How the Iranian Economy Actually Works

27:41which is how Iran's government is structured. Both the military and these big bunyads only report to him. And how can you question someone who's effectively God's representative? I mean, the extraction from the private sector, how much of that is about consolidating political power? And how much of it is about being worried about, I guess, foreign threats that might come in through additional capital in the country. Can you kind of decompose or try to maybe psychoanalyze the motivations for, for instance, the Iranian guards wanting to stop a new airport from operating? I think the way I see it is the competition of different factions within the same system.

28:29It's not that one faction wants to have all the money and the other faction is promoting transparency and is fighting corruption. Usually you see with a change of government, you see that how the new government tries to empower people and elements close to that. And we explain that in the book and how, for example, Ahmadinejad, when he came to power, he tried to empower people close to him. But when the next presidents, when they come, including Hassan Rouhani, we see that he also tried to somehow make sure that people close to him can benefit from such resources. So I think there is this infighting that you see, that sometimes the Revolutionary Guards, they need to use their military and intelligence power, and sometimes the other faction can take control.

29:24But overall, I think there are many elements that have added to this competition. Of course, the sanctions are one of those. Decades of sanctions, they have created this lack of transparency within the state. And each faction, they come and they try to take a part of the business, trying to show themselves essential for the everyday affairs of the country to be handled. For example, before that, Iranian oil ministry has been in charge of selling ores. That's been the case for decades. But when the sanctions increased in recent decades and the government couldn't pay its debts to, let's say, Iran's police and their military forces, it gave them access to oil.

30:16So a big part of Iranian oil export has been done by the Revolutionary Guards at this stage. Some estimate that half of the Iranian oil is sold by the Revolutionary Guards. So I think the way I see it is just these different factions, they're constantly fighting with one another, trying to have a bigger share of the economy. And Tracy, I think your question, like there's one anecdote that sort of exactly answers it. So I think it's both. I think they came by their suspicion of foreign intervention in Iran's economy, honestly. I mean, if you look at the 20th century history of Iran, it is one of economic exploitation of the country by world powers, U.S., the British, the Russians, etc.

31:04And also they have used that ideology in a way that has benefited themselves. So the one anecdote that kind of gets at this is in 2020, 2021, when COVID is hitting, Iran is one of the worst affected countries by COVID. The Supreme Leader decides to bar the import of many Western doses of the COVID vaccine. And kind of almost simultaneously, the Iranian government decides to launch on a project to make its own COVID vaccine. But what's the entity that's given that contract? It's the conglomerate controlled by the Supreme Leader, Ali Khamenei. So he's both deciding a policy that and I think, you know, if we he's no longer with us, but if we had given him truth serum, I think he actually was suspicious of the motivations of the U.S.

31:54and the British in, you know, making these COVID vaccines. I think that was probably genuine. But also with that decision, he creates a shortage. And then his conglomerate that would profit from a government contract like this is able to step in and kind of save the day and also make these these vaccine doses. So you kind of see in that one example, both the ideology and the self-interest kind of really melding seamlessly in a way that it's just it's just kind of remarkable to me. So I think Bosworth's answer stands, but I also think that it's sort of both of those factors that you identified acting at once.

32:31Yeah. And Joe, I should just say the one other thing I know about Iran's economy is that it has been the subject of interest, to put it mildly, to many foreign governments over time. And of course, famously, BP, you know this, right? BP has its origins as the Iranian, Anglo-Iranian oil company. So here's one question I have just, again, from a sort of pure economic developmentalist question. Many of the things that you describe, they would call like import substitution in developing economies, etc. It's like, OK, like we don't want to import too much of X because then our sort of nascent company can't compete, etc.

33:12And in many cases, there could be logic. Has there ever been a figure in modern Iranian history who is sort of like the sort of the export oriented development? Let's build an industry that can compete. This is what we always talk about with the East Asian countries. Let's build an industry, set aside oil, that competes and that we want to thrive, etc. And the export market will be the test of whether this is a successful company or not. Has anyone like tried this sort of popular idea? I think the closest that comes to my mind was Hashemir Afsanjani, President Hashemir Afsanjani, who was saying that he wants to turn Iran into an Islamic Japan.

