London, June 28, 2007 – This week’s gasoline riots in Tehran were entirely predictable. They are also the clearest measure we have seen in recent times of the remarkable fragility of Iran’s Islamic regime.

Predictable, because they have been debated publicly in Iran for weeks and delayed several times, for fear of adverse public reaction.

A measure of the regime’s fragility because large numbers of Iranians have braved repeated threats to protest gas rationing and price hikes in one of the world’s largest petroleum exporting countries

Mahmoud Ahmadinejad came to power in August 2005 on promises that he would put more of Iran’s oil revenue on the tables of ordinary Iranians.

During the election campaign two years ago, he toured Iranian cities and towns, promising a new high school here, a municipal swimming pool there, a new factory, a new gymnasium, rural development, whatever.

Until now, he has been unable to deliver on those promises, squandering Iran’s windfall oil profits on public subsidies to such un-Iranian groups as Hezbollah and Hamas. People know this, and they resent it. And that is what ultimately led to this week’s gas riots, with petrol stations set ablaze in Tehran and in cities across Iran. <http://thespiritofman.blogspot.com/2007/06/petrol-crisis.html>

So far, the economic vulnerability of the regime has not translated into regime-threatening political vulnerability; but just wait, says one prominent Iranian businessman encountered in London, who sees similarities in what is happening in Iran today with the final years of the former shah.

During the late 1970s, he reminded me, the Iranian economy, flush with cash from high oil prices, was beset by high inflation, just as it is now. The shah’s answer was to find a few businessmen who had raised prices and throw them in jail, he said.

In April, the Research Center of the Iranian Majlis ( the rough equivalent of our Congressional Research Service) announced that inflation had risen by a stunning 22.4% for the calendar year that ended on March 21, and projected 24% inflation for the current year.

That is an unbelievably bad performance of what is supposed to be a populist government, especially when coupled to double-digit unemployment and the growing scarcity of foreign investment as the U.S.-led sanctions begin to bite.

Just as the former shah, the current regime is also seeking scapegoats: the United States and Israel (surprise, surprise). To make their case more convincing, they have singled out an Iranian businessman who fled the country on February 21, who was recaptured by Iranian intelligence agents three weeks later in a brazen extraterritorial operation in Oman.

Shahram Jazayeri was a cause celebre in Iran by the time he was dragged out of a small tourist hotel in Khasab, an Omani port in the Strait of Hormuz on March 14. Before fleeing Iran, he was sentenced to fourteen years on corruption charges,

Jazayeri made it known at the time that he had documents implementing family members of the Islamic Republic’s Supreme Leader, Ayatollah Khamenei, in business deals described by the court as corrupt. “That connection to the House of the Leader – the very summit of the state - made him radioactive,” Iranian analyst Shahriar Ahy told me.

Jazayeri’s family, whom I contacted in Canada not long after he was recaptured and tortured in Evin prison in Tehran, insisted that he had been framed and that his extensive network of businesses was legally sanctioned by the Iranian authorities. They insisted that he still hoped the courts would exonerate him. Fat chance.

Ayatollah Khomeini, the figurehead who spearheaded the shah’s overthrow, liked to say that the revolution wasn’t about the price of watermelons. It was his way of saying that the Iranian people would endure all kinds of economic hardship, if they identified with the regime.

But this week’s gasoline riots show that Iranians do care about the price of watermelons – at least, when they can see just how rich their country ought to be (because of high oil prices), and how little of that wealth is trickling down to them.

Consider this, the Iranian businessman in London told me.

When Iranians travel to Dubai, they are humiliated. They fly out of Mehrebad airport in Tehran, which was constructed some 45 years ago, and land in a modern, state-of-the-art fantasy-world in Dubai. To make the insult even more grating, unlike their native land, Dubai has no oil.  No oil, and yet they are so rich!

The only reason Dubai is prosperous and Iran remains mired in poverty comes down to effective leadership – and the lack of it. And Iranians can see this every time they travel to the UAE.

Working quietly behind the scenes, the Bush administration has won agreement from bankers in Dubai to stop clearing Iranian government financial transactions. Because Dubai has become the economic lifeline connecting Iran to the outside world, this has been a major blow to the regime.

Just last week, sources in London told me, the British government agreed to a U.S. request to put pressure on the HSBC bank to stop clearing Iranian government financial transactions as well. Since HSBC handles approximately 50% of Tehran’s remaining international business, this is an additional heavy blow.

And the economic pressures are about to expand. While in London this week, I learned of a British government proposal, now being discussed as a draft United Nations Security Council Resolution, that would ban Iranian government-owned ships and aircraft from international travel.

According to Lloyd’s List of London, the proposed UNSC resolution, as currently drafted by Britain, would prohibit Iranian ships not only from landing at foreign ports but from transiting international waters. That is an extremely far-reaching sanction that would cut off an estimated 40% of Iran’s daily oil exports, at least in the short run.

The British measure “would effectively strip Iran of the right of innocent passage, enshrined in the United Nationals Law of the Sea Convention,” Lloyd’s List wrote on June 27

The most immediate target of these latest sanctions would be the National Iranian Tanker Company (NITC), which operates a fleet of around thirty <http://www.nitc.co.ir/aboutus.htm>  Very Large Crude Carriers.

Iran could eventually contract with other shipping companies to lift their oil, but they would then have to compete with other exporters in the Persian Gulf and most likely would have to offer significant price incentives to get their oil on board.

All of this points to one simple fact, as far as U.S. policy toward Iran goes: financial sanctions have proven to be a far more effective tool than political pressures or political inducements, as fashioned by the State Department.

This regime in Tehran has never ceased a single act of bad behavior because the West has offered it a bribe. On the contrary: the greater the bribes, the more bad behavior we have seen.

Over the past six moths, as UN sanctions have slowly begun to bite, the State Department continued to hold out hope that the economic “pain” could be ended, if only the regime would suspend its uranium enrichment program.

Until now, the regime has said no. To show their resolve, Iran’s leaders chose instead to impose gasoline rationing, to spread the coast of sanctions across the population.

For the first time, the law of unintended consequences is working in the West’s favor. The popular reaction to the gas rationing has shown the regime’s vulnerability.

Now we need to take the next step and provide serious aid and political support to the pro-democracy forces inside Iran as they step forward to confront the regime.

The alternative to doing so will be war.


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