The regime tightens its belt and its fist

Iran’s struggle

THE president of Iran is a powerful communicator. When Mahmoud Ahmadinejad spoke live to the nation last month, he managed to combine seductive reasoning, patriotic appeals and more than a hint of menace. For once, though, he left even his most fervent supporters unmoved, for he was announcing the beginning of the end of subsidies on which millions of them depend. These measures are the gamble of his presidency—and may be the most important economic reform in the Islamic Republic’s three-decade history.
From top ayatollahs to the IMF, everyone agrees that spending $100 billion each year to pin down petrol, gas and electricity prices, besides the cost of staples such as flour and cooking oil, is a bad way to dispose of Iran’s hydrocarbon revenues, accounting for more than 10% of GDP and encouraging waste on an epic scale. The symptoms of the malaise are legion: tea kettles simmer all day; the streets clog with recreational drivers out for a spin; lights glare because no one can be bothered to turn them off. “We can do it because we have oil,” Iranians used to tell incredulous visitors. Oh, happy days.
By the day after his speech Mr Ahmadinejad’s axe had cut a merciless swathe. The price of petrol had gone up by 75% and that of diesel by more than 2000%. Electricity and water bills are expected to soar. The price of some types of bread has quadrupled—and many an upheaval in Iran’s history started with a bread riot. No wonder the streets of the capital, Tehran, were heavily policed after the president’s speech, as people scrambled for the last drops of subsidised petrol.
Supported by the state television monopoly, which has campaigned relentlessly in favour of the reforms, Mr Ahmadinejad has been at pains to point out their redistributive character. The old system, it is true, favoured the rich; it was they who ran fancy but inefficient cars and heated their big houses like saunas. The government has already doled out some of the money it expects to save in the form of direct subsidies into private bank accounts (of the poor, mostly), while staggered utility prices will reward thrift. The more water, gas and electricity an Iranian consumes under the new regime, the more expensive these utilities become.
With its emphasis on simple living and an end to class divisions, the government’s propaganda is more than a little reminiscent of the piously egalitarian early days of the Islamic revolution. One pro-Ahmadinejad newspaper invoked the Koran as an inspiration for ending subsidies. In his television address Mr Ahmadinejad advised people to put the subsidies entering their bank accounts towards their next utility bill, but anecdotal evidence suggests that many have withdrawn the cash and are on a spree. “People are just happy to have money coming to their bank accounts,” comments one Tehrani. “They will get a nasty shock when the bills pile up.”

The president claims that the new measures will leave 60% of the population better off than they were under the old system, with only the richest 40% having to tighten their belts. More of the cash the government expects to save through the reforms will be ploughed into housing and infrastructure. In five years, by which time the last subsidy is meant to have been eliminated, Mr Ahmadinejad predicts that Iran will be “paradise on earth”.

The government’s primary goal, a reduction in waste, has already been achieved. In the first three days of the scheme, the authorities say, electricity use dropped by 11% across the country, and millions of litres of petrol were saved. “From now on,” says a Tehran housewife, “I will think twice before using the washing machine.” She expects her family to have to move to a smaller flat, “as higher energy prices mean we will no longer be able to afford to run the one we have.” Car prices fell slightly in the first week of the reforms.

But the new measures are likely to be highly inflationary, particularly after the government exhausts its stockpiles of commodities such as rice and cooking oil, limiting its ability to manipulate prices. Inspectors have been out in hordes, enforcing a government prohibition on runaway price increases, but upward pressure on all but a few staples will be hard to resist. In the words of a doctor at a private hospital, “The cost of everything we provide, from surgery to medicines to convalescence, is going to go up, because everything is linked to energy prices.” On the first day under the new scheme there were empty taxis on Tehran’s streets. “They are travelling empty”, said one driver, “as a protest at government price controls. How long can we afford not to reflect the new fuel prices in the fare we charge?”

Mr Ahmadinejad promises to shield Iran’s beleaguered manufacturers from soaring energy bills by giving them handouts. Still, a knock-on effect on unemployment, already around 15%, seems unavoidable. Fortunately for the president, inflation, which ran at around 25% in 2008, has since fallen to 10% while international commodity prices have dropped. But they are now rising again; and even allowing for reduced consumer demand, a return to 2008 inflation levels, say economists, is the best that can be expected.

Chronic maladies call for strong medicine, but Mr Ahmadinejad makes an unlikely healer. He is Iran’s most polarising president in decades, and has spent much of his five years in office at loggerheads with his rivals at home. For all that, the subsidy reforms enjoy broad support, even from his stiffest critics. Anything less would be considered treasonous, for the Islamic Republic now exists in a carefully managed state of national emergency.

