Iran has coexisted in tense relations with the U.S., European Union and other developed economies since the Iranian Islamic revolution in 1979. These tensions reached a peak in the decade of 2000 with the application of economic sanctions by major world economies and other UN members against Iran's nuclear development program, which was promoted by hardline conservative governments in the country.
In 2015 under the leadership of moderate reformist President Hassan Rouhani, Iran successfully negotiated the removal of sanctions in exchange for the revision of its nuclear program. It also gained the prospect of more peaceful relations with major world powers and neighboring countries in Central Asia and the Middle East.
The 2017 presidential elections in Iran will determine whether hardline conservative political factions are restored to power and tensions are renewed; or whether the current moderate regime can retain power to promote the continued easing of tensions and re-integration of Iran into the global economy.
The Islamic Revolution In Iran
The profile and political structure of contemporary Iran can be traced to the events of the Iranian Islamic Revolution in 1979.
The revolution brought the overthrow of the former monarchic government of the Pahlavi Dynasty and the Shah of Iran, who ran a pro-Western administration that had the backing of the U.S. Although the Shah administration brought prosperity to the country, some segments of society were dissatisfied with economic disparity, high inflation and the perceived "Westernisation" of the country.
The revolution was backed by conservative Islamic clerics and students, and led by the Shia leader Ayatollah Ruhollah Musavi Khomeini, who sought an Islamic-based cultural reform. Following a popular uprising and attempted government repression of protests, the Shah fled the country in January 1979. In April of that year, a referendum was held to establish an Islamic Republic, and an Islamic regime led by Khomeini was installed.
Iran's Political Structure
Iran uses a hybrid theocratic and weak presidential system to run its government affairs. Effectively, the country's "supreme leader" is the country's highest political authority. The supreme leader (Ayatollah Ali Khamenei, as of January 2017) is selected by the Assembly of Experts, a body of 88 Islamic clerics and scholars. The supreme leader also consults with a guardian council; half of its 12 members chosen by parliament and the other half chosen by the supreme leader.
Iran's president and parliament are directly elected by the people. The president, in the role of a head of state, has the power to accredit foreign ambassadors, select Iranian ambassadors, and sign legislation and treaties. As the head of government, the president also selects and presides over the council of ministers, and oversees executive powers. The president answers to the parliament, while the council of ministers answers to the president and to the parliament.
Ministers must be approved by parliament and can be removed through a no-confidence vote. The supreme leader, however, retains control of the country's armed forces as their commander in chief. The supreme leader also has authority to appoint the heads of the judiciary in addition to state media. The president does not have the power to veto legislation, nor the power to discontinue deliberations in parliament in order to call for new elections.
As for the budget, 60% is controlled by Iran's governing administration. The remainder is under administration of religious charitable foundations, which are controlled by the supreme leader and organisations under his power.
Oil And Oil Policy
Iran is the fourth-largest holder of oil reserves in the world (with an estimated 158 billion barrels, and the sixth-largest oil producer (producing 3.6 million barrels per day).
Following the signing of the nuclear accord, economic sanctions against Iran no longer prohibited foreign investment in the country. As a result, Iran opened up bidding to foreign oil companies in 2016 for increased development of the country's oil reserves. The action is expected to attract more than US$200 billion in investment for oil and gas exploration from major oil companies around the world.
Iran is perceived to have sought to build a nuclear weapons program as early as 1984 during the country's war with neighboring Iraq. Iranian political leaders have denied that accusation, saying the country sought to enrich uranium only for nuclear power purposes.
However, secret nuclear development facilities have been found in Iran near the cities of Natanz and Arak. Also, the country has openly developed a ballistic missile program that is seen as potentially compatible with nuclear weaponry. Some analysts believe Iran has been aided in its nuclear development program by China and groups in Pakistan.
In 2015, Iran and the permanent members of the United Nations Security Council came to an agreement that foresaw the dismantling of the program. Under the terms of the accord, Iran accepted reducing its uranium stockpiles and restricting its uranium enrichment capacity in exchange for the lifting of international economic sanctions.
The U.S. has imposed restrictions on economic exchanges with Iran continuously since 1979, following the seizure of the U.S. Embassy in Tehran. In response to Iran's covert nuclear development program, the U.S. in 2010 stepped up the sanctions and took special aim at investment in Iran's energy sector, foreign trade financing and international banking transactions. The European Union, which was previously one of Iran's top trading partners, imposed sanctions in response to Iran's nuclear program in 2006 and stepped those up beginning in 2010. At least 16 other countries participated in the sanctions to some measure.
The sanctions were estimated to cost Iran about US$60 billion annually in lost oil export revenues, and froze more than US$100 billion in Iranian financial assets.
In 2015, Iran and the P5+1 group of nations reached a deal in which sanctions would be lifted in exchange for deactivating some of its nuclear processing facilities and reducing its uranium enrichment and stockpiles. Since then, many of the sanctions have been lifted, though some remain, especially from the U.S.
