Change of heart surgeon: Iran’s reformist president

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The Economist.

Hello and welcome to The Intelligence from The Economist. I'm Jason Palmer.

And I'm Rosie Bloor. Every weekday we provide a fresh perspective on the events shaping your world.

One of the helping hands that Ukraine Ukraine has been getting as it fends off Russia's invasion is a long delay to its debt servicing. But some of that is coming to an end soon. We ask how, or if, the country can keep its creditors happy.

And there are so many reasons to go to Dubai. The sun, the shopping. And then there are the low taxes, the Russian exiles, and the freedom from European populists. Our correspondent tells us the United Arab Emirates is a magnet for millionaires.

But first, sometimes real political change can start not with protests, movements, charismatic leaders, but rather with an accident.

We've heard in the last hour that Iran's president and foreign minister have both died in a helicopter crash.

Suddenly, President Ebrahim Raisi, a hardliner whose conservative grip never loosened even as the country simmered with protests, was gone. And the country's Supreme Leader, Ayatollah Khamenei, wanted the job filled quickly. That might easily have meant rigging an election. He's done it before. But this time he didn't. And on Friday, more than 16 million Iranians Nearly 80 million Iranians voted to take the country in a new direction. Whether or not it's the reset that Iranian voters want, it seems to be one that the Supreme Leader might need.

The cry for change could hardly have been clearer.

Nicholas Pelham is a Middle East correspondent for The Economist.

When Iranians voted for Masoud Pashashkian last Friday, they voted for reform in the country, but it's still unclear just how much he can change Iran.

So let's start with who Mr. Pashashkian is.

He's a 69-year-old heart surgeon who's promised that he can fix Iran's social and economic malaise in much the way as he's been healing Iranians on the operating table. He's promised social reforms. He said that women should have the right to wear what they choose, and he's He's also called for restarting negotiations with the West, and in particular with America. He says that Iran doesn't have a problem with any other country except for Israel, and he hopes that he can somehow persuade the West to ease sanctions and rescue Iran from what candidates during this election campaign have called Iran's cage.

And I suppose it's instructive to know who it is he was running against by way of contrast.

Unlike the last election, when it was really just a stable of hardliners that were contesting the vote, this time Iranians had a real choice In particular, in the second round, you had Mr. Pazeshkian, who stood for representing a lay middle class who was tired of being ruled over by theocrats, standing against a hardliner, Saeed Jalili, who repeatedly called for confrontation with Western enemies. He very much followed in the footsteps of the previous president, Ebrahim Raisi, and he was seen as somebody who was going to be pushing for the Talibanization of the country, for renewed enforcement of the mandatory veil, which had largely slipped off many women's heads over the past couple of years since the widespread protests after the death in custody of Mahsa Amini. And these kind of opposing visions of the future of Iran, one which was accommodating itself to the wider world and one which was stuck in the isolation of the Islamic Revolution, really played out in heated television debates. [FOREIGN LANGUAGE] And that, in turn, prompted a fierce dispute discussion amongst many Iranians who were deeply disenchanted with the regime over whether to boycott the vote or whether to vote to stop the hardliners. And in the end, I think it's fair to say that Iranians did both. They voted in large enough numbers to elect a reformer, but then over half the electorate didn't turn out at all. And that sent a message that Mr. Khamenei, the Supreme Leader, still has a long way to go to restore confidence in his system.

And we spoke since Mr. Raisi's death about the degree to which the Supreme Leader would have a hand in the election. Why do you suppose it is that he let a reformer come out on I think it's clear from Mr.

Raisi's tenure that the hardliners really don't have an answer to the Islamic Republic's deep economic malaise. It's clear that popular dissatisfaction has been growing in the country. The gap between the rulers and the ruled has only been widening. And I think there is concern in the system that at a time when the region is increasingly grappling with an aging supreme leader and the prospect of succession, that they really need to do something to try and stabilize the country and regain a degree of legitimacy for the Islamic Republic. So though himself of deeply conservative stock, he seems to recognize that the hardliners were only leading the country into a cul-de-sac. And it may be that he concluded that avoiding a hardline approach could restore some support to the regime.

So is it reading too much into this to imagine that with the election of a reformer, that the kind of balance of power in Iran is going to change?

