Iran Paid for Su-35 Jets, But Russia Won’t Deliver Them

Earlier this month, Brigadier General Hamid Vahedi, Iran’s air force commander, ended weeks of speculation about the imminent delivery Russian Sukhoi Su-35 fighter jets. “Regarding the purchase of Su-35 fighter jets [from Russia], we need them, but we do not know when they will be added to our squadron. This is related to the decision of [Iran’s] high-ranking officials,” he stated in an interview on state TV.

Vahedi's comments sparked speculation about dysfunction in the Russia-Iran partnership, including that Israel had successfully convinced Russia to postpone delivery of the advanced fighter jets to Iran.

While officials in Tehran continue to pursue a partnership with Russia, it is increasingly clear that Russian officials see their relationship with Iran as little more than a card that can be played according to their needs.

Russia’s potential sale of Su-35 jets to Iran has been connected to the deeper military cooperation between the two countries since the Russian invasion of Ukraine in February 2022. Iranian drones are being used by Russian forces to bomb Ukrainian cities. The first drones were transferred from Iran to Russia around one year ago.

But Iran has been waiting for far more than a year to receive the Su-35, which would prove a major upgrade in capabilities for Iran’s aging air force, largely comprised of American jets in service since before the 1979 revolution.

According to one current and one former diplomat with direct knowledge of the matter, Iran made “full payment” for 50 Su-35 fighter jets during the second term of President Hassan Rouhani. The officials requested anonymity given the sensitivity of Iran’s arms purchases. According to the former diplomat, at the time of purchase Russia had promised to deliver the Su-35s in 2023. Neither source expects that the deliveries will be made this year.

A third source, a security official, speaking on background, expressed disappointment that Vahedi’s “uncoordinated interview” had called attention to the fact that the deliveries were now in doubt. Iranian officials feel embarrassment over Russia’s failure to adhere to commitments.

The delay in the delivery could be traced to the strong relationship between Russia and Israel. In June, Axios reported that Israeli officials confronted Russian counterparts over Russia’s growing military cooperation with Iran and the possibility of Russia providing Iran advanced weapon systems. Israeli Prime Minister Benjamin Netanyahu disclosed the “open and frank” dialogue with Russian officials in a closed-door hearing with Israeli lawmakers on June 13.

In the view of the former diplomat, due to their arrogance, Iranian hardliners “fell into the trap” of believing that they were an equal partner to Russia, simply because “the Russians are queuing up to buy arms from them.”

The drone transfers have contributed to Iran’s political isolation, giving Western officials the impression of deepening cooperation between Russia and Iran, even as the Iranian Foreign Ministry continues to claim that Iran remains a neutral party in the Ukraine war. According to the security official, neutrality remains the consensus position of the Iran’s Supreme National Security Council, but he warned that country’s military brass may not all share that same view.

Notwithstanding the ambitions of Iranian generals, Russia continues to treat Iran far worse than an ally. Earlier this week, Russia issued a joint statement with the Gulf Cooperation Council (GCC), affirming the United Arab Emirate’s claims on three Iranian islands: the Greater Tunb, the Lesser Tunb, and Abu Musa. The statement enraged Iranian officials. Ali Akbar Velayati, a senior advisor to Iran’s Supreme Leader, called Russia’s assent to the statement “a move borne of naivety.” Iran’s foreign minister and its government spokesperson stressed in statements that Iran will not tolerate claims on the three islands from any party. The officials had made such statements before—a China-GCC joint statement from December 2022 caused a similar public outcry.

As Iranian officials are forced to defend their ties with Russia once again, a question remains. Why does Iran have so little leverage over Russia, even after the Russian invasion of Ukraine? The answer lies in the mindset of Iranian officials.

Back in May, Iran’s Supreme Leader, Ali Khamanei, declared that “Dignity in foreign policy means saying no to the diplomacy of begging.” The slogan “diplomacy of begging” has become popular among conservatives and the hardliners, who have used it to condemn the signing of the Joint Comprehensive Plan of Action (JCPOA) and to accuse former Iranian foreign minister Javad Zarif of begging the West for sanctions relief. But if begging the West for sanctions relief is wrong, why are hardliners eager to beg Russia for the Sukhoi jets?

Tehran’s ties with Moscow were never built on trust. They were built on mutual fears and mutual needs. Were the administration of President Ebrahim Raisi to realize that looking to the West does not preclude political and economic relations with Russia and China, Iran could strengthen its position in the Middle East and regain leverage in its relationship with Russia. Until then, the Russians will continue to look at their relationship with Iran as a nothing more than playing card.

Photo: Wikicommons

Sanctions, CBDCs, and the Role of ‘Decentral Banks’ in Bretton Woods III

In a recent conversation on the Odd Lots podcast, Zoltan Pozsar offered an interesting use case for central bank digital currencies (CBDCs), a potentially transformative technology that 86 percent of central banks are “actively researching” according to a BIS survey from 2021.

Pozsar, a former Credit Suisse strategist who is setting up his own research outfit, believes that a new global monetary order is emerging—he calls it “Bretton Woods III.” As part of this order, the adoption of CBDCs will enable central banks to play a more pivotal role in global trade through the formation of a “state-to-state” network that is intended to be independent of Western financial centres and the dollar. In this network, central banks will play a “dealer” role when it comes to providing liquidity for trade among developing economies. Commenting on China’s push to internationalise the renminbi, Pozsar set out his vision:

You need to imagine a world where five, ten years from now we are going to have a renminbi that’s far more internationally used than today, but the settlement of international renminbi transactions are going to happen on the balance sheets of central banks. So instead of having a network of correspondent banks, we should be thinking about a network of correspondent central banks and a world where you have a number of different countries and in which each of those different countries have their banking systems using the local currency but when country A wants to trade with country B… The [foreign exchange] needs of those two local banking systems are going to be met by dealings between two central banks.

In short, Pozsar believes that the adoption of CBDCs will enable the creation of a “new correspondent banking system” built around central banks. But even if central banks do begin to use CBDCs to settle trade, reducing dependence on dollar liquidity and legacy correspondent banking channels, the underlying problem motivating CBDC adoption will remain.

Moving away from the dollar-based financial system is foremost about geopolitics. Globalisation, as we have known it, reinforced a unipolar order. The United States was able to leverage its unique position in the global economy into unrivalled superpower status. In the last two decades, the weaponisation of the dollar further augmented U.S. power—Americans are uniquely able to wage war without expending military resources, which is another kind of exorbitant privilege. As Pozsar notes, the countries moving fastest towards CBDCs are those that are either currently under a major U.S. sanctions program (Russia, Iran, Venezuela etc.) or at risk of being targeted (China, Pakistan, South Africa etc.) These countries recognise “that it is pointless to internationalise your currency through a Western financial system… and through the balance sheets of Western financial institutions when you basically do not control that network of institutions that your currency is running through.” As Edoardo Saravalle has argued, the power of U.S. sanctions is actually underpinned by the central role of the Federal Reserve in the global economy.

Adopting CBDCs would enable countries to reduce the proportion of their foreign exchange reserves held in dollars while also reducing reliance on U.S. banks and co-opted institutions such as SWIFT to settle cross-border payments. However, even if countries reduce their exposure to the dollar-based financial system in this way, U.S. authorities will still be able to use secondary sanctions to block central banks from the U.S. financial system for any transaction with a sanctioned sector, entity, or individual. Any financial institution still transacting with a designated central bank could likewise find itself designated.

Moreover, even if Bretton Woods III emerges, leading to the formation of a robust parallel financial system that is not based on the dollar, central banks will continue to engage with the legacy dollar-based financial system. It is difficult to image a central bank correspondent banking network in which nodes are not shared between the dollar-based and non-dollar based financial networks. As such, the threat of secondary sanctions or being placed on the FATF blacklist—moves that would cut a central banks access to key dollar-based facilities—will remain a significant threat.

Even Iran, which is under the strictest financial sanctions in the world, including multiple designations of its central bank, continues to depend on dollar liquidity provided through a special financial channel in Iraq. A significant portion of Iran’s imports of agricultural commodities continue to be purchased in dollars. Iran earns Iraqi dinars for exports of natural gas and electricity to its neighbour. The Iraqi dinars accrue at an account held at the Trade Bank of Iraq. The dinar is not useful for international trade, and so Iran converts its dinar-denominated reserves into dollars to purchase agricultural commodities—a waiver issued by the U.S. Department of State permits these transactions. The dollar liquidity is provided by J.P. Morgan, which plays a key role in the Trade Bank of Iraq’s global operations, having led the creation of the bank after the 2003 invasion. 

The fact that the most sanctioned economy in the world depends on dollar liquidity for its most essential trade suggests that central banks will remain subject to U.S. economic coercion, owing to continued use of the dollar for at least some trade. But even in cases where Iran conducts trade without settling through the dollar, U.S. secondary sanctions loom large.  

For over a decade, China has continued to purchase large volumes of Iranian oil in violation of U.S. sanctions, paying for the imports in renminbi. Iran is happy to accrue renminbi reserves because of its demand for Chinese manufactures. But owing to sanctions on Iran’s financial sector, Iranian banks have struggled to maintain correspondent banking relationships with Chinese counterparts. When the bottlenecks first emerged more than a decade ago, China tapped a little-known institution called Bank of Kunlun to be the policy bank for China-Iran trade.

The bank was eventually designated by the US Treasury Department in 2012. Since then, Bank of Kunlun has had no financial dealings with the United States, but that has not eased the bank’s transactions with Iran. Bank of Kunlun is owned by Chinese energy giant CNPC, an organisation with significant reliance on U.S. capital markets. When the Trump administration reimposed secondary sanctions on Iran in 2018, Bank of Kunlun informed its Iranian correspondents that it would only process payment orders or letters of trade in “humanitarian and non-sanctioned goods and services,” a move that was intended to forestall further pressure on CNPC. Ultimately, Bank of Kunlun had far less exposure to the U.S. financial system that China’s own central bank ever will, a fact that points to the limits of a central bank correspondent banking network. For CBDCs to serve as a defence against the weaponised dollar, they would need to be deployed by institutions that maintain no nexus with the dollar-based financial system. It is necessary to think beyond central banks.

What Pozsar has failed to consider is that in a world with two parallel financial systems, a country would not necessarily have a single reserve bank. Alongside central banks, we can envision the rise of what I call decentral banks. If a central bank is a monetary authority that is dependent on the dollar-backed financial system and settles foreign exchange transactions through the dollar, a decentral bank is a parallel authority that steers clear of the dollar-backed financial system and settles foreign exchange transactions through CBDCs. The extent to which Bretton Woods III really represents the emergence of a new bifurcated global monetary order depends not only on the adoption of CBDCs, but also the degree to which the innovations inherent in CBDCs enable countries to operate two or more reserve banks whose assets and liabilities are included in a consolidated sovereign balance sheet.

Again, Iran offers an interesting case study for what this innovation might look like. The reimposition of U.S. secondary sanctions on Iran in 2018 crippled bilateral trade between Europe and Iran. Conducting cross-border financial transactions was incredibly difficult owing to limited foreign exchange liquidity and the dependence on just a handful of correspondent banking relationships. France, Germany, and the United Kingdom took the step to establish INSTEX. As a state-owned company, INSTEX would work with its Iranian counterpart, STFI, to establish a new clearing mechanism for humanitarian and sanctions-exempt trade between Europe and Iran. The image below is taken from a 2019 presentation used by the management of INSTEX to explain how trade could be facilitated without cross-border financial transactions.

The model is strikingly like Pozsar’s suggestion that CBDCs will enable central banks to settle trades using their balance sheets, rather than relying on the liquidity of banks and correspondent banking relationships. INSTEX and STFI were supposed to net payments made by Iranian importers to European exporters with payments made by European importers to Iranian exporters, using a “virtual currency unit” to book the trade. The likely imbalances would be covered by a cash injection into INSTEX (Europe was exporting far more than it was importing after ending purchases of Iranian oil). It was an elegant solution, which sought to scale-up the methods being used by treasury managers at multinational companies operating in Iran to purchase inputs and repatriate profits.

Earlier this year, INSTEX was dissolved. Its shareholders, which eventually counted ten European states, lacked the political fortitude to see the project through. Notwithstanding bold claims about preserving European economic sovereignty in the face of unilateral American sanctions, there was always a sense among European officials that Iran was undeserving of a special purpose vehicle. But as the world moves to a new financial order, more institutions like INSTEX will emerge. Pozsar’s vision is bold insofar as he believes central banks will establish new cross-border clearing mechanisms based on CBDCs. But if new digital currencies can emerge to displace the dollar in the global monetary order, so too can new institutions be established.

Pozsar’s vision for Bretton Woods III becomes more convincing if one considers that the emergence of institutions such as decentral banks could lead to the creation of correspondent banking networks that are truly divorced from the dollar-based financial order. However, there remain plenty of reasons to doubt that such a system will emerge. Pozsar appears to have given little consideration to the issue of state capacity. Most countries have poorly managed central banks as it is—in the Odd Lots interview he pointed to Iran and Zimbabwe as early movers on CBDCs. We should have low expectations for the ability of most governments to develop and implement new technologies such as CBDCs or to establish wholly new institutions such as decentral banks. Moreover, the ability of the U.S. to use carrots and sticks to interfere with those efforts should not be underestimated.

There may be compelling structural drivers for something like Bretton Woods III, namely the rise of China and the overall shift in the global distribution of output. But somewhere along the way those structural drivers need to be converted into institutional processes. Bretton Woods is shorthand for the idea that monetary rules are as important for the operation of the global economy as the macroeconomic fundamentals. Countries reluctant to break the rules will struggle to rewrite them.

Photo: Canva

When it Comes to Middle East Diplomacy, Chinese and European Interests Align

A version of this article was originally published in French in Le Monde.

In March, China managed to a broker a détente between Iran and Saudi Arabia, achieving a diplomatic breakthrough that had eluded European governments. But Europe and China have shared interests in the region and there is scope for the two powers to work together to foster further multilateral diplomacy.

Europe and China, which both depend on energy exports from the Persian Gulf, have long relied on the US-led security architecture in the region. But the 2019 attacks on oil tankers in the UAE and oil installations in Saudi Arabia, widely attributed to Iran, were a watershed moment. Shifting US interests and President Trump’s erratic reaction to those attacks forced the Chinese and Europeans to take more responsibility for regional security over the last four years.

In 2020, China presented its idea for regional security in the Persian Gulf, arguing that with a multilateral effort, the Persian Gulf region can become “an oasis of security.” In the time since, the agreement between Saudi Arabia and Iran, signed in March, can be considered an outcome of such efforts.

