Iran's Political and Economic Reforms under Pezeshkian: Navigating Geopolitical Risks for Emerging Market Investors

Iran's political and economic landscape has entered a precarious phase under President Masoud Pezeshkian, elected in July 2024 amid widespread public discontent and a collapsing economy. While Pezeshkian's reformist agenda offers a glimmer of hope for economic stabilization and improved international relations, the entrenched power of conservative institutions and the shadow of geopolitical conflict pose significant risks for emerging market investors. This analysis evaluates the interplay of political constraints, economic reforms, and regional tensions to assess investment opportunities and risks in Iran.

Political Constraints: A Fragile Reformist Mandate

Pezeshkian's election marked a rare shift toward reformist governance in the Islamic Republic, following the sudden death of hardline President Ebrahim Raisi in 2024. His campaign emphasized social liberalization, nuclear diplomacy, and economic recovery, yet his authority is circumscribed by Supreme Leader Ayatollah Ali Khamenei and the Islamic Revolutionary Guard Corps (IRGC). According to a report by DW, Khamenei retains ultimate authority over foreign policy and military decisions, while the IRGC and Guardian Council continue to resist structural reformsIran's complex political and military power structure^[1]. This institutional rigidity limits Pezeshkian's ability to implement meaningful changes, particularly in sectors dominated by conservative factions.

The recent war with Israel has further complicated Pezeshkian's political calculus. As noted by The Conversation, Khamenei is reportedly considering a staged power transition to maintain regime stability, but conservative resistance to social and economic reforms remains fierceWhere next for Khamenei? After war, Iran’s supreme leader is faced with difficult choices^[2]. For investors, this dynamic underscores the risk of policy reversals or abrupt shifts in governance, which could destabilize market confidence.

Economic Reforms: Incremental Steps Amid Systemic Challenges

Pezeshkian's economic agenda focuses on curbing inflation, attracting foreign investment, and reducing reliance on sanctions-driven emergency interventions. According to IranWire, his government has pledged to deregulate sectors like car imports and improve transparency in monetary policyPezeshkian’s Ten Pledges on Economic Changes to Improve Iranians’ Lives^[3]. However, the Central Bank of Iran has highlighted the lack of independence in monetary policy as a critical barrier to inflation controlEconomic Alarm Bells Ring Louder as Iran’s Leaders Hold Crisis Meetings^[4].

Foreign investment remains constrained by U.S. and international sanctions, which restrict access to global financial systems and increase transaction costs. While Pezeshkian has signaled openness to rejoining the Financial Action Task Force (FATF), progress is contingent on resolving the nuclear issue. As Global Policy Journal notes, replicating the economic growth of the reformist Khatami era (1997–2005) requires overcoming today's more repressive political environment and intensified sanctionsIran under Pezeshkian: Challenges for replicating reformist-era growth^[5].

Initial market reactions to Pezeshkian's election—such as a modest appreciation of the Iranian rial and gains in the Tehran Stock Exchange—suggest cautious optimismIran under Pezeshkian: Challenges for replicating reformist-era growth^[5]. However, structural issues like low foreign exchange reserves and a fragile financial system persist, complicating long-term recoveryCritical Risks of Investment in Iran for 2024^[6].

Geopolitical Risks: Nuclear Diplomacy and Regional Escalation

The 2024–2025 Israel-Iran conflict has heightened geopolitical risks, with implications for global energy markets and investment stability. According to Russell Investments, scenarios range from limited retaliation and temporary de-escalation to "weaponized uncertainty" in the Strait of Hormuz or rogue escalationHow the Iran Conflict Could Reshape Portfolio Risk^[7]. A regional war could disrupt oil supplies, increase insurance costs, and trigger a repricing of risk assets.

Pezeshkian's nuclear diplomacy further complicates the outlook. While he has reiterated Iran's commitment to dialogue under international law, his administration has also advanced uranium enrichment capabilities at the Fordow plantPreserving Space for a Nuclear Deal with Iran in 2025^[8]. This dual-track approach—seeking diplomacy while expanding enrichment—risks renewed sanctions or U.S. military intervention, as highlighted by Arms Control.orgEnding Iran’s Nuclear Program an “Illusion”: President Pezeshkian^[9].

For emerging market investors, the interplay of nuclear negotiations, regional tensions, and domestic instability creates a volatile environment. The involvement of external actors like Russia and China in supporting Iran, alongside U.S. efforts to moderate Israeli responses, adds another layer of uncertaintyIsrael-Iran Conflict: Escalation, Nuclear Strategy, Global Impact^[10].

Investment Strategy: Balancing Opportunities and Hedging Risks

Despite the challenges, Pezeshkian's reformist agenda presents niche opportunities for investors willing to navigate high-risk environments. Sectors like infrastructure, agriculture, and technology could benefit from limited deregulation and foreign investment incentives. However, exposure should be hedged against geopolitical shocks, such as renewed sanctions or regional conflict.

Diversification across asset classes and geographic regions is critical. Investors should also monitor nuclear diplomacy closely, as a breakthrough in negotiations could unlock sanctions relief and catalyze economic reforms. Conversely, a breakdown in talks or escalation with Israel would likely trigger market sell-offs.

Conclusion

Iran's political and economic reforms under Pezeshkian represent a fragile experiment in balancing reformist aspirations with institutional conservatism and geopolitical volatility. While the president's agenda offers potential for economic stabilization and improved international relations, the risks of policy reversals, regional conflict, and nuclear tensions remain elevated. For emerging market investors, a cautious, diversified approach is essential to capitalize on niche opportunities while mitigating exposure to systemic shocks.