33:57So he was very fascinated by metro system in Western societies, and he wanted to create the same system. But at the end, I think he failed to do that. What do you think, Agona? Yeah, I mean, I think, you know, I don't know that I would, if anyone should cite me on this, but I, you know, when I'm kind of looking at sort of how Iranian companies compete, I mean, given the fact that the way the direction, the direction the economy has gone in is favoring these entities, these companies that are linked to powerful people in the state, and that's sort of poisonous to competition. And so the idea that even within Iran's domestic economy, the truly most talented and meritorious companies are not the ones that rise to the top or are the most successful or get the most market share.

34:49It's the ones that are smart enough or able enough to sell enough of their shares to some powerful entity that at least they're then protected from being perhaps raided or shut down. Or maybe they get some sort of like special dispensation from the government. And then the idea that those companies that are themselves maybe not the best are then going to compete externally with like the Siemens of the world or GE just seems a bit, even if we set aside sanctions being a huge barrier, which they are, it seems a bit unrealistic to me that Iran would succeed in that kind of market. Although, you know, Iranian steel has, you know, they used to get a lot of foreign revenue, foreign currency from exporting steel to various countries.

35:33So they are, there is a market for some Iranian goods, but it's, you know, I don't know that they would kind of be at the top of any sort of world list.

35:57Support for the show comes from public.com. If you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge. On public, you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English. Like, if the VIX hits 25, buy a put option on the S &P 500. or if my cash balance goes above$20 ,000, move the excess into my direct index. You approve the workflow and your agent handles the rest. Monitoring the market, watching for your conditions and executing your strategies exactly as defined.

36:35An investing platform driven by your intent, not just your clicks. You can also get full read and write access to your account via the public API. Go to public.com slash market and fund your account in five minutes or less. That's public.com slash market. Paid for by Public Investing. Brokered services by Open to the Public Investing, Inc., member FINRA and SIPC. Advisory services by Public Advisors, LLC, SEC Registered Advisor. Complete disclosures available at public.com slash disclosures. Can we talk about the tech sector specifically? Because, again, this was surprising to learn that at one point Iran had a vibrant startup scene.

37:14But on the other hand, it kind of makes sense. If you think about a place where because of sanctions, you don't have a lot of Amazons or Ubers around, then maybe that's the perfect, you know. I also just associate Iran with having a lot of young, bright, young, educated, young, young, young, young people. Yeah, absolutely. So what did Iran's tech startup scene actually look like? Yeah, I mean, this is a fascinating chapter and one that we really dug into. So Iran was the second country in the Middle East after Israel to get access to the Internet. So it's a very kind of like tech forward, pioneering country in that way.

37:52And towards the end, towards the early 2010s, more and more young people are starting to get online. The Rouhani government, kind of this more moderate government coming in, they enabled access to 3G and 4G Internet. So there's suddenly this access to mobile data and to the ability to kind of have apps and stream video, all that sort of thing. So it really took off. And Iranian users wanted content, they wanted apps. And as you mentioned, sanctions meant that even with a nuclear deal, because the nuclear deal, if you remember, did not allow American companies to go into Iran. So the leading tech companies in the world, Amazon, Uber, Lyft, they could not operate.

38:35So there's this sort of protected ecosystem of 80 million at that time, 85 million or so population that needed apps and Iranian businesses could suddenly launch and serve those people. And so that's really what happened. So you kind of start to see the first inklings of this sort of tech industry forming in the early 2010s. You get some very early foreign investment, even before the nuclear deal happening, and some Iranian expats moving back and sort of seeing what's happening and starting venture capital funds. And this really then takes off after the nuclear deal is signed in 2015 and goes into effect in early 2016.

