Khamenei's masterstroke

By Darisuh Zahedi and Scott Field

As the international community basks in the afterglow of new Iranian President Hassan Rouhani’s conciliatory gestures at the U.N. General Assembly, it is worth reflecting on the deeper significance of his sudden rise to prominence. At first glance, his resounding and unexpected presidential victory in June appeared to be a setback for Supreme Leader Ali Khamenei and for the conservative agenda. Indeed, Rouhani, like reformist President Mohammad Khatami some years before him, was not Khamenei’s preferred candidate. But in fact a Rouhani administration does not represent an unequivocal setback for the Khamenei. Rather, it is becoming ever clearer that allowing Rouhani’s election to pass smoothly was a deliberate and shrewd maneuver by Khamenei to preserve order in a country beset by a daunting array of foreign and domestic challenges. This strategy may well buy Iran some time, but unless the regime starts delivering on an extraordinary breadth of challenges, the country could easily find itself facing a full-blown socioeconomic crisis, with unpredictable consequences for itself and the surrounding region. 

When the Iranian regime in early 2010 finally quelled the pro-democracy Green Movement, which protested the June 2009 re-election of President Mahmoud Ahmadinejad — a contest the movement alleged to be fraudulent — the Islamic Republic’s custodians must have feared similar turmoil after the next election. Having paid a steep price to reinstall their favored candidate in the face of determined and widespread public opposition, could they risk doing so again? Another uprising in 2013 could have been fatal: While the 2009 unrest was spearheaded by Iran’s much-depleted middle class, by 2013 there had arisen a more dangerous possibility. With the economy reeling from the dual impact of tightened international sanctions and Ahmadinejad’s populist mismanagement, the traditionally loyal working class had also become disenchanted with the regime, and the specter of a truly broad-based protest movement was looming. The regime could not afford another electoral misstep that triggered public outrage.

Not fully appreciating this, many observers expected Khamenei to employ a reflexive, hard-line response, such as engineering the election in favor of a devout and unswerving regime loyalist like Saeed Jalili, Iran’s chief nuclear negotiator. This ploy would have projected a defiant stance to foes at home and abroad and, in true Khamenei style, evinced no hint of exploitable weakness. But such an inflexible move could have placed unbearable strain on a system already facing multiple dire threats — the faltering economy, the nuclear crisis, the war in Syria and pressures for internal reform. During Ahmadinejad’s tumultuous reign, Iran’s political system had grown dangerously polarized, rigid and incapable of effectively meeting these challenges. By pragmatically acquiescing to Rouhani’s rise, Khamenei has momentarily lifted the lid off the pressure cooker. Given Iranians’ widespread support for Rouhani’s espoused principles of conciliation and tolerance at home and abroad, Khamenei’s artful sidestepping of an electoral crisis may well have been a necessity, but from the standpoint of the regime’s continued survival, it was also most assuredly a virtue. Whether the stability promised by Rouhani’s election will indeed materialize now depends largely on his ability to deliver quick results on a daunting agenda. 

The top priority is to salvage Iran’s ruined economy. Even before Ahmadinejad’s presidency, it had numerous structural flaws: It was state-dominated, undiversified, oil-dependent, reliant on the production of low-value-added goods and saddled with chronically high levels of inflation, unemployment and income disparity. But Ahmadinejad’s fiscal policies exacerbated these flaws. He flooded the economy with petro-dollars. (Oil tripled in price for a short time under his tenure before falling and rising again to twice its price when he entered office.) That in turn fueled inflation and worsened unemployment and inequality. His primary strategies for fighting inflation — keeping the value of the currency artificially high, lowering tariffs and importing cheap goods from China — were worse than the disease itself. To boot, his subsidy rationalization program, which was supposed to compensate for price increases and enable investment in more efficient machinery, was a fiasco: Manufacturers actually received nothing, further weakening the domestic industrial base. The crutch that kept the economy afloat was oil money, pure and simple. 

Even if he had tried, Ahmadinejad could not have set the stage more effectively for sanctions to bite as nastily as they have. By increasing the country’s dependence on oil money and imports, he made it more vulnerable to sanctions that have targeted both. Oil revenue has been cut by more than half (Iran’s oil exports today are a third of what they were two years ago), and transaction costs for conducting trade have skyrocketed. As a result, all macroeconomic indicators are negative: Annual inflation is between 100 and 300 percent, economic growth has been negative for the past two years, unemployment and economic disparity are the highest in recent history, factory closures are on the rise, and those lucky enough to work are being paid only intermittently. Under current conditions, it is impossible to diversify the economy and overcome oil dependence. To do so, Iran would need a means for attracting capital and technology, a reversal of the brain drain and capital flight, a bureaucratic overhaul and the creation of institutions that enhance predictability, stability, accountability and transparency. None of this is possible — and the risk of a broad-based political uprising will therefore remain — unless Iran overcomes its international isolation and sanctions are lifted.

