A Febrile Iran Poses a Risk Forecasting Challenge - And an Opportunity

 

For Chief Risk Officers, and for CEOs and strategic planners in the maritime community, the volatile situation in Iran poses a considerable assessment challenge, with both potential business opportunity upsides and operational downsides. 

Prominence has been given to the setbacks Iran and its Axis of Resistance have suffered abroad, but at home the domestic situation is more unstable than it has been for many years.  A continuance of the country’s current political direction is likely to lead to the imposition of snap-back sanctions, accompanied by social disorder and a further deterioration of already dire economic circumstances - all bad for orderly global trade. 

But the upside is that if change occurs - whether as the product of an initiative by the new Trump administration, as the fall-out of further Israeli-led military action, or because of internal political changes prompted by internal unrest in the country - then the potential re-emergence into the global economic system of an oil-rich, populous country with enormous but latent economic potential could present the maritime community with huge investment opportunities, especially for those who are prepared and ready to move.

What then are the indicators and warnings of change which should be looked out for?

IRGC cohesion

Having seized power from the Shah by revolution, Iran’s theocratic rulers have always been acutely aware of the need to protect themselves from the same process applied to them.  The Islamic Revolutionary Guard Corps (IRGC), as the name suggests, has as its primary purpose the protection of the Islamic leadership by whatever force is necessary, leaving the defense of the country to the regular armed forces.

Never short of funds or resources to fulfill this mission, the IRGC has effectively suppressed successive waves of internal unrest, notwithstanding that the current regime probably commands no more than 25% active popular support. Any waning of this effectiveness - just as the Savak internal security service wavered in the final months of the Shah - would probably be a significant indicator of regime vulnerability. 

The prevailing unity of purpose within the IRGC could be weakened by internal splits between hardliners and those believing a lack of popular support imperils the regime.  It could also be weakened by defections – by those who believe they can see that regime change is in the offing.

Reformist influence

The Iranian Velayat-e Faqih political system, based on the widest voting franchise in the Middle East but moderated by the supreme clerical leadership, has always had a genuinely confrontational element between hardliners and reformist factions. Reformists, vetted and culled as candidates by the supreme leadership, have never had much influence. The electorate have nevertheless voted for a succession of reformist-inclined presidents, from Khatami and Rouhani to the current Dr Masoud Pezeshkian, each of whom has (so far) failed to deliver on the mandate won because of hardliner resistance.

A litmus test of which way the wind is blowing is the degree of support President Pezeshkian manages to attract within the Iranian parliament; if the mood is changing, those closer to the center ground, being politicians, will fall in behind him. 

Internal unrest

Street and popular protest, sparked by unpredictable events, can always flare up in Iran. Repeated failures of protest movements, either populist or union-based, has depressed Iranians but has not removed their desire to have another go, should circumstances be favorable. 

Iranians are currently facing record inflation (reaching 57% in Lorestan), reductions in subsidies, regular wage arrears, and gas and electricity shortages during the cold mid-winter season. Iran's Misery Index, a calculation that combines unemployment and inflation rates, rose to 60% at the beginning of the month, its highest ever level. Tensions are also high because of attempts by hardliners to impose a new hijab law, a move being resisted by President Pezeshkian. In this atmosphere, even small incidents have the potential to spark wider protests.

There are already clear signs that the authorities are nervous about unrest in the border regions of the country, and are also facing increasing insurgency. Since the end of October, a long-running separatist insurrection has flared in the southeastern province of Sistan-Baluchistan. Iranian state media initially described reinforced security force activity in the area as an exercise, but operations have been going on for months now, with acknowledged security force and separatist casualties mounting past levels not seen for many years. 

Drone imagery helpfully released by the IRGC shows that the separatists have substantial infrastructure in Pakistani Baluchistan. At the beginning of December, a similar ‘exercise’ began in the northeast, aimed against rebels supported from Afghanistan, with whom there are tensions over the damming of rivers. On January 4, the IRGC flew a brigade of troops into the Kermanshah area of western Iran, embarking upon Exercise Great Prophet 19 and reinforcing locally-based Basij internal security forces; the IRGC announced that it had recently destroyed an ‘extremist takfiri network’ in the area, language which is normally used to describe Kurdish separatist activity, and also captured the leader of a Mojahedin-e-Khalq (MEK) cell active in Ardabil. 

Last month, 60,000 members of the Basij were mobilized to carry out internal security exercises in Arabic-speaking Khuzestan;  across the border from Basra. This is a traditionally restive area, and the IRGC announced that a major arms seizure had been made in the district capital of Andimeshk. On January 10, an unprecedented internal security exercise involving 110,000 mobilized Basij volunteers is scheduled to take place in Tehran, according to Brigadier Ali Mohammad Naeini, the IRGC spokesman. Brigadier Naeini has told the Financial Times that “the number of drills has almost doubled this year compared with last year, in response to the evolving threat landscape.”

These unusual events are indicative of building internal pressures for change, albeit stoked up by external actors, including the Albanian-based exile group, the MEK. These pressures make the nation far more fragile, and not as robust as it has been in the past to deal with external adversaries, who have been provoked and goaded into taking active measures to curb the threats posed by Iran’s nuclear weapons programme, missile and drone capabilities and aggressive regional influence policies.

Major political changes appear to be inevitable in the short to medium term; probably the primary question for corporate risk assessors is whether change will play out either in an orderly fashion, or if revolutionary chaos will ensue, disrupting the wider region.