39:17And foreign investors are just really intrigued by this idea that we finally have like the last sort of green field opportunity is in Iran and maybe it could be the next Russia, maybe it could be the next China, and we could really get in early on this. And so that we kind of trace what happens after that. You know, it's great if you go to the website of the University of Tehran right now, it's all the cliches of every university. They have a picture of a bunch of happy grads. They have the required photo of a multiracial classroom, whichever university has on their website, all these people learning.

39:53But let's talk a little bit more about, okay, you mentioned like the Ubers and Lyfts, et cetera. Like what else were people trying to build? Like how far did this ecosystem push? And then you mentioned, okay, eventually a company gets to a point, it reached some threshold in which like it is no longer really able to like operate as like a private entity that pursues shareholder value as its mission. What's the second, after all this excitement, like where does it go? them? Yeah, so I mean, I will say a lot of the startups were kind of familiar, there were sort of like versions of things that we'd be familiar with the West.

40:30So there's the Amazon of Iran called Digicolor, there's the Uber of Iran called Snap, there's food delivery apps, there's all sorts of things. There's also things that are kind of more unique, but those the most successful companies, the ones like kind of right out the gate are the ones that are sort of taking business models that have been tried and true in the rest of the world and localizing them for Iran. So, you know, they start to really grow. And this kind of takes everyone by surprise, including the government. I think, you know, from interviews I've done, it seemed like the government really sort of thought this stuff was sort of whatever, you know, like, okay, I think they didn't quite realize how quickly this field would grow.

41:09And our character that we kind of follow in the book starts his own venture capital fund, first with domestic funding, and then brings in a lot of external funding as well from Europe and Russian investors. This sort of, I think, takes a lot of the conservative kind of established forces by surprise. And what we very quickly see is a backlash. And first, it kind of takes the form of sort of hidden kind of whispers. There's like a mysterious telegram channel that forms that starts making accusations against some of the startup founders and, you know, sort of people around that sector. The startups are very much associated, in some cases they did not mean to be, but in some cases they did sort of form an alliance.

41:53They're associated with the elected government of Hassan Rouhani. And, you know, there were already these factions kind of developing that were very against Rouhani, particularly in the Revolutionary Guards and sort of saw him and his diplomats as being too conciliatory towards the U.S. So this backlash from the security state is kind of forming. People are being interrogated. They're being, you know, sometimes arrested. Even their offices are being raided. And at the same time, what we document is that people kind of middlemen with a foot in the security state and a foot in the private sector, people who had been, you know, Ministry of Defense officials or who had served on the boards of some of these bunyads, et cetera, they start to make an offer to some of the startups.

42:38And basically the offer is give us like 5 % of your shares and we will help protect you from these accusations and from the risks that you're facing. And some of the startup founders take that deal. You know, we really try to get into their mindset and we interviewed over 70 people for this section of the book. And I think they some of them didn't understand really what was happening. They felt beleaguered and they felt quite at risk and they wanted to save their companies. They wanted to do what they felt like was good work, employing people, providing middle class jobs. And so some of them took that deal.

43:14And we see, for instance, the Uber over on Snap sold a large portion of shares to one of the bunyads. There's another kind of rideshare company that launches with Revolutionary Guard financing. And then ultimately, just a couple of years ago, we sort of trace the specifics of this and how much the company tried to resist. But ultimately, the Amazon of Iran, Digicolor, did sell 40 percent of its shares to a telecom that is part owned by one of these bonnets as well. So we really kind of see this exciting, vibrant, thriving industry that was not deeply connected to the government over time, then kind of is subdued by those government forces.

43:58By the way, Tracy, I just found this very interesting article from 2020, that company Snap. app in order to get onto the there's a story from rest of world they got on the apple app store by disguising the app as a music streaming app and then only upon a user logging in with an iranian ip address would its full capabilities as a ride hailing app emerge and then i guess apple has since banned that but some clever ingenuity there yeah very smart so one thing i'm wondering is at the time of this tech boom, such as it was, there were some Iranian officials that seemed to be supportive of it. I can't remember his exact name, but there was someone in the ministry who was like actually actively promoting tech at the same time that you had other actors in the government who are starting like disinformation campaigns to smear these companies and making, you know, not so subtle threats and things like that.

