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Iranian rials

Mohammad Khatami-Ardakani


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Known as Persia until 1935, Iran became an Islamic republic in 1979 after the ruling shah was forced into exile. Conservative clerical forces subsequently crushed the westernising liberal element. During 1980-88, Iran fought a bloody, indecisive war with Iraq over disputed territory, which caused large-scale damage to its economy. The key current issue is how rapidly the country should open up to the modernising influences of the outside world, with a conservative faction in control of some key institutions, such as the Council of Guardians, and a reformist faction centred on elected President Khatami. 

US and Iran 
Despite the apparent improvement in the relations between the US and Iran, which had followed the 11 September terrorist attacks, by January 2002 the tension between the two countries had reached new peaks. President Bush accused Iran of being part of an "axis of evil" together with Iraq and North Korea and asked Iran to stop meddling in the internal affairs of Afghanistan and developing weapons of mass destruction. The efforts of the lobby favourable to the abolition of sanctions against Iran, which includes several us congressmen and senators, have so far been unsuccessful. 
The Bush administration is increasing its pressure against Iran on the world arena, although most countries are not very keen to respond to such calls. In May it announced sanctions against Armenian, Chinese and Moldovan firms, accused of transferring to Iran equipment and technology suitable for the development of weapons of mass destruction, a clear a warning to Iran's trading partners. The Bush administration is also bringing some pressure to bear on the Central Asian countries, hinting that the concession of economic aid might be conditional to adopting the right attitude towards Iran. The largest economies appear the least likely to bow to the pressure. The European Union in particular looks inclined to actually expand its ties to Iran. However, Teheran must also have watched with some anxiety the May decision of EU foreign ministers to postpone the starting of talks with Teheran on a trade and cooperation pact. The only major countries whose relations with Iran have been affected have so far been Japan and Russia and even them rather marginally. There have been delays in the negotiation of deals in the oil, nuclear and defence industries, but in the end both Russia and Japan appear intent on continuing their flourishing trade with Iran. With the exception of US companies, the oil industry worldwide is very active trying to increase its presence in Iran as much as possible. This applies to relatively small companies too, despite the demanding character of the Iranian market.

Iranian responses 
On the Iranian side, the reformist government is keen on improving relations with the US, but there remains strong opposition from the conservatives, who dominate a number of key institutions, first and foremost the Council of Guardians, and count among their members the Supreme spiritual leader, Ayatollah Khamenei. Calls for the formation of a united national front against "American aggression" appeared to be delivering some results until April, with a lull in the repression of dissidents and the liberal press. Former President Rafsanjani, who has a reputation for pragmatism and in the recent past had showed signs of wanting to recycle himself as a moderate reformist, after having taken an intransigently anti-American stance in the early months of 2002 sponsored secret negotiations with the US, aimed at easing the tension between the two countries. 
While the Iranian leadership has good reason to be worried about the intensification of American hostility, the Bush administration is clearly not planning any direct action, but it is rather trying to increase the pressure on Iran, in order to achieve either a fall of the Islamist regime due to an internal crisis or at least the adoption of a more moderate line in foreign policy. During 2002, the Bush administration has among other initiatives actively opposed the extension of the Iran-Turkey gas pipeline to Greece and the EU and invited Japan, a major trading partner of Iran, to exercise pressure on Teheran. The Iranian government has, on its part, showed some signs of greater moderation, for example by asking the Lebanese Hezbollah to exert restraint against Israel and by avoiding to the threat of an oil embargo as a way to intervene in the Israeli-Palestinian conflict. These moves, however, did not appease the US administration. By mid-May even the reformist President Khatami felt that he had to take a strong stance and warned the US administration against "threatening, insulting and humiliating" Iran. however, as the discovery of wrecks of spy planes (which could only be American) was reported in iran, the government refrained from accusing the us, showing how keen it still is to avoid confrontation as much as possible. As a reaction to growing American pressure, Teheran strengthened its efforts to improve its relations with its Islamic neighbours, such as the Central Asian countries, Azerbaijan and even Saudi Arabia

Russia and Iran 
Moreover, the re-emergence of Russia as a big player in the oil market could test the good relations that the two countries have been enjoying for some years and which are crucial to Iran's strategic position. Russia and Iran, for example, have increasingly diverging ideas about how to deal with the resources of the Caspian Sea and despite much effort from Iran, Russia appears to have decided to side with the other littoral countries. While in the medium- and long-term Russia's desire to become a major player in the oil market could hurt Iran's own plan to dramatically expand its market share, the main danger to Iran is that Russia could soon be lured towards a more pro-American stance in exchange for economic concessions, which might include forgiving Russia's Soviet era debt in exchange for the termination of nuclear cooperation with Iran. 

