Iran: A changing of the Guards

At first glance, the building is remarkable only for its questionable taste. With pink marble on its facade and plastic plants along the corridors, the newly built nine-storey office seems typical enough in affluent northern Tehran.

Everything is crafted to be inconspicuous. The holding company based here takes its name from a precious stone, avoiding any tell-tale religious associations. The employees do not have the beards, khaki fatigues or high-collared shirts that are the hallmarks of Iran's military men and conservatives.

But this is no ordinary company. It is, in fact, affiliated with the Islamic Revolutionary Guards Corps and is probably one of dozens of such holdings across the country. The building houses offices with interests ranging across telecommunications, trade, energy and technology.

"The commanders who come to their offices in this building show up in plain clothes," says a western-educated businessman who visits the purportedly private holding company regularly. "But the senior commanders who are the main figures hold their meetings with businessmen in their modern houses outside Tehran and next to their huge swimming pools at strange times like 6am."

The Revolutionary Guards - Sepah in Persian - are the target of increasingly punitive international sanctions, primarily for running a ballistic missile programme that can strike Israel, and for its alleged involvement in disputed atomic facilities. The corps' Quds Force is a particular concern and is understood to be responsible for Iran's ties with Hizbollah and Bashar al-Assad's government in Syria.

But at home it is the Guards' commercial empire that causes the deepest worries. Over the past decade, associates of the Guards have profited from $120bn of so-called privatisations to acquire core national assets, notably in the communications sector. This has only strengthened the financial muscle that the Guards had accumulated from their traditional cash cow: taking a hefty cut from imports of consumer goods, believed to range from glass to Maseratis.

But now this new cadre of Sepah-affiliated businessmen, who are considered Iran's oligarchs, will have to overcome a new challenge if they are to preserve their influence.

The victory of Hassan Rouhani in June's presidential election, which many observers say defied the will of the Guards, and the Islamic regime's shift towards support for his more moderate domestic and foreign policies, could prove costly for the corps. Western diplomats say that Iran set out a fresh approach to breaking the impasse over its nuclear programme at talks in Geneva this week.

The new government also seems determined to reduce the Guards' influence and carve out space for private companies that have been suffocated by its operations. Despite holding the world's largest gas reserves and fourth-biggest oil reserves, sanctions over Iran's nuclear programme are crippling the country, stoking inflation and unemployment. Mr Rouhani's government has sensed that economic revival will require an attempt to curtail the influence of the Guards.

"The regime has decided that it needs to improve its image at home and abroad by containing the Guards and allaying concerns that the country is run by military men," says a senior adviser to the government. "The Guards' economic interests have become too big and out of control. They need to be curbed."

The Guards have become the country's commercial powerhouse by taking assets in privatisations as well as big energy and construction projects. It is almost impossible to estimate the force's total wealth because of its opacity. Nonetheless, some analysts reckon the Guards' companies and banks generate income of about $100bn annually.

This rise in wealth has worried even conservatives. "If no right decision is made," Ahmad Tavakoli, a conservative member of Iran's parliament said recently, "those who have military power and economic power will reach a point that they also want the political power."

The Sepah was established after the 1979 revolution as a force parallel to the conventional army but with a specific duty to protect the clerical regime from domestic and foreign threats. Since then, the 120,000-strong force has been designated by the US state department as a "proliferator of weapons of mass destruction".

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Its commercial acumen grew after Iran's war with Iraq (1980-1988) when Akbar Hashemi Rafsanjani, then president, encouraged the force to help his government build dams and roads.

But the Guards' ambitions kept growing and hit fever pitch under Mahmoud Ahmadi-Nejad, the former president. Today, according to some Iranian websites, the Guards own more than $20bn of oil and gas projects, including some in the South Pars field, the world's biggest gasfield, off southern Iran. Technocratic veterans from the Iranian oil industry complain that the Guards lack the engineering skills and should never be trusted with assets so vital to the national interest.

An affiliated company bought the state-run telecommunications company in 2009 for about $7.8bn under the so-called privatisation plan. Providing landline, mobile phone and internet services to a 75m-strong tech-savvy population is estimated to generate income of tens of billions of dollars every year.

The private sector complains that it is unable to compete. One civil engineer in a private company says his business, like many others, is "on a steep slope towards bankruptcy".

"We have lost out to quasi-private engineering companies which the Sepah established overnight and who easily steal projects from us," he adds.

A business consultant says the Guards' companies compensate for their lack of expertise by hiring European advisers from countries such as the Netherlands, Britain and Italy. "They surely do not run their companies with prayers."