I think that depends how much rope the regime gives Mr. Pesechkian and whether Iranians see some results from his tenure. Many Iranians are hopeful. On the night of the election, there was a sort of almost celebratory mood on some streets in the capital, Tehran. Men and women crowded the streets as if the regime's strict dress code had been already repealed. And when the results were announced, there was almost a sense of victory.

So how much that hope translates into real change, I suppose, depends on how much rope he's given, I suppose, but also who he surrounds himself with. Do we have a sense for the kind of cabinet he's going to put together, the kind of government he's going to run?

It seems that many of the names that he's considering previously served under the tenure of Hassan Rouhani, the last reformist president who was in office from 2013 to 2021. Many are looking to Mr. Rouhani's former finance minister, Ali Tayyeb Nia, who is credited with bringing down inflation from sky-high levels to single digits, really for the first time in decades in Iran. Under Mr. Raisi, Iranians faced a sevenfold increase in the price of basics like chicken and The rial, the Iranian currency, has crashed against the dollar. And just some sense of economic stability would bring huge relief to a population that is really struggling to make ends meet. And you've seen the evisceration of the middle class. One thing that's interesting about Mr. Pesechkian himself is that he sort of represents that professional middle class. Other names that are tipped are Javad Zarif, who is the former foreign minister who negotiated the nuclear deal with America and other global powers in 2015. And then critically, Iranians are looking to see whether Mr. Raisi can bring more women on board. In the history of 45 years of the Islamic Republic, you've only seen one woman. Can he increase that number substantially? Can he increase the representation of ethnic minorities? And critically, will he bring a Sunni minister on board into what is very much a Shia theocracy? Can this president really help Iran escape the cage that it's locked itself in for the best part of 5 decades?

But in a lot of ways, the architects of that cage have been the hardliners in that country. None of these reforms are going to sit well with them.

They're not, and that's going to be where the Supreme Leader can play this balancing role. Can he give Mr. Pahlavi enough slack to allow him to govern? Can Mr. Pahlavi, for his part, bring on board people within his cabinet who can also help keep the zealots at bay? If he can bring in some of the pragmatists, some of those within the security establishment, those who have good ties with the Islamic Revolutionary Guard core, it might be that he can go far enough to keep the hardliners at bay. He doesn't have much time to play with, and I think his choices of cabinet are going to be critical to deciding whether he has the confidence of his electorate or not.

And imagining that he does, this ends up being a stable situation. Let's look outside the country for a moment. What does this all mean potentially for Iran's place in the world?

That internal skepticism is very much reflected internationally. There hasn't been a rush of support to welcome Mr. Bezeshkian in office from many Western countries. I think there's a sense of wait and see. And don't forget that the region and the world is a very complex place at the moment. You've got the prospect of a looming war between Israel and Lebanon that could draw Hezbollah's ally Iran into the fray, as well as the United States. There's a strong sense in Iran that the next president is going to be Donald Trump and that that is going to lead to further escalation between Iran and the United States. So despite the smiles and the warm words coming out of Mr. Pesechian's team, I don't think you can overstate the problems that he's going to face in trying to heal Iran's deeply fractured relations domestically, within the region, and the wider world.

Nicholas, thanks very much for your time.

Jason, it's always a pleasure. Thank you.

And policy certainty. The UK's Modern Industrial Strategy delivers all three and more through a 10-year plan. With £10 trillion in capital, world-class universities, and unrivalled market access, the UK is engineered for growth. Start your investment journey at business.gov.uk/growth.

In Ukraine, the clock is ticking as yet another threat bears down, this time on the country's economy. At the end of the month, Ukraine's creditors are set to start calling in debt repayments that have been on hold for 2.5 years. Sure, Ukraine's allies are pouring money into its defense, but that comes mostly in the form of hardware. And you can't make payments on your debts using a Patriot missile system.

2 years ago, just after Ukraine was invaded, its politicians negotiated a freeze on all its debts.

Karianne Richmond-Jones is our international economics correspondent.

But that deal is now coming to an end and there's nothing to replace it. And really, Ukraine's financial stability is at stake.

So talk me through what Ukraine's debts actually look like.

