The future of foreign investment in Iran: a distant pipe dream?

According to reports at the time, Iran was explicitly looking at the approach Venezuela has taken since the US capture of its president, Nicolás Maduro, in January.

For the Iranians to make that suggestion public, it was almost certainly signed off the very top: until his death on 28 February, Supreme Leader Ayatollah Ali Khamenei approved all foreign policy decisions. Either way, this was the first time since the nuclear deal negotiations a decade ago that Iranian officials had hinted at an openness to US investment. In part, this softening on western investment likely reflected Iran’s ever-worsening economic plight, which in recent months prompted widespread public protests in the country. But it was also a clear sign of the pragmatic concessions that Iran’s political system was willing to make to ensure its own survival.

The proposal was not formally presented before negotiations were called off, with Iran unwilling to concede on core US demands to relinquish its nuclear programme. Soon after, the US and Israel launched unprecedented strikes on the country. The conflict continues to escalate this week as Iran widens its retaliatory attacks on targets in neighbouring Gulf states. 

However, that briefly mooted prospect of foreign investment in a surviving Islamic Republic remains less far-fetched – at least in the medium term – than might first appear.

The Islamic Republic fights on

US President Donald Trump has publicly stated that his aim is regime change. Khamenei is now dead, as are perhaps dozens of senior defence figures in Iran. But the regime Khamenei consolidated over the last four decades is complex. It comprises multiple power centres, none contingent on the survival of a single individual, with deputies ready to step in even as the US and Israel steadily eliminates the senior leadership. 

Under the Supreme Leader’s oversight, various bodies each play a semi-autonomous role in administering and controlling the country. They include the president and cabinet, the Islamic Revolutionary Guard Corps (IRGC), the conventional armed forces, the judiciary, and the cleric-led Guardian Council and Assembly of Experts, among others. All are underpinned by an expansive bureaucracy, and driven by the ideology of the 1979 Islamic revolution. It is this complex array of structures loyal to the revolution, along with careful contingency planning, that have kept the regime in power for nearly half a century. And it is what now allows Iran to escalate its military response even with Khamenei gone.  

So far, Iran’s response to the strikes seems to be focused on regime survival. It has shown itself willing to respond fiercely, escalating and expanding the conflict. But, rather than a kamikaze approach, this strategy seems to be designed to push its neighbours to lobby the US for a ceasefire while the Islamic Republic’s structures can still recover. 

The regime has also so far closely followed its own succession planning processes. It has designated a provisional leadership council, comprising the president, the head of the judiciary and a senior cleric, to oversee the country until a new Supreme Leader is chosen. (Khamenei’s like-minded son and long-time aide, Mojtaba Khamenei, is widely perceived to be among the frontrunners for that role.) If any one of the three is killed, a replacement is likely to be swiftly appointed.

Notably, the IRGC – which depends on the survival of the Islamic Republic for its very existence, and more broadly for its extensive political and economic influence – has abided by this process. It has not, at least so far, sought to oust the civilian executive arm of the government in an effort to prevent any concessions to the US – as some had speculated might occur in the event of Khamenei’s death.

Moreover, even if Iran’s leadership continues to be targeted by air strikes, the US has not indicated how it plans to achieve regime change. There is still no unified opposition to the regime that might facilitate a popular uprising. Most opposition leaders within Iran remain in jail, and much of the general public remains wary of protesting after the government brutally crushed the last major demonstrations in January. Kurdish and other minority parties have started to regroup, but do not yet have a firm base. Opponents abroad, such as the exiled crown prince Reza Pahlavi, still have limited support within Iran too.

This raises the possibility of the regime surviving the conflict after all, albeit much weakened.

So what happens after the conflict?

If the Islamic Republic does survive, it is (understandably) likely to be very cautious in re-entering negotiations with the US and the international community. And, given Iran’s attacks even on sympathetic neighbours such as Oman, it is unlikely to find much immediate regional support for the establishment of international economic ties. Significant groundwork would need to be laid before meaningful foreign investment is even possible, such as reconnecting the country to SWIFT. 

Everything could still change, as the unprecedented US-Israeli strikes and Iranian retaliation continue unabated. The many possible outcomes also hinge on the IRGC’s actions within Iran in the coming weeks and the approach of the new Supreme Leader, once he is appointed.

At this stage, however, it is not out of the question that, once the hostilities cease, we could see a weakened Islamic Republic gradually seek to re-engage with diplomatic channels and the prospect of foreign investment to support its recovery. The regime has always prioritised its own survival – and, as it looks to rebuild, it could be more willing than ever to make concessions to achieve that. 

The Risk Advisory Group is closely monitoring these developments as they unfold. If you would like to speak with one of our experts about the impact of this crisis on your organisation, please contact us at info@riskadvisory.com.