Iran's uneasy agenda

Frontline:

Aug 13, 2005

SHUBHA SINGH

recently in Teheran

New President Mahmoud Ahmadinejad is all set to concentrate on reviving the domestic economy, especially the oil sector, which has been stifled by U.S. sanctions.

THE June 24 election of Mahmoud Ahmadinejad as the sixth President of the Islamic Republic of Iran has generated a lot of uncertainty about the country's future policies, with Western capitals even describing it as a return of the mullah rule. Ahmadinejad had gained a reputation of being an ultra-nationalist as he campaigned on a populist wicket that focussed on unemployment, corruption and an independent nuclear programme.

A former member of the Islamic Revolutionary Guard Corps (IRGC), Ahmadinejad became visible nationally only after his appointment as Mayor of Teheran in 2003. His main opponent in the second round of the presidential election was veteran politician and former President Akbar Hashmi Rafsanjani, whose personal wealth served as a stark contrast to the simple, even austere lifestyle of the Mayor. Rafsanjani, who was President for two terms during 1989-1997, had spoken of building ties with the United States. In line with international trends, the moderate politician also favoured loosening government controls on the economy. Ahmadinejad concentrated instead on returning to the spirit of the Islamic Revolution of 1979, recalling the heights of the anti-American feeling in Iran at that time.

The Western press called Ahmadinejad Iran's first non-cleric President in 24 years. But the new President is considered a conservative with Islamist views. Many young people in Teheran expect him to put an end to the social freedoms that were returning to the Iranian society in recent years and bring back the stricter practice of Islamic precepts.

In fact, the election was widely perceived as a battle between the moderates and the conservatives, but instead it became a tussle between the rich and the poorer sections of society. The poor had come to believe that the reforms process initiated by the outgoing President Mohammad Khatami had benefited only the rich.

During the election campaign, the moderates and the pro-reforms groups got identified with the corruption and sloth that existed in the bureaucracy and economic stagnation. Ahmadinejad focussed on domestic issues such as poverty, social justice and distribution of the oil wealth among the people.

The U.S. government's confrontationist policies towards Iran, including threats to take it to the United Nations for possible sanctions as a punishment for its nuclear programme, pushed Iranians into a more radical frame of mind and resulted in the election of a candidate they saw would be capable of standing up to the U.S. (Iran's Supreme Leader Ayatollah Ali Khamenei even described the election result as a "profound humiliation" for the U.S.) Many European governments have opposed the hard line adopted by the U.S. and instead favoured a policy of engagement with the government in Teheran in order to persuade it to make its nuclear programme transparent.

Several newspapers have commented on the American unease over the warming up of relations between Iran and Iraq. Putting aside the pain of the eight-year-long war with its neighbour, which resulted in the death of a million peoplem, Teheran welcomed Iraqi Prime Minister Ibrahim Al-Jaafari to the country on July 17. Al-Jaafri, who had spent several years in exile in Iran during the Saddam Hussein regime, was accompanied by 10 Ministers. Several agreements, including a proposal to build a pipeline to meet Iraq's urgent need for petroleum, were signed during the landmark visit. Ayatollah Khamenei said that an "independent, unified Iraq was a top priority for Iran". The English language newspaper published from Teheran, Iran Daily, wrote: "The Iraqi nation is the true brother of the Iranian nation. People of Iraq hated the measures adopted by the former Ba'athist regime during the Iraq-imposed war (1980-88). The ouster of Saddam Hussein was good news to both people of Iraq and Iran."

In his initial statements after the election, Ahmadinejad said that his priorities would include stimulating domestic production by rooting out corruption and removing barriers to investment.

THE Iranian economy is going through a bad phase; unemployment levels are officially pegged at 14 per cent, while the rate of inflation is 15 per cent although the real rate of inflation is around 25 per cent. The cost of living has doubled in four years, according to residents of Teheran. About 40 per cent of Iranians live below the poverty line.

Iran has a rapidly increasing young population with about 70 per cent of its people below 30 years. There are few job opportunities for the youth. The state provides large subsidies on several basic goods as a means to redistribute the oil wealth. The major part of the economy is in government hands but the inefficient public sector has meant economic stagnation.

Keeping the expectations of his voters in mind, the new President's immediate priority would be domestic economic issues. One area that will draw his attention is the oil sector, for he has been critical of "mafias of power and factions which have a grasp on our oil".

