Oil Export Recovery Helps Rohani but Election Remains a Challenge

Hassan Rohani confounded his critics in 2016. This was a year in which Iran doubled oil exports to 2.4 million barrels per day (bpd) and won OPEC exemption from its first overall production cuts since 2009. So ended a two-year effort by the Saudis to depress prices and squeeze Tehran’s coffers.
Rohani’s domestic opponents remain on the back foot. While a challenge is likely in the May 2017 presidential election from a critic of the 2015 nuclear deal with world powers (known as the Joint Comprehensive Plan of Action, or JCPOA), both the country’s improving economic outlook and Rohani’s relationship with Supreme Leader Ayatollah Ali Khamenei favour his re-election.
December saw the president unveil his draft budget for the Iranian year 2017-18, which begins in March. This is based on an oil price of $50 a barrel, up from $40 for the current year and not far short of the $55.3 a barrel that the International Monetary Fund (IMF) estimates as the break-even price that balances the budget (compared to $79.7 a barrel for Saudi Arabia).
Presenting the budget to parliament, Rohani said he hoped growth in 2016-17 would be 5%, with single-digit inflation and the creation of 700,000 jobs. For 2017-18, there will be no growth in spending in real terms as the government tries to balance stimulus with cautious management.
The good news underlying the budget is that the export of oil has recovered quickly after international sanctions eased in January once Tehran complied with the JCPOA.
Having the Organisation of the Petroleum Exporting Countries (OPEC) effectively accept Iran’s current export level (perhaps even increasing it by 90,000 bpd), despite an agreed overall reduction in production of 1.2 million bpd, reflects what Rohani called the “oil diplomacy” of Oil Minister Bijan Namdar Zanganeh.
“The OPEC agreement was a victory for Zanganeh, for Rohani’s administration and its technocratic management,” said Saeid Golkar, visiting fellow at the Chicago Council on Global Affairs and adjunct professor at Northwestern University.
Current energy exports, however, are nothing like the potential Iran has with the world’s largest hydrocarbon — combined oil and gas — reserves. Prospects for attracting foreign participation have vastly improved in 2016 and the energy majors seem undeterred by the arrival of Donald Trump as US president as of January 20th.
Royal Dutch Shell is the latest to return to Iran, with an exploration agreement for two large oil fields reached with the National Iranian Oil Company (NIOC). Total is negotiating an oil deal after its $4.8 billion gas agreement signed in November.
The company’s head of exploration and production, recently in Vienna to meet with Zanganeh, said he was “not particularly” worried about a Trump presidency.
Aircraft manufacturers are also relatively bullish, with Europe’s Airbus receiving agreement from the Obama administration to back the sale of more than 100 jetliners (with some US-made parts). Car-parts specialist Faurecia, an affiliate of the French automobile giant Groupe PSA, has signed two joint ventures.
That said, 2017 will offer challenges for Rohani, including May’s presidential election. While he remains the favourite as principlist critics struggle to find an effective challenger, Rohani’s position could be weakened by a bellicose approach from the Trump administration.
The US congressional vote to renew non-nuclear sanctions against Iran, which Rohani calls a “clear violation” of the JCPOA, which is doubtful, may have contributed to the recent weakening of the rial against the dollar.
Congress’s move has encouraged talk in the Iranian parliament of expanding the contentious nuclear programme and, while it is unlikely Iran would take such a step, the uncertainty may undermine the economic benefits of the nuclear agreement.
“At present, I really don’t see any serious rival for Rohani,” said Golkar. “Until now, the potential challengers do not seem strong enough, or popular or charismatic enough, to stop him. From another side, despite differences between the leader and president, Ayatollah Khamenei knows Rohani is more experienced, which is important, in a Trump era.
“Despite his revolutionary rhetoric, Ayatollah Khamenei knows the risk of having an inexperienced president.”
Beyond the election, Rohani is set on economic reform, including greater independence for the Central Bank, strengthening its ability to bear down on inflation, and the overhaul and capitalising of the banks to boost the private sector.
Implementing a plan from the intergovernmental Financial Action Task Force to integrate Iran’s banks into the international system could help attract foreign investment, especially beyond the energy sector. All these changes would improve the ability of small and medium-sized enterprises to raise capital.
Unemployment — up to 12.2% from 10.7% in the first half of 2016 and higher among under-25s — remains a problem both for Rohani’s re-election prospects, especially as principlists rally poorer voters against technocrats, and for longer-term stability.
Iran has long struggled to divert oil revenue into labour-intensive industries but this is essential if Iran is ever to reach its target of 8% annual growth.
Rohani, though, has made a start. He recently argued Iran had weathered lower oil prices without withdrawals from emergency funds and had instead over two years deposited “20% of its petrodollars” into the National Development Fund.

Gareth Smyth
has covered Middle Eastern affairs for 20 years and was chief correspondent for The Financial Times in Iran.
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