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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. 
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 yet. Until July, it was rather trying to increase the pressure on Iran, in order to achieve the adoption of a more moderate line in foreign policy. By July, however, with his call for "reform from below", President Bush appeared increasingly interested in fomenting a revolt against the Islamist regime. 

Iran and the rest of the world
The main tool in the hand of the US administration for exerting pressure on Iran is increasing its isolation from the rest of the world. In May the US 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 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. After some initial anxiety, the EU announced in July its readiness to develop closer commercial ties with Teheran, although conditionally on Iranian willingness to discuss such issues as nuclear proliferation, terrorism and human rights. there have been delays in the negotiation of deals with Russia and Japan in the oil, nuclear and defence industries, but in the end both countries appear intent on continuing their flourishing trade with Iran. 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. The fact that Russia and Iran have increasingly diverging ideas about how to deal with the resources of the Caspian Sea might have contributed to push Russia away from Iran. President Putin, however, appears to be trying to strike a delicate balance between continuing Russia's lucrative trade with Iran, while at the same time doing his best to appease American fears of Iranian interest in weapons of mass destruction. 

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. 
however, the conservatives are not uniformly hostile to improving Iran's relations with the us. as the focus of Iran's foreign policy debate moved towards the forthcoming conflict in Iraq during September, while the reformists appeared united in their opposition to the war, among the conservatives the voices favourable to Iran playing a role in the conflict are on the rise. The logic of the argument appears to be that not only Iran could gain influence in Iraq, but also that it could trade a benevolent stance towards the anti-Saddam war with a friendlier attitude from America, avoiding at the same time to carry out radical internal reforms. On the whole, the bush administration did not respond positively to hints coming from conservatives that a deal might be possible. 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. 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.

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. To generate the required amount of jobs, Iran's economy should growth at the yearly rate of 12%. Economic growth reached 4.5% in 2000/2001, 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, although there were signs of improvement towards the end of the summer. 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 a judiciary which is closely aligned with the conservative faction. International investors, on the other hand, are increasingly sceptical of the Iranian market under the present conditions and are demanding more favourable contracts. During May there were indeed 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. An important sign was the successful launch in July of the new euro bonds, the first denominated in a foreign currency since the Islamic revolution. There are now plans for new issues of euro bonds and even a proposal to receive oil payments in euros. 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, but already some European companies are beginning to invest small sums. Even the World Bank is planning to invest in Iran, despite the likelihood of us opposition.
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. 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. 
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. A number of draft laws, which are crucial to the re-launching of Iran's economy, remain blocked, due to the opposition of the conservatives. Such laws include a project to end the unaccountability of the foundations, which control a large part of the Iranian economy, a large-scale privatisation program, a new labour code and several others. The renewed pressure of the units of the "moral" police on an increasingly impatient youth, together with the ongoing repression against the reformist press, only contributes to the radicalisation of a part of the opposition. 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. Faced with a conservative opposition that showed little sign of wearing down, President Khatami finally decided for an all-out assault on the main conservative stronghold, the council of guardians. During September the reformist government presented a draft law, which would greatly reduce the powers of the council, especially as far as its ability to disqualify election candidates is concerned. The government also appears to be about to present other constitutional and administrative reforms, including greater powers for the president. President Khatami has already warned that he might resign if his projects are not approved, leaving the country in a state of chaos.
The outcome of the conflict between conservatives and reformists remains uncertain. while the possibility of a conservative coup d'état has long been in the air, Khatami's move appears to weaken what many saw as the only alternative to a head-on clash between left and right, that is a new coalition between moderate conservative and moderate reformers. The latter would include the reformist right of the executives of reconstruction party and the moderate left of the militant clerics society, which are both part of the current government coalition. By contrast, the more radical reformers of the Islamic Iran participation front and of the Mujahidin of the Islamic revolution would be left in opposition, once weakened in partially rigged new elections.

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Update 011 - (31/10/02)

Waiting for a war to happen
During October, Iran's foreign policy continued to be dominated by the prospect of a war in Iraq. The prospect of being soon surrounded by client states of the US, together with the fear of possibly being the next down the target list, caused much internal debate on how to cope with the situation. Moreover, Iran fears that in the event of a war its economy would suffer severely, not least because of a likely massive influx of refugees. The possibility of Kurdish nationalism being strengthened by a war in Iraq is also seen with apprehension in Teheran. There are clear signs that the ruling elite feels seriously threatened and fears a tightening of the embargo. It is estimated that since the beginning of the year several billion US$ have returned to the country, as the government repatriates its gold reserves previously held by European central banks.
As the international attention turned to Iraq, on the other hand, Iran was spared during October the war of words that had afflicted it during the previous months. The government continued to send out signals that it would be eager to drop its membership in the "axis of evil". Not only it stated that it was ready to accept a new, tougher resolution on Iraq, but also took the unprecedented step of declaring that a two-states solution is acceptable for Palestine, so long as the Palestinians accept it. Iran had previously always maintained that the state of Israel was illegitimate and the new position is clearly an attempt to distance itself from the radical Palestinian groups. 
At the same time, Iran's strenuous efforts to improve its relations with the neighbours continued unabated during October, although it appears that further significant improvements might be difficult to obtain without major concession on the part of Iran. At the beginning of October Iran could add to the positive side of the balance sheet the signature of a military cooperation agreement with Kuwait, the first of its kind with a pro-Western Arab state. However, the negotiations about the status of the Caspian Sea resources still appear to be heading nowhere and international observers believe that Iran stands no chance of reaching a deal with Azerbaijan, unless it gives up its demands of a 20% share and accept the 13% proposed by Russia. Such a concession, however, would be seen as a defeat by the internal opinion and Foreign Minister Kharrazi is already being criticised for having failed to deliver a deal. 
Iran's willingness to improve its image led to a good start in the preliminary negotiations with the EU on human rights talks, which are required by the Europeans as a condition for reaching a general agreement with Iran. Iran even accepted the new UK ambassador, after having refused his predecessor. On the whole Iran continues to fight an uphill struggle against the power of attraction of the US, espcially among the mostly impoverished states hat surround it. Between September and October, for example, it emerged that Teheran is increasingly worried of Armenia's warming to the United States. Armenia has since its re-establishment as an independent state maintained very friendly relations with Iran.

