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Iran’s regime, economy and society are in dire need of massive injections of investment and capital, particularly foreign investments, to modernize the country’s aging manufacturing infrastructure, which is largely obsolete due to years of isolation and US sanctions. The regime needs such investments to improve the woeful performance of the Iranian economy, help curb price rises linked to declining production and create jobs that can cut the soaring unemployment rate, particularly among the young.
Despite this, Iran’s reality and the regime’s history reveal tremendous obstacles that prevent the country from becoming an attractive prospect for investors — not only for overseas capital, but also domestic. These obstacles include deep-rooted problems related to the regime’s structure, economic restrictions and powerful state-controlled entities that monopolize resources, such as the Islamic Revolutionary Guard Corps, bonyads and other similar entities. Such obstacles are so big that they negate any positive factors that could attract capital, leading to international bodies consistently placing Iran at or near the bottom of indexes related to the ease of doing business, transparency and investment attractiveness.
The structure of the Iranian regime helped to create opaque entities that impede direct or indirect foreign investments. The most prominent of these entities are the IRGC and the bonyads. As the US has imposed sanctions on companies affiliated with these entities due to accusations of their involvement in financing or supporting terrorism or supporting Iran’s nuclear and missile activities, foreign companies are nervous of working in Iran and of any involvement in financial ties with these entities. Any involvement could lead to foreign companies themselves being subjected to US sanctions or possibly even deprived of business licenses for the US market.
Bonyads are nominally charitable commercial and social entities. Run by clerics, they claim to be humanitarian and charitable entities working to improve Iranian society. The bonyads, which control about 20 percent of Iran’s economy, enjoy the support of Supreme Leader Ali Khamenei, giving them massive credit facilities and customs and tax exemptions. This favorable status has led to them becoming so vast and wealthy that one of them alone, Bonyad-e Mostazafan, is reportedly the second-largest commercial entity in Iran after state petrochemical giant the National Iranian Oil Company.
The bonyads, which are not subject to any oversight or accountability, are accused of allocating vast sums of money for military or political purposes. Robert Hormats, former US undersecretary of state for economic growth, energy and the environment, noted this in a study published by the Atlantic Council in 2016.
When it comes to the IRGC, any consideration of its pivotal role in Iranian affairs needs more details, given its opposition to foreign investments generally in Iran — whether there are international sanctions on the country or not. The IRGC was established in 1979 and its economic roles began to grow during Iran’s eight-year war with Iraq from 1980 to 1988. Its roles were enhanced in the years that followed to such a degree that it now controls at least a third of the Iranian economy. If the economic and financial entities currently backed or controlled by Iranian clerics were added to the IRGC’s holdings, this would mean that the proportion of the economy under its control could rise to 80 percent, according to the German Foreign Ministry. The IRGC is involved in diverse fields such as agriculture, oil, trade, tourism, automobiles, petrochemicals and construction. Its pervasive power also extends to the media and customs at ports and airports.
In general, the IRGC is not supportive of any intensive flows of foreign investment into the country — a policy that is in line with the regime’s hard-line orientation — except in cases where there is a need for essential technological equipment to maximize income, especially in the oil industry. In many other fields, where manufacturing is confined to the production of goods for limited domestic use or consumption, the machinery and equipment used is outdated and slow. This is clearly seen in Iran’s auto industry, which produces vehicles that are low-tech and decades out of date, even in factories run in partnership with European auto manufacturing firms. Many of the vehicles produced for the domestic market lack the most basic safety and comfort features, even in the latest models.
In order for the IRGC to continue monopolizing Iran’s wealth and resources, it needs to ensure that potential rivals in both the public and private sectors face insurmountable obstacles; possibly even driving them out of business if it seems they might compete with its interests.
In this way, the IRGC and its affiliated entities effectively, if not publicly, take charge of all major deals with international companies, especially those concerning oil, gas and petrochemical investments — one of the few areas in which the IRGC is investing heavily at home. To facilitate its foreign trade, the IRGC has found it necessary to maintain an intensive presence in banking and financial remittances, as well as in dealing in gold and the precious minerals trade.
The IRGC exercises great control over investments and trade as it has marginalized the private sector and domestic trade networks, known collectively as “the bazaar.” These networks have played a historical role in providing Iranian clerics with zakat and khums and in financing protests and even uprisings in Iran. A systematic approach has been pursued to marginalize any nonstate involvement in the bazaar in favor of the IRGC. Even when the supreme leader decided to privatize 80 percent of the public sector in 2006, invoking grandiose slogans promising great economic reforms, the largest privatization deals — estimated to be worth tens of billions of dollars — were awarded to the IRGC. The deals included the country’s main telecommunications company, which is now fully under state ownership. All this means that the number of semi-governmental and commercial entities controlled by the IRGC is now estimated to stand at more than 800.
Former President Hassan Rouhani attempted to open the door for European investment and curb the IRGC’s control over Iran’s domestic economy, but his efforts did not bear fruit. It is unlikely that these attempts will continue under Ebrahim Raisi, with the hard-liners now controlling all the branches of power in Iran. Confirming this suspicion, a BBC Persian report this month revealed that Raisi’s government had concluded an agreement with the Khatam Al-Anbiya Construction Headquarters, the IRGC’s biggest economic arm, to take over the projects included in the past year’s budget related to the construction of major mosques in Iran, in return for $100 million of oil, which the IRGC firm will sell in whichever way it deems appropriate.
The IRGC exercises great control over investments and trade as it has marginalized the private sector and domestic trade networks.
Dr. Mohammed Al-Sulami
This is certainly not the first such deal, with similar multibillion-dollar agreements conducted by former President Mahmoud Ahmadinejad. The deals under Ahmadinejad ended up triggering a major corruption case, in which businessman and go-between Babak Zanjani was convicted and sentenced to death. The BBC Persian report also revealed that the regime plans to award the armed forces oil worth $4.5 billion in the coming year’s budget. This will allow the use of oil revenues for military purposes.
In the second part of this article, we will examine the vision of many specialist international bodies regarding numerous indicators and important factors that may help to attract (or scare off) foreign investors that are seeking to operate in Iran. Such factors are not confined to the economic situation and play an important role in determining the amount and nature of foreign capital that has entered Iran over the past four decades.
- Dr. Mohammed Al-Sulami is president of the International Institute for Iranian Studies (Rasanah). Twitter: @mohalsulami