COMMENT: Iran’s elections – one less hurdle for investors?

COMMENT: Iran’s elections – one less hurdle for investors?
President Hassan Rouhani, who will have to find a way of working with conservatives to introduce the reforms.
By Renata Legierska of Alaco March 1, 2016

Although reformers have made substantial gains in Iran’s parliamentary elections, the hardliners continue to control key institutions and President Hassan Rouhani will have to find a way of working with them to introduce the reforms necessary to encourage foreign investment.

In the run-up to the February 25 elections in Iran – for the Majles and the Assembly of Experts – the reformists were waging an uphill battle. The hardliners have dominated Iran’s parliament for more than a decade and there was little prospect of a significant realignment of power. Nevertheless, the reformists campaigned vigorously because their battle was not for political domination, but to demonstrate the popular backing for Rouhani’s reforms.

Their efforts bore fruit as some 70% of eligible voters turned up at the polls. In Tehran, which usually sets the political agenda for the rest of the country, the ‘Coalition of Hope’, comprising reformists, centrists and pragmatic conservatives, won all 30 seats in the parliament and 15 of the 16 seats in the Assembly of Experts. Final results show that the reformists have secured a third of seats in the parliament, which together with moderate conservatives give them a majority in the 290-seat assembly. In addition, some notable ultra-hardliners, such as Gholam-Ali Haddad-Adel, a former speaker of parliament, lost their seats. President Rouhani secured election to the Assembly of Experts, as did his ally Ali Akbar Hashemi Rafsanjani, the former president. Two of the most conservative clerics – Mohammad Taghi Mesbah Yazdi, former Chairman of the Assembly, and Mohammad Yazdi, former head of Judiciary – failed to get re-elected.

If the disqualification of many reformist candidates from running for office was the hardliners’ effort to protect the principles of the Islamic revolution, the success of the ‘Coalition of Hope’ can be seen as a popular referendum on the future direction of the revolution. The election results demonstrate that Iranians still believe that the nuclear deal and global engagement are the way to bring economic, social and political benefits to the country.

But for all the talk of reforms, Iran will continue to have a complex dual governing structure and non-elected hardliners will continue to exert significant influence over the government.

Iran’s executive apparatus comprises the elected parliament and the unelected Judiciary and the Guardian Council, which are appointed and overseen by the Supreme Leader. The Majles overseas the annual budget, approves proposed candidates to head various ministries, and has supervisory and investigative powers over various institutions. However, in practice, any laws and decisions approved by the parliament require approval from the non-elected Guardian Council and the Supreme Leader can block any legislation by issuing a ‘state order’. Finally, institutions such as Iran’s Revolutionary Guard Corps, a formidable force in the domestic economy, are not accountable to the parliament or the president, only to the Supreme Leader.

Chinese whispers

Even with a strong backing from the parliament, Rouhani is still facing a prodigious challenge in delivering a real economic windfall from Iran’s re-engagement with the West. The nuclear deal freed up between $50bn and $100bn in frozen financial assets for Tehran, which the government said it would spend on public infrastructure projects, but an overhaul of the country’s oil extraction capacity and related infrastructure is estimated to cost at least $500bn.

A lot is riding on the effectiveness of the new government in improving Iran’s economy. The election victory is important, but it might be a long while before Iran begins to realise its economic potential. Rouhani has set out to attract $50bn in foreign direct investment (FDI) per annum over the next five years, and in recent months several state and business delegations visited Tehran. But despite their optimistic words, there has so far been little tangible commitment from investors. Governments and businesses are still struggling to understand the intricacies of Iranian political and business environment, and the implications of residual US sanctions on potential investments.

And while Rouhani has been actively courting Western investors, he has been pragmatic and careful not to jeopardise Iran’s relationship with China, its largest trading partner. China relies on Iran’s oil and regards it as an important transport hub, while Iran sees China as a more dependable partner than Western states. In January, the two countries agreed to increase bilateral trade to $600bn over the next ten years. During Chinese President Xi Jinping’s visit to Tehran even the Supreme Leader voiced his approval for greater cooperation between the two states. In the short term, no Western state would be able to match this level of commitment.

The outcome of the elections is a move towards greater commercial interaction between Iran and global capital markets. Rouhani and his camp are keen to develop new business relationships and this will likely bring more investment to Iran. But conservative politicians regard old friends such as China as better than new ones. In practical terms, Iran’s re-engagement with the West means new opportunities for investors, but also greater competition.

Renata Legierska is Senior Associate at Alaco, a business intelligence consultancy.