Iran merchants and tax collectors end standoff

A standoff between Iranian merchants and tax collectors ended Saturday as the two sides reached a compromise in a weeks-long on-and-off strike that had cast a spotlight on the economic troubles of a nation now facing tightened sanctions.

For weeks, Tehran’s normally bustling Grand Bazaar had been eerily quiet and palpably tense as security forces stalked its dim galleries, the stalls of gold, jewelry, shoes and clothing that were shuttered under the pretense of painting their storefronts.

The strike followed a restructuring of Iran’s tax system that had reportedly improved audit functions, bringing more revenue for the government of President Mahmoud Ahmadinejad, but aggravating bazaar business owners.

The government retreated from its original plan to increase direct income tax on individual businesses by 70%. A deal to raise taxes by 15% ended the strike, but hard feelings toward tax collectors continued.

“Every year we used to manage to convince the tax office to pay a 7% increase compared to the previous year,” said one wholesaler in the fabric market, who spoke on condition of anonymity for fear of reprisal by security forces keeping a close tab on merchants. “Now it’s 15%. It seems like the tax office is the winner.”

Iran’s bazaars aren’t quaint provincial markets. They’re big money. And the merchants represent a business class that has traditionally wielded a lot of political power in Iran. Their support was instrumental in overthrowing the U.S.-backed shah in the 1979 Islamic Revolution, and they continue to account for huge swaths of the Iranian economy.

“The bazaaris are among the few who still have a degree of collective identity to resist the sort of erratic behavior represented” by Ahmadinejad’s proposed tax increase, said Farideh Farhi, an Iran analyst at the University of Hawaii.

“At the same time, they are no longer strong enough to engage in a full push-back,” she said.

Much has been made in the international media and on opposition blogs about the strike as an illustration of Iran’s economic crisis, but gauging the strength of the country’s economy is difficult in the absence of independent studies. Ahmadinejad has downplayed the nation’s woes, even describing the international financial crisis as “a major trickery” perpetrated by the United States.

A day later, Tehran’s stock exchange surpassed 15,000 for the first time, a fact the chief of the market said proved the ineffectiveness of the sanctions.

But most indicators show things are not as rosy as the government would like people to believe. Falling oil prices, rising unemployment, political unrest and the threat of war have forced the government to shore up its finances. Economic growth last year was anemic, at about 2%, according to the International Monetary Fund, or even less, according to some Iranian officials.

News reports of labor unrest in the provinces indicate the problem is not limited to the capital. A group of dam builders in the western Iranian province of Kurdistan have reportedly gone on strike several times after five months without wages.

Ahmadinejad wants to slash subsidies on fuel and foodstuffs by $40 billion, a move that many analysts warned could alienate his base.

“Ahmadinejad’s predicament is that he has to push through what many consider to be necessary economic reforms during difficult economic times, and he is doing so in ways that are unnecessarily provocative,” Farhi said. “At least so far he seems determined to do so. The reality is that an even bigger economic overhaul — lifting of price supports — is on its way.”

Looming above all this are the unpredictable effects of tightened international sanctions that bar cooperation with firms linked to the country’s nuclear program, penalizes anyone doing big energy deals and stigmatizes even legitimate trade with the Islamic Republic.

“The sanctions will be very influential on Iran’s economic malaise,” said Farhad Alavi, a Washington-based attorney who specializes in assessing compliance with Iran’s sanctions. “While they may not completely close the door to all business with Iran, they will substantially add to transaction costs even for non-sensitive technologies by further closing Iran’s doors to international trade and finance.”

Even the conservative newspaper Jomhouri Eslami accused the government of being out of touch with the economic troubles facing the country.

“Perhaps some officials do not believe that the situation is not good,” the paper said. “Realities show something else. The denial of these realities will push politicians into greater illusion and will prevent them from acting seriously.”

daragahi@latimes.com

Special correspondent Mostaghim reported from Tehran and Times staff writer Daragahi from Beirut. Special correspondent Meris Lutz in Beirut contributed to this report.