In May 2017, Iranian President Hassan Rouhani won a second term in a landslide victory, propelled by voters who embraced his message of economic and political reform. While this may seem like a mandate to continue to his push for domestic economic reforms and the expansion of trade and investment ties with the West, at least one major obstacle might stand in Rouhani’s way: resistance from the Islamic Revolutionary Guards Corps (IRGC).

A branch of the Iranian Armed Forces, the IRGC’s primary responsibility is to safeguard the Islamic Republic’s political system against both external and internal threats. It also operates a vast and powerful economic empire. These economic activities, which began soon after the Iran-Iraq War ended in the late 1980s, have expanded dramatically in the past decade, as Iran has struggled under the weight of international sanctions. As a result, the IRGC has emerged as the most important economic force in the country.

President Rouhani has been trying to rein in the IRGC’s economic influence for four years with little success. Despite Rouhani’s call for disengagement, the IRGC wants to maintain its economic activities. It also has some sharp disagreements with the president over global engagement and efforts to attract foreign investment.

Rouhani’s power to restrict the Revolutionary Guard is limited. The IRGC enjoys the blessing of Supreme Leader Ali Khamenei, and, as a result, that of Iran’s Judiciary, as well. The Supreme Leader does not share Rouhani’s concern about the unfair advantage IRGC affiliates have over independent private firms. In fact, Khamenei has criticized Rouhani’s economic policies on several occasions.

Despite his recent victory, Rouhani will likely continue to face challenges in trying to reign in the IRGC, as reflected in recent exchanges between the president and Major General Mohammad Ali Jafari, the chief commander of the Revolutionary Guard. In reaction to Rouhani’s criticisms of the IRGC, Jafari argued that the organization is not after economic profits and engages mostly in projects that are too risky for private sector. While this may be partially true, the IRGC has multiple economic roles, and a great many profitable assets.

The Growth and Diversity of the IRGC Economy

In 1988, then-Iranian President Akbar Hashemi Rafsanjani invited the IRGC to engage in civilian construction projects to repair the destruction wrought by Iran’s eight-year war with Iraq. Rafsanjani argued that the IRGC had developed a substantial engineering capacity during the war and, could contribute to rebuilding the country, while also generating revenue to partially finance its military expenses. During Rafsanjani’s presidency, many government contracts were awarded to IRGC’s engineering firm, Khatam Al-Anbia.

President Mohammad Khatami, whose eight-year administration followed Rafsanjani’s from 1997-2005, had a difficult relationship with both the IRGC and Khamenei, due to his Reformist and liberal attitudes. The IRGC’s economic activities did not grow significantly under his watch. During Mahmoud Ahmadinejad’s presidency (2005-2013), however, the IRGC drastically expanded its economic activities in many directions.

A former IRGC officer during the Iran-Iraq War, Ahmadinejad helped the Revolutionary Guard purchase large stakes in pubic enterprises that were being privatized to stimulate economic growth. He also appointed his former IRGC comrades as cabinet ministers. Ahmadinejad’s first and second cabinets included an average of seven to eight ministers with IRGC backgrounds. These ministers, in turn, used their powers to help the IRGC expand its economic activities and assets.

Today, the IRGC plays many roles in Iran’s economy. Primarily, it controls Khatam Al-Anbia, a large engineering and construction firm. Official IRGC documents indicate that the company currently has 812 subsidiaries, which are engaged in a wide range of industrial and financial activities. The IRGC also controls a large collection of commercial and financial firms, as well as an informal network of IRGC-affiliated private enterprises (privatized companies that were sold to IRGC officers at favorable terms). Beyond this, the IRGC is heavily involved in smuggling and covert procurement activities in response to economic sanctions.

Trying to Rein in the Guards

At the start of his first term in 2013, President Rouhani called for a reduction in the IRGC’s economic activities, in order to create more opportunities for private sector businesses. Without any support from Iran’s Supreme Leader, however, he made little progress toward this goal.

In 2015 and 2016, Rouhani managed to reduce the number of government contracts awarded to the IRGC. This shift led to strong public protests by top IRGC officials, though it was, at least, a partial victory. Rouhani has been less successful, however, in his efforts to bring IRGC-affiliated financial institutions under the supervision of Iran’s Central Bank. The Central Bank is concerned these unregulated institutions may be engaging in high-risk investments that undermine the country’s financial health.

And Trying Again

During the campaign that preceded this year’s presidential election, Rouhani repeated his call for the IRGC to reduce its involvement in the economy. As usual, IRGC officials countered that they only engage either in economic activities in which domestic firms lack technical and financial strength, such as the Assaluyeh-Chabahar gas pipeline project, or projects that private investors deem too risky because of geopolitical risk and political uncertainties.

Even if these arguments are true, President Rouhani has another important reason to try and reduce the IRGC’s economic power: he wants Iran to be compliant with the international Financial Action Task Force (FATF), which is focused on reducing money laundering and terrorist financing.

Compliance with FATF would allow Iranian banks to freely interact with international financial institutions. Many IRGC-affiliated companies are still subject to U.S. sanctions. As a result, an Iranian bank that provides financial services to any of these sanctioned firms is in violation of FATF regulations. International banks that comply with FATF will then refuse to transact with this bank. This scenario has recently played out in the country, deterring several Chinese banks from transacting with Iran.

Convincing the IRGC to divest its financial assets will not be easy as it owns many financial institutions with high capital values. These institutions also provide valuable services to other IRGC subsidiaries and affiliates. Nevertheless, since adherence to the FATF is crucial for Iran’s growing international, Rouhani is likely to push for the sale of some IRGC-affiliated financial assets, during his second term.

Can Rouhani Succeed?

In the weeks after his second electoral victory, Rouhani enjoyed a stronger level of support from his Reformist base. At the same time, tensions with the Supreme Leader and the IRGC intensified. In recent weeks it appears Rouhani has not only scaled down his ambitious reform initiatives, but also pulled back criticism of his conservative political opponents, in general, and the IRGC, in particular. This is partly a result of his limited powers in comparison to the Supreme Leader, the Judiciary, and the Revolutionary Guard.

Under these circumstances, it is unlikely Rouhani will be able to unilaterally reduce the overall size of the IRGC’s economic empire. What he might be able to accomplish, however, is a redirection of portions of the Guard’s economic interests to development projects and activities in underdeveloped areas, particularly in border provinces where the IRGC already has a heavy national security presence.

Still, domestic squabbles and power games may very well pale in comparison to rising external tensions. As threats from the Trump administration and Saudi monarchy continue to pose security challenges for Iran, the IRGC will surely find added justifications to maintain its heavy presence in the country’s economy.

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