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Iran’s disastrous year in political risk analysis

21 Dec 2019
Iran’s Supreme Leader Ali Khamenei. (Reuters)
Iran’s Supreme Leader Ali Khamenei. (Reuters)
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As I never tire of preaching to my staff as well as my clients, the best form of marketing in the business of political risk analysis is to be consistently right. Despite all the bells and whistles in my line of work, most businesses still blessedly care if — for significant fees — the political risk firm they have hired has been right about China, Donald Trump, Brexit, Europe, trade wars, macroeconomics and geopolitics. After all, getting the new world we live in right is why political risk firms are hired in the first place; giving clients a huge edge in explaining both what is, and what is to come.

What is true for businesses is even truer for political leaders and countries. Those that adapt to the times they live through — seeing the world as it is rather than as they might like it to be — tend to thrive, while those who inhabit a fantasy realm of wish fulfillment decline, never understanding the forces that cause their fall from grace.

Of all the major countries in the world that I have spent time thinking about this past year, surely Iran has the absolute worst record in terms of political risk analysis (and that is saying something). It is little wonder that this disastrous analysis goes hand-in-hand with the country’s increasingly perilous geostrategic position.

There are at least four major political risk errors Tehran has made over the last 12 months. First, the Iranian elite blithely assumed that newly imposed American sanctions — following the Trump administration’s withdrawal from the Iranian nuclear deal — would not deeply scar its economy.

Here, Iran vastly underestimated American economic power. Before the sanctions were imposed, Iran was exporting 2 million barrels of oil per day (bpd), sustaining the lifeblood of its economy. The corresponding figure is now merely 200,000 bpd, a collapse of 90 percent. The effects are crystal clear: The crippling of the country’s economy. The International Monetary Fund forecasts that the Iranian economy is set to plummet by a shocking 9.5 percent this year, while inflation has soared to a punitive 40 percent. Fully half of all Iranians are now estimated to live below the poverty line.

Second, the Iranian elite believed that the Europeans would, at best, be able to dissuade the Trump White House from following through with the sanctions and, at worst, would go their own way in continuing to build up trade with Tehran, securing its economic future. Illustrating a horrendous lack of understanding of the Trump revolution — that his Jacksonian ideology did not make him susceptible to multilateral allied pressure in the least — Supreme Leader Ali Khamenei’s regime simply did not even begin to see the dynamics of changing transatlantic relations.

The mullahs in Tehran also betrayed a complete lack of understanding for how the free market works in the West. Whatever grand pronouncements European leaders were likely to make about getting around US-imposed sanctions, they simply could not order private businesses to follow their unsteady lead.

Faced with a choice of doing business with Tehran and endangering their access to the American market or forgoing such a suicidal effort altogether, it ought to come as absolutely no surprise that every single major European business chose to shun Iran in favor of safeguarding their future prosperity. Anyone vaguely aware of how the Western free market works would have known this; pathetically, Iran’s leaders did not.

The Iranian elite blithely assumed its own people would remain forever quiescent, no matter how badly led they were and how many political risk errors its leaders made.

Dr. John C. Hulsman

Thirdly, and despite these huge economic privations, Tehran has fecklessly walked into the trap of imperial overstretch, possessing an ambitious foreign policy that is not commensurate with its limited economic means. Since 2013, US officials estimate that Iran has spent a hefty $16 billion on Iraq, Lebanon and Yemen, and an additional $10 billion propping up the Assad regime in Syria. Further, it is estimated to spend $700 million a year bankrolling its close ally Hezbollah. These huge outlays are simply unsustainable, given the freefalling Iranian economy.

There has also been an increasingly negative return for Tehran on this enormous foreign policy investment into empire. Presently, there is dramatic, broad-based animosity to the Iranian allies running the governments in Iraq and Lebanon, as a huge cross section of the populace in both countries has risen up, outraged at their corruption and mismanagement, and humiliated by their utter dependence on Tehran for survival.

These local controversies that inaugurated the demonstrations and social upheaval have morphed over time into a more general uprising against what is seen as malign Iranian influence in their countries. Iran’s imperial overstretch is both unaffordable and increasingly strategically counterproductive.

Finally, all these gigantic political risk miscalculations have come home to roost in Iran itself. The Iranian elite blithely assumed its own people would remain forever quiescent, no matter how badly led they were and how many political risk errors its leaders made. Recent demonstrations in Iran itself show this simply is not true; that the people of Iran do not have infinite patience for an elite that has been so wrong, so often.

Being right or wrong in terms of political risk analysis always has consequences and cannot be wished away. The bell is beginning to toll for Iran’s clueless leadership.

Dr. John C. Hulsman is the president and managing partner of John C. Hulsman Enterprises, a prominent global political risk consulting firm. He is also senior columnist for City AM, the newspaper of the City of London. He can be contacted via www.chartwellspeakers.com.

 

 

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