Building up to the final clash?
In terms of internal politics, there was little new happening during October, apart from the raging debate on President Khatami's proposal to reduce the power of the Guardians Council and increase his own. Unsurprisingly, the conservatives reacted angrily to the proposal, although some observers believe that a compromise might still be possible. The campaign of arrests and threats against reformist MPs continued in October, as the judiciary decided that parliament's sponsorship of an opinion poll on US-Iran relations was against the law. 

All hopes rely on gas
At the end of September the IMF reported on the Iranian economy, showing appreciation for the continuing economic growth, but criticising the expansionary fiscal policy, which could lead to inflation and an excessive strengthening of the rial. However, there is little likelihood that the Iranian government will follow this advice. The budget deficit expected in 2002/2003 is largely due to the attempt of the government to shore up its popularity among key constituencies, at a time of important political battles. 
While not the object of much debate, the situation of the oil industry is also of crucial importance for the future of Iran. There is growing consensus that exports of crude Iranian oil has been declining since the beginning of the year, possibly by 8% or 9%. A negative trend was expected, given that many Iranian oil fields are ageing and that Iran lacks the investment needed to upgrade them. This year, in any case, the situation has been compounded by an extensive program of well maintenance and by a series of strikes in the industry.
In the strategy of the Khatami government, gas is supposed to make up for the shortcomings of the oil industry. Since Iran has huge reserves of gas, which at present are largely under-exploited, it would make good sense to move the focus of the investments in that direction. However, Iran's strategy appeared about to be jeopardised by Turkey's decision in September to suspend imports of Iranian gas. The agreement with Turkey had been hailed as the opening of the gateway to Europe, a potentially very lucrative market, and the Iranian leadership appears to have been unnerved by the development. In any case, in October Iran and Turkey agreed to restart deliveries of gas. It is significant, however, that allegedly Turkey was tempted to bargain for lower prices by the offer of a substantial discount by Russia. Russia's increasingly aggressive marketing practices might cause more problems to Iran in the future, as it continues its efforts to penetrate the European market.

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Iran's first-ever International Air Show opens in Kish 

Iran's First International Air Show opened on the Persian Gulf island of Kish, the Tehran Times has reported.
Majlis Speaker, Mehdi Karrubi, inaugurated the event, in which some 65 international aviation and air industry enterprises from 12 countries present their latest products and achievements in the field of aviation.
The participating companies will offer their products in such areas as fixed-wing aircraft and helicopter manufacturing, navigational systems, airport facilities, and avionics.
Some 40 Iranian companies are participating the five-day show, with the most notable being the Aerospace Industries Organization. The debut aeronautics event is also expected to be attended by the Army's Chief of Staff, and top brass from the Air Force, and the Air Force of the Islamic Revolutionary Guards Corps (IRGC).
The show aims to present the capabilities of world's research and industrial institutions in the aviation industry, and to provide easy access to the latest international developments and breakthroughs in the field.
Iran's International Air Show will be held in a closed space of over 7,000 square meters, and an outdoors space of 75,000 square metres.

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Nourbakhsh puts this year's economic growth at 6.6% 

