Oil export recovery helps Rohani but election remains a challenge

Sunday 25/12/2016
Iranian President Hassan Rohani leaves the lectern after submitting his next year’s budget bill in an open session of parliament in Tehran, Iran, on December 4th. (AP)

London - 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.