RUTHFULLY YOURS

Rasanah Issues Iran Case File (February 2024)

Popular protests against the policies of the Iranian regime and in some cases against the regime itself affected 70 Iranian cities between Dec. 28, 2017 and Jan. 4, 2018. Nearly 4,000 protesters were arrested and 23 killed before the demonstrations stopped as suddenly as they had begun. Although the Iranian government tried to cast blame on foreign actors, the protests surprised Western observers, as well as the various Iranian exile movements, who struggled to understand what had happened after the fact. The leadership of the 2009 “Green Revolution” protests against vote fraud in the re-election of then President Mahmoud Ahmadinejad appears to have played no role. The events of the last days of December and the first days of January appear to have been a spontaneous outburst of popular frustration with deteriorating conditions of life. Lacking structure, organization and a political program, the eruption stopped as quickly as it began.

Because the protests had no organization or centralized leadership, they represent no threat to the Iranian regime in the near term. There is another side to this coin: spontaneous expressions of popular anger on a national scale reflects a deep malaise in Iran’s economy that cannot easily be fixed, if indeed it can be fixed at all. Since the Iranian revolution of 1979, the revolutionary regime has borrowed massively from Iran’s future, in economics, finance, the environment and demographics. It has allowed corruption to determine the allocation of financial resources on the scale of an African kleptocracy. And it has channeled resources into expensive foreign adventures at the expense of desperately-needed spending at home. It cannot employ its present generation of young people, who suffer an official unemployment rate of 20% and an effective unemployment rate of perhaps 35%. The next generation of young people will be much smaller due to an unprecedented decline in Iran’s birth rate.

The protests reflect deep discontent with the regime. It is significant that first demonstrations appeared in Mashdan, Iran’s second-largest city, and a former stronghold of the Iranian revolution. Unlike 2009, when the Tehran middle class paraded in orderly protests over the conduct of elections, the 2017-2018 protests started in a working-class city previously known for its piety. Some of the most violent protests occurred in the towns around Isfahan in the central Iranian plateau. Radio Farda, an affiliate of America’s Radio Liberty, posted a disturbing smartphone video Jan. 2 showing a mob burning down the police station in the Iranian town of Ghahdarijan, 24km from Isfahan and too small to be found on Google Maps. But the villagers had a grievance: the river Zayandeh Rud “life-giver” which gave rise to Isfahan dried up before reaching the city, the victim of Iran’s mismanagement of its dwindling water resources.

Ghahdarijan’s protests have been long in the making. Two years ago, an adviser to Iran’s environment ministry, Issa Kalandari, warned 50 million Iranians would be left without water, due to the exhaustion of 70% of Iran’s groundwater and the ill-considered diversion of rivers to compensate. Agriculture consumes 92% of Iran’s water. Capital-intensive farming methods could conserve water, but they also would drive peasants off the land into cities already suffering from about 30% youth unemployment.

For the past year, numerous observers have been warning of an impending economic crisis. Estimates of Iran’s military expenditure in Syria vary from US$6 billion a year to $20 billion a year. That includes $4 billion of direct costs as well as subsidies for Hezbollah and other Iranian-controlled irregulars. Assuming that lower estimates are closer to the truth, the cost of the Syrian war to the Tehran regime is roughly in the same range as the country’s total budget deficit, which ran at a $9.3 billion during 2017. Meanwhile Iran cut development spending to just one-third of the intended level as state income lagged forecasts during the three quarters ending December 2016, according to the country’s central bank.

For nearly four decades, Iran has cannibalized its physical and human capital, leaving the state with multiple crises and a deep sense of malaise. Water management is only one of several hidden deficits that the state has accumulated since the 1979 revolution. Large parts of Iran’s pension system face bankruptcy in the short term, and the government’s annual arrears to its underfunded social security system are many times the size of its official budget deficit. With the world’s fastest-aging population, Iran’s demographics will make an already-critical problem much worse during the next several years. Iran is the first country to get old before it got rich, setting in motion a pension crisis more acute than any other in the world. Its fertility rate has fallen from 7 children per female in 1979 to between 1.6 and 1.8 at present, the fastest decline in fertility of any country in history.

The number of marriages has fallen by 20% since 2012. “In Iran, the customary marriage age range is 20-34 for men and 15-29 for women … 46% of men and 48% of women in those age ranges remain unmarried,” according to the national statistics agency. So-called white marriage, or cohabitation out of wedlock, is so common and controversial that the regime in 2015 banned a women’s magazine for reporting on it. For the time being, the childless men of Iran’s last big generation provide cannon fodder for its foreign adventures. The supply of military-age men will fall drastically in 10 years (from about 7.8 million today to about 5.7 million in 2025). That makes Iran exceptionally dangerous in the relative near-term. As a nation, it is demographically doomed, and has all the more reason to undertake military adventures while it still can.