The U.S. Senate in December 2016 voted unanimously to extend the authorisation of sanctions for ten years. Senators said the vote was a means of holding Iran accountable for upholding the nuclear accord. The vote allows the U.S. government to re-impose sanctions quickly in the future if Iran is found in violation of the accord.
Iranian Election: Who Are the Candidates?
Incumbent Iranian President Hassan Rouhani is expected to run for re-election representing moderate, reformist political factions. Despite receiving criticisms from conservative groups, his position was reinforced in 2016 legislative elections when moderates gained numbers. Rouhani is not expected to face strong threats from other moderate challengers.
However, the incumbent will face challenges from a list of conservative opponents:
- The Yekta (Unique) Party of former president Mahmoud Ahmadinejad's is seen possibly fielding two candidates: Rostam Qasemi, a former oil minister and former member of the Revolutionary Guard; and Hamid Reza Haji Babaee, a Member of Parliament and former education minister.
- The Islamic Coalition Party (ICP) is seen possibly fielding Mostafa Mirsalim, the former minister of culture and Islamic guidance.
- The Front of Followers of the Line of the Imam and the Leader is expected to field deputy speaker of the parliament Mohammad Reza Bahonar, who is considered among the more of moderate voices in the conservative factions.
Iran's Relationship with Major International Economic and Political Players
The U.S. has had tense relations with Iran since the Islamic regime was installed in 1979. Shortly after Khomeini took power, Iranian revolutionaries held a group of 52 Americans at the U.S. embassy hostage for 444 days in alleged retribution for the U.S. allowing the Shah to enter its territory for cancer treatment.
Since the Iranian revolution, the U.S. has imposed economic sanctions on Iran and firms dealing with the country. In 2006, those sanctions were tightened as part of an effort to weaken Iran's uranium enrichment and nuclear weapons research. Some of these sanctions were lifted in January 2016, however, following the agreement between Iran and UN Security Council.
Israel maintained stable relations with Iran from the time of Israel's formation in 1948 until the Iranian Islamic revolution in 1979. This was in part because of the countries' mutual efforts of resistance against dominance by the former Soviet Union.
Since at least 1982, however, the Islamic regime of Iran has maintained an adversarial stance toward Israel, and some Iranian clerics and government leaders have publicly advocated for Israel's elimination. Relations have also been strained by Iran's actions to train and equip the anti-Israeli Hezbollah group in Lebanon, while encouraging Palestinian attacks on Israel from the regions of Gaza and the West Bank. Tensions have been further heightened by Iran's commitment to a uranium enrichment program and signals that it seeks to develop nuclear weapons.
Russia and Iran have maintained a mutually mistrustful, albeit stable, relationship of cooperation over the past few decades. Although Iran was the target of Russian incursions of Czarist regimes in the early 20th century, the two countries have since shown a common interest in resistance to U.S. and European dominance of global trade and politics. Also, both have been targets of economic sanctions from the U.S. and Europe.
In the 2010s, their governments coordinated to combat Middle Eastern terror groups in addition to opposition forces in Syria during that country's civil war. Russia has also provided assistance to Iran in the development of its Bushehr nuclear power plants.
Since the 1980s, leaders of the European Union have attempted to engage Iran in trade and diplomatic agreements. However, a crisis in relations erupted in the decade of 2000 after the discovery of Iran's covert nuclear development program.
Between 2010 and 2013, Europe imposed heavy economic sanctions on Iran, including an embargo on oil sales. In 2013, following the election of moderate Iranian President Hassan Rouhani, Europe entered negotiations for an agreement over Iranian nuclear policy with the P5+1 diplomatic group. Following the signing of an accord in 2015, European leaders said the agreement represented a new page in relations between Iran and the EU.
Like the U.S., the U.K. has had difficult relations with Iran since the Iranian Islamic Revolution. Tensions worsened in the 2000s following revelations about Iran's covert nuclear development program.
In 2011, the U.K. joined other nations in announcing economic sanctions against Iran for its nuclear program. As a response, the Iranian parliament voted to expel the British ambassador in Tehran. The U.K. followed suit by expelling all Iranian diplomats from its territory. Following the election of President Rouhani and the signing of the P5+1 nuclear accord, the two countries chose to reestablish diplomatic relations.
China has enjoyed an ascension as an important player within the global economy in the 2000s, taking advantage of Iran's political isolation globally to establish closer ties to the country. China has supported Iran's right to peaceful nuclear technology, but it also voted in favour of some UN resolutions against Iran's nuclear enrichment program. In February 2010, however, China declined to support Western efforts to levy further sanctions on Iran, and instead called for continuing negotiations to resolve international disagreements over Iran's nuclear program.