European governments have also sought to back multilateral diplomacy. France was intent on creating a platform for Tehran and Riyadh to engage in dialogue. President Macron helped launch the Baghdad Conference for Cooperation and Partnership that was held in August 2021. The conference was a unique opportunity to gather countries that had not sat around the same table for years. Officials from Iraq, Iran, Kuwait, Qatar, Saudi Arabia, and the UAE, in addition to Egypt, Jordan, Turkey, and France participated. Oman and Bahrain joined the second gathering which took place last December in Amman, Jordan.

The European Union also expressed its support for the Baghdad process. Joseph Borrell said during the Second meeting that “promoting peace and stability in the wider Gulf region…  are key priorities for the EU.” Adding that “we stand ready to engage with all actors in the region in a gradual and inclusive approach.”

The Joint Communication to the European Parliament and the Council on a strategic partnership with the Gulf reflects the EU’s keenness on expanding its engagements with the region, particularly on economic ties. The partnership is focused on the GCC, but it mentions that “involvement of other key Gulf countries in the partnership may also be considered as relations develop and mature”—a reference to Iran and Iraq.

Clearly, China and the European Union have multiple areas of mutual concern in the Persian Gulf region. Ensuring freedom of navigation, the undisrupted flow of oil and gas from the region, and non-proliferation of nuclear weapons are shared priorities. But while China is now a central player in the strategic calculations of all states in the region, the Europeans are being largely left out.

European diplomatic outreach has faltered in the face of new political pressures arising from Iran’s continued nuclear escalations, its involvement in Russia’s war against Ukraine, and its repression of ongoing protests for democratic change.   

The French president was coincidently in China when the Beijing Agreement was signed, and he welcomed the rapprochement between Saudi Arabia and Iran. Given shared interests, European officials must now find ways to engage with Chinese counterparts on fostering greater regional diplomacy in the Persian Gulf. 

There are reports that a regional summit will take place in Beijing later this year, involving all GCC states, Iran and Iraq. This is an important opportunity for multilateral dialogue and cooperation. European governments should consult with regional players and China to secure a seat at the meeting. The EU can help regional countries find ways to jointly tackle basic issues that have impeded economic growth which have resulted in spillover effects such as increased food insecurity and inability to mitigate the rising challenges of climate change.

In parallel, the Baghdad Conference could emerge as an EU-backed platform for economic cooperation in tandem to the now ongoing political and security dialogue process in China. The EU can draw in regional countries to help with reconstruction efforts in Iraq, a country that is in dire need of foreign investment. Given the shuttle diplomacy conducted by Iraqi officials between Iran and Saudi Arabia, and considering the role of France and the EU in the Baghdad conference, it would be apt to explore EU-supported joint economic projects in Iraq, especially those projects that create mutual economic interests between Iran and Saudi Arabia.

Whether in Baghdad, Amman, or Beijing, inclusive regional gatherings are needed to address common economic challenges facing all eight countries surrounding the Persian Gulf. Europe can make significant contributions towards regional dialogue on economic integration by helping to create multilateral platforms, transfer knowhow and technology, and provide financial support. These are areas where China has significantly increased its activities, but European countries enjoy far greater experience in establishing the institutions and infrastructure needed for regional economic development. European officials can leverage this experience to support regional diplomacy. Such efforts would also cement European regional influence at a time when US influence may be waning.

The newly appointed EU Special Representative for Gulf Affairs, Luigi Di Maio, should directly oversee and coordinate initiatives in support of economic diplomacy and integration in the region, finding common ground with China to head off competition. Achieving security through stronger diplomacy and deeper economic ties represents a transformative goal that the region can rally around.

Photo: IRNA

SIPRI Has Revised Four Years of Data on Iran's Military Spending

SIPRI—the Stockholm International Peace Research Institute—has just published its “Yearbook” for 2022. The flagship annual publication offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

Last year, I identified a major problem with the data about Iran’s military spending. The 2021 Yearbook estimated Iran’s military spending at $24.6 billion, a total that put it just above Israel in the rankings, as the 14th largest military spender in the world. This did not make sense.

Iran’s military, while posing a threat within the region, does so primarily because of inexpensive missile and drone systems and heavy reliance on proxy forces. Iran’s military lacks the kinds of advanced aircraft, armour, and other systems that are typically found in the arsenals of the world’s top military spenders.

A closer examination of the SIPRI data, and communication with SIPRI’s researchers, revealed that the Swedish think tank had been using the wrong exchange rate to convert Iran’s local currency military expenditures into dollar values. The researchers were using the “official” central bank exchange rate, which has for several years been a subsidised exchange rate used exclusively for the import of essential goods.

This common mistake has been rectified. SIPRI researchers note in the 2022 Yearbook dataset that they are using the NIMA exchange rate to convert to dollars, which results in a far better estimate of the Iranian state’s true purchasing power. The historical data has been corrected going back to 2018.

The impact of the correction is significant. The revised figures mean that instead of ranking as the 14th largest military spender in the world in 2021, Iran was actually ranked 39th. In 2022, spending totalled $6.8 billion. That is a mere fraction of the military spending of regional rival Saudi Arabia, which spends an estimated $75 billion. Iran even spends less on its military than regional minnow Kuwait.

SIPRI should be commended for making this correction. But in certain respects, the damage has been done. For several years their data was used to suggest that Iran posed a much greater threat to regional and global security than it truly did. A significant number of authoritative publications and news reports relied upon the SIPRI data to put Iran’s military spending in context and unfortunately used the inflated dollar totals published between 2018 and 2021. Those inflated figures conformed to a pervasive and convenient narrative—this may explain why the issue went unresolved for so long.

Photo: IRNA

Are Sanctions Boosting Corporate Profits in Iran?

Last year I wrote a major report examining how the inflation generated by sanctions hurts households in Iran. In the report, I note evidence of “the increased cost of inputs being passed on to consumers.” In other words, citing anecdotal evidence, I suggested that Iranian firms were raising prices to protect their margins and that this was contributing to inflation. But the report lacked a substantive review of how firms react to the pressures created by financial and sectoral sanctions. 

Firm behaviour under sanctions is understudied. The widespread assumption is that sanctions are bad for business. After all, they create significant dysfunction in the targeted economy. But the firm-level evidence is mixed. Sanctions do not tend to drive firms out of business, suggesting that companies find ways to adjust to the obvious cost pressures. Hadi Esfahani’s firm-level research has shown that “exits” (companies going out of business) played only a small role in changes in output, employment, and exports following the imposition of financial and sectoral sanctions in Iran in 2012. Saeed Ghasseminejad and Mohammad Jahan-Parvar’s study of Iranian companies listed on the Tehran Stock Exchange between 2011 and 2016 provides evidence that sanctions negatively impact profitability, but even sanctioned firms remained profitable in the period of their study. The profitability of firms that were subject to sectoral sanctions fell from an average of 16 percent to 11 percent—the margins remained healthy.

But what are the processes that are enabling Iranian firms to adjust to sanctions? A potential answer can be found in a new paper by Isabella Weber and Evan Wasner titled “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” Using data on the profit margins of major US companies in the years following the COVID-19 pandemic, Weber and Wasner examine how firms “exercise pricing power to enhance or protect short-run profitability” in the face of acute cost pressures. 

While the new research by Weber and Wasner does not discuss sanctioned economies, they describe conditions that can also be observed in Iran. Sanctions represent first and foremost a change in the supply environment—an emergency characterised by surging input costs. Financial and sectoral sanctions force most foreign companies to cease supplying customers in the targeted economy. But even when inputs remain available, currency devaluation triggered by the impact of sanctions on foreign exchange revenue and the accessibility of reserves makes those inputs more expensive. As a result, firms in the targeted country face supply chain bottlenecks and significant cost pressures. Purchasing managers’ index data from Iran makes clear that high producer prices and difficulties maintaining raw material and machinery inventories are the most persistent challenge facing Iranian manufacturing firms.

Moreover, the processes that Weber and Wasner believe underpin the “sellers’ inflation” that occurred after the COVID-19 pandemic in the United States are also at play in Iran. First, “sector-wide cost increases” lead to an “implicit agreement” among firms to raise prices. This occurs because “all firms want to protect their profit margins and know that the other firms pursue the same goal.” While state firms do dominate some sectors of Iran’s economy, such as the automotive industry, the broader manufacturing sector is dominated by private sector firms and is generally unconsolidated. The price increases seen in Iran reflect such implicit agreements and not price leadership by a few dominant firms.

Second, Weber and Wasner argue that “bottlenecks can create temporary monopoly power which can even render it safe to hike prices not only to protect but to increase profits.” In Iran, bottlenecks arose due to the effects of sanctions on imports. Under sanctions, domestic manufacturers face less competition from imported goods and the same bottlenecks also make it difficult to ramp-up output. Given the production constraints, it is nearly impossible for firms to grab market share by undercutting the competition and boosting sales. Because firms will not substantially sacrifice sales by raising prices, they can be understood to enjoy a kind of monopoly power.

Third, much like how the ongoing pandemic disruptions legitimise “price hikes and create acceptance on the part of consumers to pay higher prices,” so too do sanctions help render demand less elastic. Iranian consumers have come to understand high rates of inflation as the outcome the American sanctions and their own government’s monetary policy. While there has been some scrutiny of predatory pricing by Iranian firms in recent years, the pervading view is that firms must raise prices to survive. There is little scrutiny of whether firms are doing more than just surviving when they raise prices.

Finally, firms can raise prices because they know that consumers will keep buying. Weber and Wasner explain that “selling goods that people depend on” grants many firms extraordinary pricing power. Helpfully, the chief financial officer of Procter & Gamble has publicly boasted about this fact, stating that the company is ideally “positioned for dealing with an inflationary environment… starting with the portfolio that is focused on daily-use categories, health, hygiene, and cleaning, that are essential to the consumer versus discretionary categories which in these environments are the first ones to lose focus from the consumer.” Importantly, a significant proportion of Iran’s manufacturing base is devoted to household essentials. Meanwhile, Weber and Wasner point to government interventions during inflationary episodes as another reason why consumers put up with higher prices. Just like the stimulus checks that helped shore consumer spending during the COVID-19 pandemic in the United States, so too have cash transfers played a role in supporting household expenditures in Iran in the face of sanctions pressures.

Given that the same basic conditions for sellers’ inflation appear to exist in the US and Iran, it would be worthwhile to replicate the Weber and Wasner methodology to study the pricing power and profitability of Iranian companies. But even without a full study, a cursory review of the net margins of Iranian firms raises significant concerns that sanctions are increasing their pricing power of these firms and possibly even boosting their profitability. Comparing the net margins of companies listed in Iran’s securities exchanges (excluding financial firms) with inflation rates over the last decade reveals that, in general, profit margins rise in periods where inflation is elevated. In the four years leading up to March 2018, while Iran benefited from sanctions relief, the average profit margin for listed companies was 17 percent, while the average annual inflation rate was 11 percent. Since March 2018 and after Trump imposed “maximum pressure” sanctions on Iran, the average profit margin has risen to 26 percent. In the same period, annual inflation has averaged 40 percent. In short, Iranian companies appear to be more profitable on average when the country is under US secondary sanctions.

The continued profitability of Iranian firms has two ramifications for Western policymakers. First, it is a clear indication that elites in sanctioned economies can continue to accrue wealth, even as sanctions succeed in creating macroeconomic pressure. Second, if firms are in fact generating sellers’ inflation as part of their response to sanctions pressure, the economic resilience of firms is connected to the economic pain of households. Notably, Weber and Wasner raise the prospect that sellers’ inflation inevitably leads to “distributional conflict.” In their view, given that “living standards decline as real wages fall with rising prices,” labour will eventually push back on the profit maximisation by companies and demand higher wages. This too is a consideration highly relevant to Iran, which has seen an intensification of distributional conflict over the last decade. Protests over economic grievances have become more common, particularly protests over stagnant, delayed, or unpaid wages. Four consecutive years where inflation has exceeded 30 percent has eroded the living standard of Iranian households. In this context, firms may not be able to sustain their profit margins forever—in the medium-term, ever-rising prices will lead to demand destruction. However, while Weber and Wasner suggest that American firms have engineered a “a temporary transfer of income from labour to capital,” the implications for Iran, where firms have enjoyed increasing pricing power for the better part of a decade, are more dire.

The fact that Iranian firms have proven resilient under sanctions does have its benefits. This resilience has helped keep Iran’s economy from sliding into a deeper crisis. The resilience of businesses is also critical if Iran is to take advantage of any sanctions relief offered in a future diplomatic agreement. But the processes that underpin this resilience have significant distributional consequences. The sustained profitability of Iranian companies under sanctions represents an extraordinary and ongoing transfer of economic welfare from households to firms. In effect, not only are sanctions failing to weaken Iranian companies and their elite owners, but they are also hurting Iranian households profoundly. This suggests that the enhanced pricing power of Iranian firms and inflated corporate dividends are under-examined contributors to rising economic inequality in Iran, where the top income decile now controls nearly one-third of the country’s wealth. Sanctions were meant to make Iranian companies pay, but it is the Iranian people who are footing the bill.

Photo: IRNA

Ageing Energy Infrastructure is Holding Central Asia Back

Blackouts and "rationalisation" of energy consumption (a euphemism for coordinated blackouts) are all too frequent in Central Asia. Energy shortages arising from limited generation, insufficient energy imports, or the poor state of the transmission network mean that blackouts recur. This winter, however, the situation grew significantly worse. Amid exceptional cold weather, many households, businesses, and schools remained without heating and electricity for days on end. Unusually, the blackouts not only afflicted communities in remote regions but also capital cities.

Most of the region’s inefficient power generation and transmission infrastructure dates to the Soviet era. Central Asia faces rising demand for energy, spurred by population growth and climate change. Steadily rising energy consumption has strained power grids. Demand from new types of consumers, such as cryptocurrencies miners, has also exacerbated recent crises.

At the same time that they face chronic energy shortages, Central Asian states must also significantly cut carbon emissions and accelerate the transition to clean energy—a challenging path, especially for Kazakhstan, Uzbekistan, and Turkmenistan, where domestic production of hydrocarbons secures the majority of domestic energy consumption.

Besides generation capacity, natural gas supplies and distribution present their own technical and political problems. Kazakhstan is the world’s ninth-largest exporter of coal and crude oil and twelfth largest exporter of natural gas; its total energy production covers more than twice its energy demand. Yet, it has not been able to reliably supply electricity within its own territory. In mid-January, Turkmenistan, despite sitting on one of the world's ten largest natural gas reserves, disrupted gas supplies to Uzbekistan for over a week due to technical problems. Last year, several regions of Uzbekistan, Kazakhstan, and Kyrgyzstan were hit by blackouts caused by a technical incident in the so-called “energy ring,” a Soviet-era grid connecting border regions of these three countries, including the Kyrgyz and Uzbek capitals and Kazakhstan’s largest city, Almaty.