Harsh conditions of life and demoralization have led to widespread social pathologies. Writing in Al-Monitor on Nov. 22, 2016, Narges Bajoghli observed that the rate of infertility among Iranian couples exceeds 20%, the highest in the world and double the world’s average. Dr. Bajoghli quotes the view of Iranian public health officials that epidemic sexually-transmitted disease, especially chlamydia, is responsible for the high rate of infertility. Iran’s banking system, moreover, is insolvent, in part because of economic strains and partly because of massive insider lending to real-estate investors connected to the regime. The cost of a bailout might be as high as 50% of GDP, the costliest in recent financial history. Alireza Ramezani wrote March 10, 2017 in Al-Monitor, “Toxic assets account for 40-45% of total banking assets in the country, economic newspaper Donya-e Eqtesad reported Nov. 9, citing official data. Nearly 15% of these assets consist of immovable assets such as land and buildings. The rest consists of nonperforming loans and government debt. No official data is available about the banks’ fixed assets, but a report by Serat News website in December estimated the total value of immovable property owned by 31 Iranian banks and credit institutions at 448 trillion rials ($13.8 billion), without it providing any details on the surplus properties.”

Iran is riddled with wildcat banks offering deposit interest of up to 30%. Early in 2017 the regime capped the deposit rate at 15%, but few banks complied, the economic daily Donya-e Eqtesad reported June 8. The government responded by allowing 10 private credit institutions to fail, wiping out the savings of scores of millions of small depositors. Eurasia Diary reported Jan. 2, “A major groundswell of anger has also been building over the collapse of unauthorized lending companies that left millions of investors out of pocket. These companies mushroomed in the financial free-for-all under former president Mahmoud Ahmadinejad, lending wildly during the construction boom and collapsing when the bubble burst. Rouhani said in December that such lending companies had captured a quarter of the financial market with three to four million accounts by the time he took power in 2013 and started shutting them down.”

Parviz Aghili, chief executive of Middle East Bank, estimated that a full re-organisation of the Iranian banking sector’s roughly $700 billion balance sheet would cost $180 billion to $200 billion, or 50% of Iran’s GDP. “And we cannot afford it,” he said, according to an October 3, 2017 Reuters report. Iran’s GDP is a bit over $428 billion. To put that in perspective: the total funds appropriate by the U.S. federal government to stabilize the banking system in 2008 was equivalent to about 5% of GDP. Iran’s banking problems are an order of magnitude larger relative to the size of the economy. Iran’s pension funds are running enormous losses. At most immediate risk is the Civil Service Pension Fund, with a million insured. The Iranian Financial Tribune reported Nov. 21 that CSP “has more than one million first named insured while the number of its pensioners exceeds 1.2 million, suggesting that pensioners outnumber the employed insured population… which is horrific.”

The Social Security system still has four insured for every pensioner, but in fiscal year 2016-2017, “premiums made up only 21% of pension funds’ revenues and the profits gained through investment of funds and sale of assets only accounted for 8% of resources, leaving the government to shoulder the costs of the funds. Currently, the government owes more than 1,400 trillion rials ($35 billion) and counting” to Social Security. Less than 10% of Iran’s population is over 60, the result of a surge in the country’s fertility rate to a peak of seven children per female in 1979. Fertility since has declined to between 1.6 and 1.8, the lowest in the developing world. As the present generation ages, the ratio of Iranians over 60 will jump to 35% by around 2045 and to 45% later in the century. Iran has talented people but can’t employ them. Youth unemployment stands at 20%, but that does not take into account disguised youth unemployment in the form of 4.7 million undergraduate students: “According to the UNESCO Institute of Statistics, the number of students enrolled at the tertiary level increased by 258 percent in the past 15 years – from 1.3 million in 1999 to 4.7 million in 2014,” World Education News reports. But “only 6 percent of approximately 900,000 applicants to master’s degree programs and merely 4 percent of 127,000 doctoral applicants reportedly got admitted to a program in 2011.” Undergraduates account for 30% of Iran’s total population aged 15-30.

