UNCLAS SECTION 01 OF 02 RPO DUBAI 000501

SIPDIS

E.O. 12958: N/A
TAGS: ECON IR PGOV PREL
SUBJECT: IRAN'S EXECUTIVE-LEGISLATIVE SUBSIDIES TUG OF WAR CONTINUES

REF: RPO DUBAI 468

DUBAI 00000501 001.2 OF 002



1. (C) SUMMARY: Passage of the targeted subsidy reform bill has
stalled in the Majlis over President Ahmadinejad's demand his
administration have full control over how subsidy savings are
spent. The Majlis and Ahmadinejad have been unable to come to a
compromise after an impasse in the Majlis and Ahmadinejad's
threat to withdraw the bill. The matter has been referred to a
joint Majlis-Executive committee to break the deadlock.
Ahmadinejad seems determined to control billions of dollars in
potential savings as part of a broader strategy to extend his
authority. END SUMMARY.



ROUND ONE - SUBSIDIES MUST END




2. (C) When the first part (12 articles) of the subsidy reform
bill was introduced in the Majlis, Ahmadinejad tried to
influence the debate, repeatedly emphasizing the need to employ
free-market principles to fix the Iranian economy (reftel).
Mixing a populist message about how the rich benefitted most
from subsidies while delivering the tough news that Iranians
need to be weaned off government dependency, he argued
forcefully for the end of subsidies in numerous public
appearances. The Supreme Leader, who had previously endorsed
the need to reform consumption, concurred and endorsed subsidy
reform in a mid-October speech, and as a result, MPs approved
the plan to end subsidies over five years (NOTE: Subsidy removal
is expected to generate USD 20 billion in savings in the first
year with an additional USD 20 billion in each subsequent year,
ultimately leading to an annual USD 100 billion savings by Year
Five. END NOTE.)



BAIT AND SWITCH EXPOSES AHMADINEJAD'S TRUE INTENT




3. (C) As discussion turned to the second half of the bill,
Ahmadinejad tried to re-frame the subsidy reform debate. The
government, he argued in a one-hour television interview
November 11, "is not after eliminating the subsidies...our goal
is proper allocation of the subsidies." Having won the argument
to end subsidies, he now asserted the government's right to
determine how to spend the savings. Ahmadinejad refused to
accept the possibility of Majlis oversight.




4. (C) IRPO contacts argued that Ahmadinejad is driven
ideologically by redi

stribution but tactically by the desire to
control resources. In a recent conversation, one Iranian
economics professor based at the American University in Sharjah
argued that for Ahmadinejad, "the meat is in the cash payments"
and ceding control of some subsidy funds is an unfortunate
consequence of reforming the system. Our contact likened the
situation to the gasoline ration program introduced two years
ago. The program was meant to limit gasoline consumption, and
did so successfully, but also allowed the Ahmadinejad government
to hand out smart cards to loyalists in the IRGC and Basij who
earn a profit from the sale of subsidized gasoline on the
secondary market. Similarly with subsidy reform, our contact
postulated Ahmadinejad will reward loyalists with extra cash in
the form of extra subsidy cash smart cards. Indeed, an MP loyal
to Ahmadinejad and a member of the Majlis Planning and Budget
Commission told Fars News November 16 that the payment of
subsidies to Iranian citizens would be in the form of credit
cards while the government announced it was opening up 36
million bank accounts to pay cash. Both possibilities would
give Ahmadinejad significant control over how and to whom funds
are distributed.



AHMADINEJAD BULLIES PARLIAMENT...




5. (C) Since the Majlis has taken up the debate on how subsidy
savings will be distributed, Ahmadinejad has tried to apply
increasing amounts of pressure on MPs to cede any authority over
the funds to him. Debate on the second part of the subsidy

DUBAI 00000501 002.2 OF 002


reform bill started November 1. Majlis extended payments to all
Iranians (Ahmadinejad had proposed the bottom 70 percent) and
approved Article 13 requiring the government to request funds to
make cash payments through the annual budget process. Since
then, Ahmadinejad has made four visits to the Majlis (one
unannounced), submitted a letter withdrawing the bill, and
scolded MPs publically for demanding oversight. As a result,
they approved a subsequent article allowing the government to
determine how to spend funds. With the government refusing to
provide any details as to how the funds will be distributed or
allowing the Majlis any oversight, MPs refused to repeal Article
13 and the government refused to move forward with the article
included in the final text.



...BUT THEY PUSH BACK




6. (C) Since then, MPs have only hardened their position.
Majlis Speaker Ali Larajani, in an interview with state media
November 16 said he worried that "there is no way to re-assess
the target orientation of subsidies after ratification by MPs."
Hinting at the political power play underway, Larijani also
refused to give Ahmadinejad any credit for how far the bill had
come stating the MPs had approved all the articles at the
Supreme Leader's request. Additionally, he said whatever form
subsidy reform would take depends largely on what the Supreme
Leader decides.




7. (C) The Majlis and the administration set up a joint
committee November 15 to try and break the impasse.

Ahmadinejad attended a session of the six-person committee
November 18 and admonished MPs for making any changes to the
subsidy reform bill and urged them to give his government full
control. What emerged was an agreement to form an "independent
body" that will administer the program. Its membership remains
unclear. MPs are expected to balk if they have no membership and
the government is expected to do the same if MPs are included.




8. (C) COMMENT: In the larger context, Ahmadinejad's demand for
authority over the subsidy savings (which currently compromise
one-third of the country's USD 300 billion annual revenue)
reflects other recent moves to further centralize his
government's control over state functions. If Ahmadinejad and
his administration do succeed in gaining sole authority over the
expenditure of subsidies, it will represent a significant
increase in his agglomeration of power. But this debate also
exemplifies the increasingly bitter relations between
Ahmadinejad and the Majlis, especially Larijani. END COMMENT.
EYREA