Central Asian authorities and international stakeholders have acknowledged the urgent situation facing the energy sector. The existing infrastructure is being operated “well beyond its shelf-life,” and loses caused by inefficiency may reach around 20% in the electricity sector.

But addressing all these demand-side and supply-side challenges simultaneously is impossible; governments in the region will have to prioritize specific sub-areas of their energy sectors. In the meantime, they will need to grapple with new economic challenges arising in part from Russia’s invasion of Ukraine.

The recent blackouts sparked considerable public anger given the financial impact, health risks, and general discomfort. Protests took place in several cities across Kazakhstan, Kyrgyzstan, and Uzbekistan. While these recent protests were small, the “Bloody January” protests in Kazakhstan and the Karakalpakstan protests in Uzbekistan point to the possibility that social and economic grievances can give rise to more significant unrest. Furthermore, many families relied on stoves to keep their homes warm, adding to the already high levels of pollution in Central Asia cities, resulting in further complains.

These extensive blackouts are also of concern to potential international investors. Without stable supplies of such basic utilities, investors will be deterred from Central Asia, leading to further economic stagnation. The ongoing crisis is a big test for Kazakhstan and Uzbekistan, and to a lesser extent Kyrgyzstan, three countries whose presidents have linked their political legitimacy with improving the economic and social conditions inside their country. To create jobs for their growing populations, these countries must grow their economies. But to grow their economies, the countries must boost energy production and significantly improve the distribution network. Securing the necessary financial resources for the extensive renovation of energy infrastructure is they key step for solving the energy shortages in the region. But securing new financing has become even harder because of the Russian invasion of Ukraine, which has significantly added to the already significant risks of investing in Central Asia, resulting from power struggles and corruption within the ruling regimes.

This has not stopped Central Asian leaders from promising new injections of investment in energy generation and improvement of the existing grid. President Shavkat Mirziyoyev of Uzbekistan announced a package of $1 billion to be invested in energy generation in the Tashkent region. But Mirziyoyev’s promise of new investment was clearly a political ploy, an effort to respond to public anger. The details of the investment and the expected economic, social, and political impact remain unclear. Governments in the region are luring new investors in the renewable energy sectors by setting ambitious targets. Kazakhstan aims to introduce new projects totaling 6.5 GW by 2035 and Uzbekistan plans to launch 7 GW of new capacity by 2030. However, many of these projections include nuclear power projects involving Russia’s Rosatom, which are now very unlikely to break ground.

Successful renovation of the energy sector at the national level also requires stronger political partnerships between countries given knock-on effects in the broader region. Tajikistan and Uzbekistan deliver electricity to Afghanistan, but domestic power outages in Uzbekistan briefly halted the export last month. Such disruptions in the national or regional grids are bound to reoccur and will add to the hardships faced by Afghans.

ADB predicts that demand will rise 30 percent across the entire CAREC region (which includes Central Asia, the Caucasus, Mongolia, and Pakistan). This means that no country has significant excess capacity it can share with its neighbors. The bank’s estimates put the cost of energy infrastructure modernisation for the region at between $136 billion to $339 billion by 2030. Upgrading transmission and distribution infrastructure alone is estimated to cost between $25 billion to $49 billion.

There are also other hidden costs. For example, the state usually subsidises electricity, gas, and coal, and any price increase brings a high risk of public dissatisfaction. Furthermore, there is a vast discrepancy in consumption between the winter seasons and the summer, which both generation and transmission infrastructure needs to reflect. The revenue potential of energy exports is deeply intertwined with the global economic situation. Hence, current estimates and political promises are bound to be revised sooner or later.  

The recurring blackouts and subsequent deep freeze in Central Asia were caused by three decades of neglect, corruption, and poor planning. Any significant improvement in the situation would require years of persistent effort to overcome economic and political challenges. After the disruptions of the pandemic and the Russian invasion of Ukraine, valuable time has been lost to begin the urgently needed modernisations of power plants and grids. For ordinary people in Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan, the countdown to the next winter has already begun.

Photo: David Trilling

Iran's Special Relationship with China Beset by 'Special Issues'

On February 14, Iranian president Ebrahim Raisi flew to China for a three-day state visit at the invitation of Xi Jinping, marking the first full state visit by an Iranian president in two decades. For Beijing, hosting Raisi was an attempt to regain Tehran’s trust after the significant controversy generated by the China-GCC joint statement issued following Xi’s visit to Riyadh in December. For Tehran, taking a large delegation to Beijing was an opportunity to remind the world that China and Iran enjoy a special relationship.

On the eve of the visit, Iran, a government newspaper, published a 120-page special issue of its economic insert entirely focused on China-Iran relations. Given the newspaper’s affiliation and the timing of the publication, the special issue is something like a white paper on the Raisi administration’s China policy and the perceived importance of a functional partnership with China.

The cover of the special issue speaks for itself—it calls for the creation of a triangular trade relationship between Iran, China, and Russia. Another headline declares that the Raisi administration is “reconstructing broken Iran-China ties.” In his pre-departure remarks, Raisi doubled down on this message, noting that Iran “has to pursue compensation for the dysfunction that existed up until now in its relations with China.” With this statement, Raisi both cast blame on Hassan Rouhani, his predecessor, for failing to maintain stronger ties with China, while also implying that China had let Iran down by failing to begin implementation of a 25-year Comprehensive Strategic Partnership agreement signed in 2021.

Iran’s grievances aside, the overall tone of the special issue is laudatory, suggesting that the Raisi administration has chosen to overlook China’s apparent endorsement of the UAE’s claim over the three contested Persian Gulf islands, which caused an uproar in Iran following the China-GCC consultations in December. But a development just before Raisi’s trip generated new controversy.

According to reports, Chinese oil major Sinopec has withdrawn from investing in the significant Yadavaran oil field located on the Iran-Iraq border. The Iranian government began negotiating with Sinopec in 2019 to develop the project's second phase. The negotiations were slow-going, in part because of the challenges created by US secondary sanctions.

Fereydoun Kurd Zanganeh, a senior official at the National Iranian Oil Company (NIOC), has denied the reports, claiming that negotiations with Sinpoec are ongoing. According to him, the Chinese energy company “has not yet announced in any way that it will not cooperate in the development of the Yadavaran field.” Whether or not Sinopec has actually withdrawn from Yadavaran, the slow pace of the negotiations and the difficulty for Chinese companies to deliver major projects—as in the case of Phase 11 of the South Pars gas field—reflect that China is an unreliable partner for Iran, at least while Iran remains under sanctions.

Nonetheless, the Raisi administration is keen to attract more Chinese investment. In an interview with ISNA published on January 28, Ali Fekri, a deputy economy minister, said that he “is not happy with the volume of the Chinese investment in Iran, as they have much greater capacity.” According Fekri, since the Raisi administration took office, the Chinese have invested $185 million in 25 projects, comprising of “21 industrial projects, two mining projects, one service project, and one agricultural project.” As indicated by the low dollar value relative to the number of investments, Chinese commitments have been limited to small and medium-sized projects. Beijing has mainly invested in projects that, according to Fekri, offer China the opportunity to import goods from Iran.

Comparative data shows Iran falling behind other countries in the race to attract Chinese investment. For instance, according to the data complied by the American Enterprise Institute, China committed $610 million in Iraq and a striking $5.5 billion in Saudi Arabia in 2022 alone. With secondary sanctions in place, the prospect of more Chinese investments in Iran is unrealistic.

Despite these obvious challenges, Iranian officials have been reluctant to admit that external factors are shaping China-Iran relations. Ahead of Raisi’s departure to China, Alireza Peyman Pak, the head of the Iran Trade Promotion Organization (ITPO), denied that Xi Jinping’s visit to Saudi Arabia in December had precipitated a cooling of Beijing’s relations with Tehran.

“Such an interpretation is by no means correct. A country with an economy of $6 trillion naturally tries to develop its economy by working with all countries,” he said. Peyman Pak pointed to recent trade data to bolster his case. “In the past ten months, we have seen a 10 percent growth in exports to China compared to the same period last year,” he added, leaving out that the growth comes from a low base—China-Iran trade has languished since 2018.

In recent months, Peyman Pak has played a prominent role in brokering memorandums of understanding between Russian and Iranian companies—part of the push for a deeper Russia-Iran economic partnership. His participation in the delegation heading to China suggests that the Raisi administration is serious about shaping a triangular trade alliance between Tehran, Moscow, and Beijing. So far, that economic alliance exists only in the form of various non-binding agreements. China and Iran signed 20 agreements worth $10 billion during Raisi’s visit.

These agreements, like those before them, have a low chance of being implemented, especially while the future of the JCPOA remains in doubt. For now, China-Iran relations are limited to the text of white papers, memorandums, and statements. For his part, Xi offered Raisi some encouraging words. He reiterated China’s opposition to “external forces interfering in Iran’s internal affairs and undermining Iran’s security and stability” and promised to work with Iran on “issues involving each other’s core interests.” No doubt, the special relationship between China and Iran is beset by special issues.

Photo: IRNA

Iran Trade Mechanism INSTEX is Shutting Down

At the end of January, the board of the Instrument in Support of Trade Exchanges (INSTEX) took the decision to liquidate the company. Established in January 2019 by the United Kingdom, France, and Germany, INSTEX’s shareholders later came to include the governments of Belgium, Denmark, the Netherlands, Finland, Spain, Sweden, and Norway.

The state-owned company had a unique mission. It was created in response to the Trump administration’s withdrawal from the Iran nuclear deal in May 2018. European officials understood that the reimposition of US sanctions would impede European trade with Iran. The nuclear deal was a straightforward bargain. Iran had agreed to limits on its civilian nuclear programme in exchange for the economic benefits of sanctions relief. If European firms were unwilling or unable to trade with Iran, that basic quid-pro-quo would be undermined. For this reason, supporting trade with Iran was seen as a national security priority.

In August 2018, EU high representative Federica Mogherini and foreign ministers Jean-Yves Le Drian of France, Heiko Maas of Germany, and Jeremy Hunt of the United Kingdom, issued a joint statement in which they committed to preserve “effective financial channels with Iran, and the continuation of Iran’s export of oil and gas” in the face of the returning US sanctions. They pointed to a “European initiative to establish a special purpose vehicle” that would “enable continued sanctions lifting to reach Iran and allow for European exporters and importers to pursue legitimate trade.”

In November 2018, when the basic parameters of a special purpose vehicle were still being formulated by European officials, I co-authored the first public white paper explaining why establishing such a company made sense. Conversations with European and Iranian bankers and executives had made clear to me that trade intermediation methods were being widely used to get around the lack of adequate financial channels between Europe and Iran. If these methods could be packaged as a service by an entity backed by European governments, it would reassure European companies about remaining engaged in the Iranian market, while also reducing costs.

A few months later, INSTEX was founded. In the beginning, the company was run by the Iran desks at the EU and E3 foreign ministries. The officials tasked with working on INSTEX, who were often very junior, quickly realised they had little knowledge of the mechanics of EU-Iran trade. When they sought to enlist help from colleagues at finance ministries and central banks, they frequently met resistance. Many European technocrats were reluctant to support a project which had the overt aim of blunting US sanctions power, even at a time when figures such as French finance minister Bruno Le Maire and Dutch prime minister Mark Rutte were making bold statements about the need for European economic sovereignty. Even INSTEX’s inaugural managing director, Per Fischer, departed given concerns over his association with a company that had been maligned by American officials as a sanctions busting scheme. Then, in May 2019, when the Trump administration cancelled a set of sanctions waivers, European purchases of Iranian oil ended. That left INSTEX as Europe’s only gambit to preserve at least some of the economic benefits of the nuclear deal for Iran. 

Later that year, INSTEX hired its first real team after a new group of European governments joined as shareholders and injected new capital into the company. For a time, things looked more promising. Under the newly appointed president, former German diplomat Michael Bock, a small group of talented individuals worked to define INSTEX’s mission and build a commercial case for the company’s operation. Their efforts led to INSTEX’s first transaction, which was completed in March 2020—the sale of around EUR 500,000 worth of blood treatment medication. The political pressure to provide Iran some gesture of tangible support during the pandemic had also greased the wheels in European governments.

But many considered the INSTEX project doomed even before the first transaction was completed. Certainly, Iranian officials were derisive of the special purpose vehicle. Given that Europe had failed to sustain its imports of Iranian oil and was unable to use INSTEX for that purpose, focusing instead on humanitarian trade, Iranian officials dismissed the effort, even after the feasibility of the special purpose vehicle was proven. That it took more than a year to process the first transaction also meant that the Europeans missed their chance to fill the vacuum caused by the US withdrawal from the nuclear agreement. Without full cooperation from its Iranian counterpart, which was called the Special Trade and Finance Instrument (STFI), INSTEX could not reliably net the monies owed by European importers to Iranian exporters with those owed by Iranian exporters to European importers.

European officials will no doubt blame Iran for the fact that INSTEX failed, and it is true that the Iranian government never fully appreciated the political significance of European states taking concrete steps to counteract even the indirect effects of US sanctions. Of course, the decision to liquidate the company follows a spate of recent actions by the Iranian government—nuclear escalation, the sale of drones to Russia, and the brutal repression of protests—that make the continued operation of INSTEX politically untenable.

But most of the blame for INSTEX’s failure must lie with the Europeans—the company’s demise predates Iran’s recent transgressions. European officials promised a historic project to assert their economic sovereignty, but they never really committed to that undertaking. A mechanism intended to support billions of dollars in bilateral trade was provided paltry investment. European governments never figured out how to give INSTEX access to the euro liquidity needed to account for the fact that Europe runs a major trade surplus with Iran when oil sales are zeroed out. For the Iranians, this alone was the evidence that European leaders saw INSTEX as a political gesture that might placate Tehran, rather than an economic instrument that would bolster Iran’s economy in the face of Trump’s “maximum pressure.” 

Paradoxically, Iran will lose nothing as the liquidators shut down INSTEX, quietly selling the few assets the company had accumulated—laptops, office chairs, and perhaps some nifty pens. It is Europe that is losing out. INSTEX was supposed to be a testbed for new ways of facilitating trade without relying on risk-averse banks to process cross border transactions. Successful innovation in this area would have given a new dimension to European economic diplomacy and helped Europe assert the power of the euro in global trade. 

