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How Iran's economy could blow up the nuclear deal

The way the Iran nuclear deal works is designed to be pretty straightforward: It places severe restrictions on Iran's nuclear program to keep the country from developing a bomb, imposes heavy inspections and monitoring to make sure Iran is holding to its commitments, rewards Iran with sanctions relief, and then holds the threat of reimposing sanctions over Iran's head to incentivize it to comply.

The reason this seems like a good arrangement is that it fits everyone's political and economic incentives. So not only are there lots of mechanisms to make sure everyone is complying, but the deal is structured to put compliance within Iran's interests and make cheating look too risky to try.

But those political incentives could change — and in ways that are almost impossible to account for. If Iran's economy does not improve, public and political will could turn against the deal. Iranian leaders, who, like most autocrats, are simultaneously powerful and insecure, could feel pressured to cheat on the deal or renege outright. An Iranian economic malaise could kill this deal, and there's very little we can do about that risk.

That doesn't mean this will definitely happen, even if Iran's economy were to tank. But for all the understandable focus on things like compliance and enforcement, it's important to remember that a lot of this comes down to the Iranian leadership believing that holding to the deal is within their interests. Right now, that appears to be the case: They wouldn't have signed on otherwise.

But that could change. Given that many Iranians believe the nuclear deal will give their country and their families a far larger economic boost than is likely to actually happen, some disappointment seems inevitable. If that disappointment turns to outrage and backlash, it could be disastrous.

High expectations are setting up Iranians for disappointment

Iranians celebrate the announcement of the nuclear deal in the streets of Tehran (Kaveh Kazemi/Getty)

Iranians celebrate the announcement of the nuclear deal in the streets of Tehran. (Kaveh Kazemi/Getty)

There is a myth about the Iran deal, one heard not so much in Washington as in Tehran: that it will bring salvation to Iran's long-troubled economy.

A recent poll found that a majority of Iranians said they expected an improvement in living standards and better access to foreign investment within a year. Fifty-five percent expect higher living standards within the next year, and 61 percent expected better access to medicine and medical equipment, all due to the nuclear deal. In another poll, 53 percent said they believed the deal would reduce unemployment in its first year.

But the reality is that the Iranian economy will likely continue to struggle for a long time. Iran's economy is plagued by problems such as corruption, a middle-income trap, and a heavy reliance on oil and natural gas exports. Those are hard problems to solve, and if they get solved at all it will take years.

And the sanctions regime will only be suspended, not gone completely, for years to come. During that time, sanctions can "snap back" if Iran violates the terms of the nuclear deal. That means Iran will still be a risky place to invest: Foreign companies that sink money into infrastructure or long-term investments run the risk of losing that cash if sanctions return. They will behave accordingly.

Even if foreign investment does turn out to be available, Iran's economy will take time to increase its productivity. In the meantime, Iranian businesses will face competition from foreign firms that will have access to its markets. That's arguably great for Iranian consumers, but it could be difficult for local businesses.

This myth risks more than just disappointing Iranians who believe it. One reason the nuclear deal went through at all, with all of the painful and humiliating concessions it required Iran to make, was the overwhelming popular demand for it. That gave Iran's moderates the political mandate they needed to overcome hard-liners who oppose the deal.

That popular enthusiasm for the deal has grown dangerously out of control. When the deal was announced, it was greeted in Washington with sober policy debate. It was greeted in Tehran with jubilant crowds rushing into the streets to celebrate.

"When I see Iranians pouring out into the streets with joy, that gives me a little bit of anxiety," Jeffrey Lewis, an arms control expert, told me. "They need to manage their expectations a little better than that."

This all comes down to Iran's "hybrid" political system

Ali Larijani, the chairman of Iran's legislature and a prominent hard-liner (Fatemeh Bahrami/Anadolu Agency/Getty)

Ali Larijani, the chair of Iran's legislature and a prominent hard-liner. (Fatemeh Bahrami/Anadolu Agency/Getty)

When regular Iranians start to realize that they're not headed for overnight economic relief, they may lose enthusiasm for the deal or even turn against it. To understand why that is so dangerous, you need to understand Iran's political system, which is a lot more divided and animated than most US coverage lets on.

Yes, Iran's government is authoritarian, and its paramount leader, Supreme Leader Ayatollah Ali Khamenei, is an unelected dictator. But Iran's system is what's known as a "hybrid regime" — it has democratic elements as well, including an elected legislature and an elected president. Those institutions hold real sway; the rise of moderates in the past two years is part of how this deal happened. And Khamenei, for all of his power, is sensitive to political pressure.

To the degree that Iran has politics, those politics are divided between moderates and hard-liners. Moderates wanted the deal; hard-liners opposed it, and will continue opposing it. (Sound like any other countries you know?) Right now moderates hold the presidency, and it seems likely that will ride the nuclear deal's popularity to electoral wins in next year's legislative elections. Khamenei is still the decider, but with both popular and political opinion in favor of the deal, that has nudged him in favor as well.

But Iran's moderate politicians are winning on the nuclear deal in large part because they have promised it will bring Iranians economic relief after years of suffering. If that relief doesn't come, or if the economy tanks, the public could turn against the moderates. They could put more hard-liners into power in the 2016 election. Those hard-liners could use their increased power and public mandate to pressure against the nuclear deal. Khamenei, if he feels vulnerable, could bend.

What if Iran's politics overcome its incentives to stay in the deal?

khamenei sentences

Supreme Leader of Iran Ayatollah Ali Khamenei gives a speech in Tehran, Iran, on July 8, 2014. ( - Pool/Anadolu Agency/Getty Images)

Breaking the nuclear deal, or even just trying to cheat on it a little bit, would still be a very bad strategic decision for the Iranians. They would almost certainly be caught and punished. But governments are influenced by domestic politics as well as by strategic interests. That's particularly true of authoritarian regimes like Iran's that fear public unrest — this is a country, after all, that saw a violent revolution not so long ago.

The leaders might feel they need to go back on the deal, even if only a little bit and as a symbolic gesture to score some domestic political points, in order to stay in power. That would almost certainly be detected and lead to a crisis. In 1998, when Iraq's Saddam Hussein reneged on his disarmament obligations, it led to the US and UK bombing his country. If that were to happen with Iran, it could lead to the deal falling apart, or even to war.

It's not so outlandish: Iran's nuclear program has never really been in the country's strategic interests, particularly after 2003 when the international community began imposing really severe scrutiny and economic sanctions. And yet the program remained, at least in part because domestic political concerns were steering strategy.

That has changed; Iran's leadership has signed a deal that will severely limit its nuclear program but that, by averting war and bringing economic relief, is within the country's strategic interests. Its domestic political incentives and its strategic incentives are in line. But that might not always be the case. If domestic politics shift against the deal, most likely Iran will resist that and stick to the deal anyway. But it might not. That is a remote but concerning possibility, and one that the outside world could do little to prevent.