Economic prospects 
Apart from the international tensions, the economic and political situation of Iran remains uncertain. The development of oil extraction in Iran has been negatively affected by project delays and by some flaws in the buy-back deals negotiated with the international investors and it is by no means certain that Iran will succeed in increasing its production to the levels planned. A failure would have very negative consequences for the economic stability of the country, due to the rapid growth of internal consumption of oil, which is expected by some analysts to match the volume of exports during the current year. Petrol is sold within Iran at heavily subsidised prices, with a litre costing to the Iranian motorist just $0.063, which encourages high consumption levels and waste. Moreover, while Iran is being relatively successful in attracting investment towards the development of oil extraction, it has not succeeded yet in doing the same for the construction of pipelines to East Asia, a market for which the country is potentially very well placed. 

Economics and demographics of a latent crisis 
If the debate about the chances of success of Iran's plan to expand its oil production is still undecided, there is no doubt that the Islamic Republic cannot afford a failure. Although the birth rate has now been brought down to manageable levels, the baby boom generation is beginning to join the workforce, causing a terrible headache to the government. With 5.5 million high school certificate holders expected to join the job market in the next four years, the government needs to create more than 1,300,000 new jobs every year to prevent an increase in the unemployment rate and keep the population happy, but in 2000/2001 it succeeded in creating just 400,000. Economic growth reached 4.5% in that year, short of the 6% target but still not a bad achievement when judged by the standards of Iran's performance over the last decade. In 2001/2002, which according to the Iranian calendar ended on 21 March, low oil prices and a cut in production will ensure that growth will be lower, probably around 3.5%. It appears obvious that it will be difficult to achieve significantly higher growth rates without attracting massive foreign investment, but there is a strong opposition among conservatives against foreigners playing a much larger role in Iran's economy. Moreover, during the early months of 2002 the negotiations with potential investors in Iran's oil and gas industry took a negative turn. A wave of financial scandals has hit executives of some Iranian oil companies involved in partnerships with foreign investors and Iranian officials are now delaying the negotiations, fearful of attracting the attention of the judiciary, while international investors are increasingly sceptical of the Iranian market under the present conditions. During may, however, there were some signs of a growing willingness to offer more appealing conditions to foreign investors, as the chairman of the parliamentary energy committee, Hossein Aferideh, proposed to lengthen the buy-back contracts which represent Iran's approach to reaching agreements with international investors. At present, buy-back contracts last five to seven years, which is considered too short by many players in the oil industry. Iran will need to invest $30 billion over the next 8-9 years to maintain its share of world oil exports. The ageing Iranian fields have lost production capacity at the rate of 250,000 barrels per day, 6.4% of annual production. At least $1 billion are needed every year to maintain production at the current levels. 

Foreign investments and internal politics 
Investment in the oil industry is less controversial, because it tends to be easier to isolate from the mainstream of society and because the rewards are so obvious. But that will likely not be enough to inject enough dynamism in the Iranian economy. The opportunity to attract funds towards other sectors certainly exists. Foreign businesses express a strong interest in the Iranian internal market, which at present is underdeveloped, due to restrictions to imports, which are not allowed to exceed $15 billion, and to the inability of the domestic industries to meet demand. In the car industry, for example, it is estimated that annual sales of 300,000 cover only half of potential demand. It is expected that in the foreseeable future most investments in the non-oil sector will come from Arab countries. 
The attempts to reform the Iranian economy and political system have been slowed by the opposition of the conservative faction. The Council of Guardians has been blocking the introduction of several laws, including the new foreign investment law, approved by the parliament. There are however some signs that doubts are emerging within the conservative camp, with some taking a more moderate stance. On the other hand, there are divisions within the ranks of the reformists too, as they include both groups favourable to the liberalisation of the economy and others, such as the Islamic left, who are cold towards it. Some reformists are also showing signs of growing impatience with the pace of the reforms and Khatami is beginning to be accused of failing to deliver the democratic reforms he had promised. Faced with a conservative opposition that showed little sign of wearing down, during May President Khatami adopted a more vivid rhetoric. He warned that society might be on the verge of unrest, denounced the suppression of the popular demand for reform and threatened to step down if the reform process not completely stuck, although he also asked his supporters to be patient.