With the writing on wall, INSTEX’s management made one final attempt to give the company a future. Beginning in 2021, the company pursued a French banking license—a pivot that INSTEX’s board had approved on a provisional basis, but which was halted in early 2022. It is hard to overstate how significant it would have been had INSTEX emerged as a state-owned bank with a specific mandate to process payments on behalf of European companies that wish to work in high-risk jurisdictions, including those under broad US sanctions programme. Such a bank could have become a powerful tool for Europe to assert its economic might in the face of US sanctions. Moreover, it would even have been useful in cases where Europe is applying sanctions, like Russia. After all, a commitment to humanitarianism means that goods such as food and medicine must continue to be bought and sold even when most transactions with a given country are prohibited. INSTEX could have helped make European sanctions powers more targeted and more humane. 

For a company that managed just one transaction, a surprising amount has been written about INSTEX. It has been the subject of news reports, think pieces, and academic articles. Even if many people struggled to understand what the special purpose vehicle aimed to do, its existence was novel and therefore noteworthy. For those insiders directly involved in the company’s saga, and for those of us who have closely followed from the outside, the main takeaway seems to be that there is much yet to be learned about the complex ways in which US sanctions impact European policy towards countries like Iran, through both political and economic vectors. In this respect, INSTEX did achieve something. A group of technocrats in European foreign ministries and finance ministries learned valuable lessons, often reluctantly and with great difficulty, about the limits of Europe’s economic sovereignty. Whether those lessons can be institutionalised remains to be seen. But a fuller post-mortem on INSTEX would no doubt offer important lessons for the future of European economic power in a world dominated by US sanctions. Learning those lessons would be its own special purpose.

Photo: Wikicommons

What Role Do Economic Conferences Play in Uzbekistan’s Development?

Back in November, I travelled to Samarkand to attend the Uzbekistan Economic Forum. I had been to the ancient city nearly a dozen times, but this was my first professional event there. The Uzbekistan Economic Forum did not suddenly convince everyone that Uzbekistan is a special country. But it did show that Uzbekistan was becoming a more normal one.

Not everyone in Uzbekistan was happy with the conference. Some journalists and bloggers questioned why Uzbekistan’s government needed to convene yet another major and costly event. Others wondered if the return on investment would be worth it. Concerningly, the costs of the forum were not disclosed. Clearly, the organisers could have done a better job in publicly communicating the rationale for such a large event and why such conferences matter. To me, there are three reasons why they do.

First, Uzbekistan needs to foster regular dialogue with businesses partners, investors, and lenders who are independent from the government. Such actors are accountable to their shareholders, are subject to intense international media scrutiny, and must follow varied regulations around governance and sustainibility. Therefore, they can audit Uzbekistan’s achievements and shortcomings more honestly, generating important information for local media and civil society.

A country whose debt burden is equal to 40 percent of its economic output must be open to scrutiny of its economic policies and institutions. The forum’s thoughtful programme presented the opportunity for such scrutiny, with topics ranging from political reforms to economic inclusivity. The organizers brought in people who could ask tough questions (including former CNN and Bloomberg journalists) as chairpersons for the panel discussions. Senior representatives from the IMF, IFC, World Bank, European Bank for Reconstruction and Development (EBRD), Asian Development Bank, Asian Infrastructure and Investments Bank, regional central bankers, financiers, investors, and many consultants featured on these panels.

There was a time when frankness came at a cost. In May 2003, panelists from the EBRD, which was leading Uzbekistan through its protracted post-communist transition, spoke truthfully about the country’s economic and political shortcomings at the Annual Meeting in Tashkent. By 2005, EBRD war hardly making any loans in Uzbekistan and by 2007 it had exited the country altogether, unable to operate in an environment in which the authorities demanded deference. It was not until a decade later that EBRD returned to Uzbekistan. Today, the bank has 65 active projects with over EUR 2 billion in total portfolio value. With that much at stake, it is reasonable to expect that the EBRD and peer institutions will continue to speak up, especially as its activists continue to push the bank to live-up to its pro-democracy mandate.

Second, Uzbekistan needs a platform to prove its bureaucratic capacity, as it seeks to stay the course of increasingly difficult structural reforms. In contrast to heavily protocolled political events with predetermined outcomes such as the Shanghai Cooperation Organization or Inter-Parliamentary Assembly, participants of economic forums in Uzbekistan are more demanding, represent diverse stakeholders, and care about performance dynamics. The newly formed Ministry of Economy and Finance, the Ministry of Labor and Poverty Reduction, and the Ministry of Justice—which oversee social policy—face new challenges every day. The nominally independent Central Bank and the judiciary are undergoing significant changes with unclear outcomes. They will all need to prove that they can uphold Uzbekistan’s domestic and international commitments and pay the bills.

At the same time, reform-minded public administrators themselves need businesses, civil society groups, and international professionals to get their president's attention in the highly centralized system. In Uzbekistan, the presidential administration can be reactive, prioritizing issues in response to media coverage, expert commentary, formal reports, and face-to-face meetings. It is no secret that certain business leaders may enjoy better access to the president that many ministers do not have. So, it is good when investors are both long-term thinkers and legally bound to seek clean deals. These investors and reform-minded public administrators can form coalitions as part of two-level game through which domestic reformers in transition economies find the means with which to amplify their voices.  

Alongside many countries “stuck in transition,” the Uzbek government continues to face challenges outlined by the IMF in its 2014 review marking 25 years after the end of communism in Europe. Uzbekistan needs to reign in its exorbitant public expenditures, improve the business climate, enable market competition, enforce state divestment, and ensure rule of law. It was reassuring that almost all keynote speakers in Samarkand said the same. By the end of the first day (most discussions can be watched freely online), it was clear that there was broad consensus about what needs to happen to enable prosperity.

The Uzbek ministers and senior officials speaking at the conference shared this consensus and acknowledged problems. Some even joked, earning sincere laughter from the diverse audience. Importantly, the conference was held in Uzbek and English — this was more than political symbolism. Russia’s war on Ukraine has had varied effects on the Uzbek economy. These have been mostly negative (e.g. reduced financial inflows and increased social policy burden), though there have been a few silver linings (e.g. capital relocation, higher commodity prices, and parallel exports). After independence, Uzbekistan, like other post-Soviet states, pursued legislative and regulatory harmonisation with Moscow. But the country’s bureaucracy is starting to look beyond Russia. The use of the Uzbek language helps the central government connect to a wider swath of society. The use of English, meanwhile, represents a search for a wider cooperation with foreign countries.

Finally, these conferences help set expectations—and there are many expectations being set. That Uzbekistan will privatise the promised 1,000 more state-owned enterprises. That utility and energy prices will be liberalized. That the economic growth will be increasingly supported by foreign direct investment rather than direct borrowing. That more will be done to empower and separate the judiciary from the executive branches. That the Oliy Majlis, Uzbekistan’s legislature, will pass new competition law and that it will be signed. That Uzbek GDP will rise to USD 100 billion by 2026 and USD 160 billion by 2030. That the country embraces a free market economy, trusting that its people can achieve more with less state intervention. Whether Uzbekistan meets these high expectations is something that can be assessed when it is time to gather for another forum.

Uzbekistan is seeking a dialogue with the world. We can quibble about the optics of such conferences, but they do serve to build trust and generate credibility. There was a time when economic conferences in Uzbekistan had long titles, glorified the present, and discussed the future in only abstract terms. Back then, the desired outcome was applause—those conferences played no role in the country’s economic development. In Samarkand, a different kind of conference took place.

Photo: Uzbekistan Economic Forum

How Shifts on Instagram Drove Iran's 'Mahsa Moment'

This article was originally published in Persian.

In a narrative crafted by various political and intellectual currents, the “Iranian Instagram” is often presented as a means of depoliticising the attitudes and behaviours of the Iranian people, with its users engaging in vulgar content, falling for false news and claims, cursing at famous figures, and morbidly posting accounts of the more attractive sides of their daily lives. This same formulation is used by the conservative movement (also called the Principalists movement) to realise their policy of "organisation" and "protection" of the Internet. Using comparable language, pro-change political currents also direct users to ostensibly more political platforms, such as Twitter and Clubhouse. However, if this is the case, why has Instagram become one of the most prominent platforms for expressing and even organising political protests in the “Mahsa Moment?”

The simplest and shortest response to this question is to attribute everything that has occurred over the past two to three months to the Islamic Republic's enemies. This response has been heard repeatedly on official domestic media in recent months. Some of the self-proclaimed leaders of the people's protests in the media outside of Iran have given the same answer in different words, claiming that these events are the result of their years of hard work and meticulous planning. This type of analysis of people's collective actions is not only unenlightening and ineffectual but is a significant contributor to the current crisis.

However, another approach might be to temporarily set aside preconceived notions about online social networks in favour of a more empirically grounded and scientifically sound approach to answering this question. A portion of the answer to this question can be found by analysing the changing trends on Iranian Instagram.

Those of you who have been following along for the past three years may recall that I began a longitudinal study of Iranian Instagram in 2019 and have since published an analytical update three times in the early fall of 2019, 2020, and 2021. This year, data collection and analysis took longer than usual due to Internet filtering and interruptions, delaying the report preparation for the fourth phase of this research.

With these explanations, the findings of the fourth consecutive year of this research will be presented within the context of the question posed at the beginning of the report. The findings of this study demonstrate that the transformation of the Iranian Instagram space at the “Mahsa Moment” into a platform for online protests and the organisation of offline protests cannot be attributed to a pre-planned project. Rather, we must understand and analyse this phenomenon in light of the agency of users and the gradual changes that have occurred on Instagram in Iran over the past few years. In addition, despite tightening restrictions over the past year, Iranian Instagram continues on its path, both quantitatively and qualitatively, consistent with the previously optimistic changes.

Figure 1 depicts the frequency of active popular Iranian Instagram pages between 2019 and 2022. Despite the tightening of various restrictions facing Iranian users on Instagram, the number of active Iranian pages on Instagram with more than 500,000 followers increased by 17% in 2022, reaching 2,654.

Figure 1: Frequency of active Iranian Instagram pages with over 500k followers from 2019 to 2022

As displayed in Table 1, the share of "humour and entertainment", "fashion and beauty", and "pornography" pages among the most popular Iranian Instagram pages has decreased significantly over the past year. While the decline in "fashion and beauty" and "pornography" pages continues a longer trend, the declining ratio of "humour and entertainment" pages on Iranian Instagram over the past year is something new. In contrast, the percentage of "educational" and "business" Instagram pages has continued to rise in 2022.

The appearance of "tourism" and "emotional" pages on popular Iranian Instagram pages in 2022 is another notable change. On the tourism pages, content pertaining to tourism in various regions of Iran and the world is published, whereas, on the emotional pages, content that represents human feelings and emotions are published.

Table 1: Share of popular pages by primary subject from 2019 to 2022

The trend of changes in the network of relationships between popular Iranian Instagram pages is illustrated in Figure 2 using the Indegree Index. When comparing the changing trend of the graphs from 2019 to 2022, we observe that education (dark blue), business (brown), lifestyle (orange), and fashion and beauty (pink) pages have become increasingly integrated within their respective fields and have distanced themselves from other fields. In the upper portion of the graphs, from 2019 to 2022, we notice an increase in the intertwining of sports screens (pale blue), movies (green), and music (red). In other words, these three types of popular accounts—also known as "celebrity” accounts—have gradually shaped a field that is related to issues outside of their profession. In this multifaceted field, in addition to celebrity pages, there are humour, entertainment, political, and social pages (yellow, black, and grey).

Figure 2: Changes in the network of relationships between popular Iranian Instagram pages from 2019 to 2022, as measured by the Indegree Index

Figure 3 displays the ten Iranian Instagram influencers with the highest authority based on the Authority index. All of these individuals belong to one of the three categories: sports, film, or music. These three categories also overlap. Moreover, with the exception of two individuals, the rest post additional content on the page related to their audience's political, economic, and social concerns and demands, as well as their profession and area of expertise. Let us refer to this type of celebrity as a "celebrity-activist.”

By a significant margin, Ali Karimi has the highest authority among the most popular Iranian Instagram pages, followed by Ali Daei, Golshifteh Farahani, Javad Ezzati, Amir Jafari, Bahram Afshari, Mahnaz Afshar, Majid Salehi, Parviz Parastui, and Reza Sadeghi.

Figure 3: Network relations between popular Iranian Instagram pages in 2022, as per the Authority Index

By reflecting on Table 2 and reviewing Table 1, we can gain a greater appreciation for the reasons why celebrity-activists on Iranian Instagram gain authority. Table 2 demonstrates that the number of followers of popular subversive pages has increased by 49% over the past year. This index was 43% for refolutionist (neither revolutionist nor reformist), 22% for non-politicals, 18% for reformists, and 16% for conservatives (Principalists). Comparing these statistics to those from previous years reveals that the notion of protesting the current political situation has become increasingly popular and a sought-after item on Iranian Instagram over the past year.

In contrast, as shown in Table 1, the proportion of political pages (individuals, groups, or organisations professionally engaged in political activity) among the most popular Iranian Instagram pages did not change significantly between 2019 and 2022, fluctuating by approximately 2%. In other words, Iranian political professionals of various political orientations lack the capacity and acceptance to represent the nation's political attitudes and demands. Iranian Instagram users have increased pressure on other popular Iranian Instagram pages, requesting that they reflect and even represent the political protests of the Iranian people. As previously explained, education, business, lifestyle, and fashion and beauty pages have not directly engaged with this demand of users due to professional considerations; however, a substantial portion of the movie, sports, and music pages have responded positively to the demand of their followers, largely due to their professional considerations. In actuality, it is the crisis of political representation that has placed celebrities in the position of representing the political demands of the Iranian people and given rise to the phenomenon of "celebrity-activists.”

In this sense, these are the people who have agency and have utilised the smallest opportunities to protest the status quo. In this way, they also take advantage of the opportunities provided by celebrities. In such a scenario, political professionals dissatisfied with the formation of these relationships between users and celebrities alter the truth and promote the narrative that "these excited people" have been duped by "illiterate celebrities!" Almost every political faction has employed such insults on occasion. Of course, these same "illiterate celebrities,” once defended participating in elections and voting for reformists, thereby increasing voter turnout. But, at the current time when celebrities are under the pressure of users and the online space has aligned with the Mahsa movement, conservatives and a significant portion of reformers assert that "the excited people" have been duped by the celebrities they follow. In actuality, instead of taking fundamental and principled measures to address the escalating crisis of political representation, political professionals sometimes align themselves with "concerned artists and athletes" and "intelligent people" and sometimes curse "illiterate celebrities" and "excited people" in accordance with their immediate interests.

