The ‘nuts and bolts’ of Iran’s economic troubles

Economic dissatisfaction is increasingly being expressed in terms of political dissatisfaction in the past year.

By TERRANCE J. MINTNER/THE MEDIA LINE
Updated: JULY 5, 2018 12:56
Iranian women gather during a protest against U.S. President Donald Trump's decision to walk out of a 2015 nuclear deal, in Tehran, Iran, May 11, 2018 (photo credit: REUTERS/TASNIM NEWS AGENCY)
Iranian women gather during a protest against U.S. President Donald Trump's decision to walk out of a 2015 nuclear deal, in Tehran, Iran, May 11, 2018
(photo credit: REUTERS/TASNIM NEWS AGENCY)
As Iran decides the pathway forward after US President Donald Trump pulled out of the 2015 nuclear deal in May, economic pressures are beginning to weigh on the Islamic Republic.
In the last few weeks, Iran’s currency has been tanking rapidly against the dollar. Reports said it sank between 79,000 and 90,000 rials to the US dollar on the country’s unofficial market, according to the foreign exchange website Bonbast. At the end of last year, it stood at 42,890 to the dollar.
Furthermore, there has been a flare up of protests over economic concerns throughout the country. Vendors in Tehran’s central market staged a series of protests last week. They were upset about the rial’s collapse, which is havoc for businesses as the price of imports rises.
In the last few days, protests erupted around the southern city of Khorramshahr over a shortage of clean water. The problem has been exacerbated in the summer when temperatures in the southern region can reach up to 110 degrees Fahrenheit (43 Celsius). The protests were initially peaceful but became violent when police and protesters clashed, resulting in at least one death.
Trump ally Giuliani says end is near for Iran"s rulers, June 30, 2018 (Reuters)
Last month, protesters in Tehran shouted surprising slogans as they decried the country’s economic malaise. Videos posted to social media showed them chanting: “Death to Palestine,” “No to Gaza, no to Lebanon,” and “Leave Syria and think of us.” Others chanted “We don’t want the ayatollahs.”
The unrest seems to have rattled the leadership. Last week, President Hassan Rouhani called on the nation to “remain calm” and united in the face of the economic pressure. The country’s Supreme Leader Ayatollah Ali Khamenei also addressed the Iranian public, urging the government “to confront those who disrupt economic security.”
Economists in the country are urging the leadership to take bold action on the sinking rial and rising prices. Beyond these concerns, they have also flagged Iran’s record levels of unemployment, a private sector starved of investment, and the country's banking system, which is crippled by loans.
Suzanne Maloney, an expert on Iran and senior fellow at the Brookings Institution, told The Media Line that what is happening in Iran is a “continuation of the unrest that we’ve seen over the course of the last several years, but certainly on an intensified basis.”
She explained that there is a long history of economic protests and labor strikes in Iran. But in the past year, economic dissatisfaction is increasingly being expressed in terms of political dissatisfaction. “There is a willingness among Iranians to publicly embrace positions that are obviously quite dangerous in a system that relies continuously on repression.”
During the Iranian Revolution of 1978-79, she explained, there was an economic dimension to the unrest—a period of fast growth, inflation, and crackdowns on speculation. What began as individual economic protests became linked over time, amounting to a rejection of the system itself. “And I think that has to be of particular concern for the Iranian leadership.
“Those protesting in the streets are rejecting all elements of the leadership. They have been as critical of the reformists as are of hardliners.”
Maloney concluded by outlining Iran's most pressing economic concerns. “The long-term challenge, which the Iranian government has failed to address, is how to generate sufficient opportunities for the post-revolutionary ‘baby boom’ which is now reaching maturity.”
She added that corruption and the perception that life has gotten harder are also driving the unrest. “Expectations were raised around the 2015 nuclear deal, and it didn’t produce the anticipated ‘peace dividends.’"
The other crucial issue for Iran is what European businesses will do after Trump’s withdrawal from the 2015 nuclear pact. Tougher US sanctions could greatly deter European companies from doing business or investing in Iran.
Mahdi Ghodsi, an expert on Iranian trade and industrial policy at The Vienna Institute for International Economic Studies, told The Media Line that “it is very difficult for European signatories of the deal to incentivize companies to stay in Iran, at least in terms of investment.”
He explained that there could be a procedure to support European countries trading with Iran, but not those that seek to invest in the country. Investment is problematic because of the lack of guarantees. “If my company wants to invest in Iran, and then the US prevents it from doing business with American companies as a penalty, then it will be difficult for the Europeans to pay back that penalty.”
But for trade issues, he concluded, they could take their case to the World Trade Organization to settle the dispute.
Tom Wilson, a Research Fellow in the Center for the New Middle East at London’s Henry Jackson Society, told The Media Line that “the Iran deal as we knew it from 2015 is dead – and nothing will concentrate European minds more on this than the re-imposition of US secondary sanctions on European companies that continue trading with Iran.
“If European businesses will not face the stark choice between maintaining their operations and being hit with sanctions or pulling out of Iran, then their governments must urgently engage with and address American concerns about the deal – not least Iran’s ballistic missile capability.”