This month, Iran is celebrating the 30th anniversary of the revolution that led to the creation of the Islamic Republic. The anniversary comes as the country prepares for presidential elections, and the administration of US President Barack Obama signals a greater willingness to engage with Iran than during the past eight years.

How Iran responds to these issues will be vital in determining the short and mid-term trajectory of its foreign and domestic policies, including economic ones. Early signs of a new approach from President Mahmoud Ahmadinejad came in his speech marking the revolution’s anniversary on 10 February, when he said: “The Iranian nation is ready to hold talks, but talks in a climate of fairness with mutual respect.”

Iran’s presidential elections will be held in June, and Ahmadinejad has already announced that he will seek re-election. Hojjatoleslam Mehdi Karrubi, founder of the opposition National Confidence party, also plans to stand for election.

On 6 February, former president Mohammad Khatami announced his candidacy, after months of speculation. Khatami left the post of president in 2005 after serving two terms, the maximum permitted at one time under Iran’s constitution. His participation will make it a tough contest for Ahmadinejad.

Split support

One issue is now dominating the run-up to the elections: the prospect of Ahmadinejad facing a conservative candidate at the polls.

The president’s unpopularity – caused by inflation of about 20 per cent and unemployment officially at about 10 per cent, but unofficially closer to 15 per cent – and an overall deterioration of the economy, has split the broad conservative coalition of the United Principalist Front (UPF), which supported Ahmadinejad in the past.

The majority of the party are pushing for an alternative conservative candidate to Ahmadinejad, while the remainder are still supporting the increasingly embattled president.

In February 2008, the UPF secured 70 per cent of parliamentary seats, thanks to its promise to improve economic conditions and achieve social justice. Today, the party has neither unity nor a reputation for effectively managing the economy.

Before Khatami announced in February that he would stand for election, there was speculation that Mir-Hossein Mousavi, the republic’s leftist prime minister during the Iran-Iraq war, would run. But an agreement between reformists that Mousavi would not be able to defeat Ahmadinejad seems to have been reached. Khatami has more support than Mousavi among the largest electoral group: Iran’s youth.

Since stepping down as leader, Khatami has frequently spoken out against the economic, foreign and domestic policies of Ahmadinejad, saying that if the country remains on its current path of economic downturn “the people’s burden” of high inflation and unemployment will become heavier.

Polls show Khatami remains the country’s most popular politician of recent times. In many rural areas, his popularity rating hovers at 50-55 per cent, while Ahmadinejad has the support of about 26-33 per cent. This makes it likely that Khatami will win the election.

However, Khatami does not enjoy the challenges presented by the factional struggles that characterise Iranian politics, and has questioned the extent to which he will be able to satisfy the electorate’s expectations of political, economic and social improvements, given that the Majlis (parliament) is dominated by conservatives.

Khatami says that undoing the economic damage resulting from Ahmadinejad’s economic policies will take longer than most Iranians would tolerate. By becoming president, he would put his current popularity at risk.

A Khatami administration would focus primarily on the problems of the economy and social justice. He would change the country’s political atmosphere, but would not push for fundamental constitutional changes.

If Ahmadinejad is re-elected, Iran’s economic and domestic political policies will change little.

Whoever becomes Iran’s next president will have little room for manoeuvre in regard to the country’s economic and political relationship with the West, specifically the US.

Major foreign policy decisions, such as the nuclear issue and conditions for talks with the US, are in the hands of Supreme Leader Ayatollah Khamenei.

Any new president will also have to wait to see what changes the Obama administration proposes. A rapprochement between the US and Iran will play a deciding role in whether the country becomes attractive for Western investment and capital. The change in the US administration in January has given hope for some form of rapprochement.

During his electoral campaign for the US presidency, Obama announced his support for direct talks with Iran, without preconditions.

And in his interview with Dubai-based TV station Al-Arabiya on 26 January, Obama remarked that if Iran “unclenched its fist” the US would extend the hand of friendship.

Obama also spoke in January of offering Iran economic incentives to abandon its nuclear programme. However, he warned Tehran of tougher sanctions if it did not.