Table 2: The rise in followers of popular Iranian Instagram pages by political orientation from 2019 to 2022

The relationship between Instagram users and popular pages has gradually developed an inherent logic over time, which can be made more tangible by examining a few examples from Table 3. Hassan Reyvandi's number of followers increased by more than 6 million between 2019 and 2020, when, in addition to political protest, the production of humour and entertainment content independent of official media was considered a high-demand commodity on Instagram. Consequently, he moved from third place in 2019 to first place in 2020. From 2020 to 2021, when humorous content independent of the official media still had some appeal, Reyvandi maintained his position by keeping a considerable distance from other prominent pages. Nonetheless, Reyvandi's position has been weakened over the past year, when "opposition to the existing political conditions" became the high-demand commodity on Iranian Instagram. Indeed, it is highly probable that he will soon be demoted. Rambod Javan has already experienced this fall. After failing to meet the expectations of political dissidents on Instagram, he dropped from the second most popular Iranian Instagram page in 2018 to the tenth most popular in 2019. Behnoosh Bakhtiari's position declined even further. Bakhtiari, who had the fourth most popular Iranian Instagram page in 2019, was harshly criticised by many Instagram users after taking several controversial positions, including publishing an Instagram post against the three protesters of November 2019 who were sentenced to execution. As a result, her page fell from the fourth most popular Iranian Instagram page to the nineteenth position within three years. Such evidence demonstrates that, contrary to the misleading term "influencer,” the resultant of the collective will of users has a substantially more direct and significant effect on the behaviour of influencers, not the reverse.

Table 3: Follower counts of the most popular Iranian pages from 2019 to 2022, per million users

From 2019 to 2021, the percentage of female Instagram celebrities in Iran rose from 32% to 42%. However, there has been no discernible change in the gender distribution of famous people over the past year. Likewise, while the percentage of popular pages based in Iran increased from 76% to 81% between 2019 and 2021, there has been no significant change in this regard over the past year.

Let us conclude by examining the influence network of popular Iranian pages as affected by global authority pages. Based on the Authority Index, none of the foreign pages with high authority among the most popular Iranian Instagram pages are political. NASA, National Geographic, Leonardo DiCaprio, and Ellen DeGeneres have the most authority among film-oriented pages. Kylie Jenner, Kendall Jenner, and Kim Kardashian have the strongest authority among fashion and beauty pages. Jennifer Lopez, Selena Gomez, and Angelina Jolie have the highest authority jointly among the cinema and fashion and beauty pages. Moreover, Lionel Messi and Cristiano Ronaldo have the greatest authority among sports pages, while Khaby Lame, Dwayne Douglas Johnson, David Beckham, and the official Instagram page are authoritative among various sections of popular Iranian Instagram pages.

Figure 4: The position of authoritative international pages among popular Iranian pages on Instagram based on the Authority Index

Today, and particularly in the post-Mahsa era, the events that occur within the framework of online social networks are increasingly scrutinised by various political currents. Analysts with differing political leanings are discussing the relationship between online social networks and the collective protest actions of the Iranian people more than ever before. However, a quantitative increase in the analysis of online social networks can be considered a positive event if these analyses are continuously reviewed in conjunction with research findings in this field. Otherwise, it will not only be unenlightening but will also lead to the propagation of false stereotypes and, as a result, incorrect decisions and policies regarding this relatively new phenomenon.

Users' actions on online social networks may be correct in some cases but incorrect in others. It is crucial that whenever we find the actions of users to be inappropriate, we avoid blindly attributing everything to intelligent services, media, think tanks, or opportunistic and deceitful people. Instead of believing in these conspiracy theories, we should seek a more accurate understanding of the logic behind their actions and decisions using different methods and the logic of the situation in which users find themselves.

This methodological and analytic error is not unique to supporters of the government but is frequently committed by pro-change political currents when they encounter unpleasant phenomena in online social networks. In recent years, as a result of such a circumstance, many activists, analysts, and even some sociologists have shifted their focus from the lower levels of politics to security issues and have become experts on security issues and whistleblowers of media conspiracies and enemy think tanks.

The narrative of "excited and gullible users" is one of the recurring stereotypes regarding online social networks. In this narrative, social network users are uneducated and naive individuals who are constantly exploited by deceptive and opportunistic individuals, groups, and organisations. Throughout the past few years, and especially in the last few months, a great deal of commentary on Iranian Instagram has been based on this narrative. Interestingly, proponents of this narrative rarely question the veracity of this view and appear to see no need for scientific evidence to verify its veracity.

The results of the fourth phase of the longitudinal research I have conducted on Iranian Instagram users demonstrate conclusively that this narrative is highly misleading. Indeed, when criticising a false stereotype, we must take care not to fall into another false stereotype. Consequently, I hope that the caution that I have attempted to observe in writing this research report will be noted by the readers and that the research findings will be interpreted with the same caution.

Photo: IRNA

Regional Economic Integration Comes into Focus at Second Baghdad Conference

The second meeting of the Baghdad Conference on Cooperation and Partnership took place in Amman, Jordan on December 20. Last year’s meeting in Baghdad initiated a process for multilateralism, dialogue, and cooperation between Iraq and its neighbours, some of whom met for the first time in years. This year’s gathering in Amman cemented the initiative as an annual regional summit and, importantly, added economic integration to the regional agenda.

In August 2021, former Iraqi prime minister, Mustafa Al-Kadhimi, with the support of French president Emmanuel Macron, managed to bring together officials from Egypt, Iran, Jordan, Kuwait, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates, as well as representatives from the European Union, Gulf Cooperation Council (GCC), Arab League, Organisation of Islamic Countries, and the United Nations. This year, in addition to all those who participated in the first conference, the two missing GCC states—Oman and Bahrain—were present as well.

Al-Kadhimi largely succeeded by focusing on foreign policy, particularly as he sought to ease regional tensions. He was instrumental in revitalising relations with Iraq’s neighbours, which had been strained for years. He was also key in kickstarting dialogue between Iran and Saudi Arabia, as well as setting the stage for Iran-Egypt and Iran-Jordan talks. His hosting of the first Baghdad Conference positioned him—and by extension Iraq—as a trusted regional intermediary.

That is why Iraq’s recent transition to a new government was initially met with concern around the region. Mohamed Shia Al-Sudani’s seemingly pro-Iran stance was expected to once again strain Iraq’s ties with its Arab neighbours. There were reports that Saudi Arabia paused negotiations with Iran because of this change of government in Baghdad. But Al-Sudani’s efforts to retain the mantle passed by Al-Kadhimi put regional leaders at ease. He has committed to continuing his predecessor’s efforts to secure regional and international support for the development of Iraq—Baghdad remains in the title of the conference for this reason.

At the conference, Al-Sudani said, “The priority now lies in strengthening the bonds of cooperation and partnership between our countries through interdependence in infrastructure, economic integration and joint investments.” To that end, he argued that regional states should “strive to work together to transform from consuming to manufacturing countries by establishing joint industrial zones that enhance our collective industrial capacity and link the supply chains to one integrated chain capable of competing in global markets and launching mega projects in various sectors.”

By focusing on economic opportunities, Al-Sudani connected the Baghdad Conference to a wider agenda. He was also making an appeal for support from partners beyond the region, such as the European Union. EU High Representative Josep Borrell was present at the gathering in Amman.

In the Joint Communication on a “Strategic Partnership with the Gulf,” which was published in May 2022, the European Union praised the first Baghdad Conference and committed to supporting the region-led process. While France was the only European country supporting the Iraqi initiative initially, the European Union called for a follow-up process to the Baghdad Conference “with EU involvement” and as part of “a structured, EU-facilitated dialogue process”.

In the face of rising competition with other external players, such as China, Russia, and even India and Japan, European countries and the EU are falling behind. But Europeans can make significant contributions towards regional dialogue on economic integration by helping to create multilateral platforms, transfer know-how and technology, and provide financial support. European expertise can help the region find ways to jointly tackle the basic issues that have impeded economic growth and have resulted in spillover effects, such as increased food insecurity and inability to mitigate the rising challenges of climate change.

Establishing a new development fund by using existing instruments and institutions is key. This would mean including sovereign wealth funds, co-investment programmes, economic zones, or multi-party investment initiatives through regional banks or multinational institutions. The Islamic Development Bank, the various state-owned sovereign wealth funds within the GCC, as well as the European Investment Bank, and the European Bank for Reconstruction and Development, have all supported projects that have a multilateral or regional outlook. This could happen through matching funds allocated to the initiative by involved parties.

Through its Global Gateway project, the EU and regional partners could also “explore joint initiatives in third countries through triangular cooperation, financial support, capacity building and technical assistance.” The EU can draw in the regional players to help with reconstruction efforts in Iraq. The Global Europe Instrument foresees projects and investments in Iraq as well. The Instrument aims to fund international cooperation through grants, technical assistance, financial instruments, and budgetary guarantees.

Cooperation in developing a particular port or completing segments of Iraq’s national railway should be the priority. Exploring joint investments in Iraq’s oil and gas industry as well as green energy transition should also be considered.

Dust and sandstorms, as well as drought and water scarcity, are causing huge financial and human costs for Iraq, but also for all neighbouring countries, as well. Key projects that combat shared environmental challenges, which have proven to be the easiest avenue for cooperation, should be explored.

Even though various regional tensions remain, the outlook for regional cooperation and multilateralism seems bright and the Baghdad Conference is helping define a framework for broader regional cooperation, with integration as its aim. As Dutch diplomat Jeanine Hennis-Plasschaert, Special Representative of the Secretary-General for the United Nations Assistance Mission for Iraq, reflected during the meeting, the “demonstration of regional partnership” can now “result in a number of concrete steps.” Hennis-Plasschaert added that these steps “might even lead to a framework for regional integration as an effective means of achieving prosperity, peace and security.”

Photo: King Abdullah Press Office

When it Comes to Iran, China is Shifting the Balance

In 2016, during his first trip to the Middle East, Chinese Premier Xi Jinping visited both Riyadh and Tehran, a reflection of China’s effort to balance relations among the regional powers of the Persian Gulf. But Xi’s recent trip to Riyadh, his first visit to the Middle East since the pandemic, suggests that China is no longer aiming to treat Iran and its Arab neighbours as equals.

Following the meetings in Riyadh, China and the GCC issued a joint statement. Four of the eighteen points that comprise the joint statement directly pertain to Iran. In the declaration, China and the GCC countries called on Iran to cooperate with the International Atomic Energy Agency as part of its obligations under the beleaguered Joint Comprehensive Plan of Action (JCPOA). Using strong and direct language, the statement additionally called for a comprehensive dialogue involving regional countries to address Iran’s nuclear programme and Iran’s malign activities in the region. The language used was less neutral than that typically seen in Chinese communiqués and instead took the tone of Saudi and Emirati talking points regarding Iran.

Iranian officials were especially vexed to see that China had effectively endorsed longstanding Emirati claims to three islands: Greater Tunb, Lesser Tunb, and Abu Musa. The islands, located in the Strait of Hormuz, were occupied by the Imperial Iranian Navy in 1971 after the withdrawal of British forces. Ever since, Iran has considered the three islands as part of its territory. The United Arab Emirates (UAE) has made periodic attempts over the last four decades to regain control of the islands, claiming that before the British withdrawal, the territories were administered by the Emirate of Sharjah. While the statement does not go so far as to declare that the islands belong the UAE, China’s call for negotiations over their status inherently undermines Iran’s claims. 

The reaction of Iranian officials and the public has been sharp. The day after the statement was published, Iranian newspapers featured bitter headlines. One newspaper even provocatively questioned China’s claim over Taiwan. Iranian Foreign Minister Hossein Amir-Abdollahian tweeted that the three Persian Gulf islands belong to Iran and demanded respect for Iran’s territorial integrity. Meanwhile, Iran’s Assistant Foreign Minister for Asia and the Pacific met with the Chinese Ambassador to Iran, Chang Hua, to express “strong dissatisfaction” with the outcome of the China-GCC summit.

Amid the polemic generated by the China-GCC statement, the Chinese official news agency Xinhua announced that Vice Premier Hu Chunhua would visit Iran and the UAE next week. If the stopover in Tehran was intended as a Chinese gesture to ease tensions, the move is likely to backfire. While “Little Hu” had been expected to gain a prestigious seat in the Politburo Standing Committee during the recent National Congress of the Chinese Communist Party (CCP), he was instead demoted from the Politburo and is expected to be removed as Vice Premier in March 2023. Considering Xi’s triumphal visit to Riyadh, the optics surrounding Hu’s planned visit to Tehran are especially bad.  

As Xi begins his third term as China’s leader, he appears to be viewing relations with Iran through the prism of liability, rather than opportunity. Despite the fanfare surrounding the beginning of Iran’s long-awaited accession to the China-led Shanghai Cooperation Organisation (SCO) in September, this was a relatively shallow political move. The SCO is an organisation with a limited institutional capacity and substantial internal divisions—Iran’s accession did not herald the opening of a new era in Sino-Iranian relations.

Two issues appear to be hampering China-Iran relations. First, negotiations to restore the JCPOA have failed. With sanctions in place, Iran has struggled to attract Chinese investment and cooperation, especially when compared to Saudi Arabia and the UAE. As I argued in March, economic ties are a pillar of the Comprehensive Strategic Partnership (CSP) that China and Iran have devised, but relaunching economic relations between the two countries requires successful nuclear diplomacy and the lifting of US secondary sanctions. Beijing and Tehran announced the beginning of the CSP implementation phase last January when the nuclear talks appeared likely to succeed. Today, the prospects for implementing the CSP are nill and China-Iran trade is continuing to languish at around $1 billion in total value per month.

Second, Iran’s decision to sell military drones to Russia, thereby becoming actively involved in the war in Ukraine, is proving a significant strategic miscalculation. By actively supporting Russia’s war of aggression, Iran has taken itself out of a large bloc of countries, nominally led by China, that have adopted an ambiguous position towards the conflict. This bloc, which notably includes the GCC countries, is neither aligned with Ukraine and NATO nor openly against Russia and its coalition of hardliner states. In short, Iran’s overt alignment with Russia is at odds with China’s approach.

Meanwhile, the evident strains in US relations with Saudi Arabia and the UAE have created an opening for China to deepen ties with the two regional powers. In some respects, this opening has diminished China’s need to cultivate a deeper partnership with Iran. Ties with Tehran had long been attractive as a means to counterbalance US influence in the region. But Beijing’s success in building deeper relations with Riyadh and Abu Dhabi, two capitals that have long taken their cues from Washington, suggests that China is gaining new means to check US power in the Middle East. 

China-Iran relations have seesawed plenty over the years, but the outcome of Xi’s visit to Saudi Arabia suggests a new and more negative outlook for bilateral ties. While Iran tries in vain to “turn East,” China may be shifting away.

Photo: IRNA

Participatory Budgeting Opens Path for Democratic Reform in Uzbekistan

Since his inauguration in 2016, President Shavkat Mirziyoyev has paved the way for many policy reforms in Uzbekistan. Four of these reforms stand out as truly consequential.

