New Year priorities: Tehran focused on turmoil at home, not nuclear program

In Washington and European capitals, top New Year priorities on Iran may be Tehran’s nuclear program, and the next round of talks in Istanbul in late January.

But for Iran’s leadership, 2011 promises to be a year of significant domestic challenges, as President Mahmoud Ahmadinejad presides over a precipitous series of subsidy cuts, imposed on an inefficient economy already under strain from a host of sanctions.

Undergirding the turmoil in the Islamic Republic are questions of legitimacy that remain unresolved since the contested June 2009 presidential elections, which brought millions of Iranians into the streets in sometimes deadly protests of fraud.

Economic reform

The most important challenge in Tehran in 2011 will be economic reform.

After decades of expensive subsidies that drained the treasury of anywhere between $30 billion to $100 billion per year, Tehran’s cold-turkey withdrawal of subsidies on gasoline, fuel, and bread – which last week quadrupled the price of gas overnight and made diesel prices skyrocket much higher – is an “extremely drastic” measure, says Farideh Farhi, an Iran specialist at the University of Hawaii.

Indeed, the changes amount to the most serious economic retooling since the 1979 Islamic revolution, which toppled the pro-West Shah but created an oil-driven welfare system that provided cheap utilities and services. While there have been few reports of unrest so far, taking away such subsidies after a generation can be politically explosive.

The fact that prices have risen so abruptly – with the most needy Iranians set to receive a payment of just $40 per month from the government to fill the gap – has raised the risks.

“So much of the focus of this program has been on mollifying the population,” says Farhi. “It’s been done extremely systematically [but] there is a huge question to be asked: Why on earth, under these very difficult circumstances, with Iran under tremendous pressure from outside and a shaky position inside, the government would go for such a drastic effort?

“And I don’t have an answer,” adds Farhi. “I’m just holding my breath that it will work out. Because if it doesn’t work out, it has very, very serious consequences for Iran – we’re not just talking about the Islamic Republic.”

A jump in inflation?

The new measures announced by Mr. Ahmadinejad seek to address longstanding problems in Iran that have existed for decades, and 2011 will prove a decisive year.

“This kind of inequality and accumulation and power has been here forever in this country,” says Djavad Salehi-Isfahani, an economist at the Brookings Institution in Washington.

In some ways “inflation is a good thing, it’s the lubrication you need to get the economy to adjust to the new reality,” says Mr. Salehi-Isfahani, contacted in Tehran.

“Unfortunately, even if the government wants to allow some inflation, it has to pretend it is not going to allow it, because Iranians have a low tolerance of inflation,” which he says is now at 10 percent but perceived by average Iranians to be 50 percent.

“People don’t know that food prices globally have increased by 30 percent,” says Salehi-Isfahani. “This is a globalized economy. You can’t just buy your cucumber here as if you are living in an African country; you are living in a neighborhood of very rich people.”

Even if the price of just a few items goes up in Iran, he says, it can “create a panic,” which could prompt the government to cap some prices “in order to calm people.”

Foreign policy challenges

Beyond domestic issues, Iran also has a complicated set of foreign policy challenges in the new year.

“Iran’s first priority in foreign policy should be neighbors and the Islamic world,” the newly appointed foreign minister Ali Akbar Salehi, who has a PhD from the Massachusetts Institute of Technology (MIT) in Cambridge, Mass., said last week at his first official press conference. “In this regard, Saudi Arabia and Turkey have a special position. Iran and Saudi Arabia, as two effective countries in the Islamic world, can resolve many problems together.”

Never mind that US diplomatic cables released by WikiLeaks have quoted the Saudi monarch calling on the Americans to bomb Iran and “cut the head off the snake.”

And of course there also remains Iran’s focus on perennial arch-foe the United States. Washington, in cooperation with European allies, has orchestrated four layers of UN Security Council sanctions against Iran, along with measures that have affected everything from selling jet fuel to Iran’s commercial airliners in Europe to investment from South Korea.

“The question is whether or not there is a possibility for a compromise, and that means on both sides – not just by Iran,” says Farhi. It “makes sense” for Iran to strike a deal now that would still allow domestic uranium enrichment, though on a limited scale and with intrusive inspections and tighter safeguard measures, suggests Farhi.

“Now that the Iranians have declared victory after Geneva [talks in early December] – Iran stood its ground, and that itself was a victory – I think the path has been cleared for some sort of a compromise,” says Farhi.

But any deal would also require a compromise from Washington, which until now has insisted that Iran stop all uranium enrichment – the process to make fuel for nuclear power, that refined to higher levels can also be used to make a weapon.