WASHINGTON/DUBAI (Reuters) - Iranians will demand their government spend a windfall from the lifting of economic sanctions on improving the quality of life at home, limiting the degree to which a future nuclear deal could fund Tehran’s allies on Middle East battlefields.
Since 2012, Iran has given support worth billions of dollars to regional allies, funding and arming mainly fellow Shi‘ite Muslims in conflicts that have taken on a sectarian dimension. Its enemies say lifting sanctions will provide it with the means to do even more.
Within months of financial sanctions being lifted, Iran will be able to collect debts from overseas banks that may exceed $100 billion, mostly from oil importers whose payments have been blocked, diplomats and analysts said.
But with the budget strained by last year’s heavy fall in oil prices, and public expectations of improved socio-economic conditions in the event of a deal, the authorities will face pressure to invest new funds at home.
“The idea that Iran is going to have its pockets full of cash that it can use for discretionary purposes, I think is exaggerated,” Charles Hollis, managing director for the Middle East at FTI Consulting, said.
Infrastructure in the vital oil sector has fallen into disrepair during years of mismanagement and isolation, and the oil ministry has lobbied for huge cash injections that will be necessary to bring production back to pre-sanctions levels.
Deputy oil minister Mansour Moazzami said in February that the oil industry needed $30 billion of investment a year in order to maintain production and develop new projects, in comments carried by the ministry’s news agency Shana.
Iranian officials have not speculated in public about how much money they might receive from a nuclear deal, or how it would be distributed.
Analysts said any cash windfall would probably be deposited initially in the Central Bank of Iran (CBI), making it relatively difficult for the Islamic Republic’s secretive security officials to spirit it away to foreign battlefields.
“As soon as there is a sense that the money is there, every government department is going to start looking for flows,” said David Butter, a Middle East economic analyst and associate fellow at Chatham House.
The establishment will also face pressure from Iran’s large and vocal middle class, which turned out in force to elect President Hassan Rouhani in 2013, hoping his agenda of better management at home and pragmatic diplomacy abroad could improve their economic fortunes.
“I have to support a family of four. I don’t have time to think about politics or the nuclear issue. What people like me need is an improved economy,” said teacher Gholamreza Behrad in Tehran.
“Hopefully it will happen when the sanctions are lifted.”
Despite facing economic hardship under sanctions, Iran has ramped up support to allies such as Syrian President Bashar al-Assad, Iraq’s Shi‘ite militias, Lebanon’s Hezbollah and, Tehran’s foes say, Houthi rebels who have taken over much of Yemen.
Saudi Arabia and its allies have expressed alarm at their rival’s activities in the region, which they portray as aggressive and destabilizing, arguing that the lifting of sanctions could open to the door to even more Iranian activism.
The argument is also made in the United States, where the administration of President Barack Obama faces opposition to its decision to offer to lift of sanctions in return for a nuclear deal.
“If Iran gets major sanctions relief... that will mean more money flowing into Iranian coffers and a windfall Iran can use to step up its influence in the region even more,” Matthew Kroenig, a fellow at the Atlantic Council, said.
Administration officials downplay those fears. Treasury Secretary Jack Lew said in April that most of the money Iran received from sanctions relief would not be used to support regional proxies and activities.
“Iran will be under enormous pressure to use previously blocked resources to improve its domestic economy,” Lew said.
Iran’s most costly intervention is in Syria, whose government last week requested a new credit line worth $1 billion from Tehran after months of setbacks on the battlefield.
Matthew Levitt, a fellow at the Washington Institute and former Treasury official, said Iran’s support for regional allies did not depend on whether a nuclear deal is signed, since the leadership would fund them anyway.
“Iran has plenty of money right now to be able to fund those foreign policy projects that it considers to be of core interest, even if it doesn’t have all the funds in the budget,” he said.
Iranian paramilitary activities are run by the secretive Islamic Revolutionary Guards Corps (IRGC) and funded outside the budgetary framework, meaning there are no definitive reports on quite how much money Iran has spent, or how much it has left.
Reuters reported in late 2013 that Supreme Leader Ayatollah Ali Khamenei controls a holding organization with assets of around $95 billion. The state news agency denounced those reports as “disinformation”.
Emile Hokayem, an analyst at the International Institute for Strategic Studies (IISS) in London, estimated Iran gave between $15 billion and $19 billion worth of support to Syria alone in the two years to the end of 2014.
That figure includes the cost of keeping IRGC commanders in the field, probable shipments of arms and ammunition, and financing such as lines of credit and soft loans, he said.
The IRGC is used to operating under sanctions and knows how to pursue its goals without relying heavily on Iran’s limited foreign exchange reserves.
Obama said in an interview with the Atlantic magazine last week that the IRGCs most effective activities in the region actually do not cost very much, adding that he had pointed this out to Gulf Arab leaders at a recent summit.
A significant portion of Iran’s support to allies, including the salaries of IRGC agents, is paid for in rials. Other aid is provided in kind, such as ammunition. Trade deals are negotiated without hard currency changing hands, a Western diplomat said.
Pieter Wezeman, an expert on military expenditure at the Stockholm International Peace Research Institute, noted that Iran’s spending was only a fraction of Saudi Arabia’s military budget, which topped $80 billion in 2014.
He added that the spending power of Saudi Arabia and other Gulf Arab countries, which have also funded allies in the region, is likely to check Iran’s ambitions because of the threat of escalation.
“The key Arab states have heavily increased their spending, and if they see bigger threats from Iran I‘m sure they will go further,” he said.
Additional reporting by Yeganeh Torbati in Washington, Dan Williams in Jerusalem and Guy Faulconbridge in London; Writing by Sam Wilkin; Editing by William Maclean and Peter Graff