The first two reforms are economic. The move to a mostly market-based foreign currency regime and the implementation of tax reforms delivered significant positive stimuli for economic growth and helped to open the Uzbek economy to foreign investment.

The third reform put an end to the abhorrent practice of state-sponsored forced and child labor. Possibly more than any other, this reform has earned Uzbekistan international praise. The Economist named Uzbekistan “country of the year” in 2019, describing it as a country “that abolished slavery.” Although labour rights and state intervention issues persist in cotton production clusters, the reform effort still successfully stigmatised forced labor among top officials, improved many labour conditions, and opened the Uzbek cotton and textile industry to international trade.  

The fourth reform has garnered less international attention but is no less significant. The Citizens’ Initiative Budget is a participatory budgeting platform that lets the public decide where they think it is best to spend public money. The policy aims at better redistribution through decentralization of budget planning.

The initial outcomes are exciting: 7.8 million votes were cast in support of 61,500 spending projects in 2022. The votes determined the allocation of USD 100 million across 98 percent of all micro-districts (mahallas) in Uzbekistan. Compare this to 2021, when 6.72 million votes were collected on 69,700 projects. This year voter turnout increased, while the collective action improved with fewer—and likely more realistic—nominated projects.  It is estimated that 33 percent of Uzbek adults participated in the voting process in 2022.  A prominent blogger suggested that the participatory budgeting process was the country’s most competitive election. While tongue in cheek, this reaction to participatory budgeting points to its significance—people mobilise and vote for the option that best represents their needs.

Without true electoral accountability in the country, Uzbekistan’s central government often receives distorted signals from its people. That is why reforms that leverage the tools of participatory democracy are so crucial. Arguably the most significant recent example of distorted signals was when in July of this year Karakalpakstan’s legislature and government unanimously supported the constitutional amendments to dissolve its semi-autonomous status. Mass civil unrest erupted leading to deaths, injuries, and property damage. President Mirziyoyev later berated the Karakalpak lawmakers for failing to communicate the people’s concerns and wishes to the central government.

Alongside the participatory budget, another valuable source of signals is Uzbekistan’s media environment, which has become more free since 2016 as outspoken bloggers and probing journalists write for a range of independent digital media outlets. Even though the state-owned national television, radio, and print media have little impact on policymaking and there remains censorship, the Presidential Administration now regularly cites Telegram messages and local reports when demoting bureaucrats and municipality heads—a sign that the media is supporting accountability. Investigative reporting also sometimes forces municipal or regional authorities to abandon or adjust unpopular decisions before public anger escalates.

As promising such anecdotal occurrences of accountability may be, they do not and cannot accurately represent or equitably empower all the people of Uzbekistan. For one, there is a clear digital divide in how many people own smartphones and can afford or access the internet. Richer urban areas with better education, more infrastructure, higher incomes, and more active civil society enjoy a greater capacity to mobilise and take advantage of initiatives like participatory budgeting. These divides can be self-reinforcing. Therefore, as a rule, central governments try to keep urban residents more content.

Another reality is that such feedback channels mostly enable short term policy interventions, and do not necessarily help in gauging long term sustainable development priorities and population needs. While participatory approaches and media attention can help citizens respond when, for example, a green space is endangered, other important decisions about where to build roads and schools or when hire doctors and buy vaccines have much steeper collective action costs. Without regular bottom-up elections, in which politicians are asked to define their policy agendas and are held accountable to those agendas, it is difficult to collect informational signals on what the population wants even if everyone agrees on the essentials.

The Citizens’ Initiative Budget may prove a vital step forward in Uzbekistan’s political development if it opens the path to wider democratic reforms. Such reforms may be necessary if Uzbekistan wants to build on five years of strong economic growth—social scientists agree that the quality of political institutions determines economic outcomes.

Encouragingly, Uzbekistan is set to substantially expand its participatory budgeting platform. In 2022, the government will increase funding to nearly USD 250 million and has pledged at least USD 700 million to be disbursed in 2023. Moreover, the government has proposed that all infrastructure projects in micro-districts will be funded through participatory budgeting. A recently circulated draft white paper from the Presidential Administration suggests granting 28 districts expanded local governance authority, giving local legislators full-time paid employment, and empowering local residents with the ability to recall underperforming lawmakers and officials.

Ultimately, the essential condition for good governance at any level is enabling free and fair elections. Free and fair elections will optimise distribution of economic resources, enable growth, reduce corruption, and advance inclusion and happiness. As the success of the Citizens’ Initiative Budget shows, the Uzbek people are ready to take charge of their shared political future.

Photo: AXP Photography

Long-Awaited Uzbek-Kyrgyz Border Deal Sparks Unrest

In October, the final demarcation of the Uzbek-Kyrgyz border was expected to be successfully concluded after three decades of negotiations. The agreement was supposed to be a tremendous political victory for Kyrgyzstan, especially for President Sadyr Japarov. But instead of celebration, the agreement has spurred domestic unrest and intensified repression.

Most visibly, the unrest is due to the Kempir-Abad water reservoir in the Uzgen district. The local population in Uzgen believes that the government and president’s close ally Kamchybek Tashiev's negotiating team failed to fully address state borders, land ownership, and water management in the area and did not adequately explain the deal to the public. Concerns about ceding the important reservoir to another country and abandoning Kyrgyz land were frequently voiced, but the government downplayed concerns. Some members of a parliamentary committee responsible for the preliminary approval of the new border also complained about the secrecy of the agreement. The exact full wording of the deal was not published, which led to uncertainty about what they were actually voting for, and some parliamentarians refused to vote at all.

Japarov faced opposition to the announced border agreement both in media and in the streets. On October 22, a committee for the protection of Kempir-Abad reservoir was formed. Activists also organised a demonstration denouncing the deal and demanding transparent public discussions. However, Japarov labeled the protests as the product of the "evil intentions” of a few opponents.

To succeed, the regime has resorted to silencing the opposition voices until the deal is officially signed. On October 23, there was a mass detention of two dozen vocal opposition activists in Bishkek and elsewhere around the country. The Kyrgyz government also decided to take action against the local operations of Radio Free Europe and blocked the broadcaster’s website for two months over the alleged spreading of disinformation. Later, the National Security Committee—headed by Tashiev—ordered Demir Bank to close RFE’s local account.

The crisis over Kempir-Abad and the entire border demarcation process illustrates one of the core problems of the current Kyrgyz government: an authoritarian approach to sensitive domestic issues. On the agreement with Uzbekistan, Japarov and Tashiev decided to push the deal through the opposition using their political influence and power. There is no exact date of the official signature announced, and under the current circumstances, neither the official implementation nor peaceful acceptance of the deal by the Kyrgyz society is certain. 

Since his ascendence to power after large public protests in October 2020, Japarov has relied on his image as a strong national leader. Issues regarding territory, national interests, mineral resources, and economic prosperity have formed the core aspects of his political agenda. In recent months, however, he has faced mounting challenges in every domain. Moreover, attempts by Kyrgyzstan to present a border agreement regarding Kempir-Abad failed last year. Experiencing the same failure again would be a huge blow to Japarov’s political career.

Aside from its border issues with Uzbekistan, Kyrgyzstan also lacks fully demarcated borders with Tajikistan. Various factors have delayed the demarcation process since the dissolution of the former Soviet Union. These include complicated physical geography, mixed ethnic populations, and domestic political stakes. Tensions between Kyrgyzstan and Tajikistan have been rising in the past few years and there is little hope that the situation will improve in the foreseeable future.

The government’s nationalist rhetoric has not helped. This rhetoric has been accompanied by armed clashes and unprecedented levels of violence earlier this year. Neither Bishkek nor Dushanbe are interested in launching a full-scale war against one another, and destabilisation of the wider region is against the interests of their neighbours too. Even so, neither side has shown the willingness to engage in negotiations. For the time being, leaders in Kyrgyzstan and Tajikistan are using to justify consolidation of power at home.

While condemnable, Japarov and Tashiev’s attempts to secure the regime's position by silencing critics are hardly surprising. But the scale of the repression is concerning. Despite domestic turmoil, Kyrgyzstan still enjoys a reputation as a country with a more vibrant civil society and greater democratic mechanisms than its neighbours in Central Asia. However, researchers, activists, and civil society members interviewed by the author in recent months unanimously pointed to a worsening outlook and cited the disappearance of previously understood “red lines” and the unpredictability of authorities’ punitive actions.

Tashiev’s participation at a meeting with Vladimir Putin in Moscow last week under the auspices of the Commonwealth of Independent States illustrates Kyrgyzstan's slide towards more oppression. During the meeting in Moscow, non-governmental organisations and international bodies were labeled as threats and destructive forces.

The unrest and regime instability in Kyrgyzstan may have a negative impact also on other international projects, including the China-Kyrgyzstan-Uzbek railway, which has been on the table for two decades with no traction until last month when it was finally put forward. If the unrest persists, the parties to the rail deal may run out of patience. Moreover, Uzbekistan may either delay the ratification of the border agreement or demand more favourable conditions at Bishkek’s expense.

But even if the border deal materialises and both Kyrgyzstan and Uzbekistan implement the agreement, issues on the ground will likely persist. The newly demarcated border requires effective border management, trust, and mutual endorsement by the locals on both sides. Without a proper arrangement, even a minor skirmish might escalate to a major border conflict. Moreover, the contested future of the Kempir-Abad water reservoir further adds to the complexity to an already fragile situation at the Kyrgyz-Uzbek border.

Photo: Press Service of the President of Uzbekistan

As Protests Continue, Biden Should Enable Remittance Transfers to Iran

Protests in Iran are continuing as the Iranian people bravely maintain a presence in the streets and on social media. So far, Iranian authorities have given no clear indication that they will reform policies in line with protest demands and have signalled that a larger crackdown may be coming.

While the protests have meaningfully shifted the political discourse around women’s rights and state repression, it is unclear whether Iran’s civil society has the resources necessary to generate a large and lasting protest movement that maintains pressure on Iranian authorities and raises the costs of further crackdowns. One critical factor is the economic disempowerment of Iranian society over the last decade.

Between 2010 and 2020, the spending power of the average Iranian household has fallen by just over 20%. This loss of economic welfare is primarily the result of U.S. sanctions, particularly those imposed in 2012 and re-imposed in 2018. In the two decades leading up to 2012, Iranian households enjoyed an unbroken period in which living standards were rising.

U.S. sanctions policy has made protests in Iran more frequent, but also less likely to succeed. The economic precarity that has become a dominant feature of the Iranian social condition over the last decade makes it harder to sustain protest movements. Many Iranians literally cannot afford to organise and mobilise over weeks and months. Workers are reluctant to strike given the risk of losing their jobs. Even those who retain the economic means to protest lack the tools to organise.

In institutional terms, sanctions have weakened the formal and informal civil society organisations that help mobilise the middle class and channel middle class resources towards political action. Charities, advocacy groups, legal aid providers are starved of resources. Civic-minded women, who are at the forefront of Iran’s new protest movement, have been hit especially hard. As one Iranian activist put it last year, “Activists are struggling to survive… If they do end up with a bit of time at the end of the day for their activism, they are often too exhausted and preoccupied with economic survival to be effective.”

The recent protests have no doubt energised a wide range of social groups in Iran, but looking in both economic and institutional terms, the balance of power between Iranian state and Iranian society has clearly shifted in the state’s favour. Mobilisations have become more frequent, but they tend to be smaller and more fleeting, making it easier for the state to either crackdown or to simply wait out the protests.

As such, the Biden administration should adjust its sanctions policies to broadly authorise remittance transfers to Iran, making it possible for Iranians in the diaspora to support family and friends in ways that reduced economic hardship and strengthen capacities for political participation.

Remittance flows are restricted because banks and money transfer companies do not facilitate transfers to Iran owing to sanctions on the Iranian financial system. Most remittances are therefore made via exchange bureaus (known to Iranians as sarafis) or are hand-carried into Iran by individuals. U.S. persons are explicitly authorised to hand-carry personal remittances but are not permitted to use money service businesses. The financial flows made through exchange bureaus and hand-carry channels are difficult to track and so the true extent of remittance flows may not be reflected in authoritative estimates, but Iran is likely receiving far less remittance transfers than countries with similar economic characteristics.

The World Bank estimates Iran received $1.3 billion of remittances in 2021, equivalent to just one-tenth of a percent of GDP. By comparison, Thailand, a country with a higher per capita GDP ($19,000 vs. $16,000 in PPP terms) and a smaller population (70 million vs. 84 million), received $9.0 billion of remittances, equivalent to 1.8 percent of GDP.

It is unlikely that exchange bureaus and physical transfers total in the many billions of dollars. In short, Iran’s remittances inflows are much lower than expected given the size of the economy and the economic needs of the population. Remittances flows are far too limited to shore the economic welfare of households in the face of the generalised economic crisis to which sectoral sanctions contribute—a fact evidenced by the erosion of household consumption over the last decade.

A significant body of academic research suggests that remittances encourage political participation, including in protests. In a 2017 paper, Malcolm Easton and Gabriella Montinola use individual-level data from Latin America to explore the relationship between the receipt of remittances and political participation. They find that “remittance recipients are more likely to select protest rather than the base response” whether in a democracy or autocracy. Additionally, in autocracies, remittances make political change seem more achievable. Easton and Montinola explain that “receiving remittances increases the odds of selecting protest relative to believing change is not possible by 34%.” Abel Escriba-Folch, Covadonga Meseguer, and Joseph Wright arrive at a similar conclusion in their 2018 study which used individual-level data from eight African countries. They find strong evidence that “remittances increase protest by augmenting the resources available to political opponents” and “remittances may thus help advance political change.”

The Iranian diaspora in the United States is the largest and most politically active in the world. As U.S. persons, members of the diaspora living in the United States are unable to send remittances to Iran beyond the hand-carry method, which is not an option for those who cannot travel to Iran for personal or political reasons, or who are opting not to travel to Iran due to the increased risks facing dual nationals. To provide routine and reliable financial support to family and friends in Iran, members of the Iranian diaspora should be able to avail themselves of money service businesses or other payments solutions.

The relevant regulation does stipulate that remittance transfers “processed by a United States depository institution or a United States registered broker or dealer in securities” are authorised. However, there is a lack of such institutions offering remittance services for Iran—U.S. banks do not maintain correspondent accounts at Iranian financial institutions. As such, the Biden administration should update its regulations to enable U.S. persons to make remittances transfers through other channels. This can be done through the issuance of a new general license with two aims.