Rouhani’s economic challenge is thus unavoidably linked to progress on negotiations over its nuclear program and to Iran’s relationship with the United States. In pursuing “a phased plan to de-escalate hostility to a manageable state of tension,” he will have to navigate around Khamenei’s intense distrust of the U.S. After long insisting on Iran's inalienable rights, Khamenei is unlikely to capitulate on the nuclear issue without a conciliatory gesture from Washington. Congress’ first act, true to form, was just the opposite: in late July the House passed (with overwhelming support) a bill that might cut Iran’s oil exports to almost zero. It will therefore be extremely challenging, though not impossible, for President Barack Obama to meet Khamenei’s political requirements. The contours of the supreme leader’s demands have long been relatively clear: recognition of Iran’s right to enrich uranium as a signatory to the Nuclear Non-Proliferation Treaty (NPT), the gradual removal of all sanctions and, importantly, abandonment of perceived efforts at regime change. Meanwhile, Rouhani appears to be fully aware of Obama’s demands: signing and implementing the Additional Protocol to the NPT, opening Iran’s nuclear facilities to full and impromptu inspections and preventing Iran from achieving breakout capacity — getting so close to the nuclear threshold that it could cross it in secret if it felt the need, thus breaking out of the NPT. 

Iran’s other great external challenge, the conflict in Syria (which to large extent is a proxy war against regional rival Saudi Arabia), will complicate the search for a nuclear deal — especially now that the stakes have been raised after the alleged use of chemical weapons by President Bashar al-Assad’s regime. The United States has privately signaled willingness to override the virulent objections of its Gulf allies and agree to Iran’s participation, with Rouhani newly at the helm, in a proposed (and still much delayed and hypothetical) Geneva II peace conference. However, the White House is still insisting that Iran prevail on Hezbollah to remove its forces from the Syrian arena. While Hezbollah chief Hassan Nasrallah and his Iranian patrons might welcome the opportunity to retrench his overstretched forces as part of a deal on a Syrian transition, most observers expect such a peace settlement to be years away. Given Iran’s perception that it is fighting for its position not just in Syria but also in Lebanon and Iraq, the risks of a post-Assad transition may be too much to accept. But the alternative — a prolonged, possibly expanding regional proxy war — could be equally ruinous to Iranian interests. The Islamic Republic is reportedly sending billions of dollars that it can ill afford to prop up the Assad regime. The vital strategic interests of all the region’s major players are at stake in Syria. On one side, the U.S., Turkey, Qatar and Saudi Arabia have aligned with the Syrian rebels; on the other, Iran, Hezbollah, Shia Iraq and Russia are supporting the Assad regime. These high stakes suggest that the conflict will not end without a so-called grand bargain that adroitly trades off the interests of all parties. Rouhani will need all his renowned diplomatic ingenuity to keep Iran’s hard-liners at bay and steer a path of de-escalation on Syria that ensures it doesn’t stymie a nuclear deal. This will be especially troublesome with respect to the poisonous Iranian relationship with Saudi Arabia, but — to return to our original point — Rouhani will have a much better chance of pulling this off than one of his hard-line colleagues.

Finally, on the question of internal reforms, Rouhani has pledged to use his experience in the moderate administrations of presidents Akbar Rafsanjani and Khatami to reduce the intense polarization of conservatives and reformists wrought by the 2009 election. An test came in the battle over Cabinet appointments, during which Rouhani illustrated his pragmatism by carefully including a broad spectrum of factional and ideological affiliations. Nevertheless, given the pressure he is likely to receive from hard-line elements to favor more conservative positions, his domestic agenda might initially be limited to alleviating the economic grievances of the working and lower-middle classes rather than the more contentious political demands of the middle class about social and civil freedoms. These efforts may be just enough to prevent the working and middle classes from uniting in a broad-based revolt that would be much more threatening to the regime than 2009’s Green Movement. While pro-democracy observers in the U.S. and Europe might cheer such an uprising (and might even advocate triggering it through sanctions that will continue Iran’s economic death spiral — or even by pushing for a military attack), they would be wiser to tread carefully. There are no guarantees that expanding sanctions will lead to a popular uprising or that such upheavals, should they materialize, would result in a regime and regional order more beneficial to U.S. interests. The experience of Iraq in the 1990s — and that of Syria today — should remind all concerned to be very careful what they wish for.  

In the waning days of the Ahmadinejad presidency, Iran was sleepwalking toward a number of dangerous red lines. Khamenei’s judicious decision to allow a smooth transition to Rouhani has now bought the Islamic Republic some much-needed breathing space. The new president is arguably better suited than anyone else in Iran to simultaneously reboot the economy, clinch a nuclear deal, find a compromise on Syria and release internal pressure for political reform. Whether his tenure can be parlayed into a path toward moderation and stability for Iran and the region remains to be seen. And the clock is ticking loudly on all of these challenges.