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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 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. 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. 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. 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.
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.
Several signs of conciliation towards the US were noticed between May and July, coming especially from top conservatives, which shows just how worried some of them are about the prospect of a deepening confrontation between the two countries. 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 former President Rafsanjani, a moderate conservative, made a conciliatory speech towards the US and stated the possibility of a cooperation between the two countries. Moreover, a moderate was appointed ambassador to the UN, causing the anger of the stricter conservatives. 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. At the same time, a number of suspected members of the terrorist organisation were reported to have been rounded up and sent back to their respective country of origin. In a similar vein, the minister of defence Shamkani had recently announced the abandonment of the plans to develop long-range missiles, in favour of concentrating on intermediate range ones. When 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. 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, but on the whole these moves did not appease the Americans. 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.
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. 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. 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. 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, 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. 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.
Update 010 - (26/09/02)
Iraq takes the centre stage
During September, the focus of Iran's foreign policy debate moved towards the forthcoming conflict in Iraq, with conservatives and reformists arguing about which stand to take. The original consensus on opposing American moves against Iraq began to weaken after the Bush administration made clear that a decision to wage war had been taken. While the reformists appear 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 carrying out radical internal reforms. On the surface, all the Iranian leaders, whether conservative or reformist, continued to rail against the Bush administration, while the conservatives continued accusing the reformists of working for the Americans. Signals, however, continued to be sent out to the Americans. In mid-September former president Rafsanjani, a moderate conservative, showed his appreciation of President Bush's apparent decision to present his case against Iraq at the UN, rather than take unilateral action. More seems to be going on beneath the surface, as former foreign minister Velayati, today an advisor to Supreme Leader Khamenei, was reported to be trying to establish contacts with the US administration. A few months earlier, Rafsanjani himself had been reported to be involved in a similar attempt.
The reformists on the counter-offensive
Clearly, dealing with the US is not the main issue which divides conservatives and reformists. The real bone of contention is internal reforms, especially since the reformists, headed by President Khatami, appear to have 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. Over the past few months, members of the Council have openly stated that many reformist MPs will not be allowed to stand again in future elections. The government also appears to be about to present other constitutional and administrative reforms, including greater powers for the President and greater autonomy for local officials. Since any law approved by the parliament is still subject to the approval of the Council of Guardians, this effort appears bound to fail. But President Khatami has already warned that he might resign if his projects are not approved, leaving the country in a state of chaos.
President Khatami himself is clearly acting under pressure from the main reformist party, the Islamic Iran Participation Front, which threatened to leave the government coalition if reforms do not start making some visible progress. The main point in the program of the Front is expanding popular participation in government and its most direct adversary is exactly the Council of Guardians. However, Iran has now been ridden for months with speculations about what would happen if the reformist government were to fail. 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. There are still signs that such an outcome is possible. In September, for example, conservative leader Habibollah Asgaroladi stated that cooperation with the reformists was possible, if they purged the secularists from their ranks, an invitation which appears meant for the Militant Clerics Society. On the other hand, Rafsanjani was reported to have threatened a recourse to force, if the reformists were to really challenge the status quo.
Dangers of isolation not over yet
Despite the EU's decision to discuss a cooperation agreement with Iran and Russia's intention to go on with nuclear cooperation, which were perceived as significant blows to President's Bush policy of isolating Iran, hurdles remain that could hamper Iran's attempts to improve its relations with the rest of the world. Despite assurances in August by the International Atomic Energy Agency, that the Iranian nuclear program is peaceful, by mid-September Russian sources reported delays in Iran agreeing to the export to Russia of nuclear fuel waste. The return of nuclear waste is key to Russia's plans to trade with Iran without damaging its own relations with the US and Russia might not proceed with delivering nuclear fuel to Iran unless the latter agrees to return the waste.
Even as far as the EU is concerned, some clouds remain high in the sky. Several political conditions have been put by the Europeans to the signing of a cooperation agreement with Iran and the most difficult one to swallow for the Iranians is certainly the recognising of Israel. This is clearly unlikely to take place under the present conditions. It remains to be seen whether some of the EU demands are negotiable or not.
Even in dealing with third countries the active Iranian diplomacy of the first 9 months of 2002 appears to have delivered results more modest than it had seemed earlier. Relations with Azerbaijan remain difficult, as the latter tilts towards the United States. Turkey, an historical enemy which had appeared to become friendlier in recent times, is now engaged in a row with Teheran because of the suspension of its imports of Iranian gas. Ankara is claiming that Iranian gas is of low quality, while the Iranians maintain that the cause of the suspension is the economic crisis in Turkey. In any case, Iran is threatening to claim damages, which could harm the relations between the two countries. Even Iran's Arab neighbours seem to be raising the price of improved relations. In September, the Arab foreign ministers asked Iran to return to the UAE the three Gulf islands it presently occupies.
Ever more euro-friendly
Despite the Turkish setback, Iran's plans to export natural gas made some progress between August and September, as plans of an extension of the Turkish pipeline to Bulgaria began. Even if the Bulgarian requirements are small, this represents a further step ahead in the penetration of the European gas market. While Iran's oil industry is stagnating, not least because of limited world demand in a time of economic slowdown, the natural gas industry is making significant progress. More phases of the South Pars project are being awarded to foreign investors, including mostly Korean and Japanese firms.
Europe remains the main partner of Iranian economic development, as shown by the recent success of the first Iranian euro bond offer. Teheran is now planning a second bond issue for October, for a value even higher than the first one. Iran's fondness for the euro might well go beyond the launch of bonds denominated in euros. The Central Bank of Iran is reviewing a proposal to receive oil payments in euros, which appears likely to be approved by the parliament too. At the same time, following the approval of a new law on foreign investments, the first five foreign companies have been authorised to invest in Iran and they are all European. The amount invested is still limited (US$48.8), but this represents nonetheless an historical development for post-revolutionary Iran. Rather surprisingly, even the World Bank is planning to invest in Iran, despite the likelihood of US opposition. If the plan to invest in an Iranian leasing company were to go ahead, this too would be a strong sign of growing faith in Iran's worth as a business
30% increase in rice output projected.
