40 tough years
The rial has dropped by 70% in four months and oil by 40%. Many companies are closing and the middle class has seen its spending power obliterated
- Sunday, 31 March 2019
Traffic is slow on the Persian Gulf Freeway. A turnoff slowly leads to the foot of Ruhollah Khomeini's mausoleum. Situated along the road that links Teheran and Qom, it is the symbol of the revolution which, forty years on from the unseating of Shah Reza Pahlavi and the institution of the Islamic Republic, sees its legacy stretched to breaking point between the progressive drive mounting in the capital and the staunch conservativism of the Shiite holy city. The crossroads is just up ahead. And as it draws nearer, the events of 2019 can provide useful clues to understand where Iran is going next.
The challenge that the country faces is primarily on the economic front. And it is likely to determine the level of consent the reformist president Hassan Rouhani can hope to rely on at the end of his term in office, in 2021.
The re-imposition of sanctions by the United States, in force as of November 2018, have been felt by the population mainly in terms of a drop in their buying power, owing to a weakening of the Iranian rial which Donald Trump's defiance has compounded.
The currency has seen its value drop by 70% since the United States president tore up the Joint Comprehensive Plan of Action, the 2015 nuclear accord signed with Iran by Barack Obama. The collapse of the rial now seems to have bottomed out but the currency is still valued too low according to most Iranians. At the start of 2019, the exchange rate stood at 110,000 rial/dollar. In January 2018 it was just 40,000. This affects the country's manufacturing, owing to the rise in cost of raw materials triggered by the sanctions. A few firms are shutting down, others are having a hard time paying wages and worker protests are starting to spread. And the national economy is straining.
According to International Monetary Fund estimates, in 2019 a further contraction of 3.6% is expected. Before Trump's announcement, the Washington based organisation estimated a growth of 4% for the same year.
In this context, one of the decisive variables that could determine how the Iranian economy fares in the near future is the performance of the crude oil sector. In 2016, after the signing of the JCPOA, crude oil accounted for 63% of Iran's national exports. With the reintroduction of the sanctions, estimates quoted by Reuters report a reduction in volume of exported oil of between 40 and 60%. And the drop would have been even more drastic if the United States hadn't allowed eight countries (China, Japan, South Korea, Taiwan, Turkey, Greece and Italy) to continue to import crude oil on a temporary basis from the Islamic Republic. This 180 day waiver is set to expire in the spring of 2019. A few of the countries in question, and probably all of them, will ask for an extension, but there's no guarantee Washington will grant one, especially if alternative supply sources were to enter the market – starting with US shale oil – which could compensate at least in part a further squeeze on Iranian exports.
Other Iranian exports which may be less profitable than oil but are nevertheless strategic for the country, are threatened more by environmental factors such as drought than the sanctions. The scarcity of water has got much worse in recent months. Between 2017 and 2018 the flow of water towards Iran dropped by 33%. This was due to a drastic drop in rainfall combined with the building of a whole series of inefficient dams, where the stored water is allowed to evaporate or is too easily absorbed back into the ground. According to reports quoted by the Carnagie Endowment for International Peace, too many of these dams have been built in the country over the last thirty years, and mostly by companies linked to the Islamic Revolutionary Guard Corps. Under the complicit gaze of the government of the day.
The lack of water affects both electricity production and the agriculture sector, which accounts for 13% of Iran's non-oil exports. In recent months, this situation has triggered fierce protests against the government, particularly in the regions inland. In Isfahan, where the river running through the city has now run dry, the frustration degenerated into clashes between farmers and security forces. The high inflation rate along with the inept management of the water supply is undermining the waning consensus still held by Rouhani. This has two possible implications. On the one hand, though it is true that the current president – in his second term in office – can no longer stand at the next elections, his drop in popularity will necessarily have a bearing on the chances that the reformist candidate, whoever he is, has of winning election in 2021. Opening the door to a return to power of the conservative faction. On the other, if in the last two years of his presidency Rouhani doesn't manage to improve his level of popularity, the seventy year old reformist leader could compromise his chances of "running" for the highest post of all; the role of Supreme Guide.
The current rahbar-e moʿaẓem, Ali Khamenei, is 79 and rumours circulating on his bad health add spice to the even more widespread discussions on who will take his place. Rouhani is in a strong position, but his current problems could end up lending a hand to his main contender, Ebrahim Raisi.
One of the leaders of the conservative wing of the Iranian clergy, Raisi has already gone up against Rouhani once before. That was in 2017 when he was among the candidates for the presidential elections and was defeated but still managed to collect 38.3% of the vote (compared to his rival's 57.1%), which is proof of a strong electoral base. Just a few years down the road and the contest could be repeated, but on a different playing and with different rules.
The Supreme Guide is not elected by the people. He is elected by a body comprised of 88 clerics, the so called Assembly of Experts which, having been renewed in 2016, is made up of essentially three factions: the pragmatist faction, closer to Rouhani, the conservative one, more in tune with Raisi's positions, and the independents, who could end up having the final word.
In this context, the year that marks the fortieth anniversary of the Islamic Revolution stands as a crossroads as much for Rouhani as for Raisi: while the president now has his last chance to revive the consensus surrounding him that is currently weighed down by the increasingly perilous economic situation, the fifty eight year old hardliner of the Shiite clergy, formerly the Custodian of the Sanctuary of Imam Reza in Mashhad, is seeking an appointment that could further boost his chances in the race to secure the legacy of the current Supreme Leader. In the summer of 2019 the post of head of the judicial system, an extremely delicate position in the Islamic republic, will become vacant, once the conservative Sadeq Larijani is appointed president of the Expediency Discernment Council. Raisi is touted as being in pole position to succeed him.
The choice that will be made by Khamenei's successor will to a large extent decide what direction Iran will take in the near future. If a reformist Supreme Guide is elected the growing progressive movements could at least get a leg up, while the rise of a conservative like Raisi, who is in favour of a more sweeping Islamisation of the country and strengthening the "Axis of Resistance" in the region, which risks setting Iran on its way to further isolation. At least until the next crossroads.
This article is also published in the March/April issue of eastwest.