reflections

A Financially Stressed Rouhani Takes On His Opponents

6 MINS READJan 13, 2015 | 00:07 GMT
(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

The coming week will be an important one for Iran's relations with the United States. With just six weeks to go before the deadline in the nuclear negotiations, Iranian Foreign Minister Javad Zarif will travel to Geneva to meet with U.S. Secretary of State John Kerry on Jan. 14. The two will discuss ways to speed up the negotiating process, and then U.S. and Iranian negotiating teams will spend Jan. 15-17 working out technical details of the agreement. Finally, on Jan. 18, Iran will meet with the permanent members of the U.N. Security Council and Germany to round out this stage of the negotiation.

While a final agreement may not be around the corner, it is obvious that both sides are taking these talks very seriously. Skeptics of the negotiations have long warned that Iran is simply using the talks to drag out the negotiation process to build political cover and buy more time for its nuclear program, but the behavior of the Hassan Rouhani government suggests it is committed to reaching a deal. However, Tehran will need to overcome several obstacles standing in the way of reaching a long-term agreement.

Rouhani understands that 2015 will be the most difficult year to date for his administration. While the price of Brent crude is sitting stubbornly below the $50 per barrel mark, the resulting economic uncertainty surrounding Iran's oil-dependent economy is sending the rial on a sharp descent. Saudi Arabia, Kuwait and the United Arab Emirates, Iran's Gulf Sunni rivals, have large money reserves and can ride out the slump. Even though they collectively supply enough oil to theoretically raise prices by lowering production, they refuse to cut their output. Instead, they are enjoying seeing Iran, as well as U.S. shale producers, sweat under the pressure. Iran calculated its budget expecting a price of at least $72 per barrel, a figure that will inevitably have to be revised when the Iranian calendar enters a new year March 21. Despite Iran's various efforts to wean the economy off oil export revenue, it will not be able to escape the financial crunch this year.

While the financial stress has the potential to impact social stability in Iran, and thus the ability of the Rouhani government to make and implement significant decisions, it also undermines Iran's operations abroad. With an expensive war raging in Syria and Iraq, Iran has a hefty bill to foot in maintaining military and political support for its sectarian allies. Double suicide bombings targeted a cafe in a predominantly Alawite neighborhood of Tripoli on Jan. 10, serving as a reminder that jihadist activity could spill over from Syria into Lebanon, something that would tax Hezbollah's resources in the strategically critical Qalamoun area bordering Syria.

Iran has been able to maintain its military assistance to the Bashar al Assad government in Syria and to Hezbollah in Lebanon, but Hezbollah has recently come under heavy financial strain. Stratfor has received indications that Iran has had to reduce its contribution to Hezbollah's annual budget by some 35 percent over the past year. Tehran has allegedly prioritized cutting direct cash flows to the group while trying to maintain its military support on the battlefield, now spending about $200 million annually on its Lebanese Shiite proxy. If these expenses become harder to maintain, Hezbollah could face the risk of losing a major part of its support network. If Iran truly wants to lighten its financial burden in this theater, it may entertain a power-sharing proposal that replaces al Assad while maintaining Alawite control over the government.

This is where Russia enters the equation. Stratfor has closely tracked the movements of Russia's deputy foreign minister and special Middle East representative, Mikhail Bogdanov, as he shuttles around the region working on a peace deal for Syria. This was likely a main item on Russian Deputy Foreign Minister Sergei Ryabkov's agenda when he visited Tehran on Monday.

Russia is trying to present itself as an effective mediator for the seemingly intractable Syrian civil war while trying to leverage that role to negotiate a de-escalation of tensions with the United States. At the same time, Moscow is trying to ensure that it is a part of a final agreement between Washington and Tehran on Iran's nuclear program by offering to supply Iran with nuclear fuel and equipment. Iran will remain wary of Russian intentions as it works to manage its financial responsibilities in the region while pursuing a slow-moving rapprochement with the United States, but that is far from the only obstacle in Rouhani's path.

The Islamic Revolutionary Guard Corps (IRGC) has made no secret of its opposition to a potential nuclear deal. After all, had it not been for the sanctions regime and the Iranian state's need to circumvent and cope with those sanctions, the IRGC would never have been able to acquire the enormous clout it has enjoyed for more than a decade. It is now an important force in running Iran's economy, enjoying influence in sectors including imports and exports, energy transportation, mining and agriculture. From Rouhani's perspective, for the nuclear deal to have meaning, it must lift sanctions and legitimately open Iran's energy sector to foreign investment. For that to happen, however, the IRGC's role in the political economy would have to be diminished.

This is what Rouhani told his IRGC opponents in a Jan. 4 speech in Tehran when he argued that corrupt monopolies need to be broken and that the time has come for politics to start subsidizing the economy instead of the economy subsidizing politics, foreign and domestic. Rouhani also argued that Iran needs to make use of public referendums, a move that could enable him to bypass parliament on critical issues like a nuclear deal with the United States. Legislating via referenda poses a constitutional dilemma, but Rouhani is at the very least trying to highlight the fact that the public will stand with him on such issues instead of siding with his opponents. In the absence of contravening messages from the supreme leader, Rouhani appears to have the political momentum necessary to move ahead with his challenge to the IRGC.

Naturally, complications arise when a leader mounts an offensive against rivals on whom the government must also depend. The IRGC remains highly active in Iraq, Syria and Lebanon with the responsibility of protecting Iranian interests abroad. Rouhani can try to reduce the government's dependence on the IRGC by making personnel changes and by gradually building up the role of the Iranian army to counterbalance less cooperative security forces, but that will not solve all of his problems. He also faces the more challenging task of pushing certain conflicts toward a political resolution at a time when Iran is already stretched thin. To do that, he needs a productive conversation with the United States and a willing mediator. Russia will be standing by.

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