The Khatami Period (1997–2005)

A Growing Crisis: The Impact of Sanctions and Regime Policies on Iranians’ Economic and Social Rights

The Khatami Period (1997-2005)

Neither the US nor any other country imposed additional sanctions on Iran during the presidency of Mohammad Khatami. In fact, responding to Khatami’s call for dialogue in 1998, along with his attempts at promoting the rule of law, greater pluralism, accountability at home, and moderation of Iran’s policies abroad, the Clinton administration provided Iran with limited sanctions relief. In 1999, the US ban on the export of American medical products (contingent upon OFAC licensing), agricultural commodities, and certain civilian aircraft parts to Iran was lifted,[42] and in 2000 the import of Iranian carpets, pistachios, and caviar into the US was legalized. Although Iran did not immediately reciprocate, limited interactions between the two countries continued. These interactions reached their apogee in the aftermath of the terrorist attacks on the US on September 11, 2001, during the nascent presidency of George W. Bush, when the two countries cooperated in bringing about the ouster of the Taliban in Afghanistan.

Even after President Bush’s 2002 “axis of evil” speech and the discovery later that year that Iran had not divulged the existence of its nuclear program to the IAEA for 18 years, no additional sanctions were imposed on the Islamic Republic. The Khatami administration managed to deftly handle the nuclear revelation by negotiating with European powers, and agreeing to temporarily suspend Iran’s uranium enrichment efforts as a confidence-building gesture.

Khatami’s moderate domestic and international stance, along with America’s decision to refrain from imposing ILSA, even enabled Iran to boost its oil and gas production. The added production expanded Iran’s access to hard currency and raised the revenues with which to finance its expenditures. Between 1997 and 2005, non-American oil majors, such as Total, Shell, Petronas, and Gazprom, invested hundreds of millions of dollars in Iran’s hydrocarbons industry.[43]

Nevertheless, during Khatami’s presidency the US succeeded in denying Iran a once-in-a-lifetime opportunity by effectively preventing the landlocked Caspian Basin countries from transporting their oil and gas resources to world markets through pipelines transiting Iranian territory—even though Iran provided the most geographically logical and economically efficient means of doing so. The US also barred these countries from engaging in oil swaps with Tehran, thereby denying transit fees and construction benefits to Iran. Writing in 2004, Hossein Askari concluded, “Iran’s discounted total economic losses from delayed Caspian oil exploitation could be in the range of $7-24 billion (assuming a $20 average price for a barrel of oil and depending on Iran’s share of Caspian oil resources) and in the range of one billion dollars annually for all other sanctions related losses (largely reduced foreign direct investment, transit fees, and oil swaps).”[44]

Nonetheless, Khatami’s better macro-economic management, along with greater moderation at home and abroad, helped to marginally improve the standard of living and cultural rights of the Iranian people through sustained economic growth, job creation, and reductions of restrictions on freedoms of expression and association. Significantly, it also helped to mildly remedy the structural defects of the Iranian economy. In his second term, Khatami managed to achieve a unified exchange rate, implemented a relatively liberal FDI law, expedited the speed of privatization, strengthened the manufacturing base, marginally improved the quality of bureaucratic administration, reduced foreign debt to low and manageable levels, and created an oil stabilization fund (OSF) to insulate the country from fluctuations in the price of oil and fund loans to the private sector as a means of diversifying the economy and promoting entrepreneurship.[45] He even managed to partially reverse the brain drain, as skilled Iranian expatriates gradually began to return. Some even repatriated a portion of their assets, although their preferred mode of investment was speculation in real estate, rather than committing funds to the more complicated and cumbersome manufacturing sector.[46]

These policies produced an average economic growth rate of 5.8 percent between 2000 and 2003. In spite of the contraction of the oil sector between 2002 and 2003, the nation’s rate of economic growth reached 6.8 and 6.5 percent for 2003-2004.[47] Due to the population explosion, however, the unemployment rate, particularly among the young, continued to remain high, hovering around 16 percent between 2000 and 2002, but declining to 15.7 because of the rates of growth.[48] This progress, however, was limited and reversible, as overall the economy remained oil-dependent, state-dominated, largely closed, and uncompetitive, with low value added and relatively insignificant non-hydrocarbon exports and low levels of FDI flowing to the non-oil sectors of the economy. The nuclear issue, moreover, remained unresolved.