Friday, November 20, 2009

Iran’s Economic Climate and the Post-Election Crisis

Nader Habibi

Even before the current political crisis began in June 2009, Iran’s economy was confronted with many daunting challenges. Investors were already feeling the pressures of inconsistent economic policies and intensifying international sanctions on their shoulders. The street protests and political unrest that have follwd the disputed election have led to further deterioration in the economic climate. Now the economic players must deal with a new level of political uncertainty unprecedented since the early years of the Islamic revolution.
The election dispute has evolved into a deep division in the highest ranks of the Islamic regime. So far the ruling faction of Ayatollah Khamenei and the Revolutionary Guard has been unable to neutralize the protest movement led by former candidates Mir Hossein Moussavi, and Mehdi Karroubi. These two opposition leaders also enjoy the support of former President Khatami and several high ranking Shi'ite clerics such as Ayatollah Montazeri. At the same time it appears that the protest movement is also unable to defeat the ruling faction or force it into a compromise anytime soon. Nearly five months have past since the initial street demonstrations and yet the total number of people who join the periodic street protests in Tehran does not exceed two or three hundred thousand.

Hence private investors and business owners are gradually arriving at the conclusion that unlike the 1979 Islamic revolution which reached a climax in a relatively short period of time, (period of intense street protests lasted no more than 9 months), the current power struggle can drag on for a significantly longer interval. There is also much uncertainty about how it might end and which faction will win. The worst possible outcome for Iran's economy is the escalation of current protests into large scale political violence or a civil war similar to the Algerian experience in 1990s. Although the likelihood of such a scenario is small, it is a cause for concern among businessmen and investors and can discourage long-term investments.

Post-election protests have also increased the involvement of Iranian Revolutionary Guards Corps (IRG), in economic activities and economic policy-making. President Ahmadinejad has appointed a large number of former IRG members to key positions in government ministries and government-owned enterprises. He has also sold a number of strategic privatized firms to the IRG or its affiliated enterprises. The latest example of such transfer was the sale of a government-owned telecommunications firm to a group of IRG-affiliated firms in September. As a result of these steps the government has reinforced its control over the economy and IRG has emerged as a major economic player in Iranian economy. Firms affiliated with the Revolutionary Guards Corp now enjoy an advantage over private firms in government contract awards and access to government resources.

In addition to expanding the economic reach of the IRG, the ruling faction is also trying to increase its ability to distribute economic resources by enhancing its discretionary control over the proposed income support program. During recent parliamentary debates about replacement of current price subsidies with direct income subsidies, President Ahmadinejad has campaigned hard to make sure that the Presidents office will have discretionary control over the additional incomes of public enterprises after the removal of price subsidies on goods and services that they sell to the public. Critics are concerned that the President will use this privilege to distribute the cash and income subsidies in a fashion to enhance his political base and deny benefits to households that might be sympathetic to the post-election protest movement.

The post-election protests have also had an impact on Western nations' approach to the nuclear dispute and might have an indirect effect on the course of economic sanctions against Iran. Initially the prospects for political reform and victory of the Green Movement led to a more flexible attitude toward nuclear negotiations in first few weeks of the protests. However, as it became clear that the protest movement did not have enough strength to bring about substantial political change in the short-run, the United States and European powers tried to speed up the negotiations and intensified the threat of sanctions. Continuation of the protests in the coming months and the Islamic regime's violent reactions can lead to further isolation of Iran and give Western nations an excuse to further intensify the economic sanctions.

Yet at the same time, the domestic rift might weaken the bargaining power of Iranian government and force it to accept a compromise over its nuclear program in order to avoid further hostility from the international community. Hence the net impact of the protest movement on intensity of economic sanctions in the future is not clear. It could either force the Iranian government to compromise, which will help ease the sanctions, or can be used as an excuse by the Western nations to intensify the sanctions if the Iranian government does not compromise. For now the added uncertainty about economic sanctions will be viewed as an additional risk factor for Iranian economy. This risk factor will be of more concern to international investors than domestic ones.

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