Highlights
– Iran’s Presidential Election to be decided on local economic issues
– President Ahmadinejad holds a distinct advantage, despite a poorly performing economy
– International companies desiring business in Iran will continue to face a worsening economic environment
Economics will determine who will be leading the Islamic Republic of Iran after the June Presidential Elections. Having bought off the rural poor, the majority of Iran’s electorate, President Ahmadinejad has a distinct advantage over any reform candidate. International companies with a desire to do business in Iran will continue facing a worsening economic environment in the near to medium term as the low price of crude oil and high state subsidies bleed the country’s coffers dry while the leadership’s policies stifle any prospect of increased trade.
Electionomics
Having endured three decades of United States embargo, Iran is also dealing with international sanctions imposed because of its clandestine nuclear program and support of international terrorists. Such an environment feeds the rural masses desire for state support in place of international trade. Closed and local perspectives are the realms in which President Ahmadinejad excels. Since taking office in 2005, he has used government funds to subsidize the rural poor of Iran, winning their allegiance to his leadership. He is well known for travelling to the destitute, usually forgotten, parts of the country, with cameras in tow as he opens state sponsored health clinics, provides state purchased farming equipment, and delivers state aid gasoline to run that equipment. The rural masses, who see immediate economic benefits from these visits, love him. He knows this, and will continue using such buying sprees to maintain his support among this decisive voting block.
Limits of Largesse
President Ahmadinejad’s populist policies, funded by the high price of oil until late 2008, are no longer sustainable. Inflation has risen to almost 26 percent, housing prices have tripled, and the government is currently obliged to pay the difference between the international market price of gasoline and the $0.10 per liter charged to its people. Despite these problems, the President will carry the subsidies through the 2009 election campaign in an effort to maintain his constituency. These pay-offs will help win the day, and, in turn, continue bankrupting the country.
Countering President Ahmadinejad without the largess of government coffers, the reform candidates, Mehdi Karroubi and Mir Hosein Mousavi, are at a distinct disadvantage. Aside from the obvious problem of ticket splitting, the reformers have to rely upon the urban populace who has been soured on politics and left in the cold by the current administration’s economic policies. Yet, both Mr. Karroubi and Mousavi are conservative reformers who lack the inspiring appeal to incite reformist minded urban voters off their couches on Election Day. Lacking the ability to bring the urban masses to the polls and the largesse to buy-off the rural voters, reformers will not win Iran’s Presidential Election.
A Bomb On Trade
Iran’s economic position is more difficult than it need be due to the country’s pursuit of nuclear weapons and support of terrorists. Having demonstrated the capability to enrich nuclear material and launch ballistic missiles, Iran is no longer able to cloak its nuclear efforts behind an argument of legitimate civilian use. International sanctions will continue to tighten as long as President Ahmadinejad uses belligerence and rhetoric to maintain the support of Iran’s Supreme Leader, Ayatollah Ali Khamenei, as well as the rural poor.
Halting the nuclear program, ending subsidies to Hamas and Hezbollah, and opening trade relations with the wider world would be less expensive and foster economic growth. Such actions are not forthcoming in the near to medium term. Leadership changes at the Supreme Leader level will be needed before Iran is prepared to fully benefit from rational and mutually rewarding dialogue begun by United States President Barak Obama on March 20, 2009.
Outlook
Companies conducting, or desiring to pursue, business in Iran will face increasing hurdles to trade up to and following the June Presidential Election. Current sanctions will remain in place for the near to medium term as Iran’s weapons policies and support for Hamas and Hezbollah are sustained. Election oriented economics will further deplete Iran’s dwindling financial resources, ballooning its current account deficit. The low price of oil combined with Iran’s lack of refining capacity will keep the pool of foreign reserves small as long as fuel subsidies persist. Some progress in talks with the United States will be made on Iran’s activities in Iraq and Afghanistan, but these will not lead to a lessening of tension or an easing of trade restrictions in the near to medium term.