Battling For The Soul Of Iran

The stakes are huge as Khatami challenges hard-line mullahs

There's a hum these days in the cavernous lobby of Tehran's Esteghlal Grand Hotel--the sound of dealmaking. In one corner, four Japanese executives sip tea and flip through blueprints for a power plant they hope to build. In another, engineers from France's huge oilfield services company, Schlumberger, quietly discuss their growing Iranian business. And local businessmen work their cell phones, as common in Tehran as in Rome or Paris these days.

But just a mile across this sprawling city of 14 million, a different drama is playing out. On the campus of Amir Kabir University, around 2,000 Islamic fundamentalists howl down a moderate Muslim scholar who advocates separating mosque and state. His supporters fight back, and several people are stabbed. Others are bundled into Mercedes-Benz sedans belonging to the blandly named Information Ministry, the feared intelligence service of the Islamic Republic of Iran. "There was a lot of blood," says a witness.

Daily street violence is the outward sign of a vicious and unpredictable power struggle unfolding in Iran. New President Mohammed Khatami is struggling to assert his authority over Iran's conservative mullahs, who still wield enormous power. In May, Khatami won 70% of the vote riding a wave of popular discontent with Ayatollah Khomeini's corrupt and incompetent successors.

It's a battle for the soul of Iran. If Khatami prevails, he has a fighting chance of giving Iran's government a human face. That could mean real political parties and looser controls over the media. In turn, a democratic Iran could help ease tensions in the region--and even with the U.S. But the conservative mullahs fiercely resist any change threatening their autocratic powers.

VITAL LINK. The stakes are huge. Iran has one of the world's most strategic geopolitical locations. It bestrides the land bridge between the Middle East and Asia. It is the globe's second-biggest oil exporter after Saudi Arabia and has gas reserves second only to Russia's. It commands the sea arteries that pump Gulf oil to Western and Asian economies and can provide the shortest and cheapest route to bring vast new Caspian Sea energy supplies to market. "It's the vital link between the Caspian Sea and the Gulf and on to the Indian subcontinent," says Mehdi Varzi, Dresdner Kleinwort Benson's research head.

The mullahs' rule has been disastrous for the economy. Rigid labor and tax rules cripple manufacturing, now operating at barely 30% of capacity. Unemployment is about 40% and inflation double the officially stated 18%. The economy is sealed by protectionist laws that control or forbid the import of most goods.

Western money and politics may play a big role. Iran needs foreign investment in the oil industry to fund its budget and bankroll the public sector, which accounts for 85% of its economy. Many Europeans believe that such involvement can give them a chance to nudge Iran toward moderation. But the U.S. remains hostile to any effort to help Iran.

All the same, Iran is gaining acceptance abroad. Officially at least, it preaches good neighborliness. In mid-November, European nations quietly restored normal diplomatic relations after a seven-month spat over alleged official support for terrorists. Besides, on Dec. 9-11, Iran will host an Islamic summit of 52 nations, including American allies such as Saudi Arabia and Kuwait. "Our isolation is over," brags Hossein Nosrat, a top official of Iran's Islamic Guidance Ministry.

With Europeans, Arabs, and Russians flocking back and signing huge oil and gas deals (chart), America's hardline policy on Iran is in tatters. The eerie absence of American goods in cosmopolitan Tehran--no Coca-Cola, no McDonald's, and virtually no American cars made after 1980--mirrors America's lack of influence.

Despite Khatami's election, the U.S. Administration is unbending. "Our view is that you have to isolate and contain Iran," says Stuart E. Eizenstat, undersecretary of state for economic affairs. The stance guarantees the U.S. will have little role in determining whether the Iran of the 21st century will be a force for moderation in the world's most incendiary region or revert to being dangerous and destabilizing.

Changing Iran is a Herculean task. Khatami, a former culture minister, promises reform but is vague on details. A presidential commission, due to report soon, is expected to suggest steps such as cutting red tape and ending sudden changes in business regulations.

But the conservatives have dug in for a long night of political attrition. The unpopular Ayatollah Sayed Ali Khamenei, Supreme Spiritual Leader, Iran's highest office, controls foreign policy, the armed forces, and public broadcasting. The heavily guarded 17-story headquarters of the Bonyad Mustazafan ve Janbazan, Foundation of the Oppressed and the Disabled, is also a profound symbol of the revolutionary mullahs' power. Created to take over assets of the former Shah, the foundation owns a domestic airline, as well as shipping companies, real estate, and industrial concerns--accounting for about 25% of the economy. Chairman Mohsen Rafikdoost, Ayatollah Khomeni's former driver, answers only to Khameni. "Khatami's opponents haven't lost anything except the elections," says Ibrahim Yazdi, a former Foreign Minister.

Even so, Khatami's victory was electrifying. He was hailed as Iran's Gorbachev. Like the Russian leader at the outset, Khatami wants to make the system function better, not overthrow it. But unlike Mikhail Gorbachev, Khatami doesn't control Iran's power structure. He has, though, made some important personnel changes. Ali Fellahian, head of intelligence, was replaced by a budget expert from Iran's parliament. Fellahian was indicted by a German court last April for involvement in assassinating opponents in Berlin.

RAMPANT CORRUPTION. Khatami nominees such as Culture Minister Ataollah Mohajerani are reformers. But many doubt the new President's willingness to challenge Iran's theocracy. His power base is the fundamentalist League of Combative Clergy. Whatever differences Khatami has with opponents, says league head Ayatollah Karroubi, "all accept the fundamentals of the Islamic regime."

The economy is falling victim to the political infighting. Iran's well-educated middle class, which numbers 7.5 million, or about 12% of the population, according to Standard & Poor's DRI, isn't being given a chance to invest. Local businesses, for example, are scared by a new campaign against "quick profits." Recently, two Tehran real estate developers received long sentences--and had all their property confiscated--on vague fraud charges.

At the same time, Tehranis complain of rampant corruption, from low-level bureaucrats seeking to augment their monthly paychecks of less than $100, up to senior officials. Tales abound of hefty commissions paid into Swiss accounts of leading mullahs. Recently, eyebrows were raised when a son of former President Ali Akbar Rafsanjani became head of the Tehran Subway Co. A daughter already managed a publicly funded women's sports league, a huge font of patronage. "In the Shah's day, people stole, but the money trickled down," says an Iranian businessman. "Nowadays, the mullahs keep putting it in their pockets, and no one sees it."

Iran's oil and gas industry still works relatively well and could be in for a boost. September's $2 billion deal with France's Total, Russia's Gazprom, and Malaysia's Petronas to develop the huge offshore South Pars gasfield is a foretaste of others, say officials. Meanwhile, Iran is talking with companies such as Royal Dutch/Shell Group and British Petroleum Co. about onshore exploration and production. They would be the first such agreements since the mid-1970s.

The South Pars pact, say Iranian officials, shows that tough U.S. sanctions aren't working. Still, some Iranians complain that the country suffers. Says Mohammed Reza Nematzadeh, chief executive of Iran's National Petrochemical Co.: "If U.S. companies could enter our tenders, we'd have more choice."

After 18 years, Iran's revolutionary fervor is wearing thin. It seems as faded as the "Death to America" signs still to be seen around Tehran. Khatami's election has opened a new chapter in Iran's troubled history. But as the rising tumult in Iran indicates, pushing through real reforms will be much harder than winning an election.

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