In May, a helicopter crash killed Iranian President Ebrahim Raisi and his foreign minister. Despite the shock, there were no notable economic repercussions, highlighting the insignificance of elected officials on the economy.
We consider two indicators to capture the economic shocks in Iran: the market exchange rate of USD to Iranian rial and the price index of the Iranian stock market. The importance of looking at both indicators is that the first one is the anchor of inflationary expectations in Iran, and the second one is the best indicator available publicly for capturing the private sector’s response to a shock.
The plots below capture these indicators for the days leading to and after the sudden deaths of the president and foreign minister Hossein Amir-Abdollahian. Based on these indicators, Iran’s economy did not experience any shocks.
Facing economic sanctions for most of the past decade, the Iranian economy is now more dependent on imports than before. This observation is in contrast with how Iranian authorities and some policy analysts in the US describe the Iranian economy as resilient against sanctions by tapping into domestic resources (e.g., Chapter 4 of the book How Sanctions Work by Narges Bajoghli et al., 2024). The term resistance economy coined by Supreme Leader Ali Khamenei is used in such contexts to prove the point. But, if the economy was truly more independent and self-sufficient, why do the economic indicators show considerably more sensitivity to internationally significant news compared to the domestic shocks? While Raisi’s death had little impact on the value of the Iranian currency, heightened tensions with Israel in April resulted in a sudden boost for the dollar in Tehran’s currency markets.
Promoting domestic production and becoming more self-sufficient require some fundamental conditions, such as a healthy private sector, protection of people’s rights, and institutional integrity. Since the inception of Islamic government in 1979, constitutional errors as well as repeated malpractices have compromised these basic prerequisites for improving the economy.
Among the constitutional deficiencies that directly lead to budget deficits and inflation is the lack of independence of the Central Bank of Iran (CBI) as the authority responsible for the implementation of monetary policies. The governor of CBI shall be assigned or removed by the president. In the most recent version of the CBI’s governing law, nine out of ten voting members of the Supreme Council, the body responsible for the IR’s monetary policies, are either directly or indirectly assigned and removed by the president. This creates a conflict of interest as the government’s budget is financed by the money supply under the control of the central bank. Lack of independence for CBI means that each administration could draft a fiscally unbalanced budget, and CBI would compensate for the deficit by printing more money. This is one of the reasons that all governments since 1979 have drafted budgets with considerable fiscal deficits that favor their social policies and ambitions, only to exacerbate inflationary forces.
Privatization is another example of constitutional errors combined with malpractices by corrupt actors. Article 44 of the IR’s Constitution specifies that all major industries shall be owned by the government. That led to approximately 80% state ownership of Iran’s economy after the revolution. Twenty-five years later, in 2004, the article was amended to distribute the ownership of infrastructure and backbone industries among the private sector, cooperatives, and the state. Despite all the efforts of every government since 2004, the latest figures presented by members of chambers of commerce and other officials, as well as the CBI’s research, suggest the government, along with the office of supreme leader, and the public sector constitute between 60-80% of the economy.
Given that privatization has remained on paper for almost two decades of official proclamations, we could safely assume it is not an objective actively pursued by the authorities. Looking at the preconditions and impunities that Ali Khamenei offered to a task force he initiated in 2022 for the same purpose captures the realities and his true intentions for privatization. He assigned the vice president at the time, Mohammad Mokhber, to lead the privatization task force. While the majority of the members of the task force, including Mokhber himself, have on-going criminal cases in the IR’s courts for corruption, they are provided with judicial impunity, no parliamentary oversight is allowed, and there will be no transparency on price discovery mechanisms or accepting bids from the public.
In such a context, no single president could change the course of the country or the public’s perception of the economic conditions. It appears that some of the candidates in the recent presidential race had come to terms with this lack of power. Take the president-elect, Masoud Pezeshkian, who in his televised debate simply stated that he is nominated to execute what the Supreme Leader will envision and order. He did not even try to present any economic plans during his campaign.
The economic mismanagement in the Islamic Republic (IR) does not originate from any particular administration, nor is it corrected by successive governments. Over the past forty-five years, the IR has consistently made errors that have worsened the livelihood of the people year after year. Such malpractices, rampant corruption, and constitutional barriers to economic growth have inevitably led to a loss of public trust in the institution of the IR.
One consequence of this distrust is that inflationary expectations are anchored to the market exchange rate of the USD rather than the Central Bank of Iran’s interest rate adjustments. Similarly, the economy does not react to domestically disruptive news in the same way it responds to internationally significant events. While public distrust renders almost all economic policies of the IR ineffective—regardless of whether the government is reformist or conservative—the international community's role becomes increasingly significant for the Iranian public.
Given its inherent weaknesses, Iran’s economy is more vulnerable to foreign sanctions. The economy is more than ever dependent on imports. The agricultural sector is threatened by serious drought and water mismanagement. The industrial sector is worse off than a decade ago due to chronic negligence in investing in fixed capital formation, and the private sector is rapidly declining due to unequal competition with IRGC-affiliated actors that have deep pockets and benefit from influence over state institutions. Therefore, sanctions that target oil exports and revenues are effective in limiting the Islamic government’s ability to project power in the region and engage in domestic repression.
Experts, as cited by Tehran ILNA news agency recently, attribute Iran's primary challenge in these shared fields to a lack of investment.
