This article first appeared in the Winter 2014 issue of the Caspian Report.

Since he was elected president of Iran in June 2013, Hassan Rouhani has been striving to say the right things in order to convince the international community that Tehran is changing course. Within a few months of coming to power, he dispatched his foreign minister Javad Zarif to Geneva, where in November the Iranians managed to seal an interim but still important compromise deal about Iran’s nuclear program. The world is now eagerly watching to see if more compromises can be reached with Tehran, and if a permanent nuclear settlement can be expanded to incorporate other contentious issues that have long divided Iran from the West and from many of its immediate neighbours. Among those neighbours are the South Caucasus states. 

Rouhani’s path to the presidency

The November 2013 nuclear deal in Geneva came only few weeks after Rouhani visited New York to attend the annual UN General Assembly, where he took the opportunity to meet American officials face-to-face and had a brief but historic telephone conversation with President Barack Obama. This was the first time in 34 years that an Iranian president had spoken directly to his American counterpart. The flurry of excitement that followed about a new era in American-Iranian relations was in that sense wholly justified. Rouhani, the 65-year cleric and long-time regime operative, had somehow managed to thrill the international community. And his charm offensive has continued. 

At the World Economic Forum in Davos in January 2014, Rouhani’s remarks were arguably the most watched of any leader’s. He focused not on the issues that are most pressing for Iran’s foreign relations, notably the still-unresolved nuclear dispute, but on Tehran’s newfound quest to return to the structure of the global economy. Along those lines, Rouhani set out a long list of items that his government will seek to achieve and which together amount to a formidable policy agenda. 

In his own words, Rouhani will strive to steer his country toward the mainstream of the international economy. His government, he vowed, will set in motion policies that can become the foundations for an Iranian economic rebirth. His stated goal is to turn Iran into one of the ten largest economies in the world by the middle of the century.

Rouhani’s pledges in Davos were noteworthy from two fundamental perspectives. First, even those who deride Rouhani’s ambitious agenda as delusional must admit that at minimum, he is changing the traditional rhetoric of Tehran. His predecessor, the inexperienced and populist Mahmoud Ahmadinejad, had during his 8 years as president helped push the country toward deeper reliance on oil-income and distribution. The way in which he managed this was fraught with corruption. Furthermore, the increase in mass cheap imports from countries such as China have in turn decimated Iranian domestic production. Together with the devastating impact of the sanctions, which began to bite in earnest from 2011, the last few years of the Ahmadinejad presidency was an economic free-fall. 

But to put everything on Ahmadinejad is to miss the big picture. It was Iran’s Supreme Leader and ultimate powerbroker, Ayatollah Ali Khamenei, who was Ahmadinejad’s initial and main cheerleader, who when the sanctions first began to bite dismissed them as mere pebbles in the path of the Iranian nation. Khamenei soon after coined the phrase “khodkafai eqtesaadi” (economic self-sufficiency) and said that Iran can do without the world if that is what it takes to remain independent and be able to stand up to international demands regarding its nuclear program. 

But even Ayatollah Khamenei was flabbergasted by the speed at which Iran found itself cut off from the world economy. By the time Rouhani came to power in August 2013, Iran’s oil exports had dropped from roughly 2.5 million barrels a day to 1 millions barrels and Tehran’s oil export income had halved, from around $100 billion per year to $50 billion per year. For the sake of Iran’s internal stability something had to give, and the dire economic situation helped convince Khamenei that a new chapter had to be opened. Hence, the smiling and pragmatic Rouhani was permitted by the regime establishment in Tehran to run and to win the elections in the summer of 2013. 

In the same boat?

Rouhani’s language in Davos was trail-blazing in more ways than one. His speech in Davos was effectively a 180-degree turn away from the purported ideals of “khodkafai” peddled by his boss, Ayatollah Ali Khamenei. 

In fact, the Iranian president said in Davos that “all nations are in the same boat.” In other words, nations will either rise or sink together. Rouhani did not apply this theory only to Muslim states or to those countries that have in the past been sympathetic to Iranian policies. The notion of “all nations” as interdependent – including Tehran’s former adversaries such as the United States - is indeed a new type of rhetoric coming from Tehran, and has made Rouhani into something of an Iranian internationalist. If such thinking gains further momentum in Tehran, then the potential policy ramifications may be wide-ranging.

