Key political risks to watch in Iran

TEHRAN, Sept 1 (Reuters) - An escalating nuclear dispute with the West, a deteriorating economy and a lingering threat of social unrest will further test the power of Iranian leaders who cemented their grip by stifling unrest after last year's disputed presidential vote.

The Islamic Republic is as determined as ever to press ahead with its atomic activities despite the economic pain caused by a U.S.-led drive to isolate the major oil producer, including new U.N. and Western sanctions targeting the elite Revolutionary Guards and Iran's oil and gas sector.

President Mahmoud Ahmadinejad's government has largely re-asserted political control at home with a crackdown on the opposition which challenged his re-election in the streets.

But a plan to phase out subsidies costing the state up to $100 billion annually may spark renewed public anger.

The Oil Ministry faces the tough task of raising the $25 billion it says the energy sector needs in new investment each year to prevent crude exports from drying up.

Economic growth and foreign exchange earnings will largely depend on the oil price as Iran's economy is 60 percent reliant on petro-dollars.

Below is an outline of the main political risks for Iran:

SANCTIONS PRESSURE

Major powers are piling economic and political pressure on Iran to persuade it to suspend nuclear work they suspect is aimed at making bombs. Iran, which says it is only seeking to generate electricity, is showing no sign of bowing to such demands and has dismissed the impact of new sanctions.

The latest international measures have caused further economic strain for the establishment, psychologically pressuring ordinary Iranians who are burdened with rocketing inflation. Many Iranians blame the government for its uncompromising nuclear policy.

Supreme Leader Ayatollah Ali Khamenei, who has the final say on all state matters, has ruled out any backdown.

Any measure which inadvertently heightens pressure on the public is expected to arouse unrest, which the leadership strives to avoid after the turmoil that followed the 2009 presidential poll. The opposition says the vote was rigged; the authorities deny it.

Iran has said it could return to nuclear talks in September but wants to discuss global issues, a move seen as a new attempt to buy time while Tehran presses ahead with uranium enrichment.

WHAT TO WATCH:

-- More international firms withdrawing from Iran business

-- Could economic pressure cause social unrest?

-- Renewed talks on Iran's nuclear programme

GUARDS FEEL THE HEAT?

The latest U.N. sanctions resolution in June, naming the elite Revolutionary Guards as linked to Iran's nuclear and missile programmes, blacklists 15 firms belonging to the Guards.

Branded a proliferator of weapons of mass destruction by Washington, the Guards' influence appears to have increased since Ahmadinejad came to power in 2005, and they helped to quell last year's huge opposition protests.

Their economic role is also on the rise, with ties to firms controlling billions of dollars in business, construction, finance and commerce, the U.S. Treasury has said.

This could make them potentially vulnerable to any effective international moves aimed at their business dealings abroad.

But Nicole Stracke of the Gulf Research Center in Dubai said the Guards had prepared for possible strong sanctions and it would be difficult to track down their activities.

The engineering arm of the Guards, Khatam al-Anbia, withdrew in July from development of the country's giant South Pars gas field. Originally drafted in to show those most loyal to the leadership would carry out projects if western companies refused to get involved, it seems it decided to keep a low profile because of the sanctions.

"To evade more limitations, the Guards superficially are withdrawing from getting involved in the economy ... but nevertheless they maintain the same power as before," said a former Iranian official, who asked not to be named. "They are still running the show."

WHAT TO WATCH:

-- Which financial activities have the Guards dominated?

-- Will the Guards withdraw from financial activities?

-- Can sanctions push the clerical establishment to end the Guards' predominance over the economy?

-- Further evidence of the Guards' growing economic role

MILITARY CONFLICT?

The United States and Israel, Iran's main foes, do not rule out military action if diplomacy fails to end the nuclear row.

But some analysts have questioned the feasibility of striking Iran, saying the potential targets are too distant, dispersed, and well-defended for Israeli warplanes to take on alone.

"It would be extremely difficult...to destroy all relevant facilities to stop a potential Iranian nuclear weapons programme," said researcher Pieter Wezeman of the Stockholm International Peace Research Institute.

U.S. military firepower far exceeds that of Iran, but Tehran could retaliate by launching hit-and-run strikes in the Gulf and by closing the Strait of Hormuz. About 40 percent of the world's traded oil leaves the Gulf region through the strategic waterway. Tehran can also use militant allies such as Hezbollah and Hamas.

WHAT TO WATCH:

-- Israeli statements on how the Jewish state's leadership sees the effectiveness of the latest sanctions could provide clues to its thinking on possible military steps.

-- U.S. and Israeli naval movements in the region

-- Signs of Saudi and other Gulf facilities offered for military action.

LEADERSHIP IN CONTROL?

Although the authorities succeeded in ending widespread post-election unrest by clamping down hard on the pro-reform opposition, analysts and residents say discontent remains alive among backers of defeated candidate Mirhossein Mousavi.

Last year's vote exposed deep divisions in the establishment, but the ruling hardliners made clear they would not tolerate any further attempts to undermine their position and they appear to have gained the upper hand for now.

Human rights groups such as Amnesty International have accused Iran of a crackdown on dissent involving torture, politically-motivated executions and the imprisonment of journalists, students, activists and clerics. With the Guards ready to swiftly counter any new challenge to the Islamic state and Khamenei, opposition hopes of political and social change seem unlikely to be realised any time soon.

WHAT TO WATCH:

-- Any sign of splits within political, military leadership

-- Opposition attempts to revive anti-government campaign

STRUGGLING OIL SECTOR

Iran, which boasts the world's second-largest oil and gas reserves, wants foreign capital and technology to help modernise and expand its all-important energy sector, but U.S. and other sanctions are making investors increasingly wary of the country.

In the latest sign of Western firms stepping back from Iran despite its energy riches, Royal Dutch Shell, BP, Reliance Industries, and Independent Swiss trader Glencore have decided not to enter into new trading agreements with it.

The Economist Intelligence Unit forecasts oil export revenue at $63.4 billion this year from output of 3.82 million barrels per day (bpd), up from $53.9 billion last year, but volumes remain far below the level before the 1979 Islamic revolution.

Iran has started to issue bonds to help finance development of key energy projects, notably the South Pars gas field, and is shifting to firms from China and other energy-hungry Asian countries for investment and supply deals.

But Samuel Ciszuk of IHS Global Insight said virtually all investment into Iran was at a standstill, with Chinese oil firms "refraining from firming up their memoranda of understanding into contracts". However, Iran is used to finding a way out to evade sanctions.

WHAT TO WATCH:

-- More Western companies halting ties with Iran

-- Chinese and other Asian firms replacing them, or not

-- Iran's energy resources will deplete if not developed

-- How will Iran plug the gasoline imports gap?

ECONOMY UNDER PRESSURE

Ahmadinejad's main economic challenge ahead is to carry out a plan to slash hefty subsidies, fraught with political and economic risks for the president.

Phasing out state aid on goods ranging from bread to petrol is a huge task for the authorities, who say the reform is needed to bolster the economy and reduce reliance on imported gasoline.

Critics of the scheme, including prominent lawmakers, say it could stoke inflation and provoke social unrest. The government argues that those in need will receive compensation in cash.

Iranians are already struggling with an annual inflation rate of 10 percent and an even higher jobless rate. Iran's economy will grow 3 percent this year and 3.2 percent in 2011 after 1.8 percent in 2009, the International Monetary Fund says, lower than the Middle East and North Africa region.