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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, 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. However, most countries are not very keen to respond to such calls. 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.
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 took place between May and July, 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. 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. 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
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.
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. 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
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. 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. 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 09 - (29/08/02)
A new US strategy towards Iran
During August it became definitely clear that President Bush's 12 July statement in support of "reform from below" in Iran had not been a one off or a
misjudgement, but the announcement of a new policy towards Teheran. As President Bush's envoy to Afghanistan, Khalilzad, clarified in August, the Americans
have lost faith in President Khatami and do not believe that he will succeed in his reform efforts, nor that he will bring Iran on a path more compatible with
US foreign policy. Khatami, of course, did not appreciate the new American attitude and raised the stakes of his oratorical offensive against the US, which
has now been going on for several weeks. The main focus of Khatami's public speeches is his opposition to US war plans against Iraq, but his new
anti-Americanism serves two purposes: to make him more acceptable to conservatives in Iran and remind Americans that he has still a role to play. While some
conservatives in Iran believe that they stand to gain something from an American campaign against Saddam Hussein, Khatami thinks that his position would be
weakened further by such a development. Whatever the rhetoric, however, the Iranians are still sending positive signals to the Americans, as shown by the
delivery of 16 members of Al-Qaida to Saudi Arabia, which was revealed in August.
Internal tension keeps growing
The new approach of the Bush administration does not come as a real surprise, since it had been becoming increasingly clear over the past months that the
Americans were betting on an internal crisis in Iran in order to achieve their own foreign policy aims. Although forecasting Iranian internal developments has
proved a challenging task for many observers, often with tragic consequences, the expectation of an internal collapse of the Islamist regime in Iran is based
on at least some evidence. With the conclusion towards the end of July of the Congress of the main reformist party, the Islamic Participation Front, it
appeared clear how dissatisfied many reformists are with Khatami's performance. Despite warnings not to exceed its legal limits, the leadership of the Front,
whose main political demand is a strengthening of parliamentary powers over those of the Supreme Leader Khamenei and of the Council of Guardians, threatened
to go over to the opposition.
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.
If reformist politicians are increasingly impatient, the more so is Iranian civil society. The impact of workers strikes on the economy is beginning to be
felt. Part of the 6% decline in oil production, which has taken place over the last 12 months, is due to strikes in the industry. Strikes have been affecting
other sectors too, while the emergence of unofficial trade unions is being reported. There are also reports that pro-government factory mullahs have been
expelled by the workforce in a number of outlets.
The reaction of the conservatives to the growing popular pressure has so far been to hold firm, relentlessly punishing those who trespass the limits set by
the system. At the end of July another reformist newspaper, Nowruz, was banned for 6 months, and two more were banned at the beginning of August. Furthermore,
a prominent journalist and reformist politician, Hashem Aghajari, was arrested, together with 33 members of the so far tolerated Iran Freedom Movement.
It is not all bad news
For all the efforts of the Bush administration, Iran actually scored a major success at the end of July, as it signed a deal with Russia for the
development of its nuclear industry. Heavy American pressures on Russian government and industry seemed to have achieved a degree of success earlier in July,
when atomic energy minister Rumyantsev had declared that after the completion of Bushehr, Russia's nuclear cooperation with Iran would have ended. Instead, it
is now official that two more plants will be built after Bushehr. Money appears to have played a key role in changing the position of the Russian, whose
nuclear power stations are one of the few major items which can be successfully exported, apart from weapons and raw materials. At about the same time,
Russia and Iran also agreed on a long-term cooperation in the development of Iran's oil and gas resources.
Another remarkable Iranian success in late July was the greater than expected success of its first euro bond offering. After topping up the initial euro 500
million offer, the Iranian government added a further euro 125 million to the offer, to meet the unexpectedly high demand. Moreover, in early August five
European companies were cleared to invest a total of EUR237 million in Iranian industries, signalling an important step ahead in the attempt to attract
foreign investment into Iran.
The Iranian government also continued its efforts to improve its stand among its neighbours. After Khatami visited Kabul in the first half of August, he
received the visit of Bahrain's king Hamad, who has been on rather unfriendly terms with Iran in the past. However, some problems with the neighbouring
countries remained unresolved too, as an agreement of the exploitation of the resources of the Caspian Sea appeared as far as ever.
Oil industry deadlock continues
The 6% decline in oil production of the last 12 months is only one of several symptoms of serious difficulties in Iran's oil industry. During
August, there continued to be little progress towards new deals with international investors, as Iranian officials remain afraid of taking decisions and
risking to upset one political faction or the other. In order to make some progress easier, oil minister Zanganeh has been replacing officials with political
affiliations, with others with a more technocratic profile. Apparently, Zanganeh has today the support of Supreme Leader Khamenei, a relatively moderate
conservative who realises that the Islamic Republic needs to invest in its oil industry to survive, but serious pockets of resistance remain and are delaying
the signing of new contracts. International investors are becoming more vocal in requesting contracts which can guarantee what they consider reasonable rates
'Proton' automobile to be available on market soon IRNA N.A.