The U.S. and other nations alleged that Chinese companies were violating UN sanctions in doing business with Iran. More than 100 Chinese state companies operate in Iran, becoming its top economic partner. Also, Chinese companies took the place of Western firms that were forced by international sanctions to stop doing business there.
The Iranian nuclear agreement of 2015 has further strengthened China's competitive position in Iran.
Japan and Iran have maintained steady trade and diplomatic relations since Iran's Islamic Revolution in 1979. Japan has been a large buyer of Iranian oil exports and is one of its most significant trade partners.
However, like other countries, Japan expressed concern over revelations that Iran was carrying out a secret nuclear development program and participated in the international sanctions program. The easing of sanctions against Iran may allow Japan to resume cooperation in development of Iranian nuclear energy technology, in addition to purchases of oil from Iran that decreased during the period of sanctions.
South Korea And North Korea
Like Japan, South Korea was a large purchaser of oil from Iran before the international sanctions against its nuclear program were imposed. Since the sanctions were lifted, Iranian oil exports to South Korea have quadrupled to 400,000 barrels per day. The country has shown interest in intensifying its relations with Iran.
North Korea has been isolated internationally because of its own nuclear weapons development program, and it was one of few countries who maintained strong ties with Iran during the period of sanctions. The country was suspected of collaborating with Iran in its nuclear program.
Central Asia – India, Pakistan and Iraq
Iran's nuclear program and the Iran nuclear deal arose within the context of long-running political tensions and power disputes in Central Asia and the Middle East. Iran is thought to have begun its nuclear program in the 1980s as part of a response to a war with neighboring Iraq.
At least two other countries in Central Asia, Pakistan and India, have operational nuclear weapons programs. Pakistan differs with Iran on a religious order, with most Pakistanis following Sunni Islam and most Iranians following Shia Islam. Prior to Iran's Islamic revolution, the nation enjoyed good relations with Pakistan, though they cooled afterward.
Both Pakistan and India participated in the UN sanctions program against Iran. And with the lifting of sanctions, the nations have shown interest in intensifying trade with Iran.
Other Middle Eastern Islamic Countries
Iran's relations with other, nearby Islamic countries is shaped by the politics of oil and religious influence. Iran is dominated by Shia Islam while other influential neighbors in the region practice Sunni Islam. Several neighboring oil-producing countries, including Saudi Arabia, demonstrated concern over the revelations of Iran's nuclear program.
Iran's nuclear accord and relationship with world peers is set to be one of the central issues of the 2017 presidential election, along with domestic issues such as management of economic policies, and electoral and social reforms.
The success of reformist factions in Iran's 2016 parliamentary elections suggested that the electorate has given renewed backing to moderate political forces. However, the residual strength of conservative factions in the country's parliament and power structure remains.
Conservative politicians aligned with former President Ahmadinejad have criticised President Rouhani for:
- alleged weakness in negotiating the country's nuclear accord with world powers,
- and his alleged inability to free up more of frozen funds internationally to invest in Iran's economy.
Rouhani and the reformers may be favoured ahead of the election, though, by the gradual release of funds and prospects for new incoming private investment from abroad.
The Election And Potential Repercussions
Voters in Iran may be making a calculated economic choice on whom to choose as president in their next elections. The economy has suffered in recent years under the impact of international sanctions, but it's seeing prospects for improvement with the nuclear accord negotiated by Rouhani's administration. A hardline conservative president who is disposed to scuttling the accord could risk reversing those prospects.
However, Iranian voters may also be conscious of looming external threats to the accord. For example, U.S. President-elect Donald Trump in his campaign pledged to revisit and renegotiate the accord with terms that are more favourable for external monitoring and inspections of Iran's nuclear facilities. This factor could encourage Iranian voters to lean toward a more hardline, conservative candidate.
Therefore, the outcome of the Iranian election may be key to whether Iran or international partners backtrack on the accord and reverse the elimination of economic sanctions. The return of sanctions would especially impact on Iran's ability to sell oil abroad and raise oil prices. This would bring slower global trade and growth, leading to a more cost-induced inflation. The continued reduction of sanctions—and resumed integration of Iran into the Central Asian and global economies—would tend to favour the reduction of oil prices, and improved regional and global trade and growth.
The World Bank estimates that a full return to global oil markets by Iran adds one million barrels of oil per day to the global supply, and has an impact of US$10 per barrel on the price of oil. The impact of eliminating sanctions on the nation's economy alone is seen raising economic growth in the country from less than 1% annually during the sanctions period to more than 5%. Further, the country is seen restoring more than US$17 billion in lost bilateral trade with its key trading partners around the world.
Politics in Iran, and in relation to the country, have been a source of global uncertainty and market tension since the revolution in 1979. Its adversarial relationship with Israel and tensions across the globe have served as particular focal points of market concerns. This is particularly true as it relates to the presidential election winner's views as they relate to the country's 2015 international nuclear accord, and whether it should be reconsidered.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…