Iran's clash of visions

Iran's presidential elections set up a clash of visions [View in browser]( [Bloomberg]( Welcome to the [Year of the Elections](, Bloomberg’s newsletter on the votes that matter to markets, business, and policy amid the most fragmented geo-economic landscape in decades. As Iran [holds a presidential election]( to replace Ebrahim Raisi, who died in [a helicopter crash](last month, the issue of sanctions is a fault line that runs through its politics. Of the four men sparring for the post, the lone reformist, Masoud Pezeshkian, believes Iran must reengage with the West if it’s going to have any chance of convincing the US to lift sanctions that have blighted the country’s finances in some form, on and off, since the 1979 Islamic Revolution. That, in his view, is the only way Iran, a country of nearly 90 million people, can fix its broken economy and reintegrate it into the global system. The Islamic Republic has been largely cut off from global financial markets for years. Even the 2015 nuclear deal with the West that briefly lifted sanctions — the US pulled out in 2018 — didn’t last long enough for Iran to enter the global economic fold or receive any meaningful investment. But as OPEC’s third-biggest producer, Iran remains an indispensable cog in global energy markets. In the past two years US President Joe Biden's administration, wary of curbing global oil supplies and pushing up gasoline prices at home, has even eased its enforcement of sanctions on Iranian crude shipments, helping them to soar. Iran still desperately needs foreign direct investment, Pezeshkian argues, and both the penalties and the lack of compliance by Iran’s banks to the standards of the Paris-based Financial Action Task Force, are standing in the country’s way. His main opponent in the race, Saeed Jalili, holds opposite views. For him, the penalties are almost a badge of honor, and he would likely align Iran closer with China and Russia after already supporting the Kremlin’s war in Ukraine. For Jalili, complying with the FATF’s anti-terrorism financing standards could undermine Iran’s support for groups [such as Hamas and Hezbollah](. His radical views are unpopular with educated, middle-class Iranians in the country’s urban centers. Whoever wins, it is clear that ultimate power rests with Supreme Leader Ayatollah Ali Khamenei, who has the final say over foreign and military policy. Yet the [president can be influential]( by drawing on a base of popular support, political affiliations and links to powerful institutions. He also becomes the face of the Iranian government for the rest of the world. The election comes at a time of regional turmoil — with Iranian proxy groups including Hamas and Hezbollah at or close to war with Israel — and unprecedented levels of domestic dissent. Many Iranians are tired and exhausted of watching their salaries wither in value because of high inflation and of the increasingly suppressive actions of the security forces and the judiciary. Yet, as Pezeshkian pointed out during the first presidential debate on June 17, even China and Russia are limited in how much they’re willing to invest in a country blacklisted by the FATF. That’s a challenge for which Jalili doesn’t seem to have a solution, and it’s not something that even unfettered oil exports can fix. — [Golnar Motevalli]( People in Tehran mourn the death of Raisi on May 20. Photographer: Fatemeh Bahrami/Anadolu/Getty Images Iranian Economy Q&A [Ziad Daoud](, Chief Emerging Markets Economist for Bloomberg Economics, surveys the possible impact of the election. What are the key issues that will face the new president in Iran in his next four-year term? There are four main areas the new president will have to deal with. First, the ongoing war in the Middle East, which Iran is involved in, both directly and through proxies. Second, the economy – stagnant incomes, rising living costs, and a weaker currency have combined with social restrictions to fuel public resentment. Third, how to manage any future relations with the West and international concern around its nuclear program. And finally, the succession plans for the supreme leader, who’s currently in his mid-80s. The new president will have varying influence over these issues. Could the election results change the direction of the war in the Middle East? That’s unlikely. The president isn’t the highest position in the organizational chart of the Islamic Republic – that belongs to the supreme leader. Military institutions, like the revolutionary guards, probably have a bigger say on the direction of war than the president. In any case, markets don’t seem to expect an escalation of the war. We estimate geopolitics is adding only about $1 to the price of oil. That’s down from $12 in October, and more than $2 in April, when Iran and Israel were exchanging direct, but calibrated, attacks. Despite the widespread sanctions, the US doesn’t seem to be fully enforcing those on crude oil exports. How much relief is Iran getting from higher shipments of oil? Looser US sanction enforcement has lifted Iran’s oil output. Production reached 3.2 million barrels per day in May, up from 2.6 million at end-2022. The war in the Middle East didn’t lower flows from Tehran – if anything, output is slightly higher than the pre-October level. It appears that sanction enforcement has more to do with US elections, than the vote in Iran. Higher crude output has brought a windfall, giving Iran some relief. The economy grew by 4.7% in 2023 and is expected to expand by 3.3% in 2024. How has the economy shaped public sentiment toward the government? The turnout at the elections will be one measure of the level of discontent. Externally, Iran’s regional influence may have expanded over the last three decades. But at home, it has witnessed multiple protests and crackdowns in recent years. The economy was one trigger: incomes have stagnated, inflation has run near 40% for four years, and the currency has lost about half of its value against the dollar since end-2021. Social restrictions were another cause. We often think of Iran as a theocracy run by clerics. But it’s probably becoming more militarized, and less clerical. That’s due to the rising economic and political influence of the revolutionary guards who'll play an important role in shaping the new president’s term and influence the choice of an eventual successor to the supreme leader. The Markets Take [Paul Wallace](, Team Leader for Middle East Economic and Government News, writes about the outlook for the rial. For the majority of Iranians, the most important bellwether for the economy is the price of the US dollar. Seen as a haven — even if America’s the government's sworn enemy — it’s heavily traded on the unregulated market. With the economy under pressure due to sanctions and geopolitical tensions soaring, the rial has depreciated hugely since the US, under then-President Donald Trump, exited the Iran nuclear deal in 2018. Under Raisi and as relations with the West worsened, the rial saw its fastest decline on record. It lost more than 60% of its value against the greenback over three years to reach about 600,000 per dollar. If Iranians think that sanctions will be eased, it will stabilize and maybe appreciate, with a knock-on effect being slower inflation. That scenario’s most likely if reformist Pezeshkian wins. He’s running on a mandate to revive the nuclear deal and draw in billions of dollars of foreign investment. If Jalili — a staunch critic of the accord — wins, then it’s likely the rial will depreciate further or hover around current levels since Iranians will expect a continuation of hawkish foreign policy toward the US. The Oil Industry [Grant Smith](, a Bloomberg oil markets reporter, writes about the outlook for Iran’s crude production. Iranian oil output has staged a surprising rebound over the past two years, serving as a moderating force on global prices and a rare bright spot in the country’s economy. Tehran’s crude production climbed to 3.35 million barrels a day in April, the highest since President Trump tightened US sanctions in 2018, according to the International Energy Agency in Paris. Its exports have averaged 1.5 million a day this year, up 13% from 2023, estimates analytics firm Kpler. The recovery has been enabled by softer enforcement of sanctions by Washington, as President Joe Biden’s administration seeks to tame gasoline prices as he campaigns for re-election. Barrels are almost entirely [flowing to China](, which has reportedly negotiated considerable price discounts as Tehran is forced to compete against flows from Russia, limiting revenues for the Islamic Republic. With international oil prices near $86 a barrel amid resilient fuel demand, Iranian cargoes will continue to be welcomed — at least for another few months. But with Tehran’s comrades in the OPEC+ cartel planning to boost production towards the end of the year, Iran may have to work harder to find a home for its barrels. 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