This weekend, the world welcomed the surprise victory of Hassan Rouhani, the most “moderate” of approved candidates in Iran’s presidential election. Commentators voiced optimism over potential changes in policies, amid ongoing economic sanctions against Iran’s nuclear program, but coming changes to Iran’s foreign relations are likely overstated.
Iranian elections are notoriously hard to predict, and the result was definitely counter to RGE’s view that a conservative more closely tied to Ayatollah Khamenei would win, possibly in the second round, given voting splintering. While Rouhani has been hailed as a “moderate,” (many other more moderate challengers did not “qualify” for the ballot), he is ultimately close to Khamenei and we see him as more pragmatic and tactical. The democratic election of someone who has intermittently voiced criticism of the Ayatollah suggests some pragmatism by the ruler; perhaps in the hope of generating buy-in from Rouhani’s supporters, which avoids challenges to the regime. The installation of a moderate increases the chance of some deal, if not a grand bargain on Iran’s nuclear program, which could on the margins be positive for global growth, via reducing oil’s risk premium.
We have long thought that the next president could possibly buy some additional time amid negotiations and even put the program on hold, acknowledging the impact of sanctions. But even Rouhani, who cites his top priority as relaxing sanctions, still insists that the international community has to recognize Iranian rights to nuclear enrichment. He has opened the door to more transparency and monitoring At this stage, Iran has strategically stopped short of the “red line” of nuclear enrichment mentioned by Israel, and a Rouhani administration may feature some officials with experience in dealing with European counterparts, or at least remove nuclear negotiator and Secretary of the Supreme National Security Council Saeed Jallili, viewed by some as a major obstacle.
Such a new approach and tone might split the global community, which could in fact be a part of the plan. Outside Iran, divisions could also emerge, especially in the U.S., where Congress consistently pushed for tougher regulations while the administration sought more flexibility in implementation. European solidarity might crack. GCC and Israeli responses will be complicated, though Rouhani has set a priority of improving ties with MENA neighbors which have deteriorated sharply according to a recent Pew report. While we don’t see the Saudis (or the Qataris) and Iranians seeing eye to eye, particularly now that the U.S. is warming to arming Syrian rebels, Iran could try to build trust on the GCC homefront, focusing instead on Iraq and the Levant. Benjamin Netanyahu has warned that a new leader doesn’t mean new policies, but could face some pressure at home too. In short, there’s little here to detract from the market calm about Iran risks, but its not clear how long the stalemate could last.