US Economic Warfare and Iran’s Politics of Muddling Through

It is too early to gauge the overall economic consequences for Iran of the Trump Administration’ re-imposition of oil-related sanctions. Their full impact will partly depend on the ability of the European Union (EU), China, Russia, India, and other countries to continue buying its oil. Tehran will complement these formal sanctions-busting efforts with more traditional strategies including cross border smuggling. Still, one thing is clear: because oil revenues are critical to sustaining Iran’s vast subsidy and social welfare programs, not to mention an array of so-called private sector enterprises, it is essential that efforts to circumvent sanctions are met with some success. If these efforts fail, the regime will face pressures to impose politically risky economic austerity measures.

President Hassan Rouhani tasted the bitter consequences of even mild market reforms in December 2017 and early 2018, when protests against what was perceived as unfair economic reform policies and government corruption erupted in some hundred towns and villages. These protests, which included slogans calling for the downfall of the existing political system, emboldened Rouhani’s critics. Unhappy with his economic policies, in summer and fall 2018 the Iranian parliament  impeached or forced three ministers to resign. These events showed that it is the political impact of sanctions that counts first and foremost. The deeper they bite, the harder it could become to prevent factional struggles from escalating in ways that could test or even shake loose the political and social foundations of the Islamic Republic.

Three Scenarios: Falling Apart, Implicit Coup, or Muddling Through

On November 13, US National Security Advisor John Bolton announced the Trump Administration’s objective of sanctioning Iran by declaring that “[i]t is our intention to squeeze them very hard. As the British say: ‘Squeeze them until the pips squeak’.”  As his words suggest, the administration is counting on things falling apart in Tehran. Indeed, the real purpose of sanctions is to squeeze the economy to the point where Iranians rise up in a mass rebellion that eventually topples the regime. Still, the most likely outcome of increasing economic disorder will not be systematic chaos or state collapse. Instead, escalating internal instability could very well provoke a power grab by the Islamic Revolutionary Guards Corps (IRGC).

The most likely outcome of increasing economic disorder in Iran will not be systematic chaos or state collapse. Instead, escalating internal instability could very well provoke a power grab by the IRGC.

This kind of ‘implicit coup’ would not involve a direct power grab by military means but––if it happens at all––through the election of an IRGC leader to the presidency in 2021. However, this kind of maneuver would alarm key groups, magnify factional conflicts, and threaten the authority of Supreme Leader Ali Khamanei who is unlikely to abide it. Instead, Khamenei is likely to try to contain hard-liners affiliated with the IRGC by backing the `traditional conservatives’ in the regime. In other words, Khamenei will use the existing factional system to preserve the regime in a `muddle through’ strategy that would be assisted by popular support and demonstrations that would include all key groups, including the reformists.

Factional Balancing in Iran’s Hybrid Autocracy

Political stability in Iran’s factional system rests on maintaining a rough balance of power between competing factions that defend different interests and espouse varied agendas. Prior to Hassan Rouhani’s election in 2013, the factional system had suffered enormous strains due to the efforts of former President Mahmoud Ahmadinejad and his hardline allies to repress the reformists. This effort crystallized in June 2009, when millions of Iranians took to Tehran’s streets to denounce what they claimed was massive voter fraud in that year’s presidential election. The regime’s subsequent repression of the Green Movement antagonized traditional conservatives, some of whose leaders had previously accused Ahmadinejad of needlessly provoking the US, thus opening the door to the imposition of economic sanctions.

Following his 2013 election, Rouhani recognized that Ahmadinejad’s estrangement of the traditional conservative camp provided an opportunity to create a new governing alliance that would bring reformists and conservatives under one umbrella. While Rouhani promised to foster greater political openness, the key to this alliance was reviving the public sector and fostering international investment in Iran’s inefficient oil industry. Reformists accepted this formula because it provided a means for them to return to the political arena. Traditional conservatives accepted it because they assumed that the new moderation camp, as Rouhani called it, would advance their market oriented economic interests while keeping hardline populist forces at bay.

