Corruption, political infighting and fear of a collapse of the Iranian nuclear deal are major factors in the rial’s fall.
By: Sean Savage/JNS
With much of the world focused on the military confrontation in Syria over that country’s use of chemical weapons, Iran’s economy took a major hit as its currency plunged to record low levels. The dive in Iran’s currency, the rial, caused a panic among Iranians as the government sought to keep things under control.
However, the ongoing threat of a major war in Syria—where Iran is heavily involved in support of Syrian President Bashar Assad—coupled with the potential collapse of the Iranian nuclear deal next month could spell major instability ahead for Iran.
Since the beginning of the year, the rial has lost nearly one-third of its value. When Iranian President Hassan Rouhani came to power in 2013, $1 equaled 36,000 rials; now that figure stands near 60,000 rials to the dollar. However, the currency devaluation has been a trend since the 1979 Islamic Revolution, when the dollar equaled 70 rials.
In order to ease the panic, the Iranian government announced this week that it was going to set the official exchange rate at 42,000 rials to the dollar, while threatening harsh punishment to anyone trying to exchange money at a different rate.
While currency devaluations such as this are sometimes tied to issues such as a trade imbalance or slumping oil prices, Iran’s non-oil imports in 2017 were $47 billion, with oil sales at $55 billion, leaving a currency surplus of $17 billion.
Corruption, political infighting kill the rial
As such, most observers are pointing to corruption, political infighting and fear of a collapse of the Iranian nuclear deal as major factors in the rial’s tumble.
“The free fall in the value of the Iranian currency is, in fact, a vote of no confidence in Iran’s economy, and the country’s future prospects by businesses and investors, Iranian and global investors alike, and by the Iranian public at large,” said Iranian expert, former civilian policy adviser to US Central Command and now visiting fellow at the Washington Institute for Near East Policy, Nader Uskowi, to JNS.
Uskowi said the Iranian economy has largely remained stagnant following the Iranian nuclear deal, proving that the US led-sanctions “were only part of the economic problems the country faced.”
“The larger issues continue to be rampant” in Iran, explained Uskowi, who went on to describe them as “official corruption, at levels not seen in modern history of Iran; mismanagement of the banking sector, which is on the verge of collapse; and control of major sectors of the economy by the Revolutionary Guards (IRGC) and the office of the Supreme Leader through a dozen foundations and around 500 of affiliated companies, some designated by the US Treasury.”
Behnam Ben Taleblu, a research fellow and Iranian expert at the Foundation for Defense of Democracies, told JNS that the so-called “moderates” in Iran, such as President Hassan Rouhani, wanted to use the nuclear deal to integrate the regime into the global economy and get some relief from economic sanctions.
“While the JCPOA enriches the worst sorts of actors in the Islamic Republic and is improving—in terms of macroeconomic indicators of growth reported by the International Monetary Fund (IMF) —the Iranian economy, the average Iranian has yet to feel that dividend,” he said.
Furthermore, Rouhani and his allies “overhyped” the nuclear deal and its potential economic impact as a weapon in their arsenal against other factions in Iran, added Ben Taleblu.
“They also did not take into consideration the long-standing structural issues in the Iranian economy that must be fixed to see a real change in attitude towards Iran by foreign investors,” he said.
Nuclear deal and economy uncertainty
Adding to Iran’s economic woes is the uncertain future of the Iranian nuclear deal.
US President Donald Trump has vowed to dismantle the “disastrous deal,” and in January set a May deadline for US allies in Europe to make changes to it. Among the provisions the Trump administration has called for include stronger inspections and punishment for ballistic-missile violations. If the changes are not made, Trump has said will not renew a sanctions waiver for Iran, thereby effectively ending U.S. participation in the agreement.
“President Trump’s possible withdrawal from JCPOA will confirm the worst expectations of the Iranian business community—that Iran will remain a pariah state for major global banks and businesses, further reducing the confidence in the country’s future economic prospects,” said Uskowi.
