STRUCTURALCHARLIE January 28, PATRONAGE STRUCTURAL PATRONAGE IN IRAN IMPLICATIONS OF SUBSIDIES REFORM FOR IRAN AND U.S. POLICY CHARLIE SZROM JANUARY 28, 2010 A REPORT BY THE CRITICAL THREATS PROJECT OF THE AMERICAN ENTERPRISE INSTITUTE STRUCTURAL PATRONAGE IN IRAN CHARLIE SZROM January 28, 2010 Contents INTRODUCTION 1 RECENT CONTEXT 2 HISTORY OF IRAN’S SUBSIDIES PROGRAM 3 CURRENT SUBSIDIES AND OUTLINE OF PROPOSED REFORM 5 ECONOMIC EFFECT OF SUBSIDIES REFORM UPON IRAN’S LOWER CLASS 5 REASONS CITED IN SUPPORT OF SUBSIDIES REFORM 6 REASONS NOT STATED IN FAVOR OF REFORM 8 THE EFFECT OF SUBSIDIES REFORM UPON THE ISLAMIC REVOLUTIONARY GURARD CORPS (IRGC) 9 CONCLUSIONS FOR IRAN AND U.S. POLICY 10 APPENDIX: SUPPORTERS AND CRITICS OF SUBSIDIES REFORM 12 NOTES 14 Tables TABLE 1: IRANIAN ENERGY SUBSIDIES, ESTIMATED VALUE AND SHARE OF GDP, SELECTED YEARS 4 TABLE 2: MOTOR GASOLINE BARRELS CONSUMED FOR ROAD TRANSPORT IN IRAN AND ITS NEIGHBORS IN 2007, PER CAPITA 8 www.criticalthreats.org Structural Patronage in Iran: Implications of Subsidies Reform for Iran and U.S. Policy “[The subsidies reform package] is the most important economic bill in the past 30 years.” 1 —Iranian president Mahmoud Ahmadinejad Introduction Key Points s the U.S. Congress considers sanctions against • Although sanctions have hastened subsidies A Iran’s refined petroleum supply, Iran has already reform, the Iranian regime’s desires to seize greater enacted a plan to resist such measures. Tehran has political power, increase the Islamic Revolution- expanded its refineries, sought alternate international ary Guards Corps (IRGC’s) market dominance, gasoline suppliers, and begun an attempt to reduce redistribute income, and lessen budgetary pressure domestic gasoline consumption (this author and others have provided critical motivations for reform. detailed this three-pronged strategy in an October 2009 report). On January 13, 2010, Iran’s Guardian Council • Subsidies reform will make Iran’s economy began the last part of this defense by approving a more hostile to businesses not linked to the package to reduce energy and food subsidies. Although IRGC, increasing the economic control exerted lower gasoline consumption over the next several years by the IRGC in recent years. will make Iran less reliant on Western gasoline imports, defending against sanctions was only one reason for • The rebate program at the core of Iran’s subsidies subsidies reform, as the internal Iranian debate shows. reform package will give President Mahmound Redistributing income, reducing the burden subsidies Ahmadinejad dditional ways to reward political place upon Iran’s economy and budget, and creating an loyalists while curtailing or denying benefits to economic environment more favorable to businesses regime opponents. controlled by the Islamic Revolutionary Guards Corps (IRGC) have apparently been equally important moti- • Both the increased IRGC economic role and the vations. Each of these factors has direct and indirect rebate program could distort Iran’s economy implications for Iran and U.S. policy toward Iran. over the next several years, perhaps more Reformers have placed the creation of a rebate quickly than sanctions could, while dispropor- fund at the heart of subsidies reform to minimize the tionately harming Iran’s opposition. hardship Iran’s lower classes will encounter once subsidies drop. The regime could use the fund to • Subsidies reform in Iran necessitates that the deny benefits to individuals it views as disloyal, thus United States develop two long-term strategies, improving its ability to combat internal unrest one for dealing with a potentially more hostile, through nonviolent means. The debate over control authoritarian Iran home to a disenfranchised of the yet-to-be-finalized agency that determines opposition and one for dealing with an increas- who gets rebates has already revealed tensions ingly distorted Iranian economy. within Iran’s ruling elite. If the economic situation www.criticalthreats.org 1 STRUCTURAL PATRONAGE IN IRAN CHARLIE SZROM January 28, 2010 deteriorates further and the regime does not adjust antiregime protests (see analysis by Maseh Zarif on the rebate program flexibly, the program could exac- recent December Ashura protests in Iran here), sub- erbate those tensions and alienate the business class sidies reform has dominated debate among Iran’s and urban elite further from the regime. political and media elite in recent months. President Mahmoud Ahmadinejad could work to Many countries, particularly oil-producing states, mitigate that risk by expanding the rebate program to heavily subsidize fuel for their populations. These provide more benefits to the middle and upper classes. subsidies help ensure that all citizens benefit from Such a shift would defeat many of the main objectives the state’s oil wealth, and they help placate internal of the rebate program, however, including relieving economic, and sometimes, political frustration. Iran some of the strain on the government’s