44:58Again, I'm fascinated by the coordination problem or lack of coordination here, because it really seems like people are like, off doing different things. And if you're a business owner, how are you supposed to respond to all these competing interests? Yeah, it's not a question, I guess it's a statement. I can add a little bit to this. I think that that is the huge challenge that like, Like Iran's not just, for instance, a corrupt state or just an authoritarian state. It's also sort of chaotic. And I think that is what is poisonous to business almost more than any other part of it. You know, I'm not a China expert, but my sense is that, you know, when it comes to China, if you have an understanding with the Communist Party, then you're good to go.

45:41In Iran, even if you do end up making a deal with, you know, some bonnets, selling your shares, whatever it might be. It's a mafia structure, but there's also all these underbosses and they all kind of compete with each other and their power sways from day to day. So yes, one entity within the government was really supporting these startups and wanted them to succeed. And his administration was sort of hated by the more powerful security forces. So for the startup guys, a lot of whom were coming, you know, they were expats, they were kind of coming back to Iran, they were bewildered by this. And as you both know, I mean, business requires certainty.

46:19And that has been, I think, more detrimental, the uncertainty in Iran, the instability of the actual government structure and figuring out what it wants from day to day. That's been more poisonous almost than the actual fact of like, OK, I got to make a deal with like such and such entity and, you know, be able to continue my work safely. You know, the closest comparison that comes to my mind is like Greek mythology. I'm reading Odysseus and I realized that Zeus doesn't have the absolute power. So Iran's supreme leader didn't have the absolute power. He needs to manage between all different gods and goddesses.

46:56And in the case of Odysseus, you see that he is supported by some gods to go back home, but some angry gods are trying to block his return to back home. So yeah, I think a businessman in Iran is just like, it's a real odyssey. I love this analogy because it's like, what was the breakthrough of monotheism? Was it part to solve this problem of different people petitioning different gods, et cetera? So you want to like establish, no, there's like one set of rules. So I think that's that. But also that sort of actually brings me to another question, which came up a little bit earlier. But, you know, when we talk about some of these things, we can draw these analogies.

47:37Oh, there may be comparisons to late Soviet Union. There may be comparisons to the oligarchs extracting the resources after the collapse of the Soviet Union. There may be analogies to a country like Venezuela, which, of course, people have also likened to a mafia state. There are analogies to China with the difference between the CCP and the government itself. The thing that feels a little distinct here is the role of religion, which you meant, and the idea that there's maybe this other higher thing that people are told to strive towards. Can you talk a little bit more about like teasing out the effect that that sort of like spiritual element plays in some of this, which I could imagine, A, creates yet another difficult dimension for businesses to operate in.

48:25But then also, especially when I think of the tech sector, like tech fries people's brains. And if I wanted to have a more spiritual society, I don't know how much I want the public to be looking at their phones all day. Yeah, I think that's a good point, because I think that's been one of the core problems when Western societies have been trying to tackle the Islamic Republic. Look, Obama tried to have a nuclear deal with Iran. And Trump is trying to do that. I think one of the reasons that the US and many Western countries try to do that was their deep belief in market, free market economy and capitalism.

49:08I think the underlying assumption was that given a choice between isolations and sanctions and prosperity, of course, every country will choose the latter. Like in a way, they believe that by integrating the Iranian economy into the world, they will create some political liberalization and some form of democratization. But I think, I mean, Trump also believes that if you look at Trump's speeches in 2025, he says, oh, I want to make Iran a great nation. I see a bright future for the country. But you see, surprisingly, that Iran doesn't take that offer. The Islamic Republic, I think that's when this ideological component comes in that is somehow difficult to explain for the Western societies that you see that the country is much focused on the ideological aspects of it.

