Iran's Real Problem -- The Economy

Political infighting in Iran heated up yesterday when some of President Mahmoud Ahmadinejad's conservative supporters warned him that he might not get a second term in office if he doesn't start towing the line. The warnings came off the back of a tiff over the last couple of weeks between Iran's Supreme Leader Ali Khamenei and Ahmadinejad, in which the former warned the president to get rid of his right hand man, Esfandiar Rahim Mashaie, who was perceived as being a bit too friendly towards Israel. The president ultimately bagged his number two, but only after taking his own sweet time – a slight to Khamenei.

While the conflict is portrayed as a relatively recent event off the back of the election turmoil, the fact is that Ahmadinejad has been increasingly on the outs with conservatives in Iran for many months now, and not because of Israel but because of the economy, which he has notoriously mismanaged. His ill-thought out energy and monetary policies as well as runaway public subsidies have resulted in double digit inflation, rising unemployment, and blackouts. Under Ahmadinejad's watch (and the highest oil prices in decades) the country has become a net gas importer, despite its vast natural resource wealth.

A faltering economy was a key issue in the June 12th elections, but the problems go back farther than that. In January, as the price of oil was falling, the Supreme Leader announced that Iran's new five year development plan, set to come into effect next year, would funnel 20 percent of the country's oil and gas revenues into a new development fund separate from the Oil Stabilization Fund, which, according to many analysts, Ahmadinejad has plundered wildly. "There should be tens of billions of dollars left in the fund, and it's not at all clear that there are," says Alireza Nader, an Iran analyst at the RAND Corporation. "What is clear is that Ahmadinejad gave a lot of the oil money earned in the boom days to friends in the Revolutionary Guard, and to companies started by former Guard officers, often in the form of loans and no-bid state contracts." RAND estimates that such companies, while typically corrupt and inefficient, are now the biggest economic players in Iran, with far-reaching influence in key sectors like manufacturing, construction, and banking.

Analysts inside and outside of Iran say that the creation of the separate fund is proof that the Supreme Leader was beginning to sideline the President, or at least stop him from wreaking more economic havoc, months ago. Now, the political fault lines in Tehran are growing ever more apparent, and that will likely make the country even tougher to govern in the coming months. The implication for markets, according to Eurasia Group Director Cliff Kupchan is "an even further reduced chance that diplomacy with the U.S. will be successful." That means investors will be less likely to want to put much needed investment into Iran, and that could further destabilize the economy, regional trade, and possibly even oil exports. If that happens, the effects would reach far beyond Tehran.

Iran's Real Problem -- The Economy | News