[Mb-civic] FW: Election Aftershock In Corporate Iran

[villasudjuan]

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From: Samii Shahla <shahla at thesamiis.com>
Date: Tue, 5 Jul 2005 11:19:36 -0400
Subject: Election Aftershock In Corporate Iran

BUSINESS WEEK
JULY 11, 2005 

INTERNATIONAL OUTLOOK

Election Aftershock In Corporate Iran
The President-elect is anti-capitalist and anti-West, so investment may
suffer 

The Iranian business community is still reeling. Most executives favored the
pro-business Hashemi Rafsanjani in the Islamic Republic's June 24
presidential contest and expected him to win. Instead, the candidate of the
hardliners, Tehran Mayor Mahmoud Ahmadinejad, triumphed by a landslide. Now
the business community is trying to figure out what the conservative victory
means for them. "I have stopped shaving, taking showers, and wearing ties,"
jokes one depressed executive, referring to the scruffy neo-revolutionary
style.

Ahmadinejad's win, with 62% of the vote, could well be a watershed for
Iranian politics. It signals the end of the reform era that began when
Rafsanjani first won the presidency in 1988. Rafsanjani's two terms,
followed by outgoing President Mohammed Khatami's two, marked a gradual
opening to the West and a relaxing of the Islamic Republic's social
strictures. On the eve of this election, the business elite hoped that the
Islamic regime, with its interference in peoples' lives and its xenophobia,
was fading into the background. Rafsanjani was their man: a thoroughly
flexible mullah who even hinted at reestablishing relations with the U.S.
His election might have triggered an investment boom.

Instead of Rafsanjani, a new generation of hard-line Islamists, many with
military backgrounds, has come to the fore. Ahmadinejad, a 49-year-old
former revolutionary guard suspicious of outsiders, capitalists, and
technocrats, typifies this breed of leader. Not a mullah, he is nonetheless
close to the Supreme Leader, Ayatollah Ali Khamenei.

He struck a popular chord by criticizing the ruling elite as corrupt.
Ahmadinejad's winning margin reflects disgust among Iranians with the
elite's tendency to self-enrichment. Iranians saw him as the best hope to
stamp out corruption and redistribute the country's oil wealth.

Many ordinary Iranians also approve of Ahmadinejad's nationalist streak. But
his election increases the risk of confrontation with the U.S. and Europe on
everything from Iran's nuclear program to political developments in
neighboring Iraq. While he won't be directly in charge of Iran's nuclear
efforts, which come under Khamenei's umbrella, Ahmadinejad's ascendancy is
likely to bolster the hardliners who want Iran to take a tougher stance on
nukes. That's bad news for the Europeans, who are trying to come up with a
deal by the end of July to entice Iran to give up its nuclear fuel cycle
permanently. The rhetoric from both Tehran and Washington may intensify,
pushing oil prices even higher.

Ahmadinejad's Islamic socialist economic approach could also deal a blow to
a country that badly needs private investment and foreign technology.
Economic growth, which has hovered around 7% annually in the past two years,
dipped below 5% recently as companies worried about the election and tension
with the U.S. In his first press conference, on June 26, Ahmadinejad tried
to calm the jittery business community. "The country is in need of progress,
and for this reason we will support the stock market," he told reporters.
But he had campaigned on a populist platform, blaming the emergence of
private banks and Iran's very modest privatization program for increasing
the income gap between rich and poor.

BLOATED DEFICIT 
Now, economists worry that the new President will adopt irresponsible
policies, offering big government handouts while discouraging investment.
Giveaways are already at worrisome levels: Some $20 billion a year is spent
to subsidize fuel and power. The budget deficit hit 7.8% of gross domestic
product for the fiscal year ending in March, 2005. "[Ahmadinejad] doesn't
have a program," says Hadi Zonooz, an assistant economics professor at
Allameh Tabataba'i University in Tehran. "He is just pretending to protect
the poor people."

Certainly, executives are concerned that the investment climate could
deteriorate. Entrepreneurs such as Tehran-based Shahriar Besharat have
discovered that they can make serious money in Iran's fast-growing market of
nearly 70 million consumers. Three years ago he established one of Iran's
first bottled-water operations with French partner Groupe Castel. Revenues
have reached about $30 million, and sales could grow even faster than the
current 40% to 50% per annum if Besharat could find managers to staff a new
plant.

Now he plans to wait and see what kinds of policies emerge from the new
government before expanding further. So do other industrialists and their
foreign partners, who were laying the groundwork before the election for
major investments totaling hundreds of million dollars. But big new projects
won't go forward until companies know whether Ahmadinejad's skepticism of
Western-style capitalism holds -- or whether he realizes the country sorely
needs capital and knowhow to create enough economic growth to bring down 15%
to 20% unemployment. "Everyone familiar with Iran knows we have a huge
amount of potential," says Masoud Nili, head of the economics department at
Sharif University of Technology in Tehran. "It all depends on how sensible
our policies are."

Some investors are betting pragmatism will prevail. Marcus Gerhardt, a
London financier, is raising $50 million to $100 million for his new private
equity Turquoise Fund to pour into Iranian companies. He has lined up
Iranian industrialists and financial specialists to help him identify
targets, and found interest among investors in the Gulf. Gerhardt plans to
move ahead despite the election result. "The pressure is now on the
conservatives to deliver" better economic performance and jobs, he says.

But that may be wishful thinking. At the least, Tehran's new political
lineup means uncertainty. The conservatives seem determined to settle scores
at the Oil Ministry, which they have long considered corrupt. Rafsanjani
allies, including Oil Minister Bijan Zanganeh, are likely to go, analysts
say. In the short term, oil and gas production, which accounts for about 25%
of gross domestic product, will likely stay at current levels. But over the
longer term, projects could be delayed, hitting output.

Just how much Ahmadinejad plans to rock the boat will become clearer as he
prepares to assume power on Aug. 4. Although he served as Tehran's mayor for
two years and before that as governor-general of the city of Ardabil, his
track record is undistinguished. The son of a blacksmith, Ahmadinejad
portrays himself as a simple man. However, he holds bachelor's and master's
degrees in civil engineering and a PhD. in traffic management -- though he
has failed to tame the traffic in Iran's capital. In Tehran, Ahmadinejad is
mainly known for his public relations skills -- he frequently held meetings
with local citizens. His broader experience is limited.

Still, as long as oil prices hold up, Iran's new President will likely have
the wherewithal to buy social peace with ever-larger subsidies. If oil
earnings collapse and he fails to encourage investment, Ahmadinejad may wind
up just as unpopular as the rival he defeated.


By Stanley Reed and Babak Pirouz in Tehran



Copyright 2000-2004, by The McGraw-Hill Companies Inc. All rights reserved.
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 URL: http://www.businessweek.com/magazine/content/05_28/b3942054_mz015.htm 


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