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Iran's Citizens Demand Change

The Iranian government’s admission on 11 January that its own forces had shot down a Ukrainian airliner over Tehran three days earlier – killing all 176 people on board – has achieved a remarkable reversal in support for the regime. Days before millions had attended the mass funeral processions for Maj-Gen Qassem Soleimani, the commander of the IRGC Qods force killed in a US drone strike on 3 January, in a genuine display of anger at Washington as and apparent backing for the Islamic Revolution. Popular support for the government’s response to his killing – ballistic missile strikes on two US and coalition bases in Iraq, launched shortly after his funeral – also displayed strength of feeling. True, grief over the apparently coincidental crash of PS 752 a few hours later dampened the mood; nevertheless the Iraq strikes seemed proportionate and calibrated to avoid escalation to the full-scale war that neither the regime nor its citizens want. This support seemed to be bolstered by days of official denials of any military role in the aircraft’s loss, and its ascription to factors ranging from pilot error to technical malfunction – a narrative that held despite foreign reporting, and images circulating in social media, suggesting surface-to-air missiles were responsible. Yet on 11 January Tehran was forced to perform a volte face, almost certainly because it could not control messaging from foreign investigators, whose inspection of the bulldozed wreckage revealed unmistakeable signs of shrapnel damage. The IRGC finally admitted that its air defence forces had shot down the aircraft with two SAM 15 missiles, believing it to be an inbound US cruise missile fired in reprisal for the Iraq strikes. The admission caused profound shock, with even regime mouthpieces expressing consternation at the incompetence and deceit it revealed. Within hours mass protests had taken to the streets in cities across the country, calling not for an investigation, or sackings, but an end to the regime itself. This was an unprecedented demand for demonstrations of this type, which usually agitate for change within the system, rather than its removal. Protestors noted that the regime was able to give the US an hour’s warning of the ballistic missile strikes; however it had been unable to close its own airspace to civilian traffic, or distinguish between a civilian airliner and an incoming cruise missile, which would fly at twice its speed – to the protestors, this demonstrated a truly remarkable display of incompetence by a security establishment that constantly boasts of its prowess. Above all, they noted that the regime had killed 147 Iranian nationals – including a high proportion of talented graduate students returning to their academic studies in Canada – and then engaged in a systematic campaign of deception to deny responsibility. Strikingly they have rejected another regime trope, that Israel and the US are Iran’s principal threat, chanting that it is the regime that is their enemy; they even pointedly walk around the US and Israeli flags painted on major streets instead of marching over them and thus delivering the regime’s insult of choice. In effect the regime has discredited its biggest claim to legitimacy, that it makes Iran feared and respected, and its people safe – a claim that the Soleimani killing had seemed to hammer home across social and political boundaries. More than ten days on and despite regime promises of investigations and trials of those responsible, the protests continue across the country, their message amplified on social media and in the press by prominent public figures in sport and the arts. They have clearly rattled the regime, driving the Supreme Leader, Ayatollah Ali Khamenei, to speak at Friday prayers for the first time in two decades. His unapologetic message of blame, directed at the US and the European signatories of the JCPOA nuclear deal, delighted the regime’s massed loyalists but bolstered the protestors. Yet it is important to put these protests in proportion. They will not overthrow the regime; it has a complete monopoly of the tools of repression, which it will almost certainly use. They do not even seem likely to join forces with the demonstrators who took to the streets in fury in the autumn when petrol subsidies were reduced. While the latter protests assumed an anti-government and anti-regime aspect, they were predominantly expressions of working class fury at worsening poverty; the current wave of protests seem much more to be driven by anger among fair-weather supporters of the regime hitherto content to enjoy its benefits – predominantly students and the middle classes. Instead the latest protests should be seen as another – perhaps key – stage in the delegitimation of the regime. This is because they do huge damage to the IRGC. The IRGC has long been an empire within an empire, with its own businesses, banks, landholdings and armed forces – all of them justified by its self-proclaimed role as the shield of the revolution. This image has been shared by most Iranians; even those opposed to the regime have long taken a perverse pride in the organisation’s ability to tweak lions’ tails and make Iran count. Yet this image has survived because the IRGC has not been tested in a domestic arena since the end of the 1980-88 Iran-Iraq war. Its victories have been overseas, but so have its failures – meaning they have largely been hidden from view. Now, as a result of the excuse given for the downing of the airliner, all Iranians have had proof of what is perceived as staggering incompetence of this private empire that has hollowed out the formal state and economy and cannot even perform its core function effectively. President Trump’s policy of ‘maximum pressure’ had managed to strengthen the IRGC, allowing it to regain control of oil smuggling