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BATTERED CARAVANSERAI: IRAN FINDS THE PRICE OF DEFIANCE WORTH PAYING

The Financial Times - October 8, 2007 by Roula Khalaf and Najmeh Bozorgmehr in Tehran Some Tehran families chose an unusual outing for their children on a recent Friday, entertaining them at an open-air military exhibition marking the anniversary of the end of the 1980-88 Iran-Iraq war. Fathers proudly took snaps of boys playing on antiquated tanks, then strolled around a pond disguised as a swamp to view old mines and military diving equipment neatly displayed on tables and a newly built Shahab 2 missile. The exhibition, a joint effort by the regular army and the elite Revolutionary Guards, came at an ominous time, with the drums of war beating once again. But celebrating the end of a brutal conflict provoked by Iraq – which cost half a million Iranian lives – is seen in the Islamic Republic as a potent reminder of its capacity to survive. “It’s good to show your children the honour of resistance,” says 39-year-old Ali, who fought in the war. The billboards all over town and television programmes hailing the Iranian sacrifices have blended easily with the daily propaganda feeding the impression that American designs to subdue Iran and strip it of its right to nuclear energy are destined to fail. “If anyone wants to go to war with us, we’ll have the same kind of spirit as during the Iran-Iraq war,” says a brigadier overseeing the exhibition. Dealing with Iran’s nuclear ambitions and its influence in the Middle East may be the biggest foreign policy concern facing world powers. But thanks to a combination of overconfidence and pride, robust oil prices and the absence of meaningful foreign policy debate, the international pressures have yet to provoke alarm in Tehran. “The media are not allowed to talk about the price that Iran is paying” for its nuclear defiance, says Mostafa Tajzadeh, a reformist politician and critic of the regime. “And any slogan that makes people feel powerful gives them satisfaction because of Iran’s history and 200 years of humiliation.” When asked whether they worry about military strikes, many Iranians are dismissive, frequently echoing the same refrain. The US is bogged down in Iraq, they say, and Iran is powerful. Although government officials are taking the threat of military strikes, whether by the US or Israel, more seriously than even a few months ago, they too appear to place low probability on war. They rattle off a long list of Iranian assets that they claim would deter an attack, including Tehran’s ability to retaliate against the US in Iraq and Afghanistan and to call on allies in the region. While there might be an element of delusion in Iran’s analysis, the general mood in Tehran is that the troubles with the west are costly but manageable. The regime led by Ayatollah Ali Khamenei, the supreme leader and final decisionmaker, seems to see little reason to alter its behaviour, be it suspending the enrichment of uranium as demanded by the United Nations Security Council or co-operating with the US in Iraq, where Washington accuses Tehran of funnelling weapons to anti-American Shia militias. Politicians with close connections to the regime say that the supreme leader remains supportive of Mahmoud Ahmadi-Nejad, the country’s fundamentalist president, who has argued that defiance is the best means of asserting influence and forcing the world to accept Iran’s nuclear programme. Tehran’s insistence that the project is peaceful is doubted by western governments, which suspect its aim is atomic weapons. Akbar Hashemi Rafsanjani, the former president who is quietly advocating a less confrontational attitude, has been gradually expanding his influence within the regime but his allies say the supreme leader is still not listening to his advice. Moreover, interest groups that form the backbone of the president’s support, such as the Revolutionary Guards, are enjoying greater economic benefits – winning contracts, including in the oil sector, that foreign companies are shunning. True, Iran is paying a price for its defiance, with the impact of US financial sanctions and American pressure on European banks to stop business dealings more visible than the effect of the targeted UN sanctions against regime entities such as the Revolutionary Guards. Businessmen and diplomats say trade with Europe has significantly declined as financing has dried up; some local factories lack raw materials. Meanwhile, concern that sanctions could hit the massive gasoline imports on which Iran relies prompted the government in June to ration and raise the price of petrol, leading to rioting. Perhaps most disruptive is that the nuclear crisis has provoked broader business unease, hampering much-needed investment in the strategic oil and gas sector and discouraging local groups from embarking on long-term projects. Development of Iran’s gas – it has the second largest gas reserves in the world – has been undermined by lack of access to technology. According to the Economist Intelligence Unit, Iran is unlikely to meet its target oil production of 5.6m barrels per day by 2010, up from an estimated current output of 3.8m b/d. “Iran’s economy needs investment from both inside and outside and this requires an environment conducive to investment,” says Mohammad Hossein Adeli, Iran’s former ambassador to London and now head of Ravand Institute for Economic and International Studies, a Tehran research centre. “But no one cares about the long term,” he adds. “This is the land of Omar Khayyam, the Persian poet. He says, don’t live in the past or the future, live now.” Politicians and businessmen indeed say the regime will get by so long as oil prices are remain strong. “To put it in perspective, Ahmadi-Nejad has had $120bn [£59bn, €85bn] in oil