Iran's Hardliners against Opening up the Economy
Unwelcome European Offer in the Nuclear Conflict

EU negotiators hope that economic incentives will convince Iran to suspend its uranium enrichment program. However, economic cooperation with the West is not nearly as welcome as the Europeans believe. By Michael Heim

Iranian president Mahmoud Ahmadinejad, photo: AP
Promises to integrate Iran in the world economy will not serve to encourage, but rather hinder the cooperation of hardliners on the nuclear issue, says Michael Heim

​​In order to dissuade Iran from resuming its uranium enrichment program, European negotiators are relying on financial enticements. They propose trade agreements with Iran and even accession to the World Trade Organization as means to kick-start Iran's shaky economy.

Yet, the unsuccessful state of negotiations so far indicate that the otherwise reliable method of checkbook diplomacy doesn't seem to be working in Iran. With their generous offer, the Europeans are instead finding themselves entangled in an Iranian domestic power struggle over the regime's most lucrative privileges.

Foreigners not welcome

The Europeans are assuming that Tehran requires economic reforms, investment by foreign companies, and the integration of the country in the global marketplace. This view is also shared in Iran, and not only by reformers. Even among conservatives, pragmatic politicians regard the opening up of the country as long overdue. They see economic reforms as a means to create jobs, thereby avoiding the danger of social unrest.

The most powerful representative of this group is Ali Akbar Hashemi Rafsanjani. He supports the Chinese model of reform – yes to liberalization, but only in the realm of the economy.

There is hardly a consensus on this line, however. Iran's new president, Mahmud Ahmadinejad, believes his country can forego the goodwill of the West. As far as can be ascertained, he will rely on state job-creating measures financed by proceeds from the sale of oil and gas.

The traditionalists in the Islamic regime, which, in addition to Ahmadinejad, also includes Supreme Leader Ayatollah Khamenei, have time and again successfully blocked the activities of foreign companies in Iran. This opposition is not just a mere expression of a backward-looking ideology. It is a matter of money.

The Iranian domestic economy has been akin to a protected biotope, giving rise to a system of privileges and patronage, lining the pockets of the political clergy and assuring its influence. The bonyads, institutions that are both charitable foundations and financial conglomerates, play a considerable role in the system, controlling large property holdings and whole industries.

Their charitable activities, however, are only of marginal interest. The bonyads control airlines, universities, construction companies, and tour operators. They control the market for Coca-Cola, direct banks, and function as ship owners. Apart for the oil industry, the foundations control between 40 and 60 percent of the Iranian economy.

No financial control

This enormous economic potential is neither under public control nor does it face the scrutiny of the tax authorities. The foundations are under the exclusive and direct control of the Supreme Leader of the Islamic Revolution. The proceeds from the bonyads are funneled to the conservative network surrounding Khamenei, who also maintains close personal ties to the foundations through family connections.

The funds serve as a shadow budget, which can be used to bypass the government to make policy as the need arises. They cover costs ranging from the transport of loyal demonstrators to Tehran for mass rallies to the financing of the Lebanese Hezbollah – by-passing any form of control by the government or Parliament, or even providing them with information on such activities. Well-financed through the proceeds of the foundations, the advocates of a hard line maintain a parallel power structure under their exclusive control.

The second economic pillar of the system is the bazaar. The cooperation between traders and the mullahs arose during the reign of the Shah, when he attempted to force the country to modernize and open up to foreign companies. The bazaar traders regarded this as a threat to their trading monopoly and, as a result, threw their support behind Shiite clergymen in opposing the Shah.

In the years following the Islamic Revolution, the alliance between bazaar traders and the mosque has developed into a trusted relationship of give and take, in which the mullahs of the regime profit from donations and, in return, grant the bazaar traders lucrative privileges, such as access to subsidized foreign exchange.

The traditionalists, therefore, have good reason to regard themselves as the advocates of their business partners from the bazaar. They are up in arms over plans by modernizers to open up the country to foreign companies, as was the case under the Shah.

At the same time, the lucrative monopolies controlled by the bonyads would be threatened by the integration of Iran in the global economy. If competitive foreign companies make their presence felt in the domestic market and profits made by the foundations plunge, then the war chest of the group of hardliners at the center of power could take a beating.

Skimming off profits

This all has repercussions for the European attempt to prevent Iran from enriching uranium. Although an economic opening of the country and a stronger commitment by foreign companies might be welcomed from the viewpoint of Iran's modernizers, the plan evokes bitter resistance from hardliners. Their interests are limited to a mere exchange of goods – provided that the current structures remain unchanged and existing monopolies can richly profit as wholesalers.

Restricted trade agreements with Europe are in fact desirable, as profits from foreign trade can be skimmed off by the bonyads and the bazaar. These funds are subsequently diverted to the network of hardliners, stabilizing their informal grasp on power.

On the other hand, proposals, such as promoting the accession of Iran to the World Trade Organization, threaten the material basis of the regime's old guard. Promises to integrate Iran in the world economy will therefore not serve to encourage, but rather hinder the cooperation of hardliners on the nuclear issue.

Michael Heim

© Neue Zürcher Zeitung 2005

The author is a scholar of Islamic Studies and journalist. He lives in Hamburg.

Translation from German: John Bergeron

Nuclear Conflict in Iran
Playing With Fire
The government in Tehran has plenty at stake in its game of cat and mouse with the International Atomic Energy Agengy. What are the political goals of Iran's delaying tactics in the dispute over its nuclear program? Bahman Nirumand reports

EU and Iran
Europe's Controversial Diplomacy
Since Bush declared Iran as being part of the "axis of evil", dialogue between Teheran and Washington hasn't been on the agenda. Meanwhile, Europe is trying to negotiate with Iran. But what will force the ruling clergy to change their ways? By Hamdam Mostafavi

Navid Kermani
"This Rogue Is No Rogue – Because He's My Rogue"
It would be a disaster for Iran if Europe's policy of reconciliation with Tehran were to succeed, according to Iranian journalist and Islam expert Navid Kermani.

Related Topics