Richard Melson

June 2006

MERIA Iran Future

http://meria.idc.ac.il

the GLORIA Center,
Interdisciplinary Center, Herzliya

MERIA Journal V.10, N.2 (June 2006)

IRAN: THREE ALTERNATIVE FUTURES

Kenneth M. Pollack*

This article is part of a paper originally written for a project and conference on "Stability, Crises, and Democratization: The Arab World's Direction and the European Interests," co-sponsored by the GLORIA Center and The Military Centre for Strategic Studies (CeMiSS) of Italy.

This article discusses potential futures for Iran, taking into account international, domestic, political, and economic issues. It analyzes the question of Iran's nuclear efforts focusing on three possible outcomes: 1) a victory for the hardliners and continuation of the nuclear program; 2) the pragmatists and reformers prevail and the Iranians make concessions in order to prevent sanctions; or 3) a prolonged stalemate between Iran and the international community.

The critical issue facing Iran today is its nuclear stand-off with the international community. While this point is self-evident, what is often not is that the resolution of this crisis is likely to affect profoundly the future course of the Islamic Republic of Iran, not just in terms of its foreign policy, but also in terms of its domestic politics, its economy, and potentially even the nature of the state itself. Within the Iranian regime, the nuclear stand-off is intimately bound up with a series of other critical issues--Iran's relationship with the West, economic reform, and the legacy of the 1978 revolution. Thus, the outcome of the nuclear crisis is likely to affect, if not determine, the outcome of these other debates, which in turn are vital to Iran's medium- and possibly long-term future. It is for this reason that the nuclear stand-off has the potential to shape Iran's future in areas far beyond the traditional security sphere.

THE IMPORTANCE OF THE NUCLEAR STAND-OFF IN THE ECONOMIC SPHERE

Iran's economy is in desperate need of reform. It is crippled by corruption, with an estimated 40 percent of Iranian GDP accounted for by the Bonyads--nominally charitable foundations established to administer the Shah's assets on behalf of the Iranian people, but in actuality massive corruption machines that bankroll the senior leadership. The problem of corruption has reduced liquidity, frightened off investment, boosted inflation, spurred widespread unemployment, diminished non-oil exports, impoverished the middle class, and created a very serious gap between rich and poor. Iranian economists regularly observe that Iran must either embark on a major anti-corruption campaign or else find ways to generate huge amounts of investment in the Iranian economy. Indeed, Iran's latest five-year plan calls for $20 billion in investment every year, in addition to $70 billion to recapitalize Iran's decrepit oil industry.

The problem for Tehran, as many Iranian economists note, is that there are only three capital markets in the world capable of generating such levels of investment in Iran over the next five to ten years: the United States, Europe, and Japan. Much as Iranian hardliners would like to believe that the Russians, Chinese, and Indians could substitute for the West, they cannot--and will not be in a position to do so for about a decade. In addition, there is the issue of superior Western technology: The Iranians would much prefer to have Exxon or Shell repairing their oil infrastructure, rather than Lukoil or Sinopec.

Nor have rising oil prices alleviated the situation. Due to the extent of corruption, little of Iran's windfall oil profits are reaching the Iranian middle and lower classes. Too much is being diverted to the ruling theocracy--and from them being diverted back out of the country in many cases. As a result, recent visitors to Tehran report that not only is the economy continuing to deteriorate despite Iran's increased revenue, but tempers are beginning to fray. The Iranian people know that their government is making huge amounts of money from high oil prices and are even angrier that they are not reaping any of the rewards. Indeed, the situation is somewhat analogous to that before the 1978 revolution, when the massive increase in Iranian oil revenues from the 1973 price hikes caused a corresponding increase in state revenues but corruption prevented much from trickling down to the people. Without overstating the gravity of the current situation, it is worth noting that leading authorities on the Iranian Revolution all believe that this was an important element in sparking the revolution against the Shah.

