While President Obama contends Iran will fund urgent domestic needs with most of the money it obtains once frozen assets are released, his Republican opponents say they expect the newly flush Islamic Republic to binge on weapons and support for terrorism.
The argument is one that cannot be resolved by logic and analysis. It will only be resolved when the world sees what Iran does with its windfall. What’s more, Iran may not yet know what it will do with the cash. The odds are very high that the multitude of competing interest groups that clash and brawl in the Islamic Republic are clashing and brawling right now to determine who gets its hands on the largest part of the money.
To add to the complexity, it isn’t clear how much free money Iran will get to draw on.
“Iran will receive $150 billion that it will surely use to murder innocent men, women and children,” Jewish groups said in a newspaper ad over the weekend.
But many analysts say such claims of a terror windfall are grossly overstated.
“The amount is small and the opponents tend to exaggerate that because they want to argue that the agreement will destabilize the region,” Nader Habibi, an economics professor at Brandeis University, told Bloomberg News. He said any additional Iranian military spending probably will be “marginal.”
As for terrorism—which in the United States includes Iranian funding for the Syrian government and Yemeni rebels—others point out that the scale of terrorism isn’t a direct function of budgeting. “You don’t double the budget and double the terrorism,” one analyst told the Iran Times. The number of suicide bombings that are carried out is restricted more by the number of suicide volunteers than the size of your budget. You can buy a million rifles, but if you don’t have a million volunteers, what does that accomplish?” Syria has acknowledged it can’t find enough volunteers—or draftees—to man all its outposts.
The first question, however, is how much money there is for various Iranian interest groups to tussle over. The value of the assets to be unfrozen when the nuclear deal is implemented is difficult to pin down, in part because none of the funds are in the US. Bijan Khajehpour, managing director of Atieh International, a Vienna-based consulting firm, pegs the total at about $102 billion, while Habibi puts it at $89.6 billion and US Treasury Secretary Jacob Lew last month said $115 billion was “theoretically” available.
“There’s a lot of counting issues and a bit of an art and a science associated with it,” Adam Smith, a former senior adviser to the Treasury Department office that implemented the Iran sanctions, told Bloomberg.
Even if one could get a definitive bottom line number, some part of the frozen funds is already committed and isn’t available to politicians in Iran. Lew said more than $22 billion is tied up in contracts Iran has signed with Chinese companies. Another $25 billion belongs to Iranian individuals and banks and $25 billion represents funds that Iran deposited overseas to finance projects of the Naftiran Intertrade Co., its global oil-trading arm, according to Khajepour and Habibi. That takes most of the windfall away.
Khajehpour and Habibi believe the amount that probably would be immediately available is $29 billion in Central Bank and government funds. Treasury’s estimate of potentially available funds is $56 billion.
But US officials say Iran probably won’t choose to repatriate all of the money that becomes available to it. To begin with, Iran will need to keep overseas a portion of the funds—which Treasury says represents the country’s entire foreign exchange stockpile—to facilitate foreign trade and to avoid a sharp increase in the value of the rial. The regime is fearful the rial will strengthen, making non-oil exports more expensive and strangling exports, which would mean a lot of people would lose jobs.
The International Monetary Fund (IMF) calls for countries to retain sufficient reserves to pay for three to six months of imports, which in Iran’s case would amount to $20 billion to $40 billion—a huge chunk of the money Khajehpour, Habibi and Lew calculate will be freed up.
“As a matter of financial reality, Iran can’t simply spend the usable resources as they will likely be needed to meet international payment obligations such as financing for imports and external debt,” Lew said July 28.
Even after the deal is implemented, US sanctions will remain in effect preventing most American companies from dealing with Iran. The American prohibitions that will be suspended bar companies in other countries from trade with Iran and are known as “secondary sanctions.”
Most date from 2010 and used the threat of losing access to the US market to discourage companies, especially financial institutions, from doing business with the Islamic Republic.
In an August 5 speech, President Obama said any financial windfall Iran receives will be dwarfed by the country’s overdue bills and investment needs.
The Iranian economy shrank by almost 9 percent in the two years ending March 2014, and the government faces at least $500 billion in unpaid debts to Iranian contractors as well as pent-up investment demands, according to the US Treasury Department. That’s far more than even the most generous estimate of the total of frozen assets. (The highest estimate the Iran Times has seen is $160 billion.)
Meanwhile, the oil sector needs $130 billion to $145 billion by 2020 just to keep oil production from falling due to aging fields, the Oil Ministry has acknowledged. The capital needed to expand production comes on top of that.
In recent weeks, President Rohani has instructed government departments to prioritize domestic needs in advance of next February’s Majlis elections. This is a standard political ploy to show the public benefits. Housing, energy, telecommunications, aviation and the environment all will be competing for the available funds.
“The mentioned projects plus the government debts have the potential to absorb everything,” Khajehpour said. “But how the government will use them [the unfrozen assets] is still unclear.”
Some American opponents of the nuclear deal argue it will pose many problems for the US even if Iran devotes only a sliver of the freed-up assets to further support Syria, Hezbollah or Hamas.
US officials concede that Iran may devote some of its new funds to supporting terrorism. But they say any increase could be matched by more military spending by the US and its Israeli and Arab allies, who already outspend Iran almost 10-to-1.
The US has begun discussions with the Persian Gulf Arab states on ways to better interdict funds flowing to groups such as Hamas—which gets much of its money from rich Arab shaikhs and not just Iran.
And the biggest immediate problem of terrorism comes from the so-called Islamic State, which gets not a penny from the Islamic Republic.
