The $100 Billion Fallacy

October 4, 2015

U.S. Department of State

Of all the criticisms of the Iran nuclear deal, the “$100 billion” argument has proven one of the most pernicious. Ted Cruz summed it up at a recent rally near the Capitol:

If [the Iran deal]  goes through, over $100 billion will flow directly to Iran, to the Ayatollah Khamenei, and billions of those dollars will go directly to Hamas, to Hezbollah, to the Houthis, to radical Islamic terrorists across the world, and those jihadists will use those billions to murder Americans, to murder Israelis, to murder Europeans.

The argument has intuitive appeal. It has provided fuel for those who would annul the deal in pursuit of “a better one.” But, for a number of reasons, the notion that Iran will use its unfrozen assets to bankroll terror does not hold up to careful analysis.

First, the $100 billion figure is overstated. While Tehran does hold roughly this much in frozen assets, it has already committed a good deal of this to projects in other countries. According to the Treasury Department, only about $60 billion would return to Iran when sanctions are lifted.

Second, most of this money does not belong to the government of Iran. The debate about “Iran’s” frozen assets obscures the fact that the vast majority of this money belongs to private Iranian firms, and would have no impact on the government’s budget.

Third, and most importantly, whatever money does arrive in Tehran will almost certainly stay there. The idea that the Rouhani administration would pass on more than a few breadcrumbs to foreign groups ignores basic economic reality.

The reality is that Iran’s economy is in dire straits. Global oil prices have been cut in half since this time last year. For a country like Iran, where oil revenue accounts for nearly 60 percent of the government’s budget, this is bad news. The drop in oil prices has caused a 22 percent decline in the government’s revenue. The country is now facing its worst budget deficit since the Iran-Iraq War of the 1980s.

Meanwhile, Tehran’s spending obligations remain constant. For example, it must still fork over around $16.6 billion a year to its citizens in order to subsidize household energy costs—a populist holdover from the Ahmadinejad era, and a political third rail.

Tehran’s coffers are depleting. And they are depleting precisely when they most need to be full.

Almost every sector of Iran’s economy is in serious need of recapitalization. The Iranian financial sector is grappling with a growing underground lending market, declining bank deposits, and an estimated $60 billion in loan defaults. The Minister of Petroleum has called for $50 to $100 billion in new investments to keep the oil sector competitive. And, as Iranians eagerly anticipate an influx of foreign imports, the auto industry’s sales have plummeted by 15 percent. This auto crisis has had a domino effect, hitting the already-suffering steel industry—the second biggest non-oil sector in the Iranian economy—particularly hard.

Mehdi Pourghazi, head of the industrial committee of the Tehran Chamber of Commerce, predicts that growth will fall to zero this year. Safaei Farhani, a former economic minister, said Iran is facing a recession that not even billions in unfrozen assets can completely reverse. “The economic growth rate has not been positive in the first half of this Iranian year [since March],” he announced, “and it will probably be negative in the second half, which makes negative economic growth this year almost inevitable.”

But stagnant or negative growth is not just a problem for the economy; it is a direct political challenge to the legitimacy of the Rouhani administration.

[pullquote]While there is considerable debate over whether Iran can be “trusted,” it is ultimately a pointless exercise.[/pullquote]

Rouhani was elected president in 2013 on a promise to jumpstart Iran’s faltering economy. The deal with the P5+1 powers was, in part, a way of doing that. Rouhani and his economic advisors decided early on that Iran could not fully recover so long as international sanctions remained in place.

The problem is that, having touted the deal as a quick fix for the economy, the regime is now becoming trapped by its own rhetoric. Misconceptions about the deal are widespread. According to a recent poll, over half of Iranians believe that all U.S. sanctions have been lifted, rather than just nuclear-related ones. Even more believe that sanctions relief will come immediately, rather than in a year’s time. As a result, the vast majority of Iranians expect that, within twelve months, the deal will allow better access to foreign medical supplies (67 percent), increased foreign investment (73 percent), and a large drop in unemployment (64 percent). With rising (and unrealistic) expectations comes enormous pressure to achieve economic growth. And, without the traditional boogeyman of the sanctions regime, this pressure will fall squarely on Rouhani’s shoulders.

Iran’s economy will likely rebound in the long run, but things are looking grim in the short run. Rouhani will be facing reelection in a year and half. And in Iran, as in most countries, elections tend to be a referendum on the economy. Rouhani needs something to show for the recent deal; he needs growth and he needs it now.    

Which brings us back to the billions in unfrozen assets. Rouhani may opt to address the government deficit, recapitalize the financial and oil sector, or toss a lifeline to the auto and steel industries. In any case, what is nearly certain is that he will use the money to keep the economy afloat long enough for sanctions relief to kick in.

This was the upshot of a recently leaked secret U.S. intelligence report, which predicted that Iran would “pump…the windfall from the lifting of international sanctions into the country’s flagging economy and won’t significantly boost funding for militant groups it supports in the Middle East.”

For Rouhani to pass up a miraculous infusion of capital in order to bankroll foreign fighters would be bad economics. But even if you do not see the Iranian government as particularly development-minded, consider the popular uproar that would ensue if Rouhani prioritized Syria, Lebanon, or Yemen over Iran—in the midst of a recession no less. It would be a political suicide.   

While there is considerable debate over whether Iran can be “trusted,” it is ultimately a pointless exercise. Iran may engage in bad behavior throughout the region, and it may diverge with the West on fundamental issues. But, contrary to what Ted Cruz and others believe, Iran is a country like any other. It obeys all the same immutable forces of domestic politics that other countries obey. It is these forces that will keep Iran from funding terror—not a better nuclear deal.

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