Iran's need for foreign (particularly Western) capital ties its long- and even medium-term economic health to the nuclear stand-off. If the Western nations decide to impose serious economic sanctions on Iran to punish it for its recalcitrance or try to coerce Tehran into abandoning its pursuit of the nuclear fuel cycle, this could have a very deleterious effect on Iran's economy. This would be especially true if these sanctions were to preclude Western investment in Iran, which could have a dramatic effect on Iran's economic fortunes.

What's more, for the past 15 years, the greatest (but not the only) source of popular animosity toward the regime has been the poor state of Iran's economy. Indeed, the Iranian people elected Mahmoud Ahmadinejad president not to pursue nuclear weapons, but to reform the economy and fight corruption--neither of which he has even made a realistic start on. In November 2005, President Ahmadinejad announced that the government would begin to distribute shares of Iranian publicly-held industries to the entire populace. Rumors quickly spread that this was a preliminary step to the seizure and redistribution of many private industries and other assets, and the result was a vast, sudden flight of capital out of Iran, possibly on the order of $200 billion. This, coupled with Ahmadinejad's outrageous call to wipe Israel off the map and Tehran's foolish and ill-considered "World without Zionism" conference caused the Tehran stock market to collapse. Not surprisingly, recent visitors to Tehran report that growing public unhappiness often extends to Mr. Ahmadinejad because people feel that he has betrayed them by doing nothing on the economy or to curb corruption. Despite the common wisdom in the Western media that Iranians have universally rallied around Ahmadinejad on the nuclear issue, visitors to Tehran report a much more complicated picture: Many Iranians believe that the nuclear issue should not be their first priority and fear that it will increase their international isolation, which they know will have a negative impact on their economy.

THE IMPORTANCE OF THE NUCLEAR STAND-OFF IN THE POLITICAL SPHERE

The interrelationship among the nuclear confrontation with the West, the needs of Iran's economy, and the question of improved ties to the West (which many pragmatic Iranian leaders recognize as critical in order to deal with the needs of the economy) creates the potential for profound splits within the Iranian body politic. Westerners frequently, and mistakenly, assume that the Iranian regime is monolithic, but exactly the opposite is the case. Iran's is one of the most fragmented governments in the world. The great Persianist R. K. Ramazani once described Iranian politics as "kaleidoscopic," by which he meant that it was divided up into a thousand individual pieces, all of which lined up differently whenever the issue changed.

Of course, there are some individuals who tend to be more closely aligned with one another on these issues and it is necessary to group them into some broad categories, if only for descriptive purposes. In that sense, it is reasonable to speak of four broad positions within the Iranian political system:

In the current nuclear stand-off, Khamene'i would like very much to continue to hew to this fence-straddling line and avoid having to make a choice between bombs or butter. Unfortunately for him, the new determination of the Europeans to prevent Iran from acquiring a nuclear weapons capability has threatened to push him onto the horns of a dilemma and force him to make precisely this unpalatable choice.

Thus the current Iranian position of threatening to resume full enrichment and even withdraw from the NPT is best seen as a compromise between the hardliners and the mainstream conservatives. The hardliners like it because they have no interest in improved relations with the West and simply want the nuclear capability. The mainstream conservatives are willing to pursue it for a very different reason. For them, it is probably a way to "call Europe's bluff." Given the European record throughout the 1990s of being unwilling to follow through on any threats to get tough with Iran, Tehran no doubt believes that they will not do so this time. Most Iranian policymakers doubtless believe that taking a tough line will force the Europeans into a difficult position where they will, once again choose the economic benefits of trading with Iran over imposing meaningful sanctions in the hope of stopping the nuclear program. If this gambit pays off and the Europeans prove unwilling to impose such sanctions, then the Iranians will again have the fortuitous circumstances they enjoyed during the 1990s of being able to have their cake (the nuclear program and support for terrorism) and eat it too (the trade and investment they need from Europe and East Asia).

