Iran: A Turning Point?

As discontent spreads, there's new momentum for reform--and a showdown looms

At the end of an hour-long conversation in his modest Tehran office, Parviz Aghili, an Iranian businessman, turns reflective. "I had a dream last night," he confides. "Bill Clinton announced that he was visiting Tehran." Then he added: "I think Clinton will be coming here in the next three to six months."

While the prospect of President Bill Clinton descending on Tehran seems remote, change is definitely in the air in the Islamic Republic. At stoplights in Tehran, cars blare banned Western rock music, risking the ire of the morals police. In cafes and kebab joints frequented by the young and beautiful, men wear ponytails and short-sleeved shirts that show off gym-toned biceps. Women pull their obligatory scarves back to show off their hair and cuddle with their boyfriends in corners.

It seems like pretty tame stuff. But such behavior can get you arrested in Iran, and analysts say it is a manifestation of something more serious. "After the revolution, the traditionalists took over, and women and young people were the first victims of social repression," says Ebrahim Yazdi, leader of the Freedom Movement, an opposition group. "Now, all of a sudden, this repressed energy is being released."

Twenty years after the Shah of Iran was overthrown and an Islamic regime was installed in his place, Iran is reexamining its revolution. The 1979 revolt was originally grounded in a fight for democracy, civil rights, and freedom from foreign interference. But it was hijacked by the late Ayatollah Khomeini and a coterie of clerical activists, who imposed strict Islamic dress on women and banned alcohol and most music. The seizure of the American embassy and the extremely brutal repression of opponents turned Iran into a pariah state.

Now, President Mohammad Khatami is trying to restore normality both inside Iran and in the country's foreign relations. Elected with an amazing 69% of the vote in the May, 1997, elections, he certainly has the mandate of Iran's youthful population. More than 40% of its 65 million citizens are under 15. But many older Iranians--including even senior government officials and some of the former American embassy hostage takers--are fed up. They resent an Establishment run by clerics who have used their religious status to build a regime regarded as both corrupt and incompetent.

A crucial showdown is likely to occur early next year. In February, elections will be held for Iran's majlis, or parliament. The majlis is dominated by hard-liners who have largely obstructed the reform program of President Mohammed Khatami. If fair elections are allowed to proceed, Khatami's supporters, including many technocrats and professionals, are expected to gain control of the majlis. The election will "probably be the most important political event since the revolution," says Gary Sick, who heads the Columbia University-based Gulf/2000 project, which fosters contacts among the various players in the region through an electronic library and conferences. "Iran is experimenting with very big questions, and it is being watched not only in the gulf region but in the wider Islamic world."

SERIOUS TROUBLE. The emergence of Khatami has given Iran this window of opportunity. Many countries, including the Saudis and the Europeans, would like to see Khatami succeed. The Saudis are considering investing in Iranian projects and have backed the Iranian position of production cutbacks at OPEC. Talented and wealthy expatriate Iranians are returning. And foreign business executives and bankers are scouting the country for investments, excited not only by Iran's oil wealth but by its huge consumer market. If it plays its cards right, Iran could snap itself out of its current economic torpor and set itself on a healthy growth path. It could also become a regional leader and an example of a modern, Islamic democracy.

But if Iran fails to grab this chance, it could be headed for serious trouble. Many observers view last July's rioting, which pitted university students protesting the closure of a pro-Khatami newspaper against the police and vigilante thugs from the extreme religious right, as a warning of things to come if the Establishment doesn't bend. "Khatami is the last chance for peaceful reform. If he is defeated, then the system will be threatened with overthrow," says Ali Reza Alavi Tabar, an editor of the Sobh-e-Emrooz newspaper in Tehran and a key Khatami supporter.

Khatami himself must tread carefully. The 56-year-old cleric lost his previous Cabinet job as Culture Minister for championing films and other media deemed too avant-garde. As President, he is trying to forge Iran's competing power centers into a coherent government and promote tolerance and rule of law. This is what he has campaigned for. He contends that this would encourage investment. To pull it off peacefully, he needs to bring along the Supreme Leader, Ali Khamenei, a conservative cleric who presides over the security apparatus, and a substantial body of other conservatives.

Hard-line clerics and others worried about losing their current positions fiercely oppose many of Khatami's proposals. Conservative mullahs oppose any easing of the Islamic regime's strict social restrictions, let alone an opening to the West. After a supposedly irreligious play ran recently in a student publication, Ayatollah Abolghassem Khazali said: "Now the situation has reached the point where the existence of God is being debated in the universities."

