The Malaysian Reserve

After sanctions, Iran’s economy is nearing a crisis

Rouhani now finds himself on precarious middle group (Pic: Bloomberg)

By LADANE NASSERI, GOLNAR MOTEVALLI & ARSALAN SHAHLA / Pic By BLOOMBERG

In the run-up to the Aug 7 resumption of US sanctions against Iran, the country’s beleaguered president, Hassan Rouhani (picture), got stern directives from a few corners of the Islamic Republic.

Iran’s Supreme Leader, Ali Khamenei, urged him to deal with corruption. The powerful Revolutionary Guards commander told him to focus on Iran’s slumping currency, the rial, while a sizeable chunk of Parliament summoned Rouhani to harangue him about the sinking economy.

None of them, however, had any advice on how to ease the growing sense of despair and outrage in the streets.

Over the past few weeks, record temperatures, power outages and water shortages, along with a 50% rise in the price of some food items, have triggered scattered protests. One person was killed and 20 others detained in the city of Karaj, west of Tehran, in a protest on Aug 3.

In a nearby town, about 500 people used stones and bricks to smash the windows of a seminary and tried to set the building on fire, local media reported.

As bad as things are, they’re likely to get worse. The new sanctions ban purchases of US dollars by Iran and prevent the trade of gold, metals and automobiles. Their mere prospect has fuelled a record crash in the value of the rial, down 70% since May.

Government attempts to stabilise the currency by pegging it at a set rate to the dollar backfired and ended up speeding its decline.

The real pain, however, will hit in November, when the US reimposes sanctions on Iran’s oil industry, the economy’s lifeblood, in a bid to bring the country back to the table to renegotiate the 2015 nuclear accord.

This was supposed to be Rouhani’s time to shine. The 69-year-old moderate cleric is a year removed from winning a second four-year term as president on the back of his government’s successful negotiation of the nuclear deal, which he promised would lead to a wave of foreign investment and jump-start an economy weakened by years of isolation.

Only three years after the deal was signed, though, instead of enjoying the fruits of the accord, Rouhani has to explain what went wrong — and how he’s going to fix it. Speaking on state television on Aug 6, he indicated the US needs to ease sanctions before he’d agree to any talks.

To some observers, Rouhani’s attempts to deal with the situation have been reactionary and not part of a coherent strategy. “They’re dealing with crises as they happen,” said Saeed Laylaz, a pro-reform economist who has advised the government.

“The people have lost their trust, and they are craving efficiency. They don’t care if it comes from men with beards or neckties.”

Laylaz is drawing a distinction between the pro-Western, secularist men who governed Iran before the 1979 revolution and the religious, anti-imperialist clerics who replaced them.

Although Rouhani has a beard and dresses in the traditional garb of a cleric, he has governed as a moderate. He now finds himself on precarious middle ground.

To the right, he faces pressure from conservative clerics who were critical of the nuclear deal to begin with. On the left, he’s blamed for not doing enough to reform the political or economic system during the two years the deal was in effect.

Progress was made — oil exports surged, for example — but job creation couldn’t meet demand in a country where more than 60% of the population is under 30.

While there’s little to suggest Rouhani’s position is under any threat, the rapid deterioration of people’s prospects would leave any leader vulnerable, let alone one in an environment where Islamic conservatives wield such power.

According to a survey early this year by Toronto-based IranPoll for the University of Maryland’s Centre for International and Security Studies, more than 58% of Iranians thought economic conditions were getting worse, compared to 28.5% in August 2015, a month after the nuclear deal was struck.

And yet the political establishment knows that, at least for three more years, Iran is stuck with Rouhani.

“There is no real alternative,” said Aniseh Bassiri Tabrizi, a research fellow at the Royal United Services Institute in London.

A conservative populist candidate in last year’s elections was roundly rejected. “There is a realisation that for now this is the only way forward,” said Tabrizi.

The crisis may actually end up strengthening Rouhani’s hand domestically, with the political elites uniting against the US to ensure the survival of the regime.

“Rouhani has had a setback. But now there is no reformist or hardliner, they are all in the same boat,” said Amir Handjani, a senior fellow at the Atlantic Council.

“The time to argue who’s to blame is not now; they can’t play petty politics.”

This moment has seemed inevitable ever since Donald Trump won the US presidential election, in part by vowing to rip up the nuclear pact the minute he took office.

After he pulled out in May, encouraged by Iran’s foes in Israel and the Persian Gulf, there was hope that the European signatories (Britain, France and Germany) could save it.

It soon became clear how hard that would be, given how closely inter-twined their companies are with the US European companies, including Peugeot parent Groupe PSA, Total SA and Daimler AG, have all announced a halt to activity.

If the US succeeds in shutting in a large portion of Iran’s oil exports, it could tip the country into a full-blown crisis. Consequences would be felt around the world.

Denied access to Western finance, Iran is likely to accelerate its efforts to woo China. It’s also vowed to retaliate against any disruption to oil sales, with officials going so far as to suggest it may try to block the Strait of Hormuz — a narrow conduit for about 30% of the world’s sea-borne-traded crude.

Tensions with Persian Gulf nations already fighting proxy wars with Iran would spike.

Meanwhile, in Tehran, despair is setting in. “There’s no hope in general,” said Aliasghar Rezaei, a 58-year-old who used to run a garment factory, but now works for a ride-hailing app.

Steering his Iranian-made Peugeot through Tehran’s traffic, Rezaei talks about how he supported the 1979 revolution to overthrow the shah.

“I fought for the revolution, and I probably still would,” he said, “but something has to change.”

Iman Baik, editor-in-chief of the technology daily Fanavaran-e-Etelaat, said there’s not a lot Rouhani can do to steady the rial or fix the broader economy as long as sanctions are in place.

“The reins of the market have been practically in Trump’s hands in recent months,” he said.

On the day the sanctions went into effect, the gold markets in Tehran were packed with people trying to trade in their rials.

At the less crowded exchange centres, a woman named Massoumeh said she’s spent months saving up to buy euros to help her daughter pay for dentistry college in Hungary. Now, she couldn’t find a trader willing to exchange.

“We rushed down here, but there’s nothing,” she said. “I’m desperate.” — Bloomberg