If we estimate conservatively that half of the students are warehoused in mass diploma mills like Azad University system with 1.7 million students, the true youth unemployment rate is 45% rather than the official 30%. Iran has several top engineering schools, but the vast majority of their graduates emigrate. In all, 3.5 million Iranians are preparing to leave the country, according to Masoud Khansari, head of the Tehran Chamber of Commerce. As noted, Iran is borrowing from its future by failing to produce a future generation of children as large as the present. Sadly, it cannot employ productively the generation it presently has. Adding together the costs of recapitalization the banking system, bailout out the pension funds, and repairing the country’s water system put the government’s off-balance-sheet liabilities far above its GDP. Although direct government debt is small, the Iranian regime is drowning in unfunded obligations.
It is not at all clear how, or whether, the present regime or any successor regime will resolve these interlocking crises. Iran requires an anti-corruption program as tough as Xi Jinping’s, and the marshalling of public and private resources to reverse what some analysts call its “water bankruptcy.” It must open its closed and kleptocratic financial system to domestic and foreign entrepreneurs who can put its young people to work and persuade the talented few who graduate from its elite engineering schools to remain in the country. It cannot sustain foreign military adventures and an ambitious ballistic missile program at the same time. The present regime is incapable of carrying out this complex and costly transformation, and no opposition is available with a clear vision of how to replace it. The street protests indicate that regime has lost credibility, which will make it all the more difficult to maneuver.
It is tempting to compare Iran’s situation today to that of the Soviet Union in the late 1980s, shortly before the fall of Communism. Both had unpopular regimes committed to an ideology that the great majority of the subject population did not share and in some cases abhorred. Both had severe economic problems; in fact, Iran’s problems are much worse than those of the Soviet Union. It is also possible to compare Iranian President Hassan Rouhani to then Soviet leader Michael Gorbachev. In the wake of the protests, Rouhani has asked the Iran Revolutionary Guards Corps to divest its extensive economic holdings. The Communist regime, though, had suffered a series of strategic humiliation. The withdrawal of a demoralized Russian army from Afghanistan in 1988 was an enormous blow to the regime’s credibility. So was the inability to control the political situation in Poland, which in turn inspired resistance to Soviet rule elsewhere in Eastern Europe. Most of all, the Russian military knew that advances in American military technology would give America the upper hand in any eventual conflict.
Iran’s regime, by contrast, feels powerful. The Obama Administration’s concessions in the context of the 2015 JCPOA legitimized what had previously been a rogue regime. Iran’s tactical alliance with Russia in Syria has largely succeeded. With Iranian help and Russian backing, the Syrian government has accomplished the largest ethnic cleansing in history, displacing 10 million Syrian Sunnis, and preparing the ground for a transfer of Shia populations to Syria from Iraq, Afghanistan, Pakistan and Lebanon as well Iran. America’s insistence on majority rule in Iraq effectively delivered a Shia-ruled ally to Iran. The United States wants to contain Iran, but it does not want to commit large amounts of ground forces, and it has difficulty renouncing a Shia-dominated government in Iraq that it helped to create. The cost of Iran’s foreign interventions is cause for popular discontent, and was mentioned as a grievance by many of the demonstrators. But if historical precedent is a guide, the Iranian regime will not fall until it suffers a strategic humiliation that undermines its credibility in the eyes not only of the suffering population, but also in the eyes of the political and military elite.
To inflict a strategic humiliation on Iran that would discredit the regime in the eyes of the Iranian people is not a simple task. Iranian Revolutionary Guards and associated mercenary forces in Syria have operated with Russian air support and other forms of backing. Iran has at its disposal seasoned Hezbollah light infantry as well as Iraqi Shia militias in alliance with the regular army of the Assad regime, and there is no force on the Syrian ground ready to dislodge them. The United States maintains a small presence in the form of about 3,000 military advisers, and has no appetite for a ground war after its experience in Iraq and Afghanistan. In the past Turkey sponsored Sunni rebel forces fighting the Assad regime but now wants to reach a strategic accommodation with Russia and Iran. Russia’s support for Iran’s strategic ambitions is limited and conditional: Russia (as well as China) is concerned about the radicalization of its own overwhelmingly Sunni Muslim population, thousands of whom have trained and fought with the Nusra Front, ISIS, and other Sunni jihadists in Syria. Russia (like China) sees Iran as a counterweight to Sunni extremists who represent a direct threat to Russian security. Enhanced security cooperation between the Sunni states and Russia might provide an incentive for Russia to distance itself from its Iranian ally-of-convenience.
In the meantime, the US and its allies have no clear strategy to contain Iran. On Jan. 13, the Defense Department announced a plan to train a 30,000-man Border Security Force, with a core of Kurdish fighters, to be stationed along the Turkish and Iraqi borders. The Border Security Force would have introduced an American-trained, American-armed army into Syria capable of containing ISIS and deterring the Iranian-controlled mercenaries who backstop the Syrian government. This was America’s best move on the Syrian chessboard, and it was thwarted by Turkey’s offensive against the Kurdish strongpoint at Afrin. The Turks had Russia’s open support. Turkey’s main weakness is financial, but it enjoys consistent backing from Qatar. Turkey in turn is acting as a guarantor of Qatar’s security. It conducted an airlift to break the Gulf States’ boycott of Qatar in 2017 and has built and manned amilitary base in Qatar.
In summary: Iran’s economy is beset by a complex of crises that make life difficult and in some cases nearly unlivable for very large numbers of Iranians. The regime has lost credibility and its weakness came to the surface in the form of country-wide protests. But there is an enormous distance between protest movements and regime change, and no alternative leadership is visible to challenge the Revolutionary government. Although Iran’s resources are stretched and its people reluctant to fund foreign wars at the expense of urgent domestic needs, no clear policy has emerged from Washington or its allies to contain Iran’s strategic ambitions. Until an alternative leadership emerges and Iran’s military adventures are punished, it is unlikely that the regime will fall.