Structural Patronage in Iran: Implications of Subsidies Reform for Iran and U.S. Policy

Introduction

As the U.S. Congress considers sanctions against Iran’s refined petroleum supply, Iran has already enacted a plan to resist such measures. Tehran has expanded its refineries, sought alternate international gasoline suppliers, and begun an attempt to reduce domestic gasoline consumption (this author and others detailed this three-pronged strategy in an October 2009 report). On January 13, 2010, Iran’s Guardian Council began the last part of this defense by approving a package to reduce energy and food subsidies. Although lower gasoline consumption over the next several years will make Iran less reliant on Western gasoline imports, defending against sanctions was only one reason for subsidies reform, as the internal Iranian debate shows. Redistributing income, reducing the burden subsidies place upon Iran’s economy and budget, and creating an economic environment more favorable to businesses controlled by the Islamic Revolutionary Guards Corps (IRGC) have apparently been equally important motivations. Each of these factors has direct and indirect implications for Iran and U.S. policy toward Iran.

Reformers have placed the creation of a rebate fund at the heart of subsidies reform to minimize the hardship Iran’s lower classes will encounter once subsidies drop. The regime could use the fund to deny benefits to individuals it views as disloyal, thus improving its ability to combat internal unrest through nonviolent means. The debate over control of the yet-to-be-finalized agency that determines who gets rebates has already revealed tensions within Iran’s ruling elite. If the economic situation deteriorates further and the regime does not adjust the rebate program flexibly, the program could exacerbate those tensions and alienate the business class and urban elite further from the regime.

President Mahmoud Ahmadinejad could work to mitigate that risk by expanding the rebate program to provide more benefits to the middle and upper classes. Such a shift would defeat many of the main objectives of the rebate program, however, including relieving some of the strain on the government’s finances.

Decreased energy subsidies will also likely increase already-high production costs for small-and-medium-size businesses in Iran. Corporations with IRGC connections will more easily weather subsidies reductions because of their larger size, access to government capital and military materiel, and revenue from black market activities the IRGC and its allies largely control. Subsidies reform is thus likely to increase the de facto nationalization of the Iranian economy (which the regime already controls substantially through the bonyads and IRGC economic activities) and to concentrate even more economic power in the hands of the IRGC.

Subsidies reform is one of the largest domestic policy changes in the history of the Islamic Republic. Its goals include not only mitigating the effects of international sanctions on the sale of refined petroleum products to Iran, but also increasing the ability of the Ahmadinejad government to reward its friends and hurt its enemies through nonviolent means. The culmination of a reform campaign more than fifteen years old, today’s subsidies reform will give the regime protection from external pressure, the ability to control which segments of the Iranian population suffer from sanctions, and an additional tool to confront internal opposition without directly resorting to force. 

 KEY POINTS

• Although sanctions have hastened subsidies reform, the Iranian regime’s desires to seize greater political power, increase the Islamic Revolutionary Guards Corps (IRGC’s) market dominance, redistribute income, and lessen budgetary pressure have provided critical motivations for reform.
• Subsidies reform will make Iran’s economy more hostile to businesses not linked to the IRGC, increasing the economic control exerted by the IRGC in recent years.
• The rebate program at the core of Iran’s subsidies reform package will give President Mahmound Ahmadinejad additional ways to reward political loyalists while curtailing or denying benefits to regime opponents.
• Both the increased IRGC economic role and the rebate program could distort Iran’s economy over the next several years, perhaps more quickly than sanctions could, while disproportionately harming Iran’s opposition.
• Subsidies reform in Iran necessitates that the United States develop two long-term strategies, one for dealing with a potentially more hostile, authoritarian Iran home to a disenfranchised opposition and one for dealing with an increasingly distorted Iranian economy. 

See full report here.