to revitalize its domestic economy, Iran needs a sound and stable external environ- ment as a prerequisite.

Iran is always a critical geopolitical player in the Middle East, the world’s most complicated region. The longstanding tension between Iran, where Shiite Muslims are the majority, and Sunni-dominated Gulf states, the hostility between Iran and Israel, and the U.S. sanctions on Iran all have become burdens on Iran’s domestic development. Therefore, Rouhani concentrated on improving diplomacy and se- curity in his fi rst presidential term.

Rouhani seized the opportunity when the Middle East was in chaos after the “Arab Spring” movement of 2011 and then President Barack Obama made adjustments to U.S. Middle East policy. The Obama administration and the Rouhani administration together with other world powers reached a nuclear deal in 2015, which has been regarded as a diplomatic victory for Rouhani that breaks the Western blockade. In the deal, Tehran finally made concessions, abandoning its nuclear weapon program. In return, Washington and the international com- munity recognized Iran’s right to make use of nuclear energy peacefully. Furthermore, the United States and the West agreed to partially lift the sanctions on Iran, making it possible to improve U.S.-Iran bilateral relations. Meanwhile, through strategic cooperation with Russia in ad- dressing the Syrian crisis, Iran has expanded its infl uence on other Shiite-led countries includ- ing Syria and Iraq, and gained a louder voice in regional affairs.

But Iran’s rise as a regional power has inten- sified conflicts between rival Shiite and Sunni Muslim factions. Worse still, since Donald Trump took office as U.S. president, Washington has enhanced its alliance with both the Arab world and Israel in order to curb Iran. The multina- tional isolation of Iran will not only harm Iran’s diplomacy and security, but also have negative effects on its economy.

Actually, Rouhani’s work on the economy was not remarkable. In 2013, when Rouhani began his fi rst presidential term, Iran’s economy was on the brink of collapse. Iran’s currency had devalued by two thirds, inflation had reached as high as 35 percent, and oil and other exports had shrunk 60 percent.

In 2015, after the nuclear deal was reached, Iran rapidly resumed its oil production and ex- port. Meanwhile, the West unfroze part of Iran’s overseas assets, and the relaxation of U.S.-Iran ties came with increasing foreign investment in Iran. Iran’s economic growth reached 6.6 per- cent in 2016. Nevertheless, the recovery should be mainly attributed to the nation’s resurgent oil industry. Government fi xed-asset investment accounted for only 5 percent of the GDP, which is far below the ideal fi gure of 20 percent. The unemployment rate remains in double digits, family income has seen an unimpressive in- crease, and the poverty-stricken population is still large. Rouhani also abolished the subsidiary policy that was adopted by his predecessor, re- sulting in a 50-percent surge in prices.

The multilateral nuclear deal is not a solu- tion for all of Iran’s problems. In fact, the United States agreed to lift the nuclear-related sanc- tions on Iran, according to the treaty. Other non- nuclear sanctions, however, will continue. So, the barriers hindering Iran from returning to the global economy and trading still remain.

Furthermore, the relationship between Iran and Saudi Arabia, the leader of the Sunni states, has worsened, badly affecting regional trade and economic exchanges. Iran fi nds it dif- ficult to advance domestic economic growth through trade with other countries in the region. Perhaps, that is the fundamental reason why Rouhani emphasized in his August 3 speech that Iran would “continue constructive interac- tion with the international community.”

Domestic agenda

Rouhani’s efforts to improve relations with Washington and his promise of peaceful use of nuclear energy have won applause from the international community. Meanwhile, his moderate foreign policy has aroused criticisms and opposition from the hard- line camp at home. However, Rouhani has Khamenei’s trust and support. Moreover, the United States’ acknowledgment of Iran’s right to nuclear power and its security com- mitments to the Islamic republic under the multilateral nuclear deal have been a big diplomatic victory for Rouhani. Set against these elements, the opposition’s voice is much quieter. Even though unemployment remains serious, young Iranians were willing to vote for Rouhani because of his relatively liberal political and inclusive social policies. Unfortunately, the Trump administration has undone Obama’s work and reverted U.S. policy on Iran.

Trump chose Saudi Arabia as the fi rst stop on his fi rst foreign tour in May, suggesting that he attaches importance to Middle East affairs. In a speech at the Arab Islamic American Summit held in Riyadh on May 21, Trump accused Iran of “fueling the fi res of sectarian confl ict and ter- ror for decades.”

“Until Iran is willing to be a partner for peace, all nations of conscience must work to- gether to isolate Iran,” Trump said.

The U.S. House of Representatives voted 419-3 to approve a bill to enhance the sanc- tions on Russia, Iran and North Korea on July 25. Trump signed the bill into effect on August 2. Undoubtedly, the new legislation will cause more trouble for the three nations and others that are willing to engage with them in eco- nomic cooperation.

In Iran, Rouhani also faces hurdles to adopt- ing economic reform. If Iran wants to attract more foreign investment, the country must be open to the outside world, which might not be favored by the conservatives. On one hand, an opening-up policy might come with some risks for Iran’s political stability. On the other hand, as the country gradually deepens economic integration with other countries, the fi rm con- trol of the domestic economy by the Islamic Revolutionary Guard Corps and state-owned enterprises will certainly be shaken.

Khamenei reminded Rouhani of these risks in his remarks at the endorsement ceremony. He said he hopes Rouhani can overcome these diffi culties.

There is a strong link between the Rouhani government’s economic and dip- lomatic strategies. Iran’s economy relies heavily on oil exports. To boost economic growth and improve people’s livelihoods, Iran needs sound foreign relations. Therefore, to implement his development program and convince the United States to raise the remainder of the blockade against Iran, Rouhani must begin with diplomacy.