The most substantial joint fields for Iran are with Iraq, Qatar, and Saudi Arabia—neighbors that have significantly increased their oil and gas production with the help of international, particularly Western, companies. These countries have ambitious plans for further increasing their reserves extraction.
In contrast, due to limited foreign investment and a weak private sector, Iran's Ministry of Oil relies only on a 14.5% share of oil revenues for investments (a little more than $5 billion last year). Statistics from the Parliament’s Research Center underscore a significant decline in annual investment in the country's upstream oil and gas projects, dropping from around $18 billion in the 1990s to about $7 billion in the early 2010s, and further decreasing to $3 billion since 2017.
Not only international and US sanctions have reduced Iran’s oil export revenues in the past decade, but the adverse environment created by these sanctions have made foreign investment or borrowing impossible for Tehran.
The joint fields represent 20% of Iran’s extractable oil and 30% of its gas reserves. Despite holding the world's second-largest gas reserves and the fourth-largest oil reserves, with 33 trillion cubic meters and 157 billion barrels respectively, Iran faces challenges in fully exploiting these resources in collaboration with its neighbors.
Iran and Saudi Arabia
Iran shares several oil and gas fields with Saudi Arabia, producing only about 35,000 barrels per day from the Forouzan field (known as Marjan in Saudi Arabia). In contrast, Saudi Arabia produces 14 times more oil from this field and aims to increase daily production by 60% to 800,000 barrels and gas production by 70 million cubic meters under a $12 billion contract with international companies over the past five years.
Iran shares another large gas field, Farzad (called Hasbah in Saudi Arabia), where negotiations with Indian companies that discovered the field have not yielded results over two decades ago. Iran itself lacks the $5 billion investment capacity required for developing this field, while Saudi Arabia developed and commenced gas production from this joint field since 2013, currently producing over 30 million cubic meters of gas daily with Aramco's ongoing plan to swiftly increase daily production to 75 million cubic meters.
Saudi Arabia and Kuwait also share two oil and gas fields, Esfandiar (Lulu) and Arash (Al-Durra), with Iran, where they have developed the Esfandiar field for years and plan to develop the latter soon. However, these two countries reject Iran's share in the Arash field, claiming exclusive rights to gas extraction, a stance Iran does not accept. Iran has not even initiated development in these fields.
Joint Fields with Iraq
Iran's largest joint oil fields are with Iraq, where Iraq extracts four times more oil than Iran from these fields. Iraq has entered significant contracts with Chinese, Russian, and Western companies to boost extraction efforts.
In 2013, Iran produced 90,000 barrels of oil per day from these fields and aimed to increase production to 1.2 million barrels per day by 2021 with Chinese assistance, focusing on fields like Yadavaran, Azadegan, Azar, Changouleh, Aban, and Paydar. However, Chinese companies fulfilled only a fraction of their commitments, leading Iran to achieve a "nominal capacity" of oil production, reaching 350,000 barrels per day from the joint West Karoun fields with Iraq.
In contrast, Iraq's oil production has surged by 1.4 million barrels per day since 2013, primarily driven by developments in joint oil fields with Iran. Iran estimates needing $11 billion in investment to develop five major joint oil fields with Iraq, an amount equivalent to just two months of the country's pre-sanctions oil revenue. However, the complex structure and predominantly heavy oil type of these fields mean that Iran's current technology can only extract 5 to 10% of the 64 billion barrels of in-situ reserves. Consequently, the involvement of advanced Western companies in developing these fields appears inevitable.
Southern neighbors
Iran shares two oil fields with the UAE, Salman and Nusrat. Both countries extract 50,000 barrels of oil per day from the Salman field. However, Iran faces challenges due to the lack of gas gathering facilities, resulting in the flaring of 11 million cubic meters of associated gas daily. In contrast, the UAE efficiently produces gas from the layers in this field. Additionally, the UAE produces 65,000 barrels per day of oil from the Nusrat field, which is 20 times more than Iran's production from the same field.
Iran also shares the Hengam oil field with Oman, with both countries producing 10,000 barrels per day.
Iran's largest gas field is South Pars (North Dome), shared with Qatar. Qatar started gas extraction a decade earlier than Iran and has produced twice as much gas. While the Iranian side of the South Pars gas field has entered its second half-life in 2023 and experiences annual production declines of 10 billion cubic meters, Qatar has recently signed $29 billion worth of contracts with international companies to increase production by 40% by 2027 and 60% by 2030. Currently, both Iran and Qatar produce 180 billion cubic meters annually from South Pars.
Iran's options for increasing production lie in installing 20,000-ton platforms equipped with large compressors—a technology dominated by Western companies. All 24 phases of the Iranian side of the South Pars field are currently operational, leaving limited room for introducing new phases to enhance production or compensate for output declines from existing phases.
Qatar also extracts 450,000 barrels of crude oil from the oil layer of South Pars gas field, which is 13 times more than Iran's production from the same layer.
Additionally, Iran and Qatar share the Rashadat oil field, with each country producing between 10,000 to 15,000 barrels per day.
The only option for Iran is to reach an agreement with the West over its nuclear program, which is seen as leading to a weapons capability. It also needs to change its hegemonial policy in the region. Without a major shift in its foreign policy, energy and other sectors in its battered economy will struggle along.