What emerges from this quick taxonomy of the Iranian political scene is that there are serious differences among these different groups which the nuclear debate could transform into outright schisms. In particular, if the West remains united and is willing to impose harsh sanctions on Iran in order to coerce Tehran into giving up the nuclear program, the pragmatists (and the reformists, to the extent they matter at all) might well make an open break with the hardliners, while the mainstream conservatives would likely find themselves caught in the middle and forced to choose between the two. The consequences could be far-reaching in terms of determining the future composition of the Iranian regime, and, therefore, the course of Iranian policy.

At present, Iran's internal politics remain fragmented and deadlocked. As the hardliners, pragmatists, and mainstream conservatives have dramatically different ideas about how to address Iran's economic needs, its relationship with the rest of the world (and particularly the United States), its security situation, its foreign policy, and its cultural policies, they have not been able to make any kind of dramatic move to deal with their many problems.

The nuclear issue lies at the intersection of all of these differences and is of such importance that a clear policy choice by Tehran will only be possible if there is a clear-cut victory by one or another of these groups over its rivals. Moreover, the corollary is also true: A clear decision by Iran on the nuclear issue will entail a clear-cut victory by one of these factions in the internal political battles for control of the Iranian polity. In other words, the only way that the Iranians are going to give up their nuclear program to improve their relations with the West is if there is a fight to the finish in which the pragmatists win and end up in full control over all aspects of Iranian policy. Likewise, the only way that the Iranians will simply dismiss the international community and opt for all-out enrichment will be if the hardliners prevail in such a contest and effectively eliminate the pragmatists as a force within Iranian decisionmaking. Thus, because the stakes are so high for Tehran, the Iranian nuclear issue has the potential to break the logjam in Iranian politics and hand over control of the government to one of these factions, inevitably entailing major shifts in policy on a variety of other critical matters.

Given these variables, it is possible to sketch out three potential scenarios for Iran over the next two to five years based largely on the near-term outcome of the nuclear stand-off, which remains the key variable for Iran's future--internationally, domestically, and economically.

Scenario 1: The Hardliners' Ascendant

If the nuclear stand-off ends quickly in an Iranian victory, this is likely to tilt power heavily toward Iran's hardliners who will be able to impose their preferred policy options on the Iranian government. In this case a "victory" would mean that the international community was unable to agree on an approach that either forced Iran to give up its nuclear program or else inflicted such heavy penalties on them for continued recalcitrance that the public would view a stubborn continuance of the program as worse than a pyrrhic victory. In these circumstances, the hardliners will be able to claim that they were right: that the West needed them more than they needed the West (as Mr. Ahmadinejad has stated) and that they did not need to fear any diminution of European and Japanese economic ties. It will be a major victory for the hardline position, and would effectively discredit both the pragmatists and the mainstream conservatives (who sympathize with the pragmatists' concerns about the economy).

The result would likely be increasing dominance of the entire government apparatus by the radical hardliners, with concomitant results for policy. In foreign affairs, it would likely mean a resumption of aggressive Iranian support for terrorism and active opposition to any Middle East peace process. It likely would also mean opposing political reform in countries like Syria and Lebanon, possibly coupled with renewed efforts to destabilize status quo governments in the region (as they did with Saudi Arabia, Kuwait, and Bahrain in the 1980s and 1990s). Since the hardliners also reportedly favored a much more active effort to hurt the United States in Iraq, depending on the status of that conflict, it could mean greater and more lethal Iranian assistance and encouragement to various Shi'a militias to fight both the Sunnis and potentially the Americans as well--something that largely has not happened in Iraq so far.

In terms of domestic politics, the triumph of the radical hardliners could mean the re-imposition of strict social codes over dress, gender interaction, and other forms of behavior. Not that they need much encouragement, but it probably would convince governmental organizations like the Council of Guardians to act even more arbitrarily to exclude reformists and pragmatists from government, and the Basij and Ansar-e Hizballah to be even more willing to use violence to enforce their vision of the Islamic revolution. It could lead to crackdowns on other areas of Iranian political life that have so far been left untouched. Iran's relatively free media would be one obvious target.