Ahmadinejad has taken over at a time when Iran has a comfortable surplus because of the high international price of oil. (Petroleum is heavily subsidised in Iran with a litre of petrol costing Rs.4 in Teheran.) Oil revenue above the level of $19 a barrel goes into a separate fund called the Oil Stabilisation Fund. The fund is meant for modernisation of industries, including the oil sector. Iran has been opening the oil and gas sector for upgrading the existing facilities and exploration and development of new oil fields. The country relies mainly on its oil revenues. Eighty per cent of the state revenues come from oil. The oil sector has been the target of criticism in the Majlis (Parliament). A major shake-up in the oil industry is expected with some significant policy changes in this vital sector.

Khatami's efforts at privatisation of industries, including the energy sector, turned the utilisation of natural gas reserves into a controversial political issue. A section of the Majlis is opposed to the sale of natural gas to foreign buyers. In the past decade, the domestic consumption of natural gas was increased by substituting subsidised gas for oil in order to make more oil available for export. Some international oil technologists have predicted a rapid depletion of oil production in Iran and believe that the country must use advanced recovery techniques to sustain its production levels. The Iranian government will need technical expertise as well as capital resources from international oil companies to modernise sections of its oil industry, they feel.

The broad economic sanctions imposed by the U.S. since 1979 have hampered the growth of the energy sector in Iran. In 1996, the U.S. Congress passed the Iran-Libya Sanctions Act (ILSA). It forced the U.S.-based Conoco company to give up a $550 million contract for off-shore oil field development, which eventually went to the French company Total, and Petronas of Malaysia. In 1997, regulations were tightened to provide for mandatory or discretionary sanctions on foreign companies that provide investments of more than $40 million for the development of petroleum resources in Iran. The American legislation has never been invoked and it did not stop European companies from bidding for Iranian contracts, but it effectively restricted major foreign investment in the Iranian oil sector.

According to some estimates, Iran is said to have the world's second largest natural gas reserves "at an estimated 812 trillion cubic feet (tcf)".. The group opposed to exports of Iranian gas and liquefied natural gas (LNG) contend that the demand for gas would rise for both domestic consumption and oil field injection in the next decade. They estimate that Iran needs gas injection into 30 oil fields to maintain production levels and that only a fraction of the gas required is being injected at present.

The head of the Energy Committee of the Majlis, Kamal Daneshyar, said that 20 billion cf/d of gas would eventually be required for oil field injection to step up oil production, and this gas would have come from the South Pars fields. Daneshyar is against exporting natural gas or even LNG to India. Most analysts believe that Iran will not renege on existing contracts but proposals under discussion could be open to reconsideration.

THE debate over gas exports is of recent origin. Iran's interest in the gas pipeline is long standing and is linked to the criticism of the functioning of the country's oil companies. Teheran began making efforts to promote gas exports shortly after the discovery of huge natural gas reserves in its South Pars fields in 1988. India and Pakistan were the natural markets for its natural gas, since the energy demands in both countries were increasing and their own gas reserves were low. As Indian Prime Minister Manmohan Singh said in a newspaper interview during his visit to Washington, there are many uncertainties about the pipeline proposal, including the forming of an international consortium to handle the project. The question of availability of gas adds another uncertainty to the project.

The spokesperson for the Iranian Foreign Ministry, Hamid Reza Asefi, was sanguine about the Iran-Pakistan-India pipeline proposal. He said that Iran, Pakistan and India had made good progress on the proposal. The meetings among the three sides were an important first step, he said, adding: "The political will is there, and the rest will come."

Asefi said the President had stated that he was interested in having good relations with Iran's neighbours, Asian countries and countries with traditional ties with Iran, such as India, Russia and Pakistan.

India and Iran have a broad-ranging relationship that was built up in the past decade. The bilateral relations began warming up after the visit of Prime Minister P.V. Narasimha Rao to Teheran in 1993. Since then the relationship has expanded into a variety of sectors, and Iran has emerged as India's major energy supplier. India and Iran signed an agreement earlier this year for the sale of 5 million tonnes of LNG with an additional proposal of 2.5 million tonnes a year. India has indicated its interest in upgrading refineries in Iran for which it has the requisite technology. Indian oil companies are in the running for prospecting and developing in the Iranian oil sector.