On December 27, 2021, the other participants in the Joint Comprehensive Plan of Action (JCPOA) launched the eighth and possibly the last round of negotiations in Vienna with the aim of restoring the Iran nuclear deal. While Iran’s chief negotiator Ali Bagheri Kani appeared optimistic after the seventh round of talks, the prospect of a new deal is still uncertain. Iran’s new hard-line president Ebrahim Raisi has further contributed to doubts about a return to the JCPOA.
On December 12, the Raisi administration submitted its budget proposal for the 2022-2023 fiscal year to the Iranian parliament. The bill sets out how Raisi plans to overcome Iran’s economic challenges, which were exacerbated when the United States reimposed the sanctions in 2018. However, the proposed budget also has important implications for the West, as it mimics Tehran’s expectations of the nuclear deal. The report is apparently pessimistic about the prospects of the ongoing negotiations in Vienna and expects US sanctions to remain in place until 2022. The new proposal understates crude oil sales forecast in the previous budget of about 1.1 million barrels per day, predicting that oil sales will account for a quarter of the budget at $ 12.66 billion. Despite the questionable possibility of sanctions relief, the Raisi administration is targeting total economic growth of 8 percent, representing productivity growth of 3.5 percent and a 4.5 percent increase in investment. Iranian state media put the nominally balanced budget at 15,052 trillion rials ($ 50.2 billion using the free market exchange rate).
The bill offsets modestly estimated oil exports with a large expected increase in tax revenues. The new budget reports a planned 62% increase in tax revenue totaling $ 17.5 billion. This expected increase in tax revenue is high, even by Iranian budget standards, which often tend to overestimate tax revenue. The legislation aims to increase revenue by increasing taxes on overseas travel and introducing a tax on the value of vehicles and real estate. Dependence on taxes, among other smaller sources of income, suggests that the Iranian government is confident it can overcome its economic sanctions.
Thus, Tehran signals that it faces no economic urgency to make substantial concessions to American decision-makers in the current nuclear talks. This position is in line with Raisi’s broader belief in increasing trade and cooperation with Iran’s eastern neighbors instead of rapprochement with the West. Tehran’s prospects have little faith in the relief of sanctions and instead look to economic autonomy and maintaining Iran’s financial ties with Russia and China as its lifeline. Looking at the proposed budget and recent Iranian diplomacy, it would appear that Raisi is not in favor of negotiating a deal that is not entirely in favor of his government. But analysts should not assess Iran’s commitment to negotiate based on the personalities of its policymakers, but on the economic and socio-political constraints and challenges they will face in the coming year.
As indicators show the economy has rebounded over the past year, new data could point to this growth slowing. At worst, this new data could signal a return to contraction in the near future. New data from Iran’s Purchasing Managers Index (PMI) suggests companies are grappling with high prices and limited stocks of raw materials. Coupled with inflation, these economic shortcomings contributed to the decline in the economy’s overall PMI index. Several sectors covering agriculture, housing and services remain hampered by weak demand as the country struggles under the combined weight of external sanctions and Covid-19. Although inflation has come down over the past month, the current inflation of 44.4% means that the improvement does little to mitigate the sharp drop in purchasing power. The Raisi administration is taking steps to stimulate the economy but still refuses to directly address the impact of the sanctions. Tehran has also continually offered discounts on oil exports to entice buyers to circumvent US sanctions. But some economic experts are not convinced of Tehran’s ability to improve the economy without directly addressing sanctions, and predict that Iran’s budget deficit could be 50% higher than the current deficit if negotiations fail. In addition to leaving sanctions unanswered, relying more on tax revenue is expected to hamper Iran’s national income growth.
Iran’s economic challenges have catalyzed a series of nationwide public protests. Workers have gone on strike for better wages at government-owned petrochemical facilities in southern Iran, while in Isfahan, farmers and residents protested over water shortages last November. Teachers across Iran have also taken to the streets to demand higher salaries and better working conditions. These protests highlight a greater sense of urgency for the Raisi administration, which has pledged to diversify the Iranian economy and create around 2 million jobs by March 2023. The direct link is Iran’s socio-political and economic situation makes it less possible for the Raisi administration to test a new tax strategy centered on autonomy. As such, Tehran could remain committed to the JCPOA despite signaling a different message through its recent budget proposal.
Raisi’s government may also feel compelled to address sanctions directly for reasons other than to ease pressures on the Iranian economy. The bill plans to increase investment in Iran’s Islamic Revolutionary Guard Corps (IRGC). According to the bill awaiting parliamentary approval, the IRGC will receive $ 22 billion, double its allocation in 2021. In contrast, the standard military will receive $ 7.99 billion in 2022. One domain Notable investment has been the IRGC’s navy, whose new designs show an evolution towards more conventional naval capabilities. The feasibility of such investments depends on Iran’s ability to develop its economy and reduce the burden of its deficit. Unless Tehran aims to prioritize IRGC needs over other spending, Raisi will need to consider the most viable way to negotiate the lifting of US sanctions. With the eighth round of talks in Vienna, a final deal between Iran and the West is still uncertain. As Iran demands the lifting of all US sanctions, a breakthrough in the negotiations is still not visible. But Raisi assured that Iran takes the Vienna negotiations seriously, and the constraints its government faces due to the sanctions leave the possibility of concessions open.
Arash Toupchinejad is a junior researcher at the Canadian NATO Association and MSF candidate at Georgetown University. He is also a columnist for the European Student Think Tank.