As the Rial Declines, Iran’s Efforts to Shore up Its Economy Prove Dubious, Ineffectual

As the Rial Declines, Iran’s Efforts to Shore up Its Economy Prove Dubious, Ineffectual

On Sunday, Iranian Foreign Minister Javad Zarif spoke to a gathering of Iranian business leaders and diplomats in an attempt to salvage some confidence in the country’s economy as it faces down the threat of renewed US sanctions and the persistence of an economic crisis that has seen the value of the national currency fall to record lows. Following US President Donald Trump’s withdrawal from the 2015 Iran nuclear deal this past May, sanctions are scheduled to snap back into place on Iran after the first week of August. Additionally, secondary sanctions targeting entities throughout the world that do business with Iran will be fully re-imposed on November 4.

Zarif attempted to undermine the significance of these deadlines by saying that the US is “addicted” to sanctions. Iran’s English-language propaganda network Press TV also quoted the foreign minister as saying that the Islamic Republic will be able to weather the storm of this current, “critical” period by maintaining national unity. Meanwhile, Defense Minister Hossein Dehghan reiterated the defiance that has been expressed by various other Iranian officials since Trump’s withdrawal was announced. Press TV characterizes his message a saying, “The Islamic Republic will never bow to enemies' excessive demands even one iota.”

The new head of the Central Bank of Iran, Abdolnasser Hemmati, also contributed to this defiance over the weekend, according to UPI. However, Hammati’s language was considerably more alarming, insisting that “enemies are out to destroy the country's assets and instill disappointment in public through sanctions.” This arguably underscores that serious hardships potentially lay ahead for the Islamic Republic, at a time when poor economic indicators have already been contributing to widespread unrest at least since late last year. In this sense, Zarif’s appeal to national unity may have been intended to call for an end to that unrest, which has continued through sporadic outbreaks of protest since the end of a nationwide uprising in January.

The Associated Press highlighted this phenomenon on Monday in its reporting on the dramatic currency devaluation that has occurred in recent days. It notes that three days of demonstrations took place last month, leading to clashes between protesters and security forces outside the parliament building in Tehran. The protests were reportedly motivated specifically by the currency crisis, which has only grown worse since then. According to the AP, the value of the rial had fallen to 122,000 to the dollar by Monday and had spurred fears of even more unrest.

Al Jazeera identified a range of figures that had been given for the exchange rate over the weekend but emphasized the fact that virtually all of them represented less than half the value that had been set as an official exchange rate by Iranian authorities in April, after the rial reached a previous record low. Al Jazeera then added that the officials had attempted to enforce the rate of 42,000 rials to the dollar by cracking down on black market currency trading, but that this familiar practice had continued despite the threats.

Much of that trade represents corrupt Iranian officials or persons with government connections who have traditionally had access to official exchange rates that were lower than the market rates, and were able to profit off of the differential. This and other forms of corruption have been placed within the crosshairs of regime authorities in recent months as they have been, in Al Jazeera’s words, “bracing for August 7” and the worse economic conditions that will surely follow the resumption of secondary sanctions.

Last week, Al Monitor reported upon the apparent efforts to stamp out corruption, noting for instance that several members of the Ministry of Industry, Mining, and Trade had been arrested after the Central Bank released records on vehicle importers and the potential misuse of official-rate currency exchanges. But the report also called attention to the ways in which anti-corruption efforts tend to stir up internal conflict within the Iranian regime. This in turn hints at the potential for that conflict to produce unbalanced or ineffectual anti-corruption efforts as officials strive to punish political adversaries while protecting allies.

Nonetheless, the efforts to root out corruption as a means to slowing the economy’s deterioration continued into Monday, according to Bloomberg, which quoted the Iranian judiciary as saying that 29 people had been arrested as of Sunday and that more were pending. But the same report emphasized that the value of the rial had fallen to its current rate from only 90,000 rail to the dollar just last week, strongly suggesting that ongoing trends are “resisting government efforts to shore up the economy as the restoration of U.S. sanctions looms.”

It is possible that these efforts also included the ouster of the previous head of the Central Bank of Iran last week. However, Reuters reported that the sudden resignation of Valiollah Seif was announced without any formal explanation, thus leaving the story open to alternative interpretations. On one hand, Seif had previously been criticized by fellow Iranian officials for his failure to anticipate and prevent the currency devaluation crisis. But on the other hand, he had also been specifically targeted for new sanctions passed by the Trump administration in retaliation for his financing of the Iranian Revolutionary Guard Corps.

Thus, Seif’s ouster may have been motivated by a defiant impulse to promote policies that encourage what Foreign Minister Zarif called “national production” as an antidote to foreign pressure, or it may have been motivated by an impulse toward compliance as a means of mitigating the effects of existing sanctions. If the latter is the case, Iranian officials would almost certainly refuse to admit the strategy, and in any event, such “compliance” would be very limited.

This is to say that regardless of the reason for the change in leadership of the Central Bank, there is no immediate indication of a change of its behavior in terms of financing the IRGC and associated terrorist groups. Arguably illustrating this fact, the Washington Post published an article on Monday detailing the experiences of Afghan and other ethnic militias that have been dispatched by the IRGC to fight in Syria, in exchange for several hundred dollars per month. The report estimated that between 5,000 and 12,000 of these Afghans have been deployed, to say nothing of the Lebanese Hezbollah fighters and various other groups whose missions in Syria are still financed by the Islamic Republic.

This foreign spending has evidently contributed a great deal to the domestic unrest that Iran has experienced, alongside other motivating factors such as government corruption and the regime’s failure to turn the benefits of previous sanctions relief to the Iranian people. In protests during the December-to-January nationwide uprising and in various subsequent demonstrations, Iranians have been heard to demand a reevaluation of government priorities, chanting such slogans as, “Forget about Syria; think of us.”

This backlash is likely to grow even stronger if the Islamic Republic does not live up to Zarif’s promises of imperviousness to new and renewed sanctions. Forex Live reported last week that Iran’s oil economy could see losses of more than one million barrels per day in the first quarter of 2019, and Al Jazeera suggested that the output could decline by about two-thirds overall. Zarif’s speech on Sunday boasted that Iran would have substantial foreign support in defying US sanctions, but this is at odds with recent trends toward advance compliance with those sanctions by a variety of countries that currently do business with both the US and Iran.

As an example, the Associated Press reported last week that India had cut its Iranian oil imports by 25 percent over the past year and had given no indication of any plans for evading or compensating for the sanctions that will snap back into place in November. This pattern of cuts continued, according to Reuters, even after the Islamic Republic offered to personally insure Indian cargo transportation after previous insurers withdrew. Meanwhile, the US has avoided giving countries like India incentives for sanctions breaking, in that it has shown willingness to grant waivers to some such countries, provided they substantially reduce their Iranian trade.

Although this leaves the door open for Iran to maintain some fraction of its existing partnerships, the Trump administration has indicated that its ultimate goal is to reduce Iran’s oil exports to zero – an outcome that would surely justify the warning from the new Central Bank governor regarding efforts to “destroy the country’s assets” in order to undermine the clerical regime.