Al-Monitor Pro

Iran's startups will continue to face pressure from hardline agenda

To:

Al-Monitor Pro Members

From:

Dr. Bijan Khajehpour

Managing Partner, Eurasian Nexus Partners, Vienna, Austria

Date:

Aug. 29, 2023

Bottom Line:

Iran has a complex economic system with the government as well as semi-state institutions dominating the economic sphere and constraining the private sector. In recent months, the security establishment has targeted entrepreneurs and entities in the country's startup ecosystem, threatening to confiscate some of the successful startups. It is an alarming situation and may further limit the ability of the private sector to operate in the Iranian market. The question is how far the hardliners — meaning political forces who reject Western values and phenomena — will be prepared to go and what the reaction of the constituents of power will be.

Background Facts:
  • The Iranian private sector has operated under harsh conditions where only a handful of economic sectors are free of the dominance of the governmental companies that operate in all strategic industries and semi-state institutions that have a growing shadow in all other economic activities.
  • Though the Iranian constitution divides the economy into three sectors — governmental, cooperative and private — in reality, a massive segment of economic activity falls under the category known as semi-state, i.e. entities that are not accountable to the government but are affiliated with state institutions, including religious, revolutionary and military foundations. In 2006, Iranian authorities introduced a revision of Article 44 that theoretically opened up space for the private sector.
  • However, in the process of pseudo-privatization in the 1990s and 2000s, a large number of governmental entities were transferred to the semi-state sector, shifting the ownership of the economy to semi-state institutions.
  • In the past decade, while governmental and semi-state entities were focusing on the traditional industries and trading activities, a vibrant IT sector emerged mainly around young startup entrepreneurs. Large companies such as Digikala (Iran’s version of Amazon) and Snapp (an Iranian version of Uber) emerged and became icons of a young and vibrant startup ecosystem.
  • Now that these entities have grown in size and significance, hardline forces are pushing to put pressure on them using their established tactics by slandering them through their own media and pressuring them through their intelligence arm.
  • For instance, in line with recent socio-political developments in the country, where a growing number of women refuse to wear the obligatory headscarf, hardline media started to report that female employees of startups don’t observe the dress code. In July, law enforcement forces closed down one of the offices of Digikala in Tehran accusing it of violating the dress code laws.
  • However, signs were emerging that a bigger campaign was in play. The first warning shot came when vice president in charge of technology and innovation, Ruhollah Dehghani Firuzabadi, said that “some companies in the startup ecosystem have serious cultural anomalies, and the solution is to support original revolutionary currents to compete with them.”
  • Later, powerful hardline figure Hossein Shariatmadari published an editorial in his newspaper, Kayhan, asking the government to confiscate various large startups. He argued: "Don't the facilities and capacities used by them (meaning startups) belong to the government?! Therefore, why is their ownership and management not in the hands of the government?! ... Do not underestimate the power and intelligence of the forces committed to Islamic Iran.”
  • Hamed Beidi, CEO of the Karzar Platform, reacted pessimistically and stated: “We have experienced that when the Kayhan newspaper deals with an issue, especially in the form of a note from the chief editor, that issue does not represent a press analysis, but rather, it communicates with different levels, including the decision-making level. Therefore, in my opinion, this note will be a kind of declaration of a new position of the government's approach to startups.”
  • At the same time, some pushed back. For example, Reza Olfatnasab, a board member of the Association of Digital Businesses, reacted to Kayhan’s editorial and stated: “This is the second clear message sent by the government to the innovation ecosystem in the last 10 days. The first one was by vice president on scientific and technology affairs and today ... But Article 46 of the constitution says: Everyone is the owner of the results of his legitimate business and Shariamatdari and the like cannot claim ownership of these properties.”
  • There is already a debate among the elite on how serious this threat is and whether the Islamic Republic will return to the failed post-revolutionary policies of the early 1980s. What the hardline factions demanded then and also now is absolute loyalty, but today there is such a distance between the regime ideology and the mainstream of society that it will be difficult to expect full alignment from the society and business community alike.
Alternative Scenarios:

Scenario 1: Iranian hardliners use their intelligence muscle to limit private sector activity 

The hardliners will impose their will on the political establishment and will find a legal basis to confiscate the shares of a number of successful startups. They could use their continuous reference to security challenges as an excuse and claim that some startups and companies were undermining regime stability by disturbing social and cyber security. This will undoubtedly have a negative impact on employment and innovation in Iran and will also lead to an acceleration of private sector entrepreneurs and IT talent leaving the country. The socio-economic consequences will include more capital flight and brain drain. 

Scenario 2: The government introduces legal reforms to improve the ecosystem for startups

Appreciating the damaging effects of such calls, segments of the government will convince the higher authorities that Iran cannot afford a decline in startup entrepreneurship. Consequently, the government will introduce some legal provisions to protect the intellectual properties and businesses of startups against campaigns by the hardline networks. This legal process could take effect as a decree by the Expediency Council, similar to how a new interpretation of Article 44 was announced in 2006.

Conclusion - Most Likely Scenario:

The most likely scenario is that the current ambiguities prevail — both in the legal as well as the political sense. The hardliners have a strong voice, but they have to navigate the country’s complex power structure to achieve their goals. Many power centers would be hesitant to use the legal form of confiscation. For example, powerful members of the traditional business community, the bazaaris, will use their influence over the clergy to stop hard confiscations, because they know that their own assets could also be targeted, if this process is not stopped here. In fact, Minister of Information and Communications Issa Zarehpour reacted to the Kayhan editorial by stating: “These are the personal opinions expressed by someone and not the position of the government... the government stands behind the internal platforms, of course they must also follow the law.” Furthermore, the fact that the country will have parliamentary elections in February 2024, will compel many Majles deputies to propose steps against the hardline agenda. Consequently, the current ambiguities and uncertainties will remain.  All in all, this episode is a reminder of the complexities of power and the continuation of socioeconomic tensions and the disconnect between the ruling structure and the society at large.

Contributor Background:

Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - eunepa.com - a Vienna-based international consulting firm. He also sits on the board of the Europe Middle East Research Group. He is considered an expert on geopolitics of energy and the Iranian economy and energy sector.

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