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Update 08 - (23/07/02)

A well-meaning President Bush?
President Bush's written statement in support of the Iranian reform movement, dated 12 July, caused an uproar in Iran. Whether those comments were genuinely meant to stimulate the reform process or not, their outcome was actually harmful to the cause of the reformists, an outcome that must have been forecast by the State Department's professional diplomats. The outrage of the conservatives was hardly surprising, but even leading reformists, among them President Khatami himself, were very critical of Bush's statements. Clearly the reformists feel embarrassed by such declarations of support from Islamic Iran's traditional enemy and know that the conservatives will exploit this opportunity to brand them as servants of the US.
The fact that the intervention of President Bush comes at a time when the internal political conflict is rapidly heating up contributes to make its impact worse. The two main recent external signs of rising tension were the resignation of Jalaluddin Taheri, a prominent Ayatollah known for his critical positions, from the position of Friday prayers leader in the city of Isfahan, and the 9 July demonstrations of thousands of people in several cities. Together with the threat of the main faction within the reformist coalition, the Islamic Iran Participation Front, to quit the alliance if the pace of reform is not speeded up, and with the many similar signals of the previous months, it appears clear that the current political stalemate might soon be broken one way or another. Khatami appears decided to follow a moderate course, counting on the apparent willingness of Supreme Spiritual Leader Khamenei to tolerate some changes, as long as the Islamic nature of the political system is not endangered. A large number of his supporters, however, are not satisfied and the reformist coalition might split in the near future, to the advantage of the conservatives and to the detriment of political stability. Already a growing activity of anti-regime forces is reported, ranging from small scale armed attacks to sabotage and propaganda actions. The renewed pressure of the units of the "moral" police on an increasingly impatient youth only contributes to the radicalisation of a part of the opposition and there is a concrete danger that at some point in the future the political climate might deteriorate to the point where the economic and social framework is seriously disrupted. 

Despite all, signs of decreasing tension with the US
The statement of President Bush notwithstanding, the focus of the confrontation between reformists and conservatives has shifted from foreign to internal policy over the last month. Several signs of conciliation towards the US came during the second half of June and the first half of July, especially from top conservatives, which might prelude important changes in the current confrontation between the two countries, which has been going on since the beginning of 2002. Supreme Leader Khamenei, for example, has given the green light to the cooperation of the pro-Iranian Iraqi Shia with American-sponsored efforts to bring Saddam Hussein down. While this might be due to Khamenei's ambition to see Iran's influence in Iraq grow, other conservative leaders have explicitly addressed their attention towards Iran's relations with the US. On 21 June former President Rafsanjani, a moderate conservative, made a conciliatory speech towards the US and stated the possibility of a cooperation between the two countries, while a few days later a moderate was appointed ambassador to the UN, causing the anger of the stricter conservatives. Moreover, in apparent compliance with US request of greater Iranian efforts to prevent infiltration of Al-Qaida militants from the Afghan border, Iran has sent reinforcements towards that border. In a similar vein, the minister of defense, Shamkani had recently announced the abandonment of the plans to develop long-range missiles, in favour of concentrating on intermediate range ones. In some regards, the Bush administration appeared to respond positively, for example including the anti-Islamic Republic armed opposition of the Mujahidin-e Khalq in its list of terrorist organisations and becoming increasingly keen to distinguish between the reformists and the conservatives. 

Good neighbourhood
The foreign policy front brought some more rather good news during the last month. After some initial anxiety, the EU announced its willingness to develop closer commercial ties with Teheran, although conditionally on Iranian willingness to discuss such issues as nuclear proliferation, terrorism and human rights. Iran also seems to be making some progress in improving its relationships with two of its traditionally less friendly neighbours, such as Turkey and Azerbaijan. The visit of Turkish President Necdet Sezer on 17 June was deemed by observers to be a significant political gesture of disapproval towards US policy towards Iran. In the case of Azerbaijan, after the rapid increasing of tension at the end of June, which culminated in Azeri ships being threatened by an Iranian gunboat in the Caspian Sea, relations improved slowly during July. Iran even proposed to Azerbaijan to re-activate the existing pipeline between the two countries, which dates back to the Soviet age. Progress was also made towards the beginning of negotiations for the building of a pipeline from Kazakhstan through Iran towards the Persian Gulf, with the possible participation of Total.

Russian shadows
To offset these small gains, worrying news continued to come from Russia, with growing speculations that the days of the nuclear cooperation between the two countries might be numbered. For sure, the US are making clear that their future relations with Russia depend to a large extent on the latter's willingness to abide to demands of stopping dangerous exports to Iran. The first concrete signs that Russia is increasingly sensitive to US demands was, on 11 July, the announcement by atomic energy minister Rumyantsev that after the completion of the Bushehr plant, Russia will end its nuclear cooperation with Iran, contrary to what had been planned earlier. 