First, the Biden administration could authorise the use by U.S. persons of money service businesses, such as Europe-based exchange bureaus, to transfer non-commercial, personal remittances to Iran. Second, and perhaps more usefully, the Biden administration could authorise the use by U.S. persons of cryptocurrency exchanges to purchase USDC stablecoins and transfer those stablecoins as non-commercial, personal remittances to Iran. The administration would also need to authorise U.S. cryptocurrency exchanges to onboard users in Iran.

Exchange bureaus can typically make deposits to accounts at Iranian financial institutions. The existing regulations do state that U.S. banks can engage with money service businesses in third-countries to make remittance transfers to Iran. But that makes such transfers subject to the discretion of U.S. banks. The guidance should be modified such that U.S. persons can directly engage exchange bureaus, for example those in Europe, to make transfers to Iranian bank accounts. Making it possible for U.S. persons to use third-country money service businesses would have an immediate impact on the volume of remittances sent to Iran. However, this channel cannot scale indefinitely as money service businesses generally need to balance inflows and outflows to make transfers in a netting process.  

The use of cryptocurrency could be even more impactful. While few Iranians maintain cryptocurrency accounts, the technology provides one of the few scalable options for enabling U.S. persons to make remittance transfers to Iran. So long as cryptocurrency exchanges receive guidance that allows them to onboard Iranian users, Iranians can be expected to adopt the technology and U.S. persons will be able to transfer cryptocurrency without a constraint on scale.

The authorisation should be limited to exchanges and should not cover transfers made directly to addresses or via wallet providers, because of the additional controls that the exchange can impose. It is technically feasible for cryptocurrency exchanges (such as Coinbase and FTX) to limit the value of transfers that can be received and held by Iranian users in line with the provisions of the authorisation. Additionally, transactions processed by the exchange do not happen on cryptocurrency blockchains, they are run within the exchange’s internal database. This enables the exchange to freeze any account held by its user and block further transfers if necessary. Moreover, the exchange could ensure that users were only able to transfer certain cryptocurrencies to Iran, such as traceable USD stablecoins which are pegged to the dollar (the best option is USDC, which has a track record of cooperation with US regulators). This would ensure that exchanges are not providing a platform for speculative trading by Iranian users and that Iranians do not have a perverse incentive to hold onto their remittances. These exchanges can also require additional KYC for U.S. persons and Iranian individuals on either end of a given transfer.

To be effective, these authorisations would need to be followed by extensive outreach by the U.S. Department of Treasury and U.S. Department of State to ensure that money service businesses and cryptocurrency exchanges begin supporting Iran-related transfers. U.S. authorities would also impress the importance of monitoring for suspicious transactions and could ask for data on the remittance flows to enable better enforcement. Any authorisation could be granted based on a limit to the value of remittances made by a U.S. person each month—a limit as low as a few hundred U.S. dollars could make a significant difference in supporting basic household welfare in Iran.

There is a risk of abuse by individuals seeking to transfer funds to designated entities or individuals in Iran. But the risk is limited. Flows of USDC cannot be directly taxed or expropriated by the state. To spend any remittances they have received, Iranians would either need to pay for goods and services by transferring USDC to another Iranian user that has created an account on the exchange, or by finding an Iranian user who is willing to exchange USDC for cash.

The lack of hard currency flows means that the proposed action does not entail a substantive change to the structure of U.S. sanctions on Iranian economic sectors and state-owned and controlled entities. Even so, the authorisations can significantly boost the economic resources of Iranian civil society and enable more robust political participation, including in protests. However, the decision to participate in the protests lies with each Iranian. Unlike a strike fund, this policy does not create an incentive for protest, nor are the remittances made contingent on certain kinds of political action.

There is a precedent for this approach. Even while adding sanctions on the Maduro government, the Trump and Biden administrations have notably allowed Venezuelans to continue to use U.S.-based financial services, such as the payments app Zelle, to send and receive U.S. dollars. This has had the effect of shielding many Venezuelans from even steeper declines in economic welfare as the country experienced a steep sanctions-induced recession.

Enabling Iranian-Americans to make remittance transfers to their family members in Iran within the context of existing sanctions regulations would mean that the Biden administration is not only seeking to deprive the Iranian state of resources for repression but is also working actively to preserve the power of the civil society at a time of general economic crisis. This is what true solidarity would look like.

Photo: IRNA

Iranian Women are Colliding with the Iranian State

On the day that Ebrahim Raisi, Iran’s President, was giving a speech at the United Nations headquarters in New York about the double standards with which human rights are pursued around the world, a tear gas canister flew past me and hit a car that was parked a few metres away. I was among the protesters running down Palestine Street in the centre of Tehran, and the tear gas was being fired directly at us by anti-riot police. We were doing nothing more than shouting slogans, but any of us could have been severely injured or killed—this was not an isolated incident. According to human rights groups, more than 90 people have been killed in the ongoing protests across Iran. The protests were ignited by the death of 22-year-old Mahsa Amini while she was in the custody of the morality police. The authorities have responded to these protests with a brutal crackdown—beating, shooting, arresting—and an internet blackout that has blocked access to platforms such as WhatsApp and Instagram.

Twenty years ago, it would have been hard to imagine that dozens of cities in Iran would erupt in protests against imposed religious rules. The death of Zahara Bani Yaghuob, an Iranian medical doctor arrested by authorities in Hamedan in 2007, did not lead to widespread protests at the time. But the Iranian state is reaping what they have unintentionally sown. Despite rolling back some women’s rights, such as the Family Protection Law introduced under Mohammad Reza Pahlavi, and imposing an Islamic dress code, after the revolution, a so-called Islamic educational system helped more women in rural and lower social classes to receive an education. While women in upper and middle social classes benefited from progressive laws prior to the revolution, traditional families, typically from disadvantaged backgrounds, felt more comfortable sending their daughters to school under Islamic laws. Today, women account for 60 percent of university students in Iran. It is no coincidence that Generation Z, now on the frontlines of the recent protests, are the children of Iran’s 1980s baby boomers. Generation Z’s parents were the first cohort to see a dramatic shift in the numbers of women receiving higher education in Iran.

A few hours before the tear gas canister nearly struck me on Palestine Street, I was passing security forces on Revolution Avenue when a man in plain clothes and a helmet came up to me and said, “Our cameras will capture your face. If I see you again in this area, you’ll get arrested.” “For what crime?” I asked. “No offence required,” he replied, “I have the power, and I’ll use it against you.”

The man’s boast is the key to understanding the recent protests in Iran. After Sepideh Rashnoo was harassed on a bus by a fellow citizen over her “improper” hijab in July, the dangerous power that had been delegated to pro-regime citizens became clearer. Iranians watched Rashnoo, a writer and artist, make a humiliating forced “confession” on national TV. In contrast to Rashnoo’s humiliation, the woman who harassed her over her hijab enjoyed a kind of authority bestowed upon her by the government.

Along with the morality police, the citizens who have been granted this authority stepped up their policing of the hijab rules since Raisi’s election, which was marred by record low turnout. The death of Mahsa Amini while in police custody has revealed the conflict between the Iranian government and citizens who do not want to comply with rules they believe infringe on their civil rights. There is significant disillusionment and profound doubt about the prospects of reforming a system that has shown zero interest in compromise. If the Green Movement’s slogans were full of verses from Qur’an and other Islamic references, the slogans heard in the recent protests contain no Islamic references and no requests for narrow reforms.

Despite the economic stagnation, systematic corruption, and mismanagement in recent years, economic grievances do not feature in the slogans either. The protests have coalesced around dissatisfaction about how the Iranian state relates to society. The protests that erupted after Mahsa Amini’s death emerged mainly from marginalised groups: Kurds who are an ethnic minority, the middle class which as encountered so much hostility from the government, women who are not even recognised or protected in the system if not wearing a hijab, and the working class who have witnessed widespread governmental corruption in the recent years.

While living under the strict rules of an increasingly authoritarian state, the future for these oppressed groups is grim—they see a dead end. Accordingly, for the Iranian authorities, the unification of these various social groups, which has happened for the first time since the 1979 revolution, poses a new challenge.

In recent years, Iran’s middle class has been shrinking because of international sanctions and economic decline. Still, they have had some spaces, such as social media and satellite television, to engage with progressive ideas on human rights. Long before the recent protests forced Iran’s national television to address the issue of compulsory hijab on their programmes, subjects such as the hijab, personal freedom, and gender politics have been debated on social media and foreign-based television channels before large audiences. In this way, two different worlds have coexisted and one is now crashing into the other.

Are we witnessing another revolution in Iran? It is hard to ascertain. Iran’s state ideology still has sincere supporters, not just at home but also across the region. Some analysts have pointed to the limited number of protesters to suggest the protests are a “virtual revolution” that exists only on social media. Still, a revolutionary turn does not necessarily depend on the number of active protesters; it arises from a dead-end situation. Following Ayatollah Khamenei’s speech in which he called the protests “riots” and blamed a foreign plot for the unrest, the obstruction has never been clearer.

Nevertheless, there is a movement in Iran. Motivated by their anger following Mahsa Amini’s death, a growing number of women who have found the courage to go out with their hair uncovered in public. For a political system that places enormous emphasis on women’s appearance, this is a profound form of protest. Iranian women, supported by the many men who have now joined them, are challenging the discrimination they have experienced for decades. They have already achieved a great victory by making their voice heard around the world.

Photo: EPA-EFE

Can SCO Members Achieve Connectivity in the Face of Conflict?

The two-day Shanghai Cooperation Organisation (SCO) summit took place last week in Samarkand, Uzbekistan. Aside from agreeing to the Samarkand Declaration, which summarises the intention of SCO members to foster deeper economic partnerships, the gathered leaders also signed 44 documents consisting of numerous memorandums, roadmaps, and action plans for cooperation in tourism, artificial intelligence, and energy.

The SCO leaders mostly focused on the importance of new transit routes and economic cooperation. Chinese President Xi Jinping, who travelled to the summit as part of his first foreign tour since the COVID-19 pandemic, touted ambitious plans to expand economic cooperation with Central Asian states.

Negotiations over the China–Kyrgyzstan–Uzbekistan railway took place in the sidelines of the summit and the three parties agreed to conduct a feasibility study with a view to constructing the new route. Uzbek officials also lobbied for another transit corridor from Uzbekistan through Afghanistan and Pakistan, but support among SCO members has been tepid given the need to engage with the Taliban government in Kabul.

Uzbekistan also signed 17 cooperation agreements with Iran focused primarily on transport and trade. Tashkent is seeking further access to Iran’s Chabahar port for its economic development. The Iranian delegation, led by president Ebrahim Raisi, signed a Memorandum of Obligations that paves the way for full SCO membership. Iran’s accession process could be completed in less than a year. The presence of Turkish President Recep Tayyip Erdogan and Belarusian President Aleksandr Lukashenko reflected the SCO’s interest in expanding its influence, even among non-member countries.

But the spirit of cooperation and the visions of connectivity were undermined by reminders of the numerous conflicts in which SCO member countries are involved. During the summit, Russian President Vladimir Putin’s interactions with fellow leaders were tainted by the war in Ukraine. While there were no official statements about the Ukraine invasion during the summit, most member states found their way to express dissatisfaction with the economic turmoil and destabilisation caused by Russia's invasion. Indian Prime Minister Narendra Modi told his Russian counterpart that “now is not an era of war.” Several leaders, including Kyrgyz President Sadyr Japarov, made Putin wait in front of cameras before meeting him—a power move that Putin has famously used in recent years.

China, too, expressed its concerns over the consequences of the current events in Ukraine. The strongest message came in the form of vocal support for Kazakhstan. In a statement, Xi said that “no matter how the international situation changes, we will continue to resolutely support Kazakhstan in protecting its independence, sovereignty, and territorial integrity.” Russian hawks had recently threatened Kazakhstan after Kazakh leaders took steps to distance themselves from Moscow.

But the war in Ukraine was not the only conflict to cast a shadow over the summit. During the summit, clashes began between two member states, Tajikistan and Kyrgyzstan. Meanwhile, tensions also rose between Armenia and Azerbaijan, an SCO dialogue partner whose president, Ilham Aliyev was in attendance at the summit.

The border between Tajikistan and Kyrgyzstan has been troubled since the demise of the Soviet Union. The former Soviet Republics have failed to properly demarcate their shared border due to complicated geographic terrain, mixed ethnic populations, and general political instability. But since last year, the regular border clashes have become more dangerous and more deadly. New clashes between Tajik and Kyrgyz forces erupted during the SCO summit, leaving dozens dead and hundreds injured. As the clashes between the two Central Asian republic escalated, Russia attempted to show its influence. Just after the summit, Putin spoke with the Tajik and Kyrgyz presidents and called on them to "prevent further escalation." Both countries are members of the Russia-led Collective Security Treaty Organization. A tenuous ceasefire is now in place.

Other SCO member states and dialogue partners may be implicated in the conflict if it escalates further. Earlier this year, Tajikistan began production of Iranian-designed drones as part of a novel joint venture. Meanwhile Kyrgyzstan has purchased Bayraktar drones from Turkey.

The Samarkand Summit demonstrated the value of the SCO as a platform for bilateral and multilateral initiatives of its member and associate countries. The SCO is especially attractive for strong personalist leaders, whose politics prevent active participation in other international rules-based blocs and bodies. However, because the SCO does not contribute to a rules-based order, the organisation has struggled in the face of conflict—such as the clashes that took place last week between Tajikistan and Kyrgyzstan.

If the SCO is to mature as an organisation and make good on its vision of connectivity, it must also serve as a platform for conflict resolution. Until now, SCO member states have viewed longstanding tensions among other members as something outside the bounds of the bloc. India is assuming presidency of the SCO and Modi did chide Putin over his invasion of Ukraine during their bilateral meeting. Will far-flung conflicts in Eastern Europe, the Caucasus, and Central Asia, be of little concern or too costly to ignore?

Photo: Kremlin.ru

Grief and Grievance in Iran’s Growing Protests

For four days, protestors have marched on Iranian streets. The protests were triggered by the killing of Mahsa Amini, who was fatally injured while in the custody of the Guidance Patrol, a police unit in Iran that mainly enforces the country’s Islamic dress code. Amini, who was 22 years old, died last Friday after several days in a coma. She was visiting Tehran from the province of Kurdistan to see her relatives.

Iran has seen multiple waves of protests in recent years. In 2017, protests erupted in response to a sharp drop in the value of the rial and grew to include claims of economic mismanagement and corruption. In 2019, nationwide protests were triggered by a fuel subsidy reform and Iranians took to the streets to decry declining living standards. In 2021, protests focused on water rights recurred in various Iranian provinces. This year, labour protests have taken place across the country as a public sector employees and blue-collar workers seek job security and wage increases.

In many respects these protests have been linked. In each round of unrest, protestors mobilised because of similar grievances, mainly economic. They shouted the same slogans—“Death to the dictator!”—expressing anger at a sclerotic political establishment. They faced the same brutal response from security forces, who injured and killed with impunity.