Everyone must watch his step

Ahmadinejad, reformer and polariser

The supreme leader, Ayatollah Ali Khamenei, who enjoys practically untrammelled power, periodically calls Iran’s bickering politicians to order and has shielded the president from the danger of impeachment. The country has been tense and sombre since the summer of 2009, when Mr Ahmadinejad’s disputed re-election brought millions of opposition supporters onto the streets, culminating in a vicious crackdown by the authorities. The opposition has since been cowed; but what confidence ordinary Iranians had in the future has now evaporated, for the country is suffering unremitting international pressure directed against its nuclear plans and is reeling from several lethal bombings in Tehran and in some of the country’s troubled border regions—all against a backdrop of intensifying state repression.

From international criticism of a spate of executions to the British ambassador’s recent championing of Iranian human-rights activists, Iran’s leaders point to a Western conspiracy to destabilise the country in favour of the official losers of the 2009 poll, Mir Hossein Mousavi and Mehdi Karroubi, and their liberal politics. Fearing a backlash, the authorities have refrained from arresting the pair, but their political activities are now limited to putting out statements on their websites. Lesser opposition figures have got off less lightly. The past two months have seen the arrest of (among others) three reform-minded journalists, four opposition politicians and an economist who criticised Mr Ahmadinejad’s subsidy reform. In January Nasrin Sutoodeh, a human-rights lawyer, was jailed for 11 years, while film-makers around the world have protested at the six-year sentence recently imposed on Jafar Panahi, a dissident Iranian director.

Attacks at the end of November on two scientists involved in the Iranian nuclear programme, one of them fatal, have been attributed to Western intelligence agencies, as was a massive suicide-bomb in the southern port of Chabahar, on December 15th, which killed at least 39 people. (Baluch separatists, whom Iran accuses of getting American help, claimed responsibility.) On January 10th the Intelligence Ministry announced the arrest of several people for their involvement, allegedly at Israel’s behest, in the assassination of a physics professor who had been linked to Iran’s nuclear programme.

The biggest contributor to Iran’s pervasive sense of encirclement, however, and the sharpest spur both to reform and repression, is the sanctions regime that the United States and its allies have imposed. Four years ago, when George Bush’s administration was trying to win Chinese and Russian support for its sanctions drive, officials in Washington insisted that their intention was simply to penalise those Iranians involved in their country’s nuclear programme, which America, its European allies and the leaders of many Middle Eastern countries (as revealed by WikiLeaks) regard as a front for bomb-making. Since 2006 China and Russia have signed up, however reluctantly, to six UN resolutions against Iran, while America and its European allies are now promoting a still broader range of sanctions.

According to Stuart Levey, the American Treasury official who plots his country’s sanctions policy, the aim is not only to force Iran to forgo its insistence on self-sufficiency in nuclear power, but also to rethink its “support for terrorism, suppression of dissent, and abuse of the financial system”. Mr Levey’s aim is to dissuade the world from doing business with Iran, and his blend of blandishments and threats has been effective. The authorities in Dubai, a hop across the Persian Gulf from Iran’s southern coast, no longer welcome Iranian businesses or workers, Iranian banks are boycotted by companies around the world, and shipments to or from Iran are delayed by customs officials on suspicion that their cargoes are proscribed. Iranians are experienced sanctions-busters, but the solutions they favour, which include setting up front companies and using middlemen to transfer money, are expensive even when they work.

Blessing and curse

As America’s latest efforts suggest, and Mr Ahmadinejad’s energy-saving reforms implicitly acknowledge, Iran’s oil is both a blessing and a curse. It would be hard for the Americans to stop the world, especially China, which sees Iran as a major supplier of its own energy, from buying Iranian oil. But the Islamic Republic has limited refining capacity and has long relied on foreigners for roughly a third of the petrol it consumes. So last June, when America’s Congress authorised Barack Obama to penalise foreign companies that sell petrol to Iran, the Iranians reacted by stepping up their drive for self-sufficiency.

Iran is vulnerable both as a consumer and an exporter. The Iranians now boast that they are self-sufficient in petrol, but this has been achieved only by switching petrochemical plants to petrol production, reducing the country’s petrochemical exports and worsening its balance of payments. Further, as an illustration of Iran’s febrile mood, many Iranians blame a recent lethal rise in air pollution on the allegedly low quality of indigenous fuel. It is doubtful whether Iran’s leaders can achieve all their stated aims of maintaining petrol production, manufacturing lots of petrochemicals and cleaning the foul air their citizens must breathe.

Saving and self-sufficiency are the mantras of the day. Although the subsidy reforms are supposed to hand control over prices from the government to the market, the trend is towards more government interference in citizens’ lives. In truth, the president has been chipping away at individual Iranians’ autonomy ever since he came to power, as each internal palpitation and outside threat becomes a pretext for the country’s security chiefs to exert more control over the people.