Courts controlled by these hard-liners have ordered newspapers supportive of Khatami shut down. Editors and even fellow clerics have found themselves on trial and sometimes in jail for advocating liberal policies. And some people in Iran play very rough indeed. Beginning about a year ago, Tehran witnessed a series of grisly murders of liberal writers and intellectuals--apparently by rogue security men.

JAIL-CELL SUICIDE. In this atmosphere, it is not clear that this election will be fair. Candidates have to be vetted by the clergy-controlled Council of Guardians, which may disqualify liberal candidates. Preelection skirmishing can be seen in the trial of Abdullah Nouri, a key Khatami ally charged with using his Khordad newspaper to insult Iran's religious leadership and advance ties with the U.S. and Israel. On Nov. 12 the Special Court of the Clergy convicted him on 15 counts. Nouri would be the strongest candidate for speaker of the next parliament, but the court's aim seems to be to bar him from running.

Yet the attacks by the hard-liners often backfire. The murders of writers about a year ago--possibly by security agents--have given Khatami a chance to begin reforming the Intelligence Ministry. Saeed Emani, a deputy intelligence minister, was one of several officials arrested in connection with the killings. His jail-cell suicide prompted charges in the reformist press of a coverup.

Show trials such as Nouri's may also play into the hands of the reformers who want to do away with the special courts. And attacks on Khatami's Islamic credentials seem to be bringing Supreme Leader Ali Khamenei closer to the embattled President, rather than driving a wedge between the two. "Our President is a pious man working for the rebirth of Islam," Khamenei told worshipers at Friday prayers on Oct. 1. This was a sign that a substantial portion of the religious Establishment sees Khatami as their best hope for remaining in power, say Iranian analysts.

Already, Khatami's Iran is not the dour police state that an American visitor fears. Playing cat-and-mouse with the Islamic authorities has become an amusing way of life. Just about everyone in Tehran has a contact in the Armenian community who supplies bootleg gin. And risque restaurants or hosts of noisy parties learn to pay off the police. A young woman tells of the police bursting into a wild party in wealthy North Tehran. "I had to climb over the garden wall in my heels and miniskirt," she complains.

If you can find a way of negotiating Tehran's horrendous traffic, there are a wealth of people from politicians to consultants and analysts who will talk quite openly. Prominent fixtures on this circuit are such former leaders of the American embassy takeover as Abbas Abdi, who can be found in a dingy office across the street from the University of Tehran. Now a political analyst and supporter of Khatami, Abdi is scathing on the subject of the clerical regime. "The mistake that the clerics make is that they believe the popularity of the late Ayatollah Khomeini was gained only because he was a clergyman. In fact he gained his popularity from the people," Abdi says.

GO IT ALONE. If the conservatives lose control of the parliament, Khatami and his aides will turn their attention to economic reform. Iran's per capita income has actually declined since the revolution to just under $1,800, according to the World Bank. "It is a very rudimentary economy," says Fareed F. Mohamedi of Moody's Investors Service, who assigned Iran its first credit rating in June--a B2--which is one notch below Lebanon and one above Russia.

After years of pursuing a go-it-alone strategy, Iran is clearly in the market for foreign investment. Blessed with the world's second-largest gas and fifth-largest oil reserves, it has dangled a series of projects before the international oil majors. Iran is also signaling that it wants to return to the international debt markets with a $300 million Eurobond after a 20-year absence. "Iran could be an excellent opportunity in the next three years," says Rupert Wise, an investment banker at London's Robert Fleming & Co., who recently returned from scouting business opportunities in Iran.

Still, the road back to a normal economic existence will be hard. The material shortcomings of the Islamic Republic are obvious to any visitor. Tehran, the capital, with 12 million in population, prides itself on its sophistication, yet to visit there is to go back in time. The streets are choked with pollution-spewing 1960s-design automobiles. The phone system is primitive, and even hotels charging top rates turn out to be dark and shabby. "This is like North Korea," says Sadegh Samii, chairman of Ketab Sara Co., a publishing house.

While Iran is getting some economic reprieve thanks to higher oil prices, the vital signs of the economy are less than healthy. The country's total output shrank slightly last year, though it could pick up to 3% this year; unemployment is at 20%; inflation is in the 25% range. The currency is so depreciated, in fact, that you have to go around with fat wads of notes just to take care of taxi fares and restaurant bills. The economy hasn't improved since Khatami came to power, and that is being used against him by some of his opponents, especially former President Hashemi Rafsanjani.