The Head of Board of Directors of Zagross Khodro Car Industries Co Ltd., Darioush Gholami, said that the 'Proton' automobiles will be available in the market
soon, IRNA News Agency has reported.
He said that the automobile is a joint production scheme by Iran and Malaysia and the initial plan is to produce over 200 cars.
He said that the automobile is qualitatively comparable to other cars assembled in Iran including Citroen and Nissan models. Gholami added that currently
the assembly line churns out four cars per hour.
He said that over 200 cars are ready to be produced and delivered to the market, adding "We forecast that Proton production to reach 3,000 by the end of the
current Iranian year on March 21st."
He further said that Proton model 'Wira' will have a base market price of around rls 140,000,000.
Malaysia car maker, Perusahaan Otomobil Nasional Bhd (Proton), is poised to strengthen its position in the West Asian market with the commencement of CKD
(completely knocked down) operations in Iran.
Proton's International Business Division General Manager, Anuar Rozhan, in a statement earlier in July, said Proton had positive projections for Iran as it is
a very important market given its strategic location in the region, an area that holds tremendous potential for the future.
He said in Iran "demand strongly outgrows supply" with the passenger car market in excess of 300,000 units per year.
Iran offers Proton a potential source of quality parts and components as it has some 40 years of automotive industry experience. Proton was invited by the
Industrial Development & Renovation Organization (IDRO) of Iran in 1999 to study the feasibility of assembling Proton cars. Subsequent progress saw
Proton entering into a relationship with Zagross Khodro Car Industries Co Ltd.
The first Proton team came Iran in 2000, and by 2001 various agreements had been signed with Zagross Khodro including distribution,technical licensing and
Iranian deputy foreign minister says Azeri talks "productive"
Iranian Deputy Foreign Minister, Mohsen Aminzadeh, who paid an official visit to Baku, ended his visit on 6th August, ANS TV reported. Iran is currently
assisting Azerbaijan with gas supplies but will ask Azerbaijan for help with gas supplies in future when Azerbaijan increases its gas output, Aminzadeh said
while answering journalists' questions.
Iranian Deputy Foreign Minister Mohsen Aminzadeh said that he had held productive talks with the Azerbaijani president and ministers during his two-day visit
to Azerbaijan on 5th-6th August. Saying that the Iranian parliament had a sensitive approach to the Caspian Sea issue, Aminzadeh added that the Iranian
Foreign Minister, Kamal Kharrazi was due to report to the parliament about the processes in connection with the status of the Caspian Sea today. Touching on
the Caspian status, the deputy minister said that any decision contradicting its legal status would be unrealistic.
Aminzadeh said that there was no principal disagreement over military exercises in the Caspian Sea. He said that the military status of the Caspian Sea has
not been clearly defined yet. We hope that relations will strengthen to a level on which there is peace in the Caspian Sea and there is no need for military
manoeuvres or force.
The deputy foreign minister said that there were no disagreements in fishing and other issues.
Iran's first electronic park to be established
The government has given the green light to a plan to establish the first-ever electronic park in Urumieh, an official of West Azerbaijan Province's
Industrial Parks was quoted by the local media as saying IRNA News Agency has reported.
The report said that the industrial park will occupy an area of 32 hectares and will accommodate 107 industrial units that will be allotted spaces on 19
hectares of park land.
According to the official, plans for the first and second phases of the park project are almost final and that construction will begin as soon as a contractor
is found, he said.
Research and software-related activities will also be allowed inside the industrial park and 20 applicants have already registered to undertake activities in
these areas, the report further said.
It said some rls. 2.64 billion of provincial funds have already been allocated to lay the foundation of the industrial park.
The park will be the country's third specialized industrial park after the foodstuff technology and auto parts manufacturing industrial parks established
Iran eager to expand ties with international organisations
First Vice President Mohammad Reza Aref has said here that expansion of ties between Iran and international organisations will promote peace and security in
the region and world, IRNA News Agency has reported.
During a meeting with the World Bank (WB) Managing Director, Shengman Zhang, and Director for Middle East and North Africa Region, Joseph Saba, Aref added
that the Islamic Republic has always announced its readiness for further cooperation with international organisations.
Touching upon the United States' influence and interference in international bodies, he noted that international forums should try to fulfil their duties and
avoid implementing any measure to the benefit of a particular country.
The official further stressed Iran's willingness to make use of the facilities and expertise guidelines provided by the World Bank and to participate in the
bank's economic projects in other countries.
As for the war-shattered Afghanistan, Aref announced that the Islamic Republic is ready to cooperate with the international organisation in the reconstruction
of that country.
Shengman Zhang, in response, expressed the bank's eagerness to enhance ties with Tehran. He referred to Iran's remarkable potentials for progress and
emphasized exchange of various delegations between the two sides.
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