The state’s growing authoritarianism is expressed in different ways, from the hectoring tone of official speeches to the now total intolerance of the liberal opposition. Newspapers may no longer mention Messrs Mousavi and Karroubi, and the country’s biggest liberal political party has been banned. Companies tied to the Revolutionary Guard, which generally backs Mr Ahmadinejad but must answer to the supreme leader, Mr Khamenei, flaunt the dominance they enjoy in such fields as hydrocarbons and civil engineering. The baseej, a volunteer militia that played a big part in suppressing the 2009 disturbances, is on a vigorous recruitment drive.

In November, after a long tussle, a huge network of private universities fell into the government’s clutches. Nor has the public sector’s dominant position been dented by the government’s spurious privatisation programme; according to the World Bank, a mere 14% of offloaded public-sector outfits have ended up in private hands.

From films to television and book-publishing, Iran’s official culture is now dominated by a small, pro-government clique. Favoured screenwriters and film-makers are rewarded with permits and funding. Those who refuse the government’s largesse—and the creative obligations accompanying it—find themselves out in the cold. Last month the annual commemoration of the death of Shia Muslims’ favourite martyr, the Imam Hossein, was unusually subdued. Mourners gathered under the watchful eye of thousands of policemen. The authorities apparently feared that the event would be hijacked by the opposition, as happened in 2009.

The government’s tools are not only, or even mostly, intimidation, but also the perks and promises of a monopolistic state. People who attend mourning ceremonies in government offices are rewarded with free food. Baseejis get into university more easily than non-baseejis. Civil servants in some departments are given loans on generous terms.

American officials depict the international campaign to ostracise Iran as successful coalition-building. It may well end up destabilising the Islamic Republic. In the short run, however, sanctions and isolation have strengthened the hardliners whose policies America most dislikes.

More than the big state-backed enterprises, whose money and connections let them circumvent sanctions, the relatively pro-Western private sector is suffering from the squeeze on finance, restrictions on imports and a paucity of spare parts. Westernised, middle-class Iranians have been inconvenienced by the refusal of fuel suppliers at European airports to fill up Iranian airliners. Iran has responded in kind, with the result that most flights between Tehran and Europe now stop for fuel in a third country. Even cultural collaborations between Iranians and Americans have fallen foul of sanctions.

As long as the Islamic Republic can sell oil at high prices, Iran’s gravy train will trundle on. There is no sign yet that Western pressure has convinced Mr Khamenei to abandon his plans, vociferously endorsed by Mr Ahmadinejad, for Iran to become a big producer of nuclear fuel.

Recent talks between Iran, the United States and the European Union have achieved little, even if the parties did agree to meet again. The Iranians suspect America of being behind the recent sabotage of one of their main nuclear facilities, which led to a temporary halt in uranium-enrichment work, and have noted WikiLeaks’ revelations concerning American lobbying against Iran at the very time, in 1999, when Mr Obama was proposing detente. The Iranians now depict him as dishonest and his overtures as a sham.

Sanctions help the hard men

All in all, for the hardliners in Tehran, Iran’s isolation is not without advantages. The last period of relative detente with the West, under Mr Ahmadinejad’s liberal-minded predecessor, Muhammad Khatami, was a nightmare for the supreme leader. Revolutionary values were diluted and there was a clamour for more democracy. That has now come to an end, and negotiations give Iran’s diplomats a chance to grandstand about Israel’s nuclear weapons. The top brass threaten the Israelis with dire consequences if they dare attack Iran’s nuclear facilities.

Behind the disturbances of 2009 lay abstract middle-class worries. Those Iranians who took to the streets were angry at the contempt they had been shown by their rulers. The danger now is that the subsidy reforms will be badly managed and that these dissatisfied Iranians will be joined by a new, more volatile mass—poorer and less easily intimidated.

Many in Iran’s higher echelons are caught between loyalty to the regime and a desire to see Mr Ahmadinejad fall flat on his face. His chutzpah undimmed, he drives many of his ideological bedfellows to distraction. One upshot of the Islamic Republic’s intolerance is that power tussles now centre on personalities, not ideas. Indeed, when the president abruptly fired his foreign minister, Manouchehr Mottaki, in December, it was interpreted as a rebuff to the supreme leader, who had proposed Mr Mottaki in the first place, and a boost for the president’s unofficial ambassador-at-large, Esfandiar Rahim Mashai.

Tehran’s not easy to breathe in

Whoever the personalities, it is Mr Khamenei who sets Iran’s course, and that seems unlikely to change. In foreign affairs the Islamic Republic’s policy is to exploit its reputation across the Muslim world for principled opposition to America and Israel, while strengthening economic ties with China, its main shield against sanctions, and emerging powers such as Brazil and Turkey. At home, the plan is defensive: to hunker down and prepare for the economic, political and perhaps military challenges that lie in store. Before Iran reaches paradise, a spell in purgatory beckons.

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