Iran’s Economic Crossroads

WASHINGTON — Critics have dismissed the Nov. 24 interim accord reached with Iran on its nuclear program as marginal, tenuous and easily reversed. But an enormous amount has changed, especially from Iran’s viewpoint. Essentially, Iran agreed to freeze its enrichment program for six months to allow time for talks on a potential final agreement, while a few sanctions were lifted. Overlooked in the debate over the merits of the deal are the economic dimensions that are surely a factor in Iran’s calculus.

These considerations, more than ideological ones, may well shape the landscape of future bargaining. It would be a colossal error to restore or expand the few sanctions that are being lifted, as some members of the United States Congress are threatening to do.

Before the deal started developing, in secret talks that started in March, Iran’s leaders faced a dilemma: scrap their whole nuclear program or live indefinitely under sanctions that were strangling their economy. Rather than surrender completely, they swallowed the economic hardship and eventually came to think that they could endure it for longer than the West expected.

But now they can envision a compromise that allows them a nominal right to enrichment if they forgo a path to nuclear weapons — and full relief from sanctions once they sign a permanent accord. That is a deal that might be accepted even by the most hard-line forces in Iran.

Under the stringent sanctions of the past two years, Iran’s oil exports dropped to around 1 million barrels per day from 2.5 million. Gross domestic product shrank by 5 to 6 percent. Inflation soared to 45 percent, and unemployment to 35 percent. Iran’s leaders, who showed their interest in experimenting with negotiations when they allowed Hassan Rouhani to win the presidential election this year, do not blame only the sanctions for these economic failings. They also fault mismanagement under former President Mahmoud Ahmadinejad, whose support came largely from the poor and from the Islamic Revolutionary Guards Corps, which controls Iran’s nuclear program.

By contrast, Mr. Rouhani proposed structural reforms as a way around sanctions during his campaign, and once in office, he canceled Mr. Ahmadinejad’s signature initiative of public housing for the poor. Now he sees improving Iran’s international image as essential to attracting foreign investment and even tourism.

The modest sanctions relief would loosen restrictions on oil exports and trade. But with youth unemployment rising, Iran will still need a growing private sector producing non-oil exports. Mr. Rouhani has put a priority on removing export duties and red tape; Iran earned some $18 billion in non-oil exports in the past year, and that number stands to grow if more sanctions are lifted.

The World Bank ranks Iran 144th of 185 countries in ease of doing business; to strengthen the private sector, the government will have to privatize state enterprises, revise investment and banking rules, and provide cheap credit, tax incentives and more liberal labor laws. Those reforms could trouble the Revolutionary Guards. They control a substantial proportion of state-owned enterprises that are inefficient and corrupt, hobbled by byzantine rules and dominated by predatory conglomerates tied to ruling clerics and leaders of the corps. Altering labor laws or cutting subsidies and social benefits would anger the poor. Three years ago, the government deployed riot police officers to contain a backlash against cuts in subsidies for food, fuel and electricity.

At this point, of course, the Revolutionary Guards show no inclination to give up their nuclear program, but they also see the process of seeking a deal with the West as an important boost to Iran’s economy and their own business interests — especially if it would obviate politically costly economic reforms.

Such is the state of the debate in Iran. If Congress sabotages the interim deal by stiffening sanctions and forcing Iran back to a difficult choice, Iran’s leaders will almost certainly bite the bullet and opt for stringent economic reforms — as they did in 2010, when they first risked political turmoil by cutting popular subsidies by between $60 billion and $100 billion — rather than a humiliating total abandonment of their nuclear program.

Iran is at a crossroads. It is weighing the relative benefits of deal-making and economic reform, and is experimenting with both. For the United States and other nations seeking to rein in Iran’s nuclear program for good, it would be better to tie the fortunes of Iran’s economy to diplomacy than to insist on a level of sanctions so onerous as to challenge Iran to forgo a deal, continue its nuclear program and gamble that reforms alone — rather than international trade — can keep its economy afloat.

If Iran pursued such a course, impoverishment, at some point, might force it to the bargaining table. But by then, its nuclear program would only have grown far larger and be closer to a bomb, and be that much more difficult to abandon. And the risk of armed conflict would only have increased. It is better for the United States to keep open its trial run at compromise, in hopes that Iran will be convinced — six months from now — that a permanent, verifiable nuclear deal is the only way to secure a prosperous future.

Vali R. Nasr is the dean of the Johns Hopkins School of Advanced International Studies.

A version of this op-ed appears in print on December 5, 2013, in The International New York Times.