Euro success
On the economic side one important event was the successful launch of the new euro bonds, the first denominated in a foreign currency since the Islamic revolution. The international business community was divided about the chances of this initiative, with some commentators pointing out that the remaining rating company still active in Iran, Fitch Ratings, gives Iran just a modest B+, not to speak of the dangers of political instability. However, Iran's reputation as a good payer resulted decisive in determining the good acceptance of the bonds on the international markets. A declaration from the US State Department, that the Bush administration will probably not punish foreign companies which invest in Iran's oil and gas sector, also contributed to a slightly better outlook for Iran's chances of attracting investments.

Structural problems show little sign of being overcome
However, the main source of Iran's economic under-performance is to be found in its own internal limitations and these show little sign of being resolved successfully. The June earthquake highlighted the inefficiency of the Iranian state and caused a debate in the reformist press, but the unchanging attitudes towards foreign investment remain a more immediate concern. In July yet another oil company, BHP Billinton, expressed its dissatisfaction at the type of deal it had been offered by Iranian oil executives. 
Even the 2002-2003 Iranian budget, approved during the spring, reflects the political constraints under which Khatami and his government have to operate. Spending has gone up massively on the previous year, with tax cuts and massive pay rises to civil servants, whose real income is increasing by 17% in real terms. The government expects to pay for a large part of such increases in expenditures through the privatisation program, which however has been stagnating for a while and might well continue to do so in the near future. Most observers therefore believe that Teheran will soon be running a massive deficit.

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Caspian oil swaps with Iran to grow fivefold by year-end 

Caspian crude oil swaps from Kazakstan and Turkmenistan through Iran are expected to increase fivefold to 120,000 barrels a day by the end of the year, President of Switzerland-based trading house and crude shipping company Vitol, Ian Taylor said on 5 July, has reported.
Mr. Taylor added that the amount could quickly increase to around 370,000 barrels per day, though Vitol isn't the only shipper handling the crude swaps.
Oil companies have long eyed the Iranian route as a quick and cheap solution to get crude oil out of the landlocked Caspian region, but have been hampered by US sanctions, which prohibit trade with Iran. Instead, the US has supported costly and complicated pipeline routes that bypass Russia to the north and Iran to the south.
Crude swaps are a relatively simple and cheap way of exporting oil without investing in big infrastructure projects such as pipelines, as the oil is only shipped a short distance and the receiving country hands over the same amount at an export point.
Under the swaps agreement, Iran takes crude oil from Central Asian producers through the port of Neka for its northern refineries in exchange for Iran's Persian Gulf crude, which is easily exported to other markets. Currently, the Kazak oil is tankered across the Caspian from the port of Aktau and Turkmen output is piped across the border to Iran.
Vitol has been instrumental in putting together a $150 million pre-finance package, mainly backed by BNP Paribas, to fund construction and modification work on the Neka terminal in Iran and two refineries to facilitate the crude oil import from Central Asia.
China Petroleum & Chemical Corp, or Sinopec (SNP), will be carrying out the construction of the port facilities at Neka and expansion of the Tehran and Tabriz refineries to adjust for the different quality of Caspian crude, Taylor said. The Neka terminal is projected to have a capacity of 370,000 bpd by December 2002 and the pipeline to the refineries will have an initial capacity of 120,000 bpd, increasing to 370,000 bpd within six months.
Most of the companies shipping their oil through Vitol for the past year are either state oil companies or other producers working in the region, but not U.S. oil companies due to the sanctions against Iran.
Iran charges a swap fee of US$16 per ton for Turkmen crude and US$13 per ton for Kazak crude as well as making some adjustments for quality differentials.

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Littoral states discuss Caspian biological resources in Iran 

Joint working groups of the Caspian biological resources commission started their session in Tehran on 15th July. Eight working groups will take part in this session. Among the issues to be discussed are maintaining the Caspian's biological resources, fighting poaching, the reproduction of biological resources and determining quotas for the use of biological resources, including quotas for the export of caviar and sturgeon, MPA News Agency has reported.
Ma'sumeh Ebtekar, the head of the Iranian Department of the Environment, said that Iran is ready to sign the convention on protecting the environment of the Caspian sea. The programme for protecting the environment of the Caspian Sea started five years ago, Ebtekar said.

