After the Iran Deal, Time to Revive Economic Statecraft

Such a strategy should focus on efforts to foster European investment to Iran, and empower a moderate Iranian middle class vital to the long-term survival of the deal.

Shortly after Iran tested a ballistic missile in late January 2017, the U.S. Treasury Department responded by imposing new sanctions against individuals and entities involved in Iran’s missile program. The use of sanctions was the first window into the Trump administration’s policy towards Iran.

For the most part, however, Trump’s approach to Iran remains unclear – leaving many to wonder whether the Joint Comprehensive Plan of Action (JCPOA) reached between Iran, the Obama administration and other world powers will be able to survive the recent missile test and the potential for similar events in the near future.

Over the past several years, Western governments have framed their strategy as a middle path between appeasement and military engagement, seeking to curtail Iran’s nuclear program through the use of economic sanctions.

Today, a strategy for Iran should rely not only on sanctions but also on other economic means. In particular, the US and EU should prioritize efforts to help EU companies do business in Iran, which could foster private-sector competition in an economy traditionally dominated by the Iran Revolutionary Guards Corps (IRGC).

Since its founding following the Iranian revolution in 1979, the IRGC has come to control not only Iran’s ballistic missile programme, but also a multi-billion dollar cartel of business interests that reaches nearly every sector of the Iranian economy.

The entrance of foreign organizations into the Iranian market has the potential to complicate life for the IRGC and loosen its grip over the economy. Doing so would go hand in hand with sanctions-based efforts to weaken the IRGC and could even strengthen Iran’s politically moderate middle class in the long term.

There is ample precedent for such shifts toward political moderation resulting from the rise of a globalized market economy. As political economist Susan Strange has argued, an acceleration of technological change, increased capital mobility, and revolutions in communications over the past 30 years have driven a diverse set of global political developments, including the disintegration of the Soviet Union, the rise of the Asian Tigers, and the turn in many developing countries from authoritarian governments to democracies.

These shifts have the ultimate effect of improving the economic prospects of non-elites, increasing the average citizen’s awareness of the benefits of market economies, and driving demand for reform and democratic governance.

Thus far, the Iranian middle class has failed to attain the independence and political power necessary to significantly curtail the influence of the IRGC and its allies. The nuclear sanctions likely aggravated this problem, as middle class business owners failed to compete with the IRGC’s business conglomerate due to its control over the black market, monopolization of resources, and primacy in winning government contracts.

The entrance of European firms into the Iranian market has the potential to bolster Iranian businesses that compete with the IRGC. It can also create “spillover effects” that will increase the competitiveness of local firms by bringing new technologies and know-how into the economy. As a result, European investment in Iran can help create the type of viable private sector necessary for the development of a strong middle class.

But foreign investors still face significant risks in the Iranian market. Endemic corruption, macroeconomic instability, and an insufficient regulatory and legal framework give pause to many potential investors, especially those who face high upfront capital costs and long payback periods. Investors have also had a difficult time accessing financing due to continued US financial sanctions and vague guidance from the Treasury Department on what non-US companies are allowed to do.

The first step for a geoeconomic approach to relations with Iran is for Washington to recognize the central role of multinational firms in modern diplomacy. Firms control technologies and management expertise and have access to markets and global sources of capital – some of the major points of leverage in today’s global economy. The structuring of contracts between European firms and Iranian entities is already emerging as a key playing field for economic statecraft in the wake of the nuclear deal.

A long-term strategy should be built on workable relationships between Washington and European firms. This means helping firms do business with non-sanctioned Iranian entities with the understanding that cultivating such business may have significant diplomatic payoffs down the road.

Such a strategy would also require the US and EU governments to take into account the reputational effects of overusing economic coercion, and make a concerted effort to build and restore trust amongst firms when tools such as sanctions must be used liberally.

While helping firms to do business with Iran is politically challenging, a first step is to build a narrative. The idea is not that economic integration will pacify the IRGC, but that structural economic shifts driven by European investment can empower a more moderate middle class, underpinning the nuclear deal’s boost to the moderate government of Iranian President Hassan Rouhani.

Crafting a geoeconomic strategy towards Iran will take time. During this time, the US and EU can recalibrate other policy mechanisms and structure responses to Iranian missile tests and similar developments.

For now, constructing a broader geoeconomic framework will require Western governments and experts to determine what its most effective tools are, how they work, and in what contexts they can be most effective. It’s time to go beyond sanctions in the design of both Iran policy and nonproliferation policy.

Tom Hickey is a postgraduate student studying International Political Economy at the London School of Economics.