TEHRAN – This is the second part of Tehran Times’ exclusive interview with Prof. Dr. Mohammad Reza Farzanegan on the activation of the snapback mechanism and the broader impact of renewed UN sanctions on Iran.

Farzanegan turns his focus to Iran’s capacity for resilience and reform in the face of renewed sanctions. While acknowledging the multifaceted challenges—ranging from pressure on the middle class to growing corruption and social strain—he also highlights the country’s untapped potential to turn crisis into opportunity.

He underscores that external pressure, though damaging in the short term, can act as a catalyst for long-delayed structural reforms. He points to the growing role of digitalization, tax and subsidy reforms, and the empowerment of women in the workforce as key levers for sustainable development. Moreover, he suggests that Iran’s diplomatic pragmatism, particularly its efforts to maintain dialogue within the NPT framework while deepening eastern partnerships, reflects a strategic adaptation rather than isolation.

Below is the full text of the interview:

Based on what you just explained, what implications will these sanctions have on Iran’s social stability, especially considering their impact on the middle class?

The Iranian middle class has clearly declined under sanctions. In our analysis up to 2019, before the pandemic, we estimated that the share of the middle class was around 50 percent of the population, whereas in the absence of sanctions it could have been closer to 80 percent. That represents a gap of about 30 percentage points.

Your question, however, is about the effect on social stability. Here the picture is complex. Sanctions generate several negative externalities. They increase corruption, especially political and administrative corruption, not just petty forms. Rent-seeking behavior rises, while transparency falls, since governments under sanctions often restrict the publication of information to avoid external exposure. This lack of transparency creates fertile ground for further corruption.

Corruption undermines social trust. It reduces trust in institutions but also weakens trust between individuals, which is damaging for the stability of the social system. Empirically, higher corruption is associated with greater risks of conflict, protest, and violence. In our research on sanctions and conflict in Iran, we find that rising sanction intensity is linked to more civil disorder and terrorism. Interestingly, the risk of large-scale conflict, such as civil war, actually declines. This is partly due to a “rally around the flag” effect: when the integrity of the country is perceived to be at stake, even opposition groups tend to unite against the threat of fragmentation or separatism.

Still, the broader mechanism is clear. Sanctions generate economic pain through inflation, currency depreciation, unemployment, capital flight, and rising poverty. These pressures lower the opportunity cost of joining radical groups or engaging in violent protest. In a growing economy, individuals have more to lose and are less likely to take such risks. Under sanctions, the reverse holds. This helps explain the growing signs of radical behavior and declining social cohesion.

In short, sanctions erode the middle class, fuel corruption, and weaken social trust. Together, these dynamics make Iranian society more vulnerable to instability, even if the forms of instability vary across different types of conflict.

How might continued sanctions shape Iran's foreign policy and especially its approach to nuclear negotiation and its cooperation with the agency?

Iran’s foreign policy under the new round of UN sanctions will likely shift further east. This trend is not new. In recent years, China has already become Iran’s main trade partner, purchasing more than 95 percent of Iran’s oil exports. Europe and the West have been reduced to a marginal role. Since trade and foreign policy are closely linked, this dependence has reinforced Iran’s political and economic alignment with China, and to some extent with Russia. The reactivation of UN sanctions will deepen this shift.

At the same time, Iranian authorities are aware of the importance of keeping diplomatic channels open. If diplomacy is completely closed, it strengthens those who advocate more radical and confrontational strategies, including military options against Iran. The leadership has learned from experience: the UN sanctions of 2006–2015 created strong domestic pressure for negotiation, which ultimately helped bring Rouhani to power with the promise of lifting sanctions. That diplomatic track led to the JCPOA. I would therefore expect that, even under the current sanctions, there will be continued efforts to maintain some form of dialogue.

The challenge, however, lies in the deep mistrust between Iran and the West, which has only worsened after the recent 12-day war between Iran and Israel and direct U.S. military intervention in Iran. This makes negotiations far more difficult than a decade ago. Nevertheless, I believe that Iran will try to remain within the NPT, despite calls from some domestic factions to leave. The administration understands the risks of more radical moves and the value of preserving at least minimal cooperation with international institutions.

Still, the situation is much more dangerous than it was ten years ago. The sanctions issue is now compounded by the real risk of direct military confrontation with Israel and the United States. My concern is that reactivating UN sanctions could not only deepen Iran’s eastern orientation but also unintentionally pave the way for a new round of military escalation.

What strategies can Iran adopt to mitigate the effects of sanctions and rebuild its economy and society in this situation? 

Well, strategies are, of course, more difficult under sanctions. When under sanctions, domestic capacity and resources must be mobilized for production and investment, and the sanctioning environment further complicates matters. Transparency declines, rent-seeking and corruption increase. Society becomes more short-term oriented because inflation makes the future value of money uncertain. From the private sector perspective, this discourages investment in long-term projects.

The government also faces limited resources under sanctions. Oil exports are constrained, and even when possible, financial sanctions complicate repatriation of funds. Buyers demand higher discounts, intermediaries emerge, and transaction costs rise. UN sanctions add inspections, increasing delays and insurance costs. Even regional partners, such as Iraq, Afghanistan, or Pakistan, can create compliance issues, further complicating trade.

In this sense, strategies are constrained. Reducing the cost of doing business and encouraging domestic entrepreneurs is crucial. Tax reforms and formalizing the informal economy could help, as could rationalizing energy subsidies to reduce government spending and improve efficiency. Digitalization, including AI and digital banking, offers additional pathways to enhance productivity and reduce waste. Iran has made notable progress in digitalization over the past year.

Implementing major reforms under sanctions is challenging, as the government must consider social and political repercussions. Ideally, reforms, such as subsidy adjustments, taxation, and economic diversification, should occur before external pressures arise. Sanctions force the government to pursue politically costly reforms that had been postponed, such as reducing dependence on oil. While sanctions increase living costs, they also create an opportunity to promote rational resource use, human capital development, and broader inclusion of women in the workforce.

Female labor participation in Iran remains low, around 10–15%. Most working-age women are either not employed or not actively seeking work. Some may work in the informal economy, but social, cultural, legal, and economic barriers prevent many from contributing to the formal economy. Reducing these barriers could significantly increase the talent pool, particularly in the service sector. Gender equality in education has improved, with near-parity in enrollment and, in some cases, more women than men in universities. The challenge now lies in integrating these graduates into the labor market. Simple reforms could raise female labor participation to the global average of 50%, generating substantial economic benefits.

Iran possesses skilled human capital and ample domestic resources, but short-term investment behavior shaped by sanctions, political constraints, and corruption limits their productive use. High corruption encourages quick gains over long-term investment, reducing entrepreneurship and industrial development.

In sum, sanctions negatively affect multiple aspects of Iran’s economy, yet they also create incentives for innovation and efficiency. External pressure can highlight opportunities for reform, productivity improvements, and better utilization of human capital. Sanctions are not solely detrimental; they can push the economy toward more rational and sustainable practices.

**********CAPTION: Photo shows Prof. Dr. Mohammad Reza Farzanegan