That is the principal test for President Rouhani and the second fundamental implication of the pledge he made in Davos about Iran’s yearning to embrace the world once again. Is it at all likely that the Iranian Islamist system will be open to the kinds of transformative agenda and an entire new relationship with the world, which in effect is what Rouhani is calling for? 

It is one thing to appreciate Rouhani’s quixotic language and the fact that the elite in the Islamic Republic have perhaps re-discovered the virtues of being an integral part of the global economy given the harsh impact of the sanctions. Still - and this is something of which the sophisticated and seasoned Rouhani must be fully conscious - the re-integration of the Iranian economy cannot happen without other and very likely bigger domestic political adjustments to some of most hardened and contentious dogma that remains in place. In other words, to assume that solving the Iranian nuclear saga is the path to Tehran’s total redemption is naïve at best. 

What are those likely bigger political adjustments? The list of demands is long and will depend on who is asked. Outside Iran, the United States, Israel or Saudi Arabia will first expect to see a change in Tehran’s belligerence toward them before they can be convinced that Rouhani’s words represent a tectonic shift. But even among some of Iran’s smaller immediate neighbours, there is plenty of scepticism about the likely discrepancy between Rouhani’s promises and Iran’s action. In the meantime, a successful and sustainable overhaul of Iran’s foreign policy has first of all to be convincing for neighbouring countries in the Persian Gulf or in the Caucasus. 

Rouhani and policy continuity

Nonetheless, President Rouhani has to be commended for his vision and courage to stand up or at least attempt to reshape the orthodoxy that has prevailed in Tehran in recent years. But he has to be reminded that fixing Iran’s economic ills and standing in the world will not be as simple as just inviting foreign investors to Iran. It requires confidence building across the spectrum, at home vis-à-vis domestic opponents, and abroad among those that have for long resented Tehran’s regional policies. 

Furthermore, to understand Rouhani’s prospects to bring about change, it is useful to recall the performance of his immediate predecessors. Mahmoud Ahmadinejad (2005-2013) used his presidency as a platform to promote his persona as a man of the masses. He too sought to challenge the orthodoxy in Tehran and wanted to shape the debate and Iran’s path, but he made all the wrong decisions. His worldview was not that of an internationalist but a radical populist who ultimately had no final destination in mind. Instead, his presidency will be remembered for his bombastic style and aimless policies, as well as his abhorrent opportunism (such as when he sought to gain popularity among the Arab populations by raising questions about the veracity of the Holocaust). 

The president before Ahmadinejad, the reformist Mohammad Khatami (1997-2005), was a very different proposition. Like Rouhani, Khatami too promised to turn Iran into a mainstream international actor and he too reached out to the United States. Nonetheless, at the end of the day, regardless of the fact that Ahmadinejad and Khatami had very different styles, both only could do as much as was sanctioned by the Supreme Leader, Ayatollah Ali Khamenei. In other words, in the Iranian political system, presidents come and go and at times major policy differences are evident but the system’s policy continuity rests on the fact that the Supreme Leader’s office is a permanent feature of the political process. That office has since June 1989 been occupied by the same man, Ali Khamenei.

Ayatollah Khamenei jealously guards his political prerogatives, including his absolute right to block any policy that he deems as unsuitable for the Islamist order (nezam), which has governed Iran since the revolution of 1979. In that context Khamenei has certain so-called “red-lines,” or policy areas where the supreme leader is more or less fixed in his mindset, and where no president can seek to alter the status quo. Up until recently, enmity toward the United States was one of those “red-lines”, but Khamenei has now seemingly allowed President Rouhani at least test the waters and see if a deal can be stuck with Washington. Another “red-line” is the ideological hostility against Israel, but there are no signs that Ayatollah Khamenei is ready yet to make any concessions on this front. The vast majority of all the other foreign policy issues that Iran faces then fall outside Ayatollah Khamenei’s so-called “red lines”, and there Rouhani has much more leeway. 

How can this leeway be utilized in practical terms by the Rouhani government? At the regional level, Tehran can be expected to build on existing multilateral political-economic structures. On that front, the Economic Cooperation Organization (Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan) and the Shanghai Cooperation Organization - where Tehran has observer status but has applied for full membership – stand out as channels where Iran likely will seek to inject some momentum in the hope that it can promote itself as a geographic bridge connecting West Asia, Central Asia, and East Asia. 