The most important question mark would remain the economy. The hardliners don't have any good solutions for how to fix the economy. Ahmadinejad's proposals amount to discredited versions of 1970s socialism that would only make Iran's economic situation worse than it already is. Many simply don't care about the economy, quoting Khomeini that "we did not make the revolution to change the price of melons." They will certainly block the reformist/pragmatist solution of developing greater ties to the West by an amelioration of those policies that the West finds offensive (like the nuclear program and support for terrorism). This, in turn, could still place limits on the extent to which European and East Asian countries would be willing to deal with Iran. Thus, the economy might continue to worsen. In this case, there could be greater social unrest, which the hardliners would likely deal with through violence.

However, if the Europeans and Japanese chose to keep trading and investing in Iran at pre-2002 levels (which would require a stunning degree of fecklessness but certainly cannot be ruled out), this might allow the economy to keep stumbling along as it is without actually collapsing. This too would produce a (lesser) increase in popular unhappiness, but again, the willingness of the hardliners to use force makes it unlikely that this would amount to much in the short- to medium-terms.

Thus, because of the ascendance of Ahmadinejad and his allies in the Abadgaran movement, a bad outcome in the nuclear dispute suggests that we might have the bad old Iran of the 1980s back--which is certainly what they hope to accomplish.

There is at least one other path to this outcome that could result from the current nuclear stand-off. If the United States were to launch military strikes against the Iranian nuclear program, it seems most likely that this would result in the same hardliner victory in Tehran. Obviously such an unprovoked act of war would throw a great many things up in the air, but it seems most likely that doing so would once again play into the arguments of the hardliners: They would be able to claim such attacks as proof that the United States sought to destroy the Islamic Republic and subjugate Iran; they would be able to argue that such an attack increased the importance of acquiring nuclear weapons to deter future American military operations, and many Iranians probably would be more willing to tolerate economic problems if they believed it necessary to make sacrifices to fight a war against the United States. It would simultaneously discredit the reformists and the pragmatists for having argued for better relations with the United States and might provide an excuse for the hardliners to crack down hard on even the mildest forms of dissent.

Consequently, a U.S. military operation ironically could have the same impact as a Western failure to deal firmly with Iran's nuclear program: it could allow Iran's radical hardliners to marginalize the reformists and pragmatists and to take more complete control over Iranian policy and governmental organizations. In other words, both of the extreme options being considered by Western governments to deal with Iran's nuclear program--military strikes or caving in to Tehran--would likely produce the same terrible (from a Western perspective) outcome with regard to the future of Iran.

Scenario 2: The Pragmatic Solution

If the international community remains resolute, united, and willing to impose heavy economic sanctions on Iran to coerce it into abandoning its nuclear program, it could produce a very different outcome over the medium-term future. These are exactly the circumstances that Supreme Leader Khamene'i has been hoping to avoid, because they will force him to make a choice between Iran's economic health (favored by the reformists and pragmatists) and pursuing the ideals of the revolution (favored by the hardliners and embodied presently in the nuclear program). There is certainly a very real prospect that faced with such a choice, Khamene'i would choose to cut off Iran's nose to spite its face and side with the hardliners. If that were the case, it would be the same outcome as scenario one, above. However, it seems at least as likely, and arguably more so given the concessions he has already made over the years to prevent European economic sanctions, that he would choose to give up his nuclear program in return for a lifting of sanctions, trade and investment, and nuclear energy and security guarantees from the West, particularly the United States--assuming such carrots were on offer. It would mean Khamene'i will have sided with the pragmatists over the hardliners and, because the hardliners are highly unlikely to ever give up on these issues, it will mean that they will have been routed in the internal political battles.

Although such an outcome might be deleterious to the preservation of the ideals of the Islamic Revolution (and it is clear that Khamene'i understands the kind of titanic battle that he would have to wage to achieve this), it would likely be the best possible result for the Iranian people. With the technocratic pragmatists firmly in charge and a new economic agreement reached with the West, Iran would have its best chance to reform and rejuvenate its economy. As many of the pragmatists have placed maintaining public support for the regime ahead of adherence to Khomeini's ideology, many more social codes might fall by the wayside. There might also be an additional loosening of the political system because the pragmatists have typically been less willing (although not unwilling) to use force to deal with internal dissent.