Alarm bells sounded this year when politicians were competing for the presidential election and started speaking out against the Guards over fears that its commanders could engineer the poll to favour their candidates.

Mr Rafsanjani issued the starkest warning, saying the Guards "now control the country's pulse in the economy, foreign and domestic politics and would not be happy with anything less than the whole country".

In a delicate manoeuvre intended to curb the ambitions of the Guards but not antagonise them, Mr Rouhani held out an olive branch last month. He indicated that they should not interfere in politics but reassured senior commanders that he put no store in "rumours" that the corps was a threat to private companies. He even urged them to take over "three or four national economic projects" but only in a "complementary" capacity to the private sector.

Mr Rouhani said the Guards could help his government avoid international sanctions and tackle smuggling in spite of widespread accusations from Iranian businessmen that the Guards themselves operate dozens of jetties outside Customs supervision to import goods worth billions of dollars.

"The Guards know the country's situation very well," Mr Rouhani said. "A country that was selling 2.5m barrels per day of oil is now selling less than 1m, while it has to import 7.5m tons of wheat."

Ayatollah Ali Khamenei, Iran's supreme leader and ultimate decision maker, to whom the Guards profess loyalty, immediately endorsed the president's comments. The co-ordinated comments were clearly aimed at addressing demands of domestic and foreign investors that the Guards be reined in.

A business consultant says that the Guards will not be forced to close their sprawling network of companies. But the corps may have to give up contentious industries and trades such as the import of luxury goods, including cosmetics and Porsches.

"Tens of thousands of people and families are dependent on this cycle created by the Guards," the consultant says. "We will see some resistance by the Guards not to lose too much, but the commanders have realised that it is a decision the regime as a whole has taken and they have to swallow it."

Khatam-ul-Anbia, the Guards' biggest contractor, has been hit by UN, US and EU sanctions on charges of proliferation. It has 5,000 contractors, 45,000 employees and 150,000 people who work part-time, according to Brigadier General Mohammad-Reza Yazdi, deputy commander of the Guards for legal affairs. The headquarters has taken over hundreds of projects in oil, gas, petrochemicals, marine installations, consulting, mining, pipelines, dams, jetties, tunnels and irrigation networks.

Bijan Namdar Zanganeh, Iran's oil minister, is expected to lead attempts in the cabinet to reduce the Guards' influence. He says: "I deeply believe in transparency and competitiveness in contracts" and insists on "transparency in oil swaps". His remarks are taken as a warning that he will not sign oil and gas deals outside the bureaucratic procedure, something the previous government was accused of doing to benefit the Guards.

Instead, new oil ministry officials say they are trying to lure investment and are ready to co-operate with leading US and European companies if sanctions are lifted. It is unclear how the Guards will react.

Although hardliners opposed to Mr Rouhani (and close to the Guards and some radical clergy) seem largely under control, at least for now, there are fears in Tehran that an assault on their economic interests may trigger a backlash in other fields, such as the nuclear talks. The Guards oppose any rapprochement with the US. That antipathy is an ideological pillar to keep junior forces loyal.

Although Mohammad-Ali Jafari, the top commander of the Guards, has backed the government's nuclear diplomacy, he has accused Mr Rouhani of making a "tactical mistake" in talking by telephone with President Barack Obama on the sidelines of the UN General Assembly. Some hardline protesters hurled a shoe and eggs at Iran's president on his return.

The incident prompted Mohammad Khatami, Iran's former reformist president, to accuse hardliners of organising the attack - without specifying who - and warned of assassination attempts against reformist politicians.

Iranian analysts expect the country's supreme leader to make some changes in the Guards' hierarchy to ease tensions between the government and the military men.

"We will see new faces in the highest rankings of the Guards in the next one or two years so that the new commanders are in tune with the country's fresh political developments," says the government adviser.

It is an open secret that the force's favourite candidates lost to Mr Rouhani in the presidential election even though reformist politicians suspected during campaigning that the Sepah might rig the poll.

The suspicion is rooted in the 2009 election when the opposition Green Movement accused the Guards of engineering an "electoral coup" to have Mr Ahmadi-Nejad re-elected through allegedly large-scale fraud.

But analysts believe Ayatollah Khamenei ordered the commanders not to interfere in this year's contest. Still, any shift in the Guards' domestic power is unlikely to affect the operations of the Quds Force. That would undermine its foothold in the region and its leverage in any future deals with the US.

Hassan Firouzabadi, the chief of staff who oversees both the regular army and the Sepah, has offered an indication that the Guards would be willing to bend with the new political direction and return to its military responsibilities. "The armed forces are not into generating income through economic activities ... If the government does not need the potential of the armed forces, that potential will go back to military centres."

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