At a Turning Point: Whither Iran?

The events in Iran are extremely moving and also disturbing. From my point at the end of a keyboard, I can simply sit and analyze, but one cannot help but realize that real people are fighting and dying over there in a struggle to determine the future of Iran. My heart does go out to them, brave people; I admire their courage and can’t imagine what it must be like to be there now. But what lies ahead: will the outcome look like the first Iranian Revolution, or will it be Tienanmen Square, Persian style?

At this point, the result could go either way, although as of today, I would give marginally higher odds that the hard-line forces will have to make at least some concessions, and may in fact be overthrown. There are several reasons for this. Firstly, we observe some degree of “cracking” in the elites. Cracking is not necessarily fatal to the regime - there was also cracking in the Chinese leadership during Tienanmen Square, and the result there was that hardliners removed softliners before sending in the tanks. However, if the regime leadership does not exhibit some degree of cracking, it is much more difficult for street opposition to neutralize the power of coercive forces: i.e. the police and other armed forces.

A second issue is that the protests have spread beyond students and intellectuals and connected to a much broader coalition in society. When this happens, it generally signifies a substantially deeper dissatisfaction in society and problems that need addressing by whatever regime succeeds at this point. I was listening to a CNN interview in which an Iran scholar pointed out that the language of protest has changed in the last day or two from an attack on the government (those in power) demanding a clean election into an attack on the regime (the system of rules that determine the government), demanding a reworking of whole political institutions in Iran.

A third issue is that, unlike Tienanmen Square, demonstrations have spread to many other locations across Iran. This is not simply a protest in the capital city that can be crushed by bringing in military units from the countryside. The regime may be able to use the military to crush resistance, but it would have to be done in multiple cities, and probably simultaneously. It is uncertain whether the police and and army will continue to obey orders to beat and kill civilians - many of them may have in fact voted for the opposition candidate themselves. The Basij militias, however, are likely to be loyal to the hardline regime, and we are likely to see them increasingly armed over the next week.

Forces that will determine the outcome

The result ultimately comes down to two issues: 1) where the loyalty of the armed forces lies, and 2) the endurance of the revolutionaries. Issue one ultimately trumps issue two, but a lack of endurance may determine the outcome before the armed forces come into play.

Once protests become widespread and violent, the result really depends on whether the armed forces side with hardliners, with reformists, or with social movements in the street. The police are unlikely to be numerous enough and heavily armed enough to hold back a determined social movement, but the army can crush large numbers of unarmed people - as they did in Tienanmen Square - as long as they are loyal. Loyalty needs to stretch fairly far down the command chain. Generals are usually more tied into the existing regime, but colonels may command regiments and divisions and can swing outcomes. I don’t have any details that would tell me whether the Iranian army will be loyal to hardliners, but I do think that the army’s loyalty cannot be taken for granted, since militaries tend to be socially conservative but in favor of both technological and institutional moderinization.

The loyalty of the army may not come into play, however, if the citizenry does not have sufficient endurance until the regime calls for the army or the army takes matters into their own hands. Right now, it looks like citizens do have the endurance to keep up the protests and demonstrations even in the face of police and militia brutality. There are also particular cultural factors regarding muslim traditions in memorializing the dead that mean that protests may resurge at regular intervals. However, it is conceivable that enough fear will be generated to keep the population at home out of emotional exhaustion. This is clearly what the hardliners are hoping for right now.

What if hardliners win?

No matter who wins, these events will be transformative in Iran. In China, the Tienanmen Square massacre resulted in a new social contract that expanded economic freedoms with the understanding that political reforms would remain off the agenda and be dealt with harshly. In Iran, it is unclear whether this solution is feasible, since political power is so tightly bound with religion (e.g. the role of the Guardian Council). China remained strictly authoritarian after Tienanmen Square, but it subsequently abandoned any pretense to Marxist-Leninist-Maoist ideology and is now socialist in name only.

In Iran, however, is very difficult to imagine a way for the Ayatollahs and Mullahs to retain authoritarian power and yet abandon the principle of theocracy. This means that even if the hardliners win in the short term, there is little in the way of a new social contract for them to offer. Without some kind of new offer, the most likely result is either an extremely bloody crackdown, followed by extremely draconian police state, or possibly a lengthy civil war.

What if reformists win?

The West is in a difficult position - clearly there is a great desire to support reformists, and yet any direct intervention is likely to feed hardliner claims that the entire reform movement is part of a conspiracy of the West to undermine Iran’s sovereignty. Therefore, it is essential to be supportive without being interventionist at this stage.

Where the West can be supportive is to assure reformers that if they succeed in ousting the hardliners, Iran will find itself among nations interested in helping to reconstruct and rebuild. This may prove more challenging than we would like to think, because reformers may not support all the reforms the many West would like to see, such as an end to Iran’s nuclear weapons program, the funding of Hizbullah, and calling for the destruction of Israel. Finding a place for a strong role for Islam without theocracy would be a major accomplishment for Iran, and probably go a long way to addressing the underlying issues driving the protests.

The reformists do have an advantage that they have a leader - Mir Houssein Moussavi - who can become the focus of a post-crisis government. Many times, grass-roots movements without a built-in leader crumble when they actually try to exercise power, so the presence of a leader and party organization is a major advantage for the reformists. However, the demands of the reformists have now stretched beyond issues of what the post-crisis government will be like, and now encompass questions of what the post-crisis regime will be like. This means that it is likely that major constitutional reforms will take place, and possibly even a new constitutional convention revising the entire institutional structure of the state. These are major tasks, and reformists will need to plan and move quickly on this if they do come out of this as victors.

For the West, this is a major opportunity to establish positive relations with what had been a renegade state massively opposed to western influences. It is also a chance to reestablish positive relations with a major Islamic power, although the West will need to tread carefully so as not to be perceived as choosing sides in the Sunni-Shia schism.

Investment Implications

Since I write on many investment themes, I feel I ought to make some observations about investment implications, although quite frankly, some moments are historical enough that they do not require an investment implication to be worth writing about in this blog.

Nonetheless, there are some investment implications, none of which seem particularly esoteric or hard to see. Instability in the region does add uncertainty to the continuity of crude oil supplies, and thus tends to drive up the price. The higher oil prices will also improve the prospects of alternative energy sources, and may have a marginal effect depressing the price of carbon credits. Instability of this type very often puts downward pressure on the local currency. The currency effect happens in part because citizens try to send their savings out of the country if they can, in part because political disruption is likely to lead to economic disruption, and in part because if there is large-scale destruction, reconstruction will likely require substantial capital imports. In addition, if oil supplies from Iran are interrupted, currencies of other oil exporting nations may strengthen slightly as they take up the slack. The uncertainty also drives up volatility, so selling options becomes more attractive, at least if they can be hedged.