and thus the regime’s principal source of cash under the new US sanctions regime. Now the regime as a whole is under pressure because of its incompetence. The shield of the revolution currently looks more like its bier. And while the regime will survive, the IRGC’s opponents within the regime have been strengthened. How will this play out? Iran faces legislative elections on 21 February. These are never free and fair; only candidates vetted by the Guardian Council can stand, and while reformists are elected opponents of the regime are barred and/or imprisoned. Before the destruction of the Ukrainian airliner, it had been expected that the reformists and liberal conservatives around the Rouhani government would be punished for the collapse of the JCPOA nuclear deal – negotiated by Rouhani’s administration – and the subsequent economic downturn. Regime hard-liners, on the other hand, expected to reassert full control of the legislature. Both sides were expected to suffer as a result of low turnout – the regime has lowered the threshold for a valid result in these elections from 25% to 20%. Now no-one knows what will happen on 21 February. Fury with the regime could coalesce around support for the most liberal candidates permitted to stand; alternatively it could turn into a determination to deny the regime’s elections any legitimacy by refusing to vote, with the aim of keeping turnout below the valid result threshold. Whatever happens, Rouhani’s camp has been strengthened within the regime, by the IRGC’s apparent incompetence and his own appeals to hard-liners. (Iran’s rejection of the nuclear enrichment limits in the JCPOA deal, and its censure by the latter’s European signatories, has played well in the Guardian Council.) Regime politics have suddenly become much less controllable. Yet this turbulence will be largely internal and may not be manifested in shifts in foreign or security policy. Iran still needs to break out from ‘maximum pressure’, so will continue to combine coercion in the Persian Gulf and through regional proxies with diplomacy to woo the US’s regional allies. Crucially, this coercion campaign will still have the potential to cause significant escalation; while the attacks on the US bases in Iraq theoretically end the current cycle of tit-for-tat, the IRGC will not consider the Soleimani debt fully repaid, and terrorist or proxy attacks on US interests should be expected in the months ahead. Iran – and particularly the IRGC – will also feel under pressure in Lebanon and Iraq, so will be looking to apply pressure on the US to leave it alone. For many hard-liners within the regime, the recent confrontation with Washington may in fact have convinced them that applying pressure on the US will actually force its complete withdrawal from the region. Trump’s personal messages to the regime to stop its retaliation for Soleimani after the ballistic missile attacks will reinforce the notion – widespread in Iranian policy circles – that Trump will do anything to avoid war. (This assumption was briefly overturned by the escalation represented by the Soleimani killing; his messages thus destroyed the advantage Trump had briefly obtained.) So Iranian activity against US interests will continue. Iran has also made sure not to burn bridges with JCPOA’s European signatories. It has set aside formal limits on enrichment but is only gradually increasing the amount of material it produces, clearly still hoping the Europeans will provide economic relief. Hopes that Iran might have been persuaded of the need to negotiate a new nuclear deal, to Trump’s liking, are misplaced. The regime will not negotiate with Trump (who it deems an utterly unreliable partner) until it absolutely has to – which probably means after November 2020 (and Trump’s putative re-election). The reality is that the regime will keep following its current course in foreign and security policy, no matter how Iran’s internal politics play out. What will this mean for investors? The next few months will see more war scares, attacks on critical infrastructure, interruption of oil and gas supplies, and belligerent language, with markets responding – responses that may be more marked now that other significant elements of geopolitical volatility (above all US-China trade frictions) are easing. Confidence in the Middle East region as a whole is likely to be hit, in substantial part because there is no prospect of either Iran or the US doing what needs to be done to restore stability. The period until November 2020 – and, if Trump is re-elected, beyond – is likely to be volatile indeed. The one outstanding question is whether the downing of the airliner really was incompetence. The IRGC is certainly paying the price of that perception. Internal stress within the regime will be considerable. That may, strategically, result in changes that make the regime either more palatable to the West, or considerably more hard line. Either way, the status quo ante is unlikely to prevail. With all best wishes, Dominic Armstrong Dominic Armstrong CEO HORATIUS CAPITAL darmstrong@horatius.co.uk www.horatius.co.uk Mobile: +44 (0) 7977 928 898 53 Davies Street  London W1K 5JH We are delighted to announce that Horatius is the winner of the HFM European Emerging  Manager 2019 – Fixed Income Under $100m Award. Horatius Capital Limited is an Appointed Representative of Privium Fund Management (UK) Limited which is Authorised and Regulated by the Financial Conduct Authority. Horatius Capital Limited is a limited company registered in England and Wales with registered number 10436077. Our registered office is at 22 Chancery Lane, London, United Kingdom, WC2A 1LS. This message is intended solely for the addressee and may contain confidential information. If you have received this message in error, please send it back to us, and immediately and permanently delete it. 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