Background
Not since the Green Movement or Islamic Revolution before it has Iran been faced with widespread protests that pose an existential threat to the ruling regime. The death of Mahsa Amini, a tourist to Tehran from her native Kurdish region of the country, struck a chord with Iranians across the country, sparking months of backlash and unrest ongoing to today. The current bout of turbulence is but one in a string of many the current regime has weathered since coming to power in 1979, the Islamic Republic repeatedly bucking expectations of brittleness. However, we observe the confluence of national vehemence and geopolitical circumstances as signaling the potential end of the Islamic Republic in Iran, albeit a slow-motion demise.
Analysis
Amini, 22, was killed in the custody of Iran’s infamous morality police for what’s colloquially known as ‘bad hijab,’ or purposefully flouting the strict laws set for women to cover their hair and body in public. Her death has roused and brought together many different Iranian age and gender cohorts – women and men tired of arbitrary religious persecution, incompetent/despotic leadership, lack of economic opportunity, and the youth demanding a freer and more open society. A broad majority of those protesting are a part of a younger cohort of Iranians “40% of those arrested are under the age of 20.” This younger generation, comprised of cross-cultural (Kurdish, Persian, etc.) and cross-class Iranians (wealthy, middle-income, poor, etc.), reveals just how deep resentment is running and how uniting the narrative calling for the end of the Islamic Republic has been. Moreover, sustained calls to end the regime illustrates that this younger demographic is finished with attempts at internal reform of the system and wants to completely ‘wipe the slate clean’ as it were. We believe that the unifying and widespread nature of these protests is part of a larger mosaic of deeper dissatisfaction felt across the Iranian population more generally and has ascended the track of single-issue protest to an all-encompassing political protest.
Building, we see aggregating Iranians ages 15-34 accounting for 30% of Iran’s total population of 85 million, or roughly 25.5 million Iranians that fall into the bucket of most likely to protest. Taking a conservative estimate, we assume that Amini’s death brought out 1/4th of this demographic, for a total of 6.3 million protestors, or 8% of Iran’s population, in protest. On an alternative liberal estimation, let’s assume half, or 12.7 million protesters at 15% of the population. In either scenario, this is a staggering amount of sustained resistance calling for an end to the current regime. Quantitatively, the demographic likely too young to protest, ages 0-14, will represent 25% of Iran’s population in the next 12-15 years when they arrive at the same age Amini protesters are now. This cohort will have grown up during ongoing political turbulence, and with the quick pace of technological ubiquity, they will be even more exposed to the world and Western culture/ideals. This will trend over time to a more resistant population in total.
Source: PopulationPyramid.net
On the thread of resistance, the fear factor imposed by the regime is fading. There appears to be a widespread willingness of young Iranians to demand a change of the system and denounce officials associated with the system, all undeterred by threats (and action) of force. Even if greater use of force is utilized by the regime, “elements of the movement go beyond mere protest.” Simply, the reliance and fading effectiveness of brute force show that the regime fundamentally doesn’t know how to contend with these protests. Iran has a history of both economic and political protests, wherein force, not compromise, was used every time to quell unrest. As older and particularly younger Iranians alike fear the reciprocity of violence less, the regime simply doesn’t have the tools to cope. For a comparable scenario, we can analyze China’s recent response to widespread protests against draconian covid restrictions. Where the CCP has made a rare course correction on its policy, which has cooled protests, the anger in Iran stems from the strict implementation of theocratic governance. Because the current regime largely bases its legitimacy on religion, it’s inherently incompatible with the course corrections, and institutional change protestors are demanding and dying for.
