Rouhani under pressure as Iran suffers from the impact of sanctions

Published in GSN, 6 September 2018

Gaining control of inflation was one of the main achievements celebrated by President Hassan Rouhani’s team during his first term in office (GSN 1,021/3). But with the rial under acute pressures, and international trade once more becoming problematic, prices are now starting to rise strongly. Inflation reached 19.3% in the Iranian month of Mordad (23 July-22 August), according to recent Statistical Center of Iran data.

Turmoil continues in the foreign exchange market, as the authorities struggle to find a way to cope with strong demand for hard currency amid tightening sanctions (GSN 1,064/9). The rial’s devaluation this year has proved positive for some, with the main Tehran Stock Exchange index rising for the past four months. However, that is something of a smokescreen: in black market currency terms, the index has more than halved in value since December, according to Tehran-based Turquoise Partners.

The worst may yet be to come. The next round of sanctions, which are due to be imposed by the United States in early November, will target the oil sector, backbone of the Iranian economy and primary source of revenue and foreign currency for the government. Oxford Economics senior economist Mohamed Bardastani predicts that sanctions will tip the economy into recession next year, with a forecast contraction of 3.7%, while inflation is likely to rise further while private consumption falls.

Officials have reportedly warned of 1m jobs being lost by March. “We should be honest with the people and tell them that we are engaged in a real war,” said co-operatives, labour and social welfare minister Ali Rabiei in an early August interview with the daily E’temad. A few days later, on 7 August, he was impeached by the Majlis-e Shura-ye Eslami (parliament).

The likelihood is that public protests – which have been a frequent feature of Iranian life since December (GSN 1,053/5, 1,051/1) – will increase in the face of any further economic hardship. This is in an environment where most of the policy options open to the authorities come with their own problems. There have been calls for the government to sell essential commodities at subsidised prices, but that is not a viable long-term strategy unless done in a very limited way.

Bank Markazi-ye Jomhuri-ye Eslami-ye Iran (Central Bank of Iran) has been talking about setting up a new cross-border payments system to circumvent the Swift system used by banks around the world, but vice governor Naser Hakimi admitted to the Majlis-e Shura in August that getting other countries to agree to use the alternative network was a huge obstacle.

There are signs of nervousness within the ruling elite. Rahbar-e Moazzam-e Iran (Supreme Leader) Ayatollah Ali Khamenei has agreed to a request from judiciary chief Ayatollah Sadeq Amoli Larijani to set up special tribunals to deal with financial crimes, amid familiar allegations that foreign enemies are behind the domestic economic turmoil.

Political ‘red lines’

Reflecting the direction the political wind is blowing, Khamenei has attacked Rouhani and the nuclear deal which his team negotiated. In a speech on 13 August, he said: “It was my mistake to allow negotiations with America”. Khamenei added that the negotiating team “crossed the red lines” he had set for the talks. (This appears to be a convenient rewriting of history, as the rahbar had been willing to go along with the compromises at the time.) Khamenei doubled down on his criticism in a meeting with Rouhani and his cabinet on 29 August, citing their “inattention” to the Islamic Republic’s economic problems.

Rouhani appeared before the Majlis-e Shura on 28 August to discