This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.
The widespread protests that rocked Iran in early 2018—catching both the government and political analysts by surprise—had an unlikely trigger. When Iranian president Hassan Rouhani unveiled his budget for the forthcoming Iranian year, he for the first time made public aspects of government expenditure that had long been kept hidden. Rouhani was hoping to boost his credentials as a reformer by exposing how significant state funding was being provided to religious and quasi-state institutions – many of which were controlled by his political rivals. But the gambit backfired, and the Rouhani government and the wider Iranian state came under criticism. Thousands of Iranians participated in loosely-organized protests around the country, with some mobilizations reportedly encouraged by Rouhani’s political rivals to express their anger that the state had long allowed such transfers while ordinary people saw their standard of living fall due to growing inflation and unemployment.
Though the protests eventually subsided, public anger at financial mismanagement and fiscal governance in Iran has been a consistent feature of domestic politics. Nationally representative polling demonstrates considerable concern about the lack of transparency in Iran’s economy among the public. Nearly 60 percent of Iranians believe that Iran’s “economy is currently run by a few big interests,” rather than for “all the people.” About the same proportion attribute “the greatest negative impact on Iran’s economy” to “domestic economic mismanagement and corruption,” rather than “foreign sanctions and pressures.” But the proportion of respondents who blame sanctions as the primary driver of the country’s economic downturn has been increasing, from 26 percent in May 2015 to 36 percent today. This shift in public sentiment is one example of how sanctions have complicated the domestic politics around financial reforms and fiscal transparency in Iran. Tweet
In May 2018, the Trump administration withdrew from the Joint Comprehensive Plan of Action (JCPOA), reimposing sanctions that had been lifted as part of the nuclear deal. The United States has subsequently pursued a “maximum pressure” campaign on Iran, seeking to starve the Iranian government of budgetary resources and to induce an economic crisis to stoke an internal political crisis. Iran’s trading partners have been caught in the sanctions crossfire. European leaders have lamented the impact of extraterritorial sanctions on European companies and banks, decrying a challenge to Europe’s economic sovereignty, while Iran’s oil buyers sought waivers from the Trump administration to allow them to continue buying Iranian crude. Iran’s economy has begun to contract as episodes of currency devaluation, inflation, and rising unemployment take root.
In the face of these intensifying internal and external pressures, the Rouhani administration has nonetheless continued to push for greater financial reforms, most notably in the context of the action plan set forth for Iran by the Financial Action Task Force (FATF), a global body that establishes standards for anti-money laundering and combating financing of terrorism controls. Other initiatives, such as the adoption of International Financial Reporting Standards (IFRS) and an effort to cleave the Revolutionary Guard, part of the country’s armed forces, from its business activities, have also featured as part of these reform efforts. But the intense politicization of what are essentially technical and regulatory reforms, spurred by both domestic political dynamics and the broader fate of Iran’s nuclear deal with the world powers, have hobbled these efforts. As a former finance executive lamented to the Financial Times in January 2018, “Mr. Rouhani is unable to make the budget transparent. His first step to make hardliners more accountable was answered by the unrest.”
The present circumstances in Iran make it a cautionary tale for domestic and international stakeholders seeking to improve financial regulations, fiscal governance, and government accountability in developing economies. Tweet The specific ways in which a combination of domestic political rivalries and international sanctions have combined to stymie reform suggest that advocates of reform need to develop more robust interventions to ensure that both the incentives and means necessary for reform are preserved.
When the Rouhani administration launched its efforts to clean up the finances of the central government, state enterprises, and the private sector, the incentives were widely understood—if Iran was going to successfully attract much needed foreign investment, having been deprived during its decade under international sanctions, it would be necessary to raise transparency and governance practices to conform more closely with international standards. But the re-imposition of sanctions, and the characterization of those sanctions by the Trump administration as part of a “financial war,” have not only eliminated this incentive, but also allowed opponents of financial reforms to oppose new regulations and transparency measures on the basis that such measures compromise Iran’s national security. Nowhere has this been clearer than in the intersection of the FATF action plan requirements and issues of fiscal transparency.
Iranian foreign minister Javad Zarif, whose mandate to repair political and economic ties with the international community depends in large part on the FATF process, has complained of a campaign to stop the reforms, telling reporters, “those places that do launder thousands of billions are certainly financially capable of spending a few hundred billion on propaganda and psychological operations in the country.” These “psychological operations” were highly targeted. When Iranian parliamentarians were preparing to vote on a new law related to global standards for combating the financing of terrorism, supporters of the law received death threats.
In a sign of real political leadership, parliament passed the law. But the ultimate ratification of these laws depends on Iran’s non-elected government bodies, which serve as arenas for consternation and compromise among Iran’s political factions. Mohsen Rezaei, the secretary of one such body, the Expediency Council, has suggested that final ratification of the FATF laws will depend on Europe continuing to support trade and investment with Iran in a “constructive manner.” The Assembly of Experts, an influential body comprised of jurists, has described the Rouhani governments’ pursuit of FATF compliance as “response to the enemy’s demands” and “a strategic mistake,” a likely allusion to the impact of new transparency and CFT rules on Iran’s ability to provide funding to proxies such as Lebanon’s Hezbollah. Rouhani has countered these arguments by suggesting that failure to meet the FATF action plan would be a form of self-sanctioning, imploring “everyone, no matter their political party or faction, not to build walls around the government because this wouldn’t be to the benefit of the people.”
Cognizant of these internal battles, the FATF has repeatedly extended the deadline for Iran to complete its action plan, despite protests from the U.S. It is in the interest of the FATF, as a technical body, for Iran to remain engaged in the action plan process, even if reforms are slow to materialize. But a second challenge for external proponents of reform is that those Iranian stakeholders who—despite political headwinds—continue to labor towards greater transparency and accountability lack sufficient technical assistance.
In most emerging markets, technical assistance, whether delivered by consultants or non-governmental advisers, plays an important role in developing capacities within both governmental organizations and commercial enterprises. But in Iran, the United States’ primary and secondary sanctions have made it near impossible for consultants and advisers to operate in the country. On one hand, U.S. officials have continually warned businesses to conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” But U.S. sanctions mean that no entities with a “U.S. nexus” can conduct business with Iran unless generally or specifically licensed to do so by the U.S. Department of Treasury. Given the significant costs and operational challenges associated with establishing completely self-contained teams to pursue engagements in Iran, only a handful of consultancies and non-governmental organizations undertook projects there. The Iranian government therefore lacked much of the expertise and support that has been instrumental to financial and fiscal transparency efforts in so many other emerging markets worldwide.
The situation led some compliance professionals to wonder “If Iran cannot access the very tools that it needs in order to reform, is it being set up to fail?” Iranian bankers think the answer is yes. A board member of a major Iranian bank stated in an interview, “If the objective was to promote greater transparency… it would have been simple to pave the way by encouraging specialized international firms to advise and assist the Iranian government and financial institutions to develop and implement the necessary legislation, procedures, and programs.”
These sanctions-induced failures of reform, which arise from ruined incentives and restricted means, are unlikely to remain unique to Iran. Sanctions are typically targeted at countries that have weak regulatory environments, where either the state or political elites generate rents from activities such as money laundering, and divert those rents for the purpose of political patronage, sometimes including terrorist financing. In other words, sanctions target precisely those countries where interventions focused on financial reform and fiscal transparency are most in need. Tweet Aside from Iran, an expanding program of sanctions targeting Russia and Venezuela, as well as recurring calls to impose sanctions on Turkey, threaten further complications for supervision of the global financial system.
Many stakeholder groups in Iran, including political parties, business organizations such as the chamber of commerce, and civil society groups such as teachers unions, continue to push for greater fiscal transparency. Iran’s newspapers regularly feature sharp commentary about the state of the country’s economic mismanagement, and how nontransparent practices and poor regulation contribute to rentierism and graft. Encouraged by this broad campaign, Iranian reformist parliamentarian Mohammad Sadeghi recently stated, “Transperancy has become a discourse and ongoing demand.” However, alluding to political pressures introduced in part by sanctions and the securitization of the national budget, Sadeghi also noted that “the complexity of the transparency issue has created obstacles in some sectors.”
Unless stakeholders committed to fiscal transparency develop strategies to account for the increased use of sanctions, global reform efforts could be seriously compromised. Tweet It may be necessary for stewards of global financial integrity to take a more assertive stance on the responsible use of economic sanctions lest years of progress in improving global regulations and supervision be undone in an environment of financial warfare where global financial integration is tantamount to entering a blast radius, and where domestic reforms, such as increased budget transparency, become akin to exposing the location of a piece of critical infrastructure and leaving it vulnerable to attack.
Esfandyar Batmanghelidj is founder and publisher of Bourse & Bazaar, a project dedicated to the free exchange of information and ideas related to commercial opportunities in Iran. Follow him on Twitter @yarbatman.
Further Reading
- The Fiscal Futures Project
- Fiscal Futures: Scenario Thinking for Fiscal Transparency and Accountability (Paper, 2018)
- State of the Field Review: Fiscal Transparency and Accountability (Research Note for the March & April 2018 Fiscal Futures’ Scenario Planning Workshops, October 2018)
- Fiscal Futures blog posts