Pivoting, Iran has been signaling that it views its future prospects (even economic) as not with the West but rather throwing all its chips in with the two Great Powers (China and Russia) now challenging the U.S. in different ways. The largest source of dialogue (Iran nuclear deal) between the U.S., E.U., and Iran is dead from reports and subsequent admission of Iranian drones being sold to Russia, helping maintain its war in Ukraine. Iran’s Supreme leader made this (proud) admission knowing the economic sanctions that would follow. Intentionally killing the Iran nuclear deal, we believe, signals the regime’s ultimate disinterest in seeking economic growth and trust-building with the West and instead is going all in with the largest contrarians to the global liberal democratic order. This is a dubious prospect, at best, for Iran. Combined, the three countries represent large energy and foodstuff producers, most of that coming from Russia, who needs most of those inputs to fuel its war in Ukraine. Any leftover will inevitably flow to China (and currently India/Turkey), the next largest importer of these resources, and doesn’t represent the same engine of foreign capital it used to. All said, materially, Russia will be no help, and China is wary of providing large displays of public support as it’s one of the largest beneficiaries of an open global economic order (particularly after seeing how the war in Ukraine has played out for Russia). Additionally, alignment with Russia and China doesn’t solve one of the significant underlying problems Iranians are protesting for – economic prosperity. Together, the three economies have fallen off the cliff of GDP growth. If Iran can’t fulfill the social contract that all authoritarians make with their citizens (improving quality of life for restricting freedoms), regime change becomes nearly inevitable in the long term.
Source: The World Bank
This desire to align with China and Russia also pushes hard against the trend that younger generations of Iranians are more culturally interested in the West than China and Russia. We’ve preached in many of our notes about the importance and impact culture (media, music, fashion, etc.) plays in relations and perception between countries and how political observers and strategists often miss this factor. It’s hard to quantify, culture often falling into the category of a qualitative force, but we believe (particularly in Iran) this is a relevant force moving the needle on sentiment among young Iranians. A number of Iranian students also study abroad in Western universities in Europe and the U.S., essentially ‘coming of age’ in free and open societies. Many who travel back to Iran feel alienated and despondent from the strict rule of the regime at home. Over the medium-long term and perhaps even in the short term, Iranians are at most trending toward a preference for the West and at least identify heavily enough with the ideals of the West to actively push for freedoms at home through protest/acts of resistance (example – bad hijab).
Conclusion
Iranians, both old and young, are aware that the world is watching their situation. As Suzanne Maloney states, “the U.S. should step back from a strategy that is based on patience and proximity negotiations through the Europeans…[the] same set of circumstances that elicited the nuclear deal no longer exist”. While we agree that the U.S. should step back from a strategy of patience under the Biden administration, we also believe that engagement is better served on the periphery rather than direct engagement to try to influence events. The current geopolitical and cultural forces at work in Iran are doing the heavy lifting for the U.S., and any scent of foul play by clandestine U.S. operators would only serve to undo the trend of influence already in play. We recommend that heightened partnership with Israel and Israeli intelligence forces, neighboring Gulf states, and continued vocal support for Iranian protesters/denunciation will enable the change the U.S. and allies would like to see in Iran, namely a friendly non-theocratic autocracy partial to the West, or at least not openly hostile.
Themes
- Oil & gas
- Minerals
- Defense
- Cybersecurity
In a scenario where there is eventual accommodation between Iran and the West, we are still unlikely to see significant opportunity for investors in their most valuable export, oil, as trust building takes a long time (example, Vietnam). Likely a cooling of tensions between the West and Iran will likely lead to more space to invest with neighbors like Saudi Arabia, Israel, Qatar, and other Gulf States. As a less hostile Iran is less likely to act through regional proxies like Hamas, homegrown ventures will have more room to grow.
Additionally, as the U.S. is undergoing a re-thinking of domestic production (currently more of a heated debate), we see ample opportunity in smid cap U.S. oil producers, midstream, and rare earth mineral miners. To play to the negative, where we don’t see a friendlier Iran in the coming decades, defense issuers will have room to grow in valuation as the U.S. will be obliged to continue a larger than desired military presence in the middle east theatre.
We believe this thinking applies to single equities in all three spaces that display capital discipline. Broad-based indices focused on these themes will see increased valuation and stable dividends for risk-down investors.
Sources:
[1] https://www.cfr.org/podcasts/protests-iran-suzanne-maloney
[2] https://www.bloomberg.com/news/articles/2022-12-12/iran-executes-second-prisoner-majidreza-rahnavard-in-mashhad-over-amini-protests
[3] https://www.bloomberg.com/opinion/articles/2022-11-15/iran-nuclear-deal-is-dead-amid-russia-s-ukraine-war-lai7ayg7
[4] https://www.youtube.com/watch?v=B1zZ_Y-1o9Y
[5] https://www.populationpyramid.net/iran-islamic-republic-of/2021/
[6] https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IR&name_desc=false
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