While Khatami and many of his supporters are leftists by background, they appear to recognize that they have no choice but to turn toward freer markets and foreign investment to employ the estimated half-million Iranians who come into the labor market each year. Khatami plans to begin privatizing some 500 state companies, including parts of the telephone system, oil refineries, and mines. "There is a lot of money in Iran. With stability, people will invest," says Siamak Namazi of Atieh Bahar Consulting, a Tehran firm founded by a group of Iranians who returned from abroad. Khatami also plans to start cutting back subsidies, which now cost the government an estimated $13 billion per year.

Iran's best hope is its oil sector. It has had modest success attracting investment since the mid-1990s. France's Totalfina is the lead company in developing two projects: the $610 million Sirri oil field and the $2 billion South Pars gas field. Royal/Dutch Shell Group just signed an $800 million deal to develop the Nowruz and Soroush fields, risking U.S. sanctions. This could be the signal for European companies to rush in, and U.S. companies are going to be furious at being the only ones shut out. Indeed, the oil community in Iran thinks the pace of deals will pick up once the hurdle of the February elections is over.

To maintain its current 15% share of OPEC, Iran would have to boost its production capacity from 3.8 million barrels per day to roughly 5 million barrels per day at a cost of about $50 billion, says Hossein Khazempour Ardebili, senior adviser to the Oil Minister and a member of the OPEC board of governors. "The alternative is to give up market share and play a lesser role in regional politics. This is something we do not intend to do," Ardebili said.

The oil sector will likely take care of itself. But Khatami has a monumental task in dealing with the rest of the economic mess. Only an estimated 20% of the economy is now in private hands, and powerful interests prefer to keep things the way they are.

Khatami's conservative opponents, for instance, are allied with the merchant classes from the bazaars. The bazaaris finance most private industry at lucrative rates of 4% to 7% per month. They are also big players in the huge foreign-exchange black market, which everyone uses. For major transactions, stacks of $100 bills are often used.

FRUSTRATION. Intertwined with the bazaaris are the bonyads--huge, quasi-religious organizations, whose empires are based on property seized from the former shah and other ancien regime figures. They are tax-exempt and heavily subsidized. Khatami scored a victory earlier this year when he managed to persuade Khamenei not to reappoint Mohsen Rafiqdoust, the notorious former Revolutionary Guard head, as boss of the largest bonyad, the Foundation of the Oppressed and War Victims. Rafiqdoust's brother was charged in 1994 in connection with embezzling $22 million from a state bank. An effective way of charging up the economy and bringing in foreign investors would be to bust up both state organizations and the bonyads and auction their assets on the Tehran Stock Exchange, whose market capitalization is estimated at $2 billion. But Khatami and his aides will be wary of taking such a course because of the influence these groups enjoy and because they employ so many people.

Despite all these obstacles, Iranians say that there have been enormous changes in the past few years. Perhaps the most encouraging sign is the return of exiles such as Parviz Aghili. Since moving back to Tehran from Canada six years ago after working in the West and Dubai, Aghili has started a brokerage firm and a business magazine. In November he launched the first private bank permitted since the revolution--although he had to call it Non-Bank Credit Institution to satisfy the authorities. But Aghili admits to frustration. "Unless you create an environment that makes local people want to invest, how do you expect foreigners to come in?"

Other expatriates have returned to start consulting and law firms. Jallal Chaikar Tavallali, who once worked for the prestigious firm of Milbank, Tweed, Hadley & McCloy in Manhattan, moved back to Tehran in 1992. He anticipates a rich practice helping Iranian expatriates invest in their home country. Cheap labor and assets are key attractions. A daily wage in Tehran, for instance, stands at only about $5.

But an extra boost of confidence could be needed to keep up the momentum. Certainly, many influential people in Iran would like to see relations restored with the U.S. Although there are still some Iranians fiercely opposed to such a step, others think Iran's quest for economic improvement will be hobbled until it comes to terms with America. "This is where different groups part ways," says Gholam Abbas Aghali Khani, a member of the majlis. "Some people think we can fulfill [the 6% economic growth targets] of the Khatami Five Year Plan without the U.S. I think it is impossible."

But many observers doubt Iran is going to make the sort of gesture toward America that would elicit a positive response. One observer said the U.S. will likely have to break the ice first. A first move could be a deal on money the U.S. owes to Iran from pre-1979 deals. The U.S. has already permitted some grain sales. Whatever Clinton's inclinations, a deal on the debt seems unlikely as long as Vice-President Al Gore is running for President. He doesn't need the controversy that dealing with Iran inevitably brings. But perhaps after the U.S. election, Aghili's dream could come true.

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