Iran, U.S. Wage A Quiet War Over The Economy

Even as much of the world wonders whether the United States or Israel will take military action against Iran's nuclear facilities, the conflict on another Iranian battlefield escalates largely unnoticed: a war over the Iranian economy.

On one side is Iran's Islamic Revolutionary Guards Corps, or IRGC. Having begun as an elite paramilitary force, the IRGC in recent years has quietly taken over about half the Iranian economy. The group now owns or controls dozens of companies, with commercial interests that range from laser eye surgery to telecommunications.

On the other side is the U.S. government's Treasury Department, which has taken the lead in the organization of a new international sanctions campaign targeting IRGC activities.

It is the latest chapter in an Iran sanctions effort dating from the 1979 seizure of the U.S. Embassy in Tehran. Over the years, the U.S. sanctions policy has been hotly debated, with critics saying they have hurt the Iranian population more than the Iranian government.

The outcome of the new economic struggle, however, could help determine the future of Iran. The IRGC role in the economy has come largely at the expense of the country's private business sector, and its growth creates a challenge for Iran's political opposition, perhaps even for the state itself.

"Ten or 20 years ago, if you were looking to a start a business [in Iran], you may have tried to partner with someone related to a powerful cleric. Nowadays, people are looking to folks who are in contact with the Revolutionary Guards," says Karim Sadjadpour, an Iran expert at the Carnegie Endowment for International Peace.

Semi-Independence Key To Business Expansion

The Revolutionary Guards first came to the world's attention when the group spearheaded Iran's bloody eight-year battle with Iraq in the 1980s. Its business activities began when it took charge of reconstructing the war-damaged country, which led to its involvement in the construction and oil sectors.

The IRGC was part of the ruling regime, but with its own organization, separate from the Iranian state.

The IRGC's semi-independent status means it has been able to take advantage of the government's privatization campaign — which began about 10 years ago — and roll over its competitors.

"The original idea was to promote a market economy," says Rasool Nafisi, co-author of a Rand Corp. report on the rise of the IRGC. "But the great chunk of [the state enterprises] was purchased by the IRGC. So actually they just went from one hand to another, from government ownership to IRGC ownership."

In 2004, an IRGC-controlled company secured a contract to operate Iran's main international airport. IRGC critics also contend that the Revolutionary Guards control up to 60 jetties at Iranian ports. Such interests enable the IRGC to control commercial imports, both permitted and illicit.

"If you're importing autos from abroad, you are subject to 50 to 100 percent tariffs, whereas if you have an affiliation with the RGC, you can do it for free," says Sadjadpour, of the Carnegie Endowment. "So you can undercut your competitors."

The growth of IRGC business activities has come so rapidly that the Rand report concluded that it may soon be seen as "an effective counter-authority to the Supreme Leader," the post first established by Ayatollah Ruhollah Khomeini in 1979 and now held by his successor, Ayatollah Ali Khamenei.

Last month, the IRGC took an $8 billion controlling interest in Iran's main telecommunications company. Given that there are an estimated 30 million cell phones in Iran, the investment is likely to prove lucrative. The acquisition also means the Revolutionary Guards will be better positioned to control Internet access and monitor private communications in Iran.

Between its gradual displacement of the private business sector, its growing capability to monitor and control the opposition movement, and its potential control of black market and smuggling networks, the IRGC has come to be seen by reformers as a major obstacle to Iran's democratization.

"Such an organization would not like to have a democratic state, especially if there is transparency and accountability," Nafisi says. "They like to have their shadow economy."

Economic Sanctions Are Double-Edged Sword

This is the economic side of the battle for Iran, and the U.S. government and its allies are in the fight. Their weapons are economic sanctions, designed to isolate Iran.

But economic warfare is a complicated business. In some ways, the IRGC may actually stand to benefit if the effect of sanctions is to reduce foreign trade and foreign investment in Iran.

"What we've seen over the last four years especially is that the Revolutionary Guards have really thrived in a more hostile, isolated atmosphere because it means less competition for them," Sadjadpour says. "I describe them as weeds that grow in the dark, in the sense that they blossom more as a result of isolation than sunlight."

To hurt the Revolutionary Guards, sanctions will have to be fine-tuned. Stuart Levey, the Treasury Department's undersecretary for terrorism and financial intelligence, told Congress this month that his office has drawn up a list of the Iranian companies that have IRGC connections.

"It's a good signal to the rest of the world who really don't want to necessarily do business with the IRGC," Levey told the Senate Banking Committee. "If we can identify the companies for them that are IRGC-owned and controlled, then [other countries] can take the steps themselves to avoid doing business with them."

The Treasury strategy rests on the premise that IRGC companies inevitably depend on some foreign business partners, even if they prefer to do business in the shadows.

"Right now, other countries are still perfectly within their legal rights to do business with the IRGC and IRGC front companies," points out Michael Jacobson, a former adviser to Levey who is now affiliated with the Washington Institute for Near East Policy. "So to the extent you can put in place international requirements for companies and countries to cut off this kind of business, I think it would be a major step."

More sanctions on Iran, even those targeting IRGC interests, could bring more hardship for the Iranian people, however. Would Iranians in that case rally against foreign pressure? Or would they blame their own rulers?

"The honest answer to that question is that no one knows," says Sadjadpour, "just as no one predicted that 3 million people would take to the streets after the June elections."