income in his two years in office, which is as much as Rafsanjani had in eight years as president and [Mohammed] Khatami [also former president] had during his whole seven years,” says one conservative politician. “If oil was at $20, we’d be finished.” The cost of doing business with the outside world has increased but Iranians are finding ways to get around financial restrictions, trading through Dubai, for example, and importing Chinese products to replace European goods. “The private sector is concerned but back-channels can be found to bypass sanctions,” says Asadollah Asgaroladi, head of the Iran-China chamber of commerce. Supermarket shelves in Tehran are full and grocery shops offer an appetising display of fresh fruit and vegetables, some of them imported. On Jomhuri Islami Street, Tehran’s electronics hub, a Sony dealer selling flat-screen television sets says his sales are still up and the competition is getting tougher. “I can sell units for thousands of dollars in the poorest areas of the city,” he says. Far more damaging to the economy (with its $200bn gross domestic product) have been Mr Ahmadi-Nejad’s imprudent and often improvised economic policies. Openly declaring that he does not believe in economic theory, the populist president has ignored his own officials’ recommendations – decreeing, for example, a decline in interest rates and embarking on a spending programme that has raised public sector wage and subsidies bills. The combination of surging liquidity and political unpredictability has led to a near-doubling in housing prices in parts of the country, as money seeks refuge in real estate. While some Iranians are getting richer, the disadvantaged who were promised a better life by Mr Ahmadi-Nejad are the ones suffering most from spiralling inflation, which economists say is above 20 per cent. It is rare to meet an Iranian these days who will not complain about rising prices. Curiously, some of the harshest criticism can be heard in the middle-class neighbourhood of Narmak in eastern Tehran, where Mr Ahmadi-Nejad lived for decades. In a store that sells fresh herbs, the 45-year-old owner laments that she has to work on Fridays, the Muslim weekend, and still cannot afford to own a house. “All my customers are cursing Ahmadi-Nejad,” she says, laughing at the president’s recent statement that Iranians were happy, joyous people. “Look at people’s faces and you’ll see how depressed they are.” Opposition groups are hoping to capitalise on this disappointment in next March’s elections to the majlis, or parliament. Once bitter opponents, the reformists led by Mr Khatami and the centrists allied to Mr Rafsanjani (the so-called conservative pragmatists) have joined hands and plan to field common candidates in the poll. Reformist officials say that even a strong minority in the next majlis would greatly increase the chances of unseating Mr Ahmadi-Nejad in the 2009 presidential elections. But the reformists acknowledge that they have two big hurdles to overcome: the first is to limit the disqualifications by the Guardian Council, the unelected body that vets candidates for their “Islamic credentials” and is often used to undermine reformists. The second is to ensure that the interior ministry, also controlled by fundamentalists, allows a fair poll. Yet international tensions could, paradoxically, work against those advocating a less aggressive approach. Mr Ahmadi-Nejad is skilfully using outside threats to rally support and shift attention away from his government’s economic mismanagement. “Imagine if the nuclear file wasn’t there, what the government would face on the issue of human rights, on the economy,” says Mohammad-Ali Abtahi, the reformist former vice-president. “But no one can mobilise people against the nuclear issue.” Outside pressures and suspicions that the US is looking to instigate a “velvet revolution” in Iran have, moreover, provoked a security clampdown that has put the opposition on notice, has undermined non-governmental organisations and led to the temporary detention of several Iranian-Americans with ties to US think-tanks. “The more international pressure there is, the more repression there is in the name of security,” says Shadi Sadr, a young lawyer who spent 17 days in jail in March after her NGO, which advises women, took part in a protest against the trial of activists. “The main allegation against me was that I wanted to overthrow the regime and that my NGO, which receives funds from a Dutch organisation, was a disguise for my activities.” It is unlikely, however, that world powers can calibrate their policies according to Iran’s electoral timetable or wait for a possible change of government to influence Mr Khamenei, the supreme leader. Western diplomats say the next few months could be decisive in the nuclear dispute, as a key report by the International Atomic Energy Agency, the UN’s nuclear watchdog, on Iran’s pledge to clarify suspicions about its programme is due in late November. Whether pressure is intensified through the diplomatic route or the crisis escalates into military conflict may also depend on Iran’s progress in uranium enrichment, as well as events in Iraq and American domestic politics. Some diplomats reckon the administration of President George W.?Bush wants to deal decisively with Iran before it leaves office in little over a year. This is why Iran’s reformists and centrists are bracing for a fight. “We know we don’t have a lot of tools in our hands to disrupt the game,” says a reformist official. “We hope nothing happens over the next few months. But if we fail in the elections, or we are disqualified, then we have to seek refuge with God. Because with two presidential elections, in the US and Iran, each side might resort to adventurism.”

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