But the protests triggered by the killing of Mahsa Amini appear different and are arguably more significant. While there are similarities with previous protests when considering the grievances, the slogans, and the repression, there is something distinct about the emotions being foregrounded as the mobilisations take place. 

So far, people of different backgrounds and different classes have joined these protests. They have taken to the streets of Amini’s hometown of Saghez and have assembled on college campuses in Tehran to express their anger and sadness. These protests are motivated by grief, not mere grievance. Grief has opened the way for a new, wider mobilisation. 

As my colleague Zep Kalb has observed, looking across recent protests in Iran, “solidarity has been hard to obtain.” Reflecting on last year’s water protests in Esfahan, Kalb explained that the protests forced “ordinary Iranians, state organisations, and political elites” to “compete fiercely about how to share the country’s increasingly scarce water resources.” Communities involved in the protests shared the same grievances—they were all demanding their water rights—but in an environment of scarcity their demands pitted them against one another.

The same can be said for the earlier rounds of economic protests in Iran. The individuals who took to the streets all shared economic grievances and wished an end to their unfair treatment in the face of low wages, high prices, and growing inequality, due in large part to the accumulative effect of sanctions. But the protests, while frequently dispersed, did not overcome class and communal divisions. 

The fragmented nature of these past protests has made it easier for authorities to respond with carrots and sticks, shirking calls for broader reform. Last year, Iranian authorities used live rounds to suppress protests in Khuzestan, a region in southwest Iran beset by poverty pollution, and water shortages. Their use of violence in a region many Iranians see as a backwater had limited political repercussions. Earlier this month, the Raisi administration inaugurated a major water infrastructure project to increase water supply in 26 cities in the province. In this way, national resources have been used to address local grievances, while systemic reforms are rejected. After all, many Iranian protestors did not necessarily care if the restoration of their rights and economic welfare came at the expense of others and without broader reform. In this way, the politics of scarcity has undermined the solidarity necessary for broader mobilisation.

But the emotion that has brought so many Iranians to the streets after Amini’s death—grief—is anything but scarce. A photograph of Amini’s parents, utterly alone and in a mournful embrace in the hospital ward, struck a chord and was widely shared on social media. Millions of Iranians have endured such private moments of grief in recent years. The scene in the hospital ward even evoked the unprocessed pain of the COVID-19 pandemic—during which 144,000 Iranians lost their lives according to official statistics. The sadness of Amini’s killing was profoundly relatable. 

There is also anger. Another daughter of Iran has had her life ruined or ended by state brutality. Over the last year, apprehensions had grown about the increasingly aggressive actions of the Guidance Patrol and Amini’s killing was the inevitable conclusion.

If Amini’s death seemed inevitable, it was also because the same thing has happened before. Comparisons have been made with the death of the “Blue Girl” in September 2019. Sahar Khodayari set herself on fire as an act of protest and died of her injuries a week later. Khodayari had faced prosecution for attempting to attend a football match at the stadium of Esteghlal, her beloved club, whose uniforms are blue.

Another aspect of Amini’s death, the idea that she was killed simply because she was in the wrong place at the wrong time, has led to comparisons with the January 2020 downing of Ukraine International Airlines Flight 752, in which 176 people were killed. Iranian authorities admitted shooting down the civilian airliner, which was departing from Tehran’s international airport, but claims it was accidental. In the aftermath of such senseless events, many Iranians, especially women and youth, feel they live in the wrong place at the wrong time.

Perhaps unsurprisingly, a nationally representative poll conducted by Gallup in 2021 reveals Iran to be a country beset by anger and sadness. Respondents were asked what emotions they had felt in the previous day. The responses were stark—34 percent experienced anger, 36 percent experienced pain, 40 percent experienced sadness, and 43 percent experienced stress. Responding to Amini’s death, journalist Omid Tousheh captured the national mood succinctly in a tweet: “Grief, anger, and desperation pour forth from the door and the walls.”

The hope for Iran is that these crushing feelings will not lead to dejection. There is a power in the emotions that are being unleashed in this new round of protests. There remains a possibility that a broad mobilisation can lead to reform, if the Iranian people can harness the deep solidarity that grief—not grievance—can foster.

Photo: AP

As China-Led Bloc Heads to Samarkand, Leaders Struggle to Find Common Aims

This week, Uzbekistan is hosting the Shanghai Cooperation Organisation (SCO) in Samarkand. The two-day summit begins on September 15. The leaders of China, Russia, India, Pakistan, Iran and other member and observer states are expected to attend. It will be the first time since the 2019 summit in Bishkek, Kyrgyzstan, that leaders will meet face to face in the SCO format.

The upcoming summit in Samarkand aims to present the organisation as a stable, capable, and evolving bloc with the capacity to address regional and global crises. For the host nation, Uzbekistan, the summit is a chance to promote the “Spirit of Samarkand” and to encourage global cooperation over global competition.

For years, the Uzbek government has sought to deepen its relations with other SCO member states. Having the opportunity to host the summit cements Uzbekistan’s position as a valuable member of the SCO community and allows it to push its regional agenda forward. Connectivity, cooperation, and the promotion of regional stability are at the core of President Shavkat Mirziyoyev’s goals, outlined on the eve of the summit.

Iran Takes Next Membership Step

One of the most important events expected to take place during the summit is Iran’s signing of binding documents related to its admission as a full member of the organisation. Iran’s accession will mark only the third time since its founding in which the SCO has admitted a new member—India and Pakistan joined in 2017. While Iran’s membership will not become official for at least another year, the procedures for its full membership will commence at the summit. Iranian leaders have faced a long wait for admission—it has been 15 years since Iran formally applied to join the bloc.

Tehran views joining the SCO as an important diplomatic achievement. The SCO represents a platform for non-western alignment and provides a platform for negotiations on tangible security and economic projects with other member states. Taking Iran on board, however, does not automatically guarantee either significant immediate benefits for Iran or an increase in the bloc’s capacity to effectively address security and economic challenges facing Asia, particularly while Iran remains under US secondary sanctions.

Eyes on Afghanistan

The situation in Afghanistan has proved strategically important for all SCO members, and especially the Central Asian republics. Security and humanitarian issues in Afghanistan were discussed in a large international conference hosted by Uzbekistan in July.

Among the Central Asian states, Uzbekistan is the loudest supporter of a taking a proactive approach towards the Taliban. While there are clear political issues with the Taliban, the Uzbek government realises that the critical south-eastern infrastructure corridor runs through Afghanistan. Development of this route promises significant economic benefits for Uzbekistan. The Uzbek president has stated that the SCO “must share the story of its success with Afghanistan.” In other words, it is a task for all regional states to engage with Kabul, and this task may become a benchmark for the capacity of SCO as an organisation. However, Afghanistan must become stable and a reliable partner to allow for its own development, as well to enable regional infrastructure projects to advance.

Tajikistan has a fundamentally different view towards the regime now in charge in Kabul. Dushanbe remains highly critical of the Taliban, raising concerns regarding terrorism and the safety of the Tajik ethnic groups in Afghanistan. However, neither Mirziyoyev or Emomali Rahmon, his Tajik counterpart, wishes to see Afghanistan further destabilised. China, India, and Russia basically hold the same position. Most regional countries are facing security threats from the Islamic State Khorasan Province and its affiliated groups. To add to the worries of the Central Asian states, Pakistan, a major player in Afghanistan, has itself faced political turmoil in the past year following the ousting of Prime Minister Imran Khan.

A Russian Dilemma

Russian president, Vladimir Putin, will face a difficult task in presenting his country as a global power in the face of unsuccessful military operations in Ukraine and economic strains caused by sanctions. The countries of Central Asia have close economic ties to Russia and are suffering the inevitable consequences of Moscow’s isolation.

As most regional countries are engaged in efforts to find ways to mitigate the negative impact of the Russian invasion of Ukraine, Moscow is expecting a not-so-warm welcome in Samarkand. Recently reported battlefield losses in Ukraine have incentivised some SCO member states to more forcefully resist Moscow's ongoing attempts to influence their foreign policy, including their aims and activities within the organisation.

The SCO is largely dominated by China rather than Russia, but Russia has long been seen as a key partner in shaping the bloc’s political and economic aims. But it appears that Russia’s future position and influence within the organisation will be increasingly determined by the priorities of other member states and not Moscow’s ambitions. Moreover, while Russia’s ties with China have been described as a “partnership with no limits” by Chinese officials, the upcoming summit will be the first time Xi and Putin meet in-person since the start of the Ukraine invasion. Their engagements on the side-line of the summit will be telling of the extent of the bilateral partnership, particularly within the framework of the SCO.

Struggling for Common Aims

According to the Uzbek foreign ministry, numerous agreements on cooperation in specific areas, ranging from digital security to climate change, are will be discussed at the summit. The SCO is also seeking to establish partnerships with countries outside its primary geographical core, namely with Egypt, Saudi Arabia, and Qatar, in an effort to further extend the bloc’s political reach. 

Until now, the greatest advantage of the SCO was that the bloc did not impose strict rules or apply pressure to prevent its members from cooperation with non-member states, even those who may be perceived as adversaries to China and Russia. This flexibility has been particularly important for Central Asian states who maintain significant security and economic relations with the United States and Europe alongside their partnerships with China, Russia, and India—as required by their multi-vector foreign policies.

Since the Russian invasion of Ukraine, however, that flexibility seems at risk. For example, Russian politician Nikolai Patrushev recently declared that military training provided by the United States to certain SCO members poses a threat to Russia. Such accusations will no doubt colour bilateral and multilateral engagements in Samarkand.

Issued at the end of the summit, the "Samarkand Declaration" will present "a comprehensive political declaration on the SCO's position on international politics, economy and a range of other aspects." To what extent the SCO will be able to accommodate its members' varied and even contradictory aims is a question yet to be answered. The Samarkand summit will convene an organisation still searching for its trajectory.

Photo: Wikicommons

Can 'Unitisation' of Oil and Gas Fields Power Diplomacy in the Persian Gulf?

In March, the Saudi Energy Minister met with his Kuwaiti counterpart to sign an agreement for the joint development of a shared offshore gas field. The Dorra field lies about 50 miles off the coast at the border between Saudi Arabia and Kuwait and is around the same distance from Iran’s southwestern shores. The field could produce 1 billion cubic feet of natural gas and 84,000 barrels of condensate per day.

Shortly after the Saudi-Kuwaiti declaration, Iran’s Foreign Ministry swiftly expressed its dismay and said that any step for the joint development of the field—called the “Arash” field in Iran—must be carried out in cooperation between the three countries. In a surprising response, Saudi Arabia and Kuwait invited Iran to hold negotiations to determine the eastern limit of the joint, energy-rich, offshore area. While the proposed talks have yet to take place, the Dorra-Arash field is a clear example of how an area of contestation has the potential to be turned into an area for cooperation, if the political and security environment of the region allows.  

As key regional players move towards de-escalation and dialogue, evidenced by the end of the intra-GCC conflicts as well as Saudi Arabia and the United Arab Emirates’ diplomatic engagements with Iran, it is worth considering potential for regional energy diplomacy. The shared oil and gas fields in the Persian Gulf and Gulf of Oman are largely untapped areas for bilateral and multilateral cooperation. Iran and Qatar share the largest gas reserve in the world and Iran shares a further two-dozen oil and gas fields in the Persian Gulf with the Gulf Cooperation Council (GCC) countries and Iraq. There are also numerous fields shared among the GCC states and Iraq. To move the energy produced by these fields, regional countries have long mulled pipelines projects, such as one between Iran and Oman, as well as talks for the re-exportation of Iranian gas as Liquified Natural Gas (LNG) by Qatar and Oman.  

But most of the shared fields amongst the Persian Gulf states are either inactive or are disputed. In the absence of cooperation agreements, countries have mainly opted to develop and extract the reserves on their own. Disputes over median lines, extraction rights, and varying concessions have often led to tensions between regional states.

Iran has disputed Kuwait and Saudi Arabia’s claims on the Dorra-Arash field since it was discovered in the 1960s. At the time, maritime boundaries in the Persian Gulf were poorly defined and bordering countries did not pay much attention to them. This was also the case for the South Pars-North Dome field—the shared gas field between Iran and Qatar—as the median line between the two countries had been negotiated before the gas field’s discovery in 1971. When Iran and Qatar determined their boundaries two years prior, the predominant factor underlying the delimitation was equidistance.  

Because of the fact that the boundaries continue to be poorly defined, Kuwait, Saudi Arabia, and Iran have each asserted their sovereignty on the Dorra-Arash field by awarding overlapping concessions throughout the past five decades. By the year 2000, Saudi Arabia and Kuwait had reached an agreement on the corresponding offshore zones where their concessions could be awarded. In retaliation for its exclusion in the negotiations, Iran deployed drilling equipment to the field the following year. A cycle of actions and retaliations that have largely continued to date, rendering the field underdeveloped on the Saudi, Kuwaiti, and Iranian sides altogether.

The output from the Dorra-Arash field will have an “inconsequential” impact on today’s global gas and LNG markets in the wake of the Russian invasion of Ukraine and rising global demands, as Wayne Ackerman argues. This is primarily because the three countries will need to use the outputs to satisfy their own domestic energy demands. But inconsequential as it might be, the output from the field is significant in both adding to the global gas reserves and establishing an area for inclusive multilateral cooperation in the region.

Economic diplomacy, if enacted through joint projects such as the development of the Dorra-Arash gas field,  could give new impetus to relations between Iran and GCC countries. The establishment of a long-term cooperation project to jointly develop the Dorra-Arash field would provide a way to measure the state of regional economic diplomacy in the region and provide Iran and its GCC neighbours to show good faith. Another possible area for cooperation is in the Salman field shared between Iran and the UAE. So far, Iran and Iraq appear the closest to putting join development plans into action. Following years of negotiations, they recently decided to form joint technical groups to develop energy ties and shared fields. 

In this context, the European, and Asian, countries and companies could step in to promote confidence-building measures between the Persian Gulf countries by proposing multilateral projects with their participation. External players, particularly those who have the capacity to mediate and work with both Iran and the GCC states, could assist the regional countries in defining their boundaries using international law, proposing win-win multilateral projects, and investing in the development of the fields.

The GCC states and Iran have largely overlooked the benefits of “unitisation,” the joint development of an oil or gas field extending across two or more territories. Unitisation would allow the GCC states and Iran, as well as external players such as European or Asian companies, to jointly develop shared fields and benefit from cost-effective solutions for extraction, processing, and export. Regional leaders should leverage energy cooperation to creating the shared incentives necessary to make regional diplomacy more durable.

Photo: Shana.ir