Ukraine has got a lot of debt. It wasn't doing too well before the war started. It had had multiple IMF deals in the last 10 years. Policymaking was poor. There was quite a lot of corruption in pre-war Ukraine. And it restructured its debts as recently as 2015. So it had a lot on its books. The problem debt this time is about $20 billion worth. Ukraine owes it to private creditors, so not to official creditors, which are countries, but to firms, banks, most of which are in Europe. For the last 2 years, those private creditors have let Ukraine off its repayments, and Ukraine has just negotiated with its country creditors to extend that moratorium, we call it, a bit further. But it hasn't negotiated that with its private creditors. Firms like Amundi, a French asset manager, and PIMCO, an American one, are set to start demanding payments on August 1st if Ukraine can't reach an agreement with them. So far, they've had no luck.

Well, what would that agreement even look like? It's no more ready to pay now than it was a year or two ago, right?

Right. That's absolutely the case. And this really gets it into the crux of the problem. Ukraine isn't just trying to extend this freeze on interest payments. That would be something we call a debt service suspension. It would look a lot like what Ukraine's agreed with its official creditors, with its country creditors. But instead, the IMF is asking Ukraine, with its private creditors, to write down some of the loans. So not just stop paying interest on them, but the IMF wants firms like Amundi and like PIMCO to actually say that Ukraine owes them much less. Restructurings like this tend to go on for a really long time, even when a country isn't at war. A quick one can take months, a difficult one takes years, and it's incredibly controversial. In June, Serhiy Marchenko, Ukraine's finance minister, offered creditors a deal that cut 60% from the value of its debts. They countered with just a third of that, 22%, and that simply isn't enough for Ukraine. And the risk without a deal now is that it's going to default. That's a real option.

So to say that they'll just simply pay none of it back rather than some reduced amount?

Not quite. So you would think that a default is a country holding its hands up and saying, no, no, no, we can't pay anything back. And that's That's not quite what's going to happen in Ukraine. So it won't service any debt, it won't send in any of those payments to European banks. But that means that there's a huge restructuring coming down the road where the creditors will try and kind of bargain and get some money back. The question is, when does that happen?

So what are the stumbling blocks to an interim deal that is less dramatic?

In a normal restructuring, creditors gamble on the economic future of a country. But war throws up all these obstacles that make it kind of impossible to predict or to weigh the odds against one another. How is a country at war meant to think about risk in terms of how much taxes it will be able to collect? How do you think about private capital and investors? Ukraine took a huge economic dip, obviously, just after the war, but actually through most of 2023, it was doing better than most people expected. Its GDP was doing better. The IMF revised up scenarios. There was a very robust harvest last year that actually made people quite hopeful hopeful about the state of the war economy. But since the beginning of 2024, things have taken a bad turn. So Russia has been attacking more and more critical infrastructure, targeting things that are essential for Ukraine's economy. That's produced a huge amount of economic damage. The IMF has revised growth targets downwards. And so this comes at a particularly bad time for Ukraine. It's got even less room to maneuver than it thought it would have. There are simply too many unknowns, creditors think, to be able to properly assess the options and come up with a kind of reason— best guess about what Ukraine's economy is going to look like in the next couple of years. And there's a second, much bigger problem. Essentially, the lenders just won't get paid if there's no country to repay. So if Russia swallows Ukraine, every lender will lose all its money. That's a risk that they're finding impossible to quantify at the moment, impossible to take a gamble on, and also impossible to fix in a restructuring restructuring because it relies on something that isn't included in any restructuring, which is the West's continued military support. How do you kind of factor that into an economic analysis?

And everything that we've been talking about until now is the country's existing debts. I mean, what happens in the after-the-war scenario if it continues to be a going concern, as you put it? Like, that's a whole new pile of reconstruction debt.

Absolutely. Whatever way this goes, Ukraine's economy is in a slow-motion disaster, and when the war ends, there's going to have to be a huge amount of reconstruction. There'll probably be a very big debt restructuring, followed by hopefully injections of a lot of capital and a lot of money. This standoff reflects a really troubling lack of faith among private investors that the West will continue to support Ukraine militarily and also crucially inject that capital when the war ends. Oddly, in a society that is just coming out of a war, some things make very good investments investments, things like factories, you can imagine. But a lot of stuff that is done in reconstruction that happens to a post-war economy is just never going to turn a profit. So, think about building skills, retraining all those soldiers into kind of profitable careers, building hospitals, repairing infrastructure. Much of that is going to have to be done with public money, and Ukraine's not going to have any. So, it's going to have to come from the West. And what the private creditors appear to be saying at the moment is that they just don't think that the West has the appetite for that kind of money.