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Iran, Malaysia sign six cooperation agreements 

Iran and Malaysia have signed six cooperation agreements, IRNA News Agency has reported. 
The agreements, which were signed in the presence of Iranian President Mohammad Khatami and Malaysian Prime Minister Mahathir Mohamad, aim to strengthen bilateral cooperation in such diverse fields as trade and commerce, tourism, technology transfer, women's affairs, and family planning. 
President Mohammad Khatami said he was certain his current trip to Malaysia will open a new chapter in Tehran-Kuala Lumpur relations. 
Speaking to reporters prior to departure from Tehran, President Khatami stressed that Iran attaches great importance to the expansion of bilateral cooperation with Malaysia. 
Khatami, heading a 92-member delegation, is visiting Malaysia in response to an official invitation extended by Malaysian King Syed Sirajuddin Syed Putra Jamalullail and Prime Minister Mahathir Mohamad. The visiting delegation includes the ministers of foreign affairs, economy and finance, and post, telegraph and telephone. 

Moscow reaffirms intent to boost ties with Iran

Russia will continue to expand ties with Iran, Foreign Ministry spokesman, Alexander Yakovenko, told a briefing recently. "We intend to develop ties with Iran on a mutually advantageous and pragmatic basis," Interfax News Agency reported.
Russia is not the only country broadening ties with Iran, he said. "Its turnover with European states has been consistently on the rise. Iran is a large country that plays an important role on a regional level," he added.
When asked about US complaints concerning Russia-Iran ties, Yakovenko replied that "Russia has always strictly complied with our international commitments."
Russia repeatedly declared its readiness to discuss US concerns on a bilateral basis, he said. "If the United States has concerns, we have special channels for discussing these suspicions," the news agency quoted him as saying.

Solana to hold important talks on EU-Iran ties in Tehran 

Javier Solana, High Representative for EU's Common Foreign and Security Policy, is to hold important political talks with the Iranian leadership in Tehran on 29th July during a regional tour, IRNA News Agency has reported. 
He will begin his visit in India, then go to Pakistan, from there to Kabul, then go to Iran and from there fly to Brunei to attend the ASEAN regional forum. 
Solana's spokesperson, Cristina Gallach, told IRNA that his visit to the region is the first on a bilateral level. She recalled that Solana had visited the area as part of EU troika last September following the terror attacks in the US. Gallach said Solana is not going to Tehran to discuss the EU-Iran trade and cooperation agreement. 
''You know that the trade and cooperation agreement will be negotiated starting in autumn. It is going to be a political trip,'' she said, speaking to IRNA after the meeting of the EU foreign ministers this afternoon. 
The General Affairs Council last June decided to give the European Commission the mandate to begin talks with the Islamic Republic on a trade and cooperation agreement.
Solana will convey the message to the Iranian leadership that the EU expects parallel progress on economic and commercial relations on one hand and political aspects on the other, said Gallach. She clarified that the political aspects are reforms, fight against terrorism, human rights and at the same time cooperation in two main regional issues, Afghanistan and the Middle East. 
In New Delhi, Solana is expected to discuss the Kashmir issue with the Indian leadership and convey Brussels' support for dialogue with Pakistan. 
''It will be a message of encouragement for both countries to resume dialogue,'' said Solana's spokesperson. 
She recalled that the last EU summit in Seville, Spain, called for a de-escalation of the situation, confidence building and dialogue between India and Pakistan. ''The risks in the last weeks have been defused, but still it is important that the international community and the EU sends the right message,'' she noted. 
In Islamabad, Solana will meet President Musharraf and the Pakistani foreign minister and discuss the Kashmir issue and the situation in Afghanistan. 
In Kabul, Solana will meet President Hamid Karzai and underline the EU's support to the Bonn process. 
''It is important that we send a personal message to President Karzai, in particular given the difficulties in the security front, disarmament, formation of a national army, the fact that warlordism is still a problem and the importance to strengthen the central government. 

Iran, India, Russia cooperation, emergence of a regional bloc 

The cooperation amongst India, Iran and Russia can lead to emergence of a new bloc in regional economic cooperation, says an eminent professor at India's Institute of Defense and Strategic Analyses (IDSA). 
Outlining the trilateral cooperation as a positive development, Prof.T. Shreedhar in an exclusive interview told IRNA News Agency, that it is aimed at evolving a joint strategy for strengthening regional peace and stability. 
He said, Iran, India and Russia are three powerful countries which can influence the regional as well as international developments and strengthening relations among them will have direct impact on peace, security and economic development of the region. 
Prof Shreedhar, who is also an expert on Afghan affairs said, "Russia, Iran and India are in favour of stability in Afghanistan and will do a lot for the reconstruction and establishment of peace in the war-ravaged country." 

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