The Trump administration’s hard stance on Iran has also scared off foreign investment in the country.
“The Trump administration has developed an admirable comprehensive Iran policy that was revealed in October 2017,” noted Ben Taleblu. “Since then, it has mostly through official statements cited long-standing terrorism and anti-money laundering concerns about doing business in Iran. This has been able to dampen the prospects for new investment and the flight of foreign capital, and has had something of chilling effect on the Iranian economy.”
At the same time, corruption and control by the Iranian Revolutionary Guards Corps (IRGC) have made foreign banks and investors afraid of investing in the country.
“According to those in the compliance world, due diligence is next to impossible with a regime like the Islamic Republic, where the state and IRGC have squeezed the legitimate private sector and corrupted the banking sector,” said Ben Taleblu. “These concerns matter for those looking to invest long-term in Iran.”
The cost Iran’s military adventures
Economic discontent in Iran also led to riots across the country late last year and earlier this year.
In late December, a small street protest in the provincial city of Mashhad over high prices morphed into widespread demonstrations in some 85 cities across the country, which lasted several weeks. However, unlike the previous mass protests following the 2009 presidential election—political protests carried out by urban elite—the December 2017 to January 2018 demonstrations were different.
According to observers, these mass protests carried out by the so-called “middle-class poor,” a group of young Iranians who are educated and cosmopolitan in their outlook, but who have been forced to live in poverty due to lack of economic mobility and opportunities.
At the same time, many of these middle-class Iranians also voiced objection to the regime’s continued support for wars across the Middle East. Protestors in January were seen using slogans such as “Leave Syria, think about us!” and “No Gaza, no Lebanon, our lives for Iran.”
“Iran is a country at war—in Syria, Iraq, and Yemen,” stated Uskowi. “The cost of expeditionary operations in these countries, if not prohibitive, is excessive, especially for a stagnant economy. The estimates for the cost of the Iranian military involvement in the Syrian conflict alone exceed $7 billion annually, or 2 percent of the GDP. This is an enormously high cost.”
While Ben Taleblu noted that Iran is spending far less on its defense budget than some of its adversaries, it has nevertheless become a burden on the Iranian people.
“Domestically, it has been the Iranian people who have borne the brunt of this cost. Cash is not the only thing Tehran has preferred to send abroad than spend at home. The regime has sent Iranian men, Shi’a Arabs, as well as countless South Asians to the frontlines of Syria to die for an ideological cause,” he explained.
As such, average Iranians have grown increasingly fed up with these foreign interventions, even though spreading the Islamic Revolution abroad has been a central pillar of the regime since the revolution.
“Average Iranians, starting in 2009 and escalating with the 2017/18 protests, have been made aware of these costs and have rightly chided the regime for forsaking the country’s national interests. Average Iranians want stability in their lives and in the region. The policies of the Islamic Republic, however, are proof positive of anything but,” said Ben Taleblu.
Uskowi agreed, adding that “people are aware of and unhappy about the costs of their country’s military adventures in the region. The protesters across Iran [in] December demanded an end to these military involvements, emphasizing the military expeditions’ pressure on the country’s social expenditure.”
More downturns ahead
Moving forward, it’s likely Iran will continue to be vulnerable to economic downturns, which will almost certainly affect the stability of the regime and possibly the region as well.
“The Iranian economy is not going to turn around in the near future, as the root causes are not answered. The regime knows that it needs to undertake major economic reforms, such as taking the IRGC out of the economy and back to the barracks,” said Uskowi.
He added that even the IRGC knows that “their involvement in large businesses can only corrupt their fighting force and spirit.”
Nevertheless, the senior leadership in the government and military remain so corrupt and entrenched in the businesses they control that they are unable to undertake any fundamental reforms, according to Uskowi.
“The situation will further delegitimize the regime,” he said, “and creates risks of public backlash and uprisings in the near future.”