The Sanctions Cabinet

Hassan Rouhani has unveiled his first cabinet, and his appointees reveal his administration’s top priority: dealing with the unfolding economic crisis by seeking relief from international sanctions.

After six weeks of intense speculation, Rouhani's choices for the ministries of interior, culture and Islamic guidance and justice have left much to be desired and ignited a lively debate among human rights activists. However the nominees for foreign affairs (Mohammad Javad Zarif), economy and finance (Ali Tayyebnia), urban planning and transportations (Abbas Akhondi) and oil (Bijan Zangeneh) ministires have met warm welcome from members of Iran’s business community. It seems that the new president does not have any illusion about the difficult days ahead, and many share his concerns. He has appointed Mohammad Nahavandian, a free market economist and chair of Iran’s Chamber of Commerce, as his chief of staff, and many believe Nahavandian, in this position, will help coordinate the economic policy making process. Many of the ministers have strong reputations as able technocrats; however their ability to be effective in today's deteriorated economic climate is open to debate.

I spoke recently with an Iranian economist who works frequently with Iranian banks, a middle aged man with over two decades experience in finance. He told me Rouhani's concerns should be focused tightly on two matters:  “He should have a cabinet that addresses inflation and is capable of increasing oil revenues despite sanctions.” Inflation is the main concern of millions of Iranian consumers, and since the election official estimates have been changing rapidly to catch up with the reality. In a recent speech Mr. Rouhani recently put inflation at 41 percent, a two fold increase from the roughly 20 percent figure Ahmadinejad’s administration acknowledged.

Declining oil revenues, a drastic fall in the value of the national currency and heavy handed international sanctions have significantly increased the cost of international trade, particularly imports. Iranians are feeling this shift acutely, as before the rial's freefall, in the early years of Ahmadinejad’s tenure, the country's reliance on affordable imports had surged. All these factors have increased the price of goods and services astronomically in Iran. Iran's middle class and lower income families are suffering the most from these drastic changes. The purchasing power of their fixed income declines daily.

But the new cabinet is well arranged to deal with the causes of inflation in Iran. The nominees for the ministries of oil and foreign affairs are internationally well-connected and respected. The hope in the business community is that they can use their diplomatic skills to secure sanctions relief and find ways to blunt the effects of sanctions in the meanwhile. Nearly all the nominees hail from technocratic backgrounds, with extensive networks among the country's business community. They know where to look for answers and have forged working relationships with the experts in their fields. They have demonstrated professionalism, within the norms of Iran’s society, to inspire respect across the political spectrum.

Alireza, a 40- year-old oil engineer, says he believes the new cabinet stands a strong chance of dealing with sanctions. “Mr. Zangeneh is the best when it comes to finding new markets,” he says. “He has good connections in OPEC.” He thinks the priority of the new government will be to end the sanctions “That is the only reason a veteran diplomat like Zarif is nominated as the minister of foreign affairs. Sanctions must end.”

Many agree with him, but others believe the hard work also lies elsewhere. My economist friend says “the real challenge is not the sanctions, the real challenge is how to deal with mismanagement and fiscal misbehavior which have been institutionalized for the past eight years.” He reminds me that the oil ministry Mr. Zanganeh is appointed to lead “is not the same organization he left eight years ago.”

Members of the Revolutionary Guards and political groups loyal to Mr. Ahmadinejad have benefited from extensive, cushy access to  economic advantages and banking facilities during the past eight years. They have won the major share of government contracts and received billions in credit lines and bank loans, without due process or diligence. Different engineering commands in the Revolutionary Guards have become multipurpose business enterprises active in different economic fields from oil and energy to road and construction. It is no exaggeration to say military officials have become the most influential group in the business sector. The success of Rouhani’s economic initiative depends on their collaboration. Not everybody is happy with this new development. Majid Tavakoli, Tehran’s conservative representative in the parliament, told Tejarat-e Farda in an interview last July, “Our military  entered the markets easily, but they won’t leave the economic affairs that easily.” Rouhani’s ministers have worked with the military before in various capacities, but this will be the first time they attempt to administer an economy with the military as a major stakeholder.

Some believe that the military's robust presence in the economy may be a hidden opportunity. Hossein, a young activist who worked for Rouhani’s campaign hopes the Revolutionary Guards' economic clout may induce greater support for Rouhani’s foreign policy. “For the first time in the last three decades all groups have mutual interest in pursuing an opening with the West,” he says. “We need to work and to interact with the world. “ Hossein's economic future and the prosperity of millions like him, depend on the success of such interactions.

The new cabinet will start its work in next few weeks. However Ahmadinejad’s legacy of mismanagement and corruption will not be swept away overnight. Iran’s economy is besieged by sanctions. It suffers from high inflation and a liquidity problem. The military's oversize economic clout has resulted in the bullying of the private sector, and mismanagement is endemic throughout the regime's bureaucracy.

These realities will set the stage for the next government’s economic policies, while the unfolding economic crisis requires immediate attention. Many believe ending the sanctions is the key to the economic problems. And it seems Mr. Rouhani is of the same opinion. However his ministers soon will realize that sanctions might not be the only problem. They do not have much time to think of an alternative approach.  Despite their qualifications, time is against them.