50:06And even after the nuclear deal that Obama managed to sign in 2015 and the lifting of sanctions in 2016, the money that came to Iran, the incentives that the Western societies offered, it was spent on military development. So the Iranian state has different priorities when it comes to development. They prefer to put the money on military development rather than on tackling unemployment, inflation, and things like that. So that's been a challenge. And I think a challenge exists at the moment as well. Like now the deal, the MOU that was signed between Trump and the Islamic Republic, they offered billions of dollars, even hundreds of billions of dollars.

50:53But it seems that some elements, some hardline elements within the Islamic Republic, they didn't want that. Tracy, I think from the perspective of the West, most people, if they're being honest, cannot believe that some people aren't just motivated by money. Like they hear like people say, oh, we believe in some higher power or some vision. But I think like deep down, we all believe that everyone has a price and that everyone actually just wants like, no, they're really they're saying this, but what they really want is wealth. And so I do think like there is this disconnect when we encounter when we have relationships with people who actually may believe in something that is not just accumulating wealth and comfort.

51:37Some people in the West. I think most people in the West. Well, OK, but on this note, what is Iran's political economy? You know, the story we just heard about chaos and competing factions and all of that suggests for the future of the Iran-U.S. conflict. I mean, we see this we see this right now, right? There's multiple factions inside Iran. There's kind of this hardline faction that is really harshly attacking the president and the foreign minister for even having the temerity to sort of negotiate this memorandum of understanding. There are people who kind of still want inside Iran for this war to continue because they really believe that Iran kind of had the U.S.

52:19on the back on the back foot. And so I think in terms of like how Iran's political economy looks going forward, I think it's still quite early to say at this point, just because they're still sort of in the midst of this war, really. And I think no one in Iran right now is looking that far ahead to the extent that they are. it's very much towards China as the future. Mohamed Baal-Ghalibov, the Speaker of Parliament, the guy who's been kind of negotiating with J.D. Vance, he basically said that as well. He said that, you know, we want investment, but they want it from China. Yeah, I agree. I think one thing that I want to add is that, again, the different nature of these states, like Trump is fighting at best for his legacy, But the Islamic Republic is fighting for its survival.

53:10I think that creates different pain tolerance and pain thresholds among these two nations. For the U.S. administration, the main problem is now if the Fed would increase the interest rate by 0.25 % and the impacts of that on mortgage rates and other things. And of course, people are unhappy with the rise of gasoline prices by a dollar or so. But when you look at the Islamic Republic, you see that the inflation is almost three figures. And they're not that much affected by that. The unemployment rate is very high. And even when you compare the casualties for the U.S. administration, the death of 18 soldiers is a lot, is significant.

54:04while for the Islamic Republic, the death of hundreds or thousands of soldiers is something that can easily absorb. So I think that is the nature of the conflict at this stage. And I think the reason that the Islamic Republic has survived the war so far is that its pain threshold is much higher. And I think if it continues like that, I think the U.S. administration, I don't think they will continue the war. because of the long-term impacts it will have on the economy. Of course, Trump is trying to keep the price of oil under$100 per barrel. Anytime that it touches 100, there is some talks for negotiations and some positive through social posts.

54:54But I think they can manage to do that for a bit, but I don't think it can continue for a long time. I think the pattern that we saw kind of throughout reporting this book and that we really see now is that for the Islamic Republic, the economy has never been an end goal in and of itself. It's focused on it to the extent that it's a means to a broader end goal of self-sufficiency or, you know, some kind of like drawing some sort of ideological strength from it. But in terms of actually focusing on the economy at the expense of, for instance, some of its ideological goals, that has never been in its pattern of behavior.

55:30And there are former officials like don't you have to take it from us. There are former officials who have said, you know, it's time to set aside our ideology and our foreign policy and focus on the economy, which would mean bringing in foreign investment, which would mean coming to some final accord with the U.S. that would really lift sanctions that we can actually move on and grow the economy. And whoever's been in power at any point, mostly Ali Khamenei for 37 years, but before that Khomeini, of course, has not taken that bet for them. The important thing has always been Iran's ideology. And I think unless there's some drastic change, I don't necessarily expect that to change.