finances. is no exception to these trends, which is why the Decreased energy subsidies will also likely economic and political ramifications of subsidies increase already-high production costs for small-and- reform have been the focus of the internal Iranian medium-size businesses in Iran. Corporations with policy debate for a number of years. Current subsi- IRGC connections will more easily weather subsidies dies may consume as much as a third of Iran’s gross reductions because of their larger size, access to gov- domestic product (GDP), adding increased urgency ernment capital and military materiel, and revenue to the regime’s desire to reduce the economic burden from black market activities the IRGC and its allies subsidies impose on the state. largely control. Subsidies reform is thus likely to The Ahmadinejad regime has adopted an increase the de facto nationalization of the Iranian approach that seeks to minimize the effect of subsi- economy (which the regime already controls substan- dies reform on the lower classes while allowing the tially through the bonyads and IRGC economic activ- middle and upper classes and those parts of the ities) and to concentrate even more economic power business class not affiliated directly with the regime in the hands of the IRGC. to bear the brunt of the change. For that reason, the Subsidies reform is one of the largest domestic regime intends to phase in a large rebate program as policy changes in the history of the Islamic Repub- subsidies phase out. lic. Its goals include not only mitigating the effects of There is a very important difference between the international sanctions on the sale of refined petro- way a subsidy program works and the way a rebate leum products to Iran, but also increasing the abil- program works. A regime generally implements sub- ity of the Ahmadinejad government to reward its sidies in the form of price caps on the sale of selected friends and hurt its enemies through nonviolent products—in Iran’s case, the caps are subject to means. The culmination of a reform campaign more rationing quotas. The regime has no direct involve- than fifteen years old, today’s subsidies reform will ment in determining who specifically benefits from give the regime protection from external pressure, the subsidies—everyone who purchases fuel at sub- the ability to control which segments of the Iranian sidized prices benefits. Attempting to deny subsidies population suffer from sanctions, and an additional to particular individuals or groups is difficult, as it tool to confront internal opposition without directly requires affecting the way those who sell the product resorting to force. charge for it. Rebates are very different. In a rebate system, the price of the product is allowed to move closer to market price and the government decides to Recent Context whom the rebates will go and how much they will be. The government can choose not to apply any fil- On January 13, 2010, Iran’s Guardian Council ters to that process, simply mailing checks (or giving approved a bill to reform energy and food subsidies.2 cash or credit) for a common amount to every citizen While Iran’s June elections have ignited a series of (similar to the 2008 tax-rebate program in the United 2 www.criticalthreats.org STRUCTURAL PATRONAGE IN IRAN CHARLIE SZROM January 28, 2010 States). But the government can also choose to Supreme National Security Council (SNSC).9 micromanage the delivery of rebates to an arbitrary Ahmadinejad loyalist Said Jalili currently heads the degree. Doing so requires establishing or designating SNSC, a body with considerable sway close to Iran’s a bureaucratic entity that can tailor the rebate pro- president.10 Of the ministers named as participants, gram based on knowledge about the particular indi- Iranian oil minister Masoud Mirkazemi, Energy Min- vidual under consideration. The Ahmadinejad ister Mohammad Aliabadi, and Industries and Minis- administration has chosen this approach by creating ters Minister Ali Akbar Mehrabian are reportedly a body, detailed below, that will supervise the rebates. loyal to Ahmadinejad. Mirkazemi also has IRGC ties, It will determine how an enormous amount of gov- and more of the participating ministers may have ernment money will be used to underwrite at least unreported connections to Ahmadinejad or the part of the living costs for as many as 46.5 million IRGC.11 Despite the fact that Ahmadinejad has direct Iranians, or 70 percent of the population. A natural supervision over only 20 percent of the rebate funds power struggle between parliament and Ahmadine- according to this plan (which is still an enormous jad for control of that body has delayed passage of amount of money), his ties to those in charge of the subsidies reform and absorbed debate over the issue. new organization (who are, after all, his ministers) In early December, the Guardian Council disap- may lead to his indirect influence over the remaining proved of a version of the subsidies reform it received 80 percent.