This is of course a tested formula to which even President Ahmadinejad endorsed, to only to find himself empty handed at the end. Over recent decades attempts at regional political-economic integration in West Asia in particular has proven enormously difficult. The Rouhani government would be well advised to instead pursue narrow and specific goals that would yield tangible result over grandiose but unrealistic – at least in the short term – and lofty aspirations. 

In other words, the government of President Rouhani should be selective in its foreign and regional policy goals. Thus far he has acted in such a manner. On the international stage, Rouhani has already made it clear he wants to repair American-Iranian relations. Closer to home, he has specifically referred to the need to reach out to Saudi Arabia and find ways to reduce tensions, particularly as the two countries are seen as leaders of the Shia and Sunni camps respectively in the sectarian battle that is now raging across so many parts of the Middle East. If he takes a fresh look at the challenges that his country faces, other possibilities do exist for Iranian foreign policy adjustments. 

The case of the South Caucasus

If a narrow focus and attention to the best returns on investment guides Rouhani’s approach, then the South Caucasus deserves his attention. In this part of the world, Tehran can through a realignment of its policies enhance its political standing, promote its economic objectives and better safeguard its security interests.

For too long, Tehran has either meddled in the South Caucasus (specifically Azerbaijan) or simply abdicated (to Russia) its role as a larger neighbour that could play a constructive role in helping the region meet its challenges. In Azerbaijan, a country with close historical and religious ties to Iran, Tehran for too long sought to play the role of the “big brother” with a relentless desire to superimpose its Shia-centric Islamist political model over a Shia-majority country that nonetheless remains secular in its orientation. 

Certainly the Iranian theocratic political model has little appeal in Azerbaijani society. Still, as far as Baku is concerned, the Rouhani administration has an opportunity to overturn some of Tehran’s past policy mistakes. That was the message from the meeting between President Rouhani and President Ilham Aliyev of Azerbaijan in Davos. However, at that meeting Rouhani was also reported to have spoken about a desire on the part of Iran to assist Azerbaijan in its oil and natural gas industries. Expressing a desire for collaboration in any field is commendable but Rouhani and his government can achieve far more vis-à-vis Azerbaijan if they pursue the same narrow and focused approach as they have seemingly begun toward the United States. 

Instead of homing in on oil and gas cooperation – a field where Baku has already had numerous successes in the last 20 years and has established foreign partnerships – Tehran should introduce new initiatives where its capacity to make a difference can make a difference. One such initiative could be linked to the frozen conflict over Armenian-occupied Nagorno-Karabakh, which has pitted Armenia and Azerbaijan against each other since the late 1980s. 

By readjusting its stance and acting as an external mediator seeking resolution to the conflict – instead of shadowing a Russian lead which is fundamentally biased in favour of Armenia – Iran can help shake up the status quo. The Armenian occupation of Azerbaijani lands is in the long-run unsustainable, but Iran can still make a very positive impact on its bilateral relations with Baku if it can demonstrate its ability to pursue genuinely neutral policies in relation to that long-standing conflict. To start with, that requires more Iranian pressure on Yerevan to open itself up to diplomatic resolution and to prevent another round of military clashes with Azerbaijan over the fate of Nagorno-Karabakh. 

Regardless of the close history that Iran also has with Armenia, the fact remains that it is Azerbaijan that has emerged as the economic engine of the South Caucasus. From an Iranian national interest it is thus Baku that should be prioritized. Put simply, Russia’s unconditional support for Armenia might serve Moscow’s goals in the Caucasus, but it makes little sense for Tehran to pretend that Iranian and Russian interests in this part of the world overlap. 

Meanwhile, by simultaneously improving relations with the United States and Azerbaijan, the Iranians can feel far less concerned about the Caucasus as a potential zone of instability that could threaten Tehran’s own interests. Once it has, through concrete action, improved the level of confidence in its relations with Baku, the Rouhani administration can initiate measures aimed at outstanding disputes including the final demarcation of the Caspian Sea where both Azerbaijan and Iran as littoral states are key players. Once such steps have been taken, President Rouhani can confidently speak of closer joint cooperation with Baku in the energy field or tout the idea of Iran as an outlet point for the landlocked states of the South Caucasus that seek to reach international markets. And this is all within the realm of possibility. Rouhani has himself put the process in motion: by reducing tensions with the United States, Iran will be less reliant on Russia’s – albeit unreliable – support. This change in the power dynamic can free Tehran’s hands in the South Caucasus in a way that has real potential to improve political stability in the region.