Kariann, thanks very much for joining us.

Thank you so much for having me.

Yeah, yeah, yeah, yeah. Anything is possible in Dubai. It's a land of opportunity. There's a lot of gold here, and we have a lot of gold diggers too.

Each week on The Real Housewives of Dubai, viewers get to peek into the world of the rich expats who've migrated to the Gulf and now call it home.

Your license, please.

This reality TV show illustrates a growing trend. More and more millionaires are seeking a new life in the United Arab Emirates. Some are lured by the bling and low taxes. More surprisingly, others are seeking a haven from the politics of populism.

Dubai has always tried to present itself as a relatively better place, and it's done that by being Cleaner, safer, just having low taxes.

Anjani Trivedi is The Economist's global business correspondent.

A new report by Henley Partners, a wealth consultancy, looks at millionaire migration across the world, which is on the rise. Approximately 128,000 of the world's millionaires are projected to migrate to a new country this year. Nearly 7,000 of those will head to Dubai.

And people used to head to America. That was the land of the free, the land of fortune. Why are they now going to places like Dubai?

Let's start with one thing. America is still home to the most millionaires in the world, and people are still going there. It's just not as many as Dubai. Now, Dubai has essentially presented itself as a relative value place. When people do the calculus of what they want from their lifestyle and they look at a place like Dubai, especially for the wealthy, then there's a lot it has to offer. And you can imagine they don't have to sit there in the heat of the summer, but they can protect their assets for their lifetime.

I feel like we first started hearing about Dubai as a haven during COVID Wasn't that where people went to escape lockdowns?

Yes.

And I think initially Dubai has been a regional hub for the rich. So the Indians, the Africans, the Arabs from other kind of the Levant often came to Dubai because it was just generally a slightly more functional place. Then COVID hit and they were very strict about it, but then they also put in place lots of visas like digital nomad visas effectively that allowed people to come and work from here even if they were employed elsewhere in the world. And that really facilitated it as a magnet for people of all sorts, you know, across the socioeconomic spectrum. So then Russia's war in Ukraine happened and companies, Goldman Sachs, other big media companies had to get their employees out of Russia. And a lot of them just couldn't pay them in Russia, especially American companies. So they moved them to Dubai. And so that created the Russian attention around it. And many, many Russians then followed, a lot of them very wealthy ones. And so they, and they bought property. And so now we come to this point in Europe where the rise of the hard right, which scares people, especially, you know, business-minded people who prefer certainty. And so they've started now looking for places where they could park themselves or park their assets, or at least diversify part of their wealth. And it's a very well-connected place. It's very easy to do business. And so again, they've had these visa programs like the Golden Visa, which allows people to have 10-year visas, not an employment-linked visa, and they can either buy property or make an investment and come and set up in Dubai.

And The Economist has also written about the fact that Dubai is not always the most transparent place to do business. Is that changing at all?

So it is. Earlier this year, the Financial Action Task Force, which is an intergovernment body, had taken Dubai off the grey list, which is essentially a list of places where they want better standards for anti-money laundering for KYC, know your client procedures at banks, and generally, you know, want more transparency into the way business and investments and money is flowing in the system. And so the UAE had tightened up, and in February it was taken off of that list. Now, the flip side of that is because the biggest banks are tightening up and the large property developers are also, you know, no longer just taking briefcases of cash, that's led people who had come in who perhaps want to shield their wealth a little more and the source of their wealth are starting to look for other places. And so that's also opened up more space for a new wave of people to come in.

And are people not put off by anxiety about the wider Middle East and instability in the region?

People were initially a little risk averse and businesses and investors had put put any new plans on hold. But now people have gotten used to it, and there is no fear of coming to the Gulf versus the kind of fear that exists when people are looking to go to Beirut. And so I think there is a general comfort around that, and people feel safe and secure.

So Dubai will continue to be a refuge for the footloose plutocrat then?

For now, yes.

Anjali, thank you so much for your time.

Thank you for having me.

That's all for this episode of The Intelligence. We'll see you back here tomorrow.