Highlights
-Demographic changes likely to challenge current Iranian political makeup
-Newly elected government in Israel to heighten tensions with Tehran
-Plunging oil revenues to have destabilizing effect on Iran
We believe several factors are currently aligning that will force Iran to engage in destabilizing behavior in 2009. Despite what is likely a genuine desire to reduce tensions with the United States—who has combat troops on Iran’s western and eastern borders—by taking advantage of the Obama Administration’s willingness to engage with the Iranian government, the clerical and military hardliners who control the instruments of power are facing three strategic challenges that will mitigate against any moderation.
The result will be continued aggressive Iranian diplomatic and military conduct that will affect politics in the region, aggravate commodities prices such as oil, and round off Iranian economic and social development.
Strategic Challenges
The first strategic challenge is demographics inside Iran. According to 2006 census numbers, nearly a quarter of the Iranian population consists of teenagers; all of whom have little connection to the 1979 revolution. Despite several years of crackdowns, the number of Iranians with access to satellite television, to include western programming, is increasing. Finally, an increasing number of Iranians are connecting to the region and elsewhere due to fewer border restrictions with Iraq. The result is an increasingly young, restless and informed population.
The second strategic challenge is the election of what will likely be a center-right government in Israel. As Likud leader Biniyamin Netanyahu works to form his government, he has left little doubt that the new Israeli administration will take military action against Iran—primarily its nuclear programs—if Israel believes its is at imminent risk. Iranian leaders cannot ignore this diplomatic pressure from Israel, opening the possibility of an escalation in rhetoric and possible conflict once the new Israeli government is in place.
The final strategic challenge is the recent plunge in oil prices, which has left the Iranian government with little additional financing to continue subsidies and social programs it implemented over the last several years when flush with cash. With the price for a barrel of crude below $40, down from a high in 2007 of $147 per barrel, Iran is cash strapped. This week the Iranian government called for a new round of Organization of Petroleum Exporting Countries (OPEC) supply reductions to stabilize prices at current levels. Falling oil prices combined with ongoing United Nations Security Council sanctions is crimping Iran’s fragile economy.
Outlook
As a result of these three challenges, we believe the Iranian government will be forced to continue and escalate harsh rhetoric designed to externalize enemies and draw popular attention away from diminished social services resulting from declining oil revenue. Iran faces many challenges, and even a few enemies, and will make the most of them in order to preserve its current governmental design and structure. We assess these tactics to work in the favor of the current government, allowing Iran to realize relative levels of internal stability. The price for such rhetoric, however, will be jangled nerves and seesaw oil prices for the foreseeable future.