56:10I would need to see a lot more evidence of that actually shifting before I would kind of change my assessment on that. All right. Yegeneh and Borzog, thank you both so much for coming on the podcast. Absolutely fascinating discussion. Yeah, really appreciate you taking your time. Thank you. I really enjoyed it. Thank you both so much.

56:40Tracy, I really enjoyed that conversation. I learned a lot. I really did mean what I said in the conversation, which is that I do think a lot of American or Western like negotiators and thinkers just sort of like constitutionally find it hard to believe that people in much of the world actually believe in things and aren't just like going to be transactional at the end of the day. That's why my first question was about how much of the Iranian revolution was driven by economic interest versus actual ideology. But yeah, I totally take the point. I also thought it was interesting. You know, when we think about emerging markets, there's plenty of investment that goes into emerging markets, right?

57:20But it feels like the stability point definitely stands out. You know, you can invest in an authoritarian regime. Totally. If you know you're bribing the right person and you're not going to have all your assets seized in like two weeks or something by a competing faction. But when it comes to Iran, it does seem that factional element, that chaos, as they described it, has been an issue. Yeah, I thought the point about the sort of like, you know, in China, there's the Chinese government and then there's the party. Right. And they're not the same thing, but they're closely linked. But the idea that like, OK, what if you have like a more multiplayer element where it's like, OK, you have some entities that are like truly like this is the state and this there are state interests.

58:06and then you have IRGC interests and then you have religious interests, et cetera. And then you really do get this sort of like potential misalignment. I love the analogy of like the sort of like petitioning the various Greek gods as like a way to think about a sort of like problem of establishing that stability. It's almost like, OK, like a gangster state might not be the worst thing in the world if there were just one gang. Right. But right. If there's just one. Producers clip that. No. Yeah. Like if there's just one gang, think about like a mafia story, right? Part of the problem, it's like, okay, I'm going to pay this mafia.

58:43I don't really need the protection for my store. This guy comes and said, I'll protect your store from damages for some insane amount. They're saying, I don't need it, but whatever, I'm going to pay it, you know? But then the moment there's three gangs and each of them wants that cut, then it becomes like a seriously unstable thing. They get mad at you for paying one of them. So like I prayed at the temple of Zeus and because I sacrificed to go to Zeus, Poseidon is now upset at me and now I have to appease Poseidon. And then I'm going to appease Poseidon. And then, I don't know, Aphrodite or whoever is going to get mad.

59:17It just goes on and on. Right. If your only issue was the sacrifice that Zeus demanded, you might not like it, but you could form a business with those expectations. And that would probably be you'd find a way to survive. But then you have this multilevel thing and you can't form that expectation. Did I ever tell you about in Tokyo, a friend of mine had a bar, tiny bar, 10 seats at the bar. And he got extorted by the Yakuza. Really? Yeah. And so what happened is there were only 10 seats at the bar. He noticed, first of all, he got a request for money, for protection money from the Yakuza. And he said, no, I'm not going to pay it.

59:52I'm a foreigner. I don't have to. Blah, blah, blah. Next night, a single Japanese man comes into the bar, orders one beer, sits at the bar all night, taking up that seat. Not a big deal. Plenty of other people around. Next night, two people come in. Two Japanese salary men sit there, order one beer, don't leave the entire night. You can see where this is going. Yeah, wow. Within 10 days, all of his seats were being taken up by single customers ordering single beers. Wow. And it didn't happen anymore after that. So, you know, I won't say. Infer how the problem was avoided going forward. Exactly.

1:00:32Exactly. That's a good story. Anyway, I'm really glad we did that episode. I learned quite a bit. Absolutely. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmond, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter and all of our episodes.

1:00:59And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we talk about the Iranian economy, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

1:01:51you