Susan Rice, the new US envoy to the UN, announced on 26 January that Iran’s nuclear plans were a “diplomatic priority”, and that Washington would pursue direct talks with Iran.

The question on every Iranian’s lips is: do the signals coming out of Washington represent a significant change in the US’ approach to Iran?
To make a judgement at this time would be premature. So far, the demands of the Obama administration in regard to Iran reflect those of the Bush administration, although the new US president intends to use diplomatic methods, including direct talks, to achieve his goals.

Nuclear issue

Nonetheless, major changes in the US-Iranian relationship are unlikely to occur in the next two years because of two major issues: Iran’s nuclear programme and Palestine.

The basic problem is that Tehran demands significant changes in US behaviour, such as the lifting of sanctions, before serious talks can begin. For its part, the US demands that Iran suspends its nuclear programme before sanctions can be lifted and serious talks start.

Unless one of the two sides makes significant initial concessions, which at this point is unlikely given the recent conflict in Gaza and Iran’s support for Hamas, US-Iranian rapprochement will not take place.

Iranian acceptance of US demands in regard to the nuclear programme and Israel would strike at the centre of Iran’s ideology. Tehran’s nuclear programme is supported by a majority of the population, for whom it symbolises Iranian geopolitical and technological independence. The majority of Iranians consider the West’s approach to the nuclear issue hypocritical.

The extent of the US-Iran rapprochement is also determined by the dynamic between Israel and Iran, which is to a significant degree based on the state of the Israeli-Palestinian issue. As long as the Palestinians and Israelis are not discussing peace, a reformist Iranian president would not be ideologically or politically able to make major concessions on the issue.

Under Ahmadinejad, and as a result of sanctions, Iran has strengthened its economic links with the Far East and its neighbours in the Middle East, specifically the GCC, Turkey and, to a lesser extent, Iraq and Syria.

The majority of Iran’s oil now goes to Asian markets. In 2008, Iran exported 32.4 per cent of its crude to Europe, 18.6 per cent to Japan, 43.3 per cent to Asia and East Asia (excluding Japan) and 5.7 per cent to Africa.

As Iranian trade with European countries has fallen because of economic and financial sanctions, Iran’s economic links with the GCC have increased. In 2000, bilateral trade between Iran and the GCC was worth $1.7bn. In 2007, it increased to $9bn, while in 2008 it rose to $13bn, according to government figures, although by the autumn of that year trade began to slow as a result of the spreading global economic crisis and Iran’s domestic economic conditions.

The GCC enjoys a substantial trade surplus with Iran. By 2008, GCC exports to the republic were worth $11bn, which accounted for 14 per cent of Iran’s total imports. The same year, the trade surplus with Iran was $6.7bn.

Iranian-Turkish economic relations are centred on Iranian imports of Turkish manufactured and consumer goods, and Turkish importation of Iranian gas and electricity.

Turkey imports about 33 million cubic metres of gas a year from Iran, which accounts for about one-third of the country’s gas imports. The value of the bilateral trade between the two countries stood at about $6.7bn in 2006, rising to $8bn in 2007 and $12bn in 2008.

The Bush administration put pressure on Ankara to limit this economic relationship, but with no success. Turkish Prime Minister Recep Tayyip Erdogan responded to this pressure bluntly. “No country has the right to ask Ankara to relinquish its relations with countries that supply it with energy,” he said in October 2007.

Iranian-Turkish co-operation in the transit of gas, and pipeline development, will continue under any new Iranian president. The republic’s economic presence will remain steady or grow in the two Arab countries with which Tehran enjoys good relations: Syria and Iraq.

The news that Iran launched a domestically manufactured satellite in early February is another sign of Tehran’s keenness to demonstrate the country’s technological prowess despite economic sanctions.

But the fact that the satellite was called ‘hope’ could suggest an appetite among Iranians for an end to the country’s frosty relations with much of the West, and some of its Arab neighbours.

This sentiment cannot be acted upon until the results of the presidential elections have been announced, but the arrival of a new president means 2009 could be a significant year for reasons other than the 30th anniversary of the revolution.

Zhand Shakibi is a lecturer in the government department at the London School of Economics.