Interestingly, this suggests that the best policy for the West to pursue toward Iran would be one of "tough love:" imposing harsh sanctions on Iran to provoke a major internal brouhaha that could (and arguably would likely) produce a clear-cut victory for the pragmatists over the hardliners. Since both the Iranian people and the West would likely be better off with the pragmatists in charge in Iran, this would be their ideal outcome. Of course, it should always be remembered that even if the West is able to provoke such an internecine crisis, in Iran the ending could never be certain.

Scenario 3: Prolonged Stalemate

The most likely outcome of the current nuclear stand-off may also be the most unstable for Iran's medium-term future. The most likely result of this impasse is prolonged stalemate between Iran and the international community, which would prolong the stalemate among Iran's competing political factions.

Tehran's admitted efforts to procure the entire nuclear fuel cycle for little obvious civilian purpose, its aggressive defiance of the international community, and its rejection of compromises by the EU3 and Russia make it likely that Iran will remain an international pariah and so preclude the clear hardline victory postulated in scenario one, above. However, the European countries (not to mention Russia and China) do not seem willing to apply the kind of economic sanctions on Tehran that could produce a major change in Tehran's behavior and produce the "Pragmatic Solution" of scenario two, above. Instead, Iran seems most likely to remain in diplomatic limbo, with its pursuit of nuclear enrichment souring relations with many states, but not enough to actually put it under severe international sanctions.

This outcome would produce only a mild form of pressure on Tehran, probably not enough to force the kind of knock-down drag-out fight that could result in the ascendance of either the hardliners or the pragmatists.[1] Instead, it could create a situation like that of the proverbial frog in boiling water: Since the heat will only be turned up gradually, the water may boil before the frog realizes it. In the same way, the prolonged nuclear stand-off will mean that there will be no major internal battle and therefore no decisive victory by one side or the other. Under these circumstances, it is unclear whether the clerical regime will recognize its looming dilemmas in time and will prove able to devise effective solutions or be able to adapt to changing circumstances in time to stave off disaster.

The economy will likely be the principal mover. Unemployment, inflation, growing wealth distribution gaps, and a host of other economic problems will gradually worsen, making the daily lives of average Iranians ever harder. Even with oil selling above $60 per barrel, most Iranians have so far seen little improvement to their lives, because most of the money is siphoned off through corruption, and this will likely continue. The continued deterioration in economic conditions, and the unhappiness they spawn, will likely continue to fuel other problems like explosive growth in narcotics use, prostitution, unwanted pregnancies, and--of greatest importance--political opposition to the regime. Iranians are livid with the rampant corruption that plagues their economy and that they believe (correctly) is the principal source of their misery; this too will undoubtedly deepen as the economic situation continues its slow decline. In particular, corruption is the main reason that while Iran's oil revenues have gone through the roof in recent months, virtually none of its new wealth has found its way into the pockets of the average Iranian.[2]

Although he was elected on a platform that featured anti-corruption, it seems highly unlikely that Ahmadinejad will be able to do any better at alleviating the plight of the Iranian people than Khatami did, and he might very well make their circumstances even worse. Ahmadinejad is committed to fighting corruption, but it is hard to imagine that the regime will allow him to do anything meaningful, because it is the regime itself that is the principal engine and beneficiary of the corruption. He might be allowed to pursue some smaller fish, but probably will not be able to touch the real graft in the system.

Likewise, Ahmadinejad also ran on a platform of economic reform, but his vision of economic reform was an unsophisticated version of 1970s socialism. Unfortunately, Iran needs less socialism, not more. It needs fewer price controls, more privatization, more private investment, and more free enterprise. Therefore, Ahmadinejad's proposed ideas would probably only add to the paralysis in the Iranian system. Although the high price of oil is serving to buffer Iran's economy in the short run, if the current situation regarding Iran's nuclear program persists, it is unlikely that Iran will receive the investment it needs from the West. Even if there are no formal sanctions, few firms are going to want to do business with Iran. Indeed, starting with the IAEA's censure of Iran in September 2005, the credit rating of the Iranian government has fallen, Western businesses have pulled out their capital, and other firms are pursuing investments elsewhere.