Iran plans to increase its rice output by 30 per cent by using hybrid and genetically modified seeds said the head of Iran's Rice Research Institute, Faramarz Alinia, in Beijing on 25th September, the Iran Daily has reported.
The official pointed out that only five percent of Iranian farmlands is under rice cultivation and the output is barely enough to offset the shortage in the domestic market.
Despite the fact that average yield in Iran is over four tones per hectare, which is higher than the global average, the country has to import up to 600,000 tones of rice annually, Alinia told IRNA.
He further said that 1.8mtons of paddy is produced annually in Iran, which is not enough to meet domestic demands.
A Chinese rice expert will visit Iran in January to assist in a project to produce hybrid rice which will be continued in collaboration with the UN Food and Agriculture Organisation.
A six-man delegation, headed by Deputy Agricultural Jihad Minister and Head of the Agricultural Research and Education Organisation, Behzad Qarayazi, attended the Chinese International Rice Congress which ended in Beijing on September 20th.
Iran missile programme in line with international criteria, minister
Minister of Defence and Armed Forces Logistics Rear Admiral Ali Shamkhani said that Iranianprogrammes to manufacture missiles domestically is in line with international criteria, IRNA News Agency has reported.
Speaking at the opening ceremony of Fateh-110 surface-to-surface missile, anti-vessel Cruise missile and 35-mm anti-aircraft shells production line, he said that Iran has no plan to extend the range of its missiles.
Elaborating on Iran's commitment to the international treaties concerning missile technology, Shamkhani said that Iran produces missiles for deterrent and defensive purposes in line with international standards, adding that for the time being there is no international treaty available for medium-range missiles.
He said that Iran's aerospace industry aims to strengthen its defensive capability adding that possessing defensive means will serve as deterrent to any probable threat to the country.
Shamkhani said that Iran believes in maintenance of power balance in the region as the key for regional peace and security. He said that Iran's programme to bolster its defence capability is in line with national defence to deal with probable threats to national sovereignty and territorial integrity.
Kuwait to negotiate gas deal
Kuwait and Iran will meet in the first half of October to discuss Iranian gas supplies to the emirate, a Kuwaiti minister told the International Oil Daily.
"We hope the negotiations with the Iranians will move swiftly and that Iranian gas will start flowing by the end of 2006," Kuwait's acting oil minister, Sheikh Ahmad Al-Fahd Al-Sabah, told the London-based publication.
"The volume would depend on the terms which are still to be negotiated, as well as Kuwait's needs after Dorra (gas field) has been assessed and confirmed," he said.
In May, Kuwait said it would move ahead with Saudi Arabia in developing the offshore Dorra field, part of which also lies under Iranian territorial waters.
Sheikh Ahmad said Saudi and Kuwaiti teams are surveying Dorra gas field with a view to starting exploratory drilling in early 2003.
He said Kuwait was interested in buying from the Saudis their share of gas in Dorra, and waiting for the field to come on stream to negotiate the terms with Riyadh.
"As a matter of principle, we said we are interested in buying all the gas for Dorra, because we are in desperate need of natural gas and its proximity makes it even more useful."
Kuwait is rich in oil but not natural gas. The emirate has already signed an agreement with Qatar to import gas by pipeline to feed its power plants.
FOREIGN ECONOMIC RELATIONS
Iran, Australia keen to boost cooperation
Australian Foreign Minister Alexander Downer, has stressed the need for expansion of relations between Canberra and Tehran in all areas, IRNA News Agency has reported. Pointing to Iran's significant role in the Middle East, he expressed satisfaction with the growing trend of bilateral ties between the two sides.
In a meeting with outgoing Iranian Ambassador to Australia, Gholam-Ali Khoshrou at the end of latter's tenure, Downer said that his country is interested in expansion of cooperation with the Islamic Republic. "Further exchange of high-ranking political, economic and cultural delegations has led both countries to have a better understanding of each other," the Australian minister said. He expressed the hope that Australian companies would play an active role in Iran's economic and industrial projects in the near future.
Khoshrou, for his part, stressed Iran's foreign policy of detente and promotion of cooperation with all countries and termed the Australian role in Asia and the Pacific as "important."
The Iranian diplomat pointed to Iran's rich culture and its unique tourist attractions and expressed the hope that Australians would travel to Iran more frequently.
Vietnam calls for expansion of ties with Iran
Vietnamese Minister of Foreign, Affairs Nguyen Dy Nien, has expressed the hope that his country's ties with the Islamic Republic of Iran will be bolstered in the near future, IRNA News Agency has reported.
Terming Tehran-Hanoi relations as historic and friendly, he stressed that he thought bilateral ties in economic and technical areas would be promoted in the future. In a meeting with the visiting Iranian Deputy Foreign Minister in charge of Asia Pacific Affairs, Mohsen Aminzadeh, he expressed the hope that the future visit to Tehran of the Vietnamese President would pave the way for positive developments in bilateral ties between the two states.
Both Iran and Vietnam, as two developing countries, should make use of the existing potential for further expansion of mutual relations in all areas, he said.
For his part, Aminzadeh hoped that the visit to Iran of the Vietnamese president and the holding of the third session of the two countries' joint economic commission in Tehran in October would bring the two countries closer.
Expressing his concern over the critical situation in the region and the probable US attack on Iraq, he urged the international community and the peace-seeking countries to help restore peace and tranquillity to the entire region.
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