The Governor of Central Bank of Iran (CBI), Mohsen Nourbakhsh, said that preliminary data indicate a 6.6 percent economic growth in the current Iranian year (started March 21), IRNA reported.
He added that the agricultural sector witnessed 6.1 percent growth, industries and mines 11.2 percent while the growth in the services sector stood at 5.1 percent in the period.
Speaking at the monthly meeting of the CBI, Nourbakhsh elaborated on the current economic developments in the world. He further underscored the need for reform of the domestic economic structure adding, "By providing financing alternatives, the government will ensure that the economy will achieve solid growth."
He added that, developments in the oil and financial markets coupled with competition in exports are factors influencing Iran's economy. Nourbakhsh went on to discuss the prospects for fiscal and monetary policies and said, "The economic growth topped 4.8 percent last year."
Given the economy's stable condition, government commitments in implementing the right policies and enforcing fiscal discipline have all contributed to the creation of a conducive environment for implementing monetary policies, Nourbakhsh remarked. He referred to the 20 percent growth in imported goods and services last year adding, "the trade surplus stood at US$5.6bn and net capital account at US$1.1bn."
He added that reduction in required deposit for opening letters of credit (L/Cs) and lowering the rate for bank deposits are among the steps taken by the CBI to boost real economic growth.
Lowering deposit rates from 21 percent to 16 percent coupled with the additional effect of the liquidity coefficient accelerator have led to increased liquidity in the real economy, the CBI head underlined.
He said that controlling the growth of liquidity has been successful this year, and highlighted the positive outcome of issuing Participation Bonds to rein in the adverse effect of liquidity growth.
One of the aims of the bonds issue was to create the needed resources for the private and public sectors, Nourbakhsh said. He added that the chosen coupon rate of the bonds, which is geared toward providing adequate funds for the private sector considers mechanisms inherent in the capital market, whereas in the public sector's case, the rate is determined by government policies.
The CBI governor expressed hope that the continuation of policy reforms, including the implementation of foreign exchange unification and eliminating the non-tariff barriers will lead to a prosperous economy.
On sectoral growth, he said industrial output saw an 11 percent growth in the first quarter of this year, followed by mining with 11.8 percent, and steel and cement production by 9.3 percent and 11.9 percent respectively in the same period.
He said growth in steel and cement output reflects a vibrant construction and industrial sector activity, which contradicts claims by some experts on a recession gripping the economy.

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Major breakthrough in EU-Iran dialogue

European Union foreign ministers have decided to commence dialogue with Iran in the upcoming UN General Assembly's third committee, The Tehran Times has reported.
"The EU wants the critical dialogue with Iran to give results. There are no preconditions, which means we can do what we wish," Danish Foreign Minister Per Stig Moeller told a press conference in Luxembourg after the meeting of EU foreign ministers.
Moeller said the EU has decided to launch a dialogue with Iran as an integrated part of the trade agreement and the comprehensive political dialogue including matters of human rights.
The two sides have stressed that the EU and Iran will enter into the dialogue with no precondition.
The purpose of the dialogue is to achieve concrete progress on the ground and the EU will assess the results regularly on the basis of fixed benchmarks, added Moeller.
Moeller's country currently holds the rotating EU presidency.

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Afghan province welcomes Iranian investment

The Governor of Kandahar, Gol Agha Shirzai, has welcomed Iranian investment in his southeastern Afghan province, including for building power plants as well as roads, IRNA has reported. 
In a meeting with Iran's Deputy Finance Minister, Mehdi Karbasian, in the southeastern Sistan Baluchestan, the Afghan official also thanked the Islamic Republic for "generous assistance" to Afghanistan during years of war and currently to the reconstruction of his country. 
"Kandahar is ready to accept Iranian private companies' support if they are determined to invest in that province," Shirzai said. 
Iran pledged at a conference in Tokyo to grant US$560m over the next five years for Afghanistan's reconstruction. 
The two sides also discussed economic cooperation fields between Kandahar and Iran as Karbasian announced Iranian private sector's readiness to set up agriculture training courses in Afghanistan and build a power plant in the Kandahar province. 
Karbasian cited Iran's reconstruction projects in the war-ravaged country, including its construction of a road which links Dogharoun checkpoint in eastern Iran to Herat in Afghanistan. 
The Islamic Republic also builds a bridge in the Milak border in southeastern Iran, which will facilitate trade and transit between the two sides, he added. 
Karbasian pointed to a transit route between Chabahar in southern Iran and Zaranj in Afghanistan, saying it will help reduce the cost of transited goods one it comes to operation. 
He said Iran is to implement a 50 per cent discount in port and warehouse facilities for transit of goods to Afghanistan.

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International Banks Delegation Visits Khuzestan Steel Complex 

A delegation comprising of the representatives of seven international banks toured the Khuzestan Steel Complex (KSC) here Sunday, IRNA reported.
Deputy Head of KSC for Project Planning Hossein Karousi-Nejad said that the delegation aims to review investment opportunities for its affiliated banks.
In this regard they have visited other industrial units throughout the country, Karousi-Nejad stated.
The official said the delegation, in its short visit to the complex, inspected various sub-projects including casting and production of wide-rolled steel sheets.
At the end of the visit various financing schemes were reviewed, Karousi-Nejad said adding that complete implementation of KSC expansion projects requires $400 million.
"It is hard to raise the sum from domestic sources and these visits go a long way toward inviting foreign sources to invest their capital in Iran's steel projects," the official remarked.
He added the foreign side expressed interest in investing in Iran and lauded the internal stability of the country.
He added that the representative of a foreign bank, which has inked a $300 million contract with the Isfahan Mobarakeh Steel Complex, expressed interest to sign a similar agreement with KSC.
The financing schemes if successful, will enable the complex to raise its steel production from 2.4 million tons to 3.4 million tons annually, Karousi-Nejad underlined. He said the one million ton surplus production will mostly be earmarked toward the export of wide-rolled steel sheets "which is a project with the highest return in acquiring forex and is economically viable."


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