All of this presages a worsening of Iran's internal economic, and therefore political, conditions. Moreover, additional factors can be added to the mix, although they would not necessarily follow from the scenario outlined above. If the hardliners are (as they are attempting) able to re-impose some social strictures, this will further antagonize many young Iranians; however, if they do not hold complete control in Tehran, the regime might not be willing to employ the kind of force that would be needed to snuff out popular demonstrations against the worsening economic and social circumstances. To this can be added the very real possibility of civil war in Iraq, which would both spill instability into Western Iran and inevitably trigger a very significant (and therefore costly) Iranian intervention, either overt or covert.

Thus, it appears that over the course of the next two to five years, the Iranian regime could easily face a series of economic, political, and diplomatic crises for which the regime is ill-prepared. At that point, the regime will likely find itself forced to make the kind of hard choices that this scenario assumes it did not have to make as a result of international pressure over the nuclear issue. In this sense, it would amount to merely delaying this debate. However, delaying this debate would be potentially very harmful to the Iranian regime. Under this scenario, this political battle would be taking place at a later date in circumstances of worsened economic straits, greater popular unhappiness, and potentially serious external problems (like civil war in Iraq) as well. At that point, to suddenly open up a vicious political debate that has been simmering for decades would be to invite events to spin out of control in many directions. In fact, at that point the possible paths that the scenario could take multiply to such an extent that it is not worth commenting on. Yet what would be clear is that it could be opening Pandora's box for the Iranian regime.

It would be premature to write the obituary of the Islamic Republic, and it seems most likely that even in this scenario it would survive, albeit in weakened and changed form. However, because the Iranians themselves do not yet recognize that many of the paths they are currently staking out are likely to crash into one another, it is impossible to predict how they would react. In the past, Khamene'i has managed to impose a number of "muddle through" compromises that allowed Iran to survive difficult circumstances, and he may well be able to do so again. There is, however, no guarantee. Thus, oddly enough, the scenario that might be most dangerous for Tehran over the longer-term is that which seems least dangerous in the short-run--maintaining some form of the status quo and simply stringing out the entire nuclear confrontation.

* Kenneth M. Pollack is Senior Fellow and Director of Research at the Saban Center for Middle East Policy at the Brookings Institution. He is the author of, most recently, The Persian Puzzle: The Conflict Between America and Iran (Random House, 2004), and A Switch in Time: A New Strategy for America in Iraq (Brookings, 2006).

NOTES

[1] This is another reason why this scenario is the most likely: it preserves the primus inter pares status of Supreme Leader Khamene'i by allowing him to continue to balance between the hardliners and pragmatists. Thus, the mainstream conservatives will likely be aiming to create such an outcome.

[2] Ironically, the election of Mahmoud Ahmadinejad was actually an important expression of Iranian popular frustration with the regime (even though it seems entirely likely that his election was partially the result of fraud). Although Western accounts have generally labeled him a "hardliner" and lumped him in with other regime supporters, Ahmadinejad's relative popularity should not be seen as an endorsement of the status quo--in fact, quite the opposite. Although Ahmadinejad is a hardliner and a devoted follower of Supreme Leader Khamene'i, he is no conservative. He is a radical reformer, and that is why the Iranian populace chose him over Hashemi Rafsanjani, the ultimate symbol of Iran's corrupt and ineffective establishment. In 1997, Iranians voted for change in the form of Muhammad Khatami and the reformists, which represented the Left's version of change. Unfortunately, the Iranian people felt betrayed by Khatami, who lacked the courage of his convictions and who they believe failed to make any meaningful changes in their lives (an unfair judgment, but a common one). Therefore, in 2005, they veered to the other extreme and voted for the Right's version of change.

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MERIA Journal V.10, N.2 (June 2006)

Pollack: Iran: Three Alternative Futures

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