The alliance between the reformists and traditional conservatives forged by Rouhani had no chance of working unless his government secured a nuclear agreement that could help to end sanctions. Trump’s withdrawal from the JCPOA doomed Rouhani’s governing alliance.  

However, this new alliance had no chance of working unless Rouhani’s government secured a nuclear agreement that could help to end sanctions. Donald Trump’s election and his subsequent decision to pull out of the Joint Comprehensive Plan of Action (JCPOA) totally upended Rouhani’s governing alliance. Indeed, it has set into motion a realignment of factional politics that is manifest in the following four dynamics:

1) Strengthening the hardliners: The Trump administration’s decision to abandon the JCPOA and re-impose sanctions has strengthened the leverage of hardline forces, especially those associated with the IRGC. Although the leaders of the IRGC did not actively oppose the JCPOA, they feared that any nuclear deal would lead to greater engagement with Western Europe and even with the United States. On this score they were reassured by the Supreme Leader, who declared that he would not tolerate any effort to use the deal as a stepping stone for a wider engagement with Washington. The hardliners also benefitted from the fact that before and after the JCPOA was signed, the Supreme Leader had argued that the US could not be trusted to stick to any deal. Thus, when Trump effectively illustrated this very point by rejecting the agreement and promising to re-impose sanctions, hardliners had ample room and cause to intensify their attacks on the Iranian president and his reformist allies.

Although the Trump Administration has argued that sanctions would impose severe costs on Iran’s leaders, and IRGC actors in particular, the reality is that they have reinforced the economic leverage of the hardliners. This is because the Revolutionary Guards have used their control of investment, currency exchange, and smuggling channels to circumvent sanctions and thus gain revenues unavailable to other sectors of the economy. This is bad news for beleaguered business groups now suffering from rampant inflation, a precipitous fall in the value of the Iranian rial (precipitated in part by a boom in illicit trade) and a shortage of costly dollars in the official exchange market. Sanctions have thus weakened the very business groups that embraced Rouhani’s drive for economic engagement and market reforms.

Sanctions on Iran have weakened the very business groups that embraced Rouhani’s drive for economic engagement and market reforms and strengthened the IRGC which controls large sectors of the economy.

2) Fracturing Rouhani’s governing alliance: The above developments have fragmented the political alliance that Rouhani forged in his early years in office. As noted, the traditional conservatives had joined this alliance in the hope that he would advance market reforms and increase foreign investment. Their hopes were buoyed by the creation of a cabinet in which pro-democracy reformist ministers had a negligible role, thus reducing the chances that hardliners might assail Rouhani’s new government.  Traditional conservatives also had another ace at their disposal: late former President Hashemi Rafsanjani. Barred from running in the 2013 presidential election, Rafsanjani recruited Rouhani to run in his stead. A millionaire businessman, Rafsanjani protected the new president’s left and right flanks by serving as an intermediary between reformists and traditional conservatives. But his sudden death in January 2017 left both groups exposed, thus weakening Rouhani’s hand just as he was facing a White House determined to sabotage everything he had sought to achieve in the domestic and global arenas.

From the vantage point of the traditional conservatives such as Speaker of Parliament Ali Larijani, former Khamenei advisor Ali Akbar Nategh Nouri, and current Khamenei foreign policy advisor Ali Akbar Velayati, the re-imposition of sanctions has undermined the very logic that led them to embrace Rouhani in the first place. Although they are putting distance between their faction and the beleaguered president, no complete divorce between Rouhani and the conservatives has yet taken place. Although politically exposed, the latter are waiting to see if Rouhani’s bid to work with the EU to find a legal means of sustaining oil sales actually succeeds. If it fails, conservative leaders will be under increasing pressure to join forces with the hardliners and their call for `resistance’ to the West and the US in particular. Indeed, this realignment has already begun. This, in turn, has put further pressure on the reformist camp that not only suffers from its own divisions but can no longer depend on the shield of protection that traditional conservatives had briefly and tentatively provided it.

3) Reformists (and Rouhani) struggle to survive: If the fragmentation of Rouhani’s government has left the reformists politically exposed, divisions within their ranks have undermined their leverage. Some of these tensions can be traced to the president’s failure to pursue political reform, and his reticence elicited sharp debates between supporters and detractors within the reformist camp. Moreover, the revival of street protests and labor strikes from August through October of this year exacerbated these tensions. Some of the strikes were provoked by the government’s efforts to reform labor laws. With sanctions looming on the horizon on November 5, Rouhani’s government apparently (and perhaps correctly) believed that it must swallow the bitter pill of more efficiency-oriented market reforms. While some reformists opposed this policy, many endorsed it. To be sure, fearing that greater economic chaos might provoke the hardliners, leading reformists such as writers Ebrahim Nabavi and Ata’ullah Mohajerani have taken to ridiculing the protestors as dangerous and unruly.

As they struggle to navigate these tensions, Rouhani and the reformists must decide how to cooperate. Seeking to address challenges to the reformist agenda in 2017, Rouhani held meetings in October of 2018. But many reformist leaders boycotted, such as Abdollah Nouri, Gholam-Hossein Karbaschi, and Abdollah Ramezanzadeh. That underscored the difficult choices Rouhani had and still does as he struggles to project his authority and relevance. The escalating conflict with the Trump Administration has complicated his task. Indeed, for the time being Rouhani has chosen the path of least resistance by echoing the hardliners’ confrontational rhetoric. His assertion before an Islamic Unity Conference that bowing to the US is “treason” and that Israel is a “cancerous tumor” may buy him some time. But his call for Islamic unity provides no solution for a domestic political arena that in fact remains deeply divided.

The escalating conflict with the Trump Administration has complicated Rouhani’s task of shoring up his reformist camp. Indeed, for the time being he has chosen the path of least resistance by echoing the hardliners’ confrontational rhetoric.

4) A strengthened Supreme Leader: These divisions will not be politically fatal. On the contrary, factional struggles offer Supreme Leader Khamenei ample opportunity to strengthen his role as the ultimate arbiter of the political field. To this end, he has in fact tried to shield Rouhani from the hardliners’ efforts to undermine his presidency. For example, in the lead-up to the June 2017 presidential elections, Khamenei warned that he would not tolerate any hint of election interference and that the election results would be honored to ensure political stability. He also added that in 2009, some people “became aware of” interference and “came out and drew battle lines.”

To highlight his dominant role, Khamenei has gone to great lengths to organize public displays of unity between Rouhani and his erstwhile hardliner opponents. The creation in June 2018 of a High Council of Economic Coordination that would presumably foster a common policy towards US sanctions underscores this effort. Apart from bringing leaders of all key factions on board, Iranian officials asserted that the new council would be working with the EU to advance mechanisms to find a means of sustaining the JCPOA, thus encouraging European states to circumvent sanctions.

What Could Come Next?

The above mix of negotiations, factional jockeying, and alliance politics suggests that while the Iranian system is under strain, it is in fact not cracking. On the contrary, as Iran’s leaders attempt to deal with the Trump Administration’s bid to shut down Iran’s economy, the overall system is exhibiting far more continuity than dramatic change.

The Islamic Republic’s history includes surviving nearly nine years of war with Iraq, the imposition of sanctions, and numerous bouts of economic crisis. Strikes and protests are not news; nor is the complex contest among rival factions. What has worked is the strategy of muddling through that has always been preferable to the black hole of drastic economic or political change. Today, Iran is working assiduously with European leaders to find ways around US sanctions. Whether this works remains to be seen. But if the Trump Administration and its Middle East allies are counting on capitulation by Iran’s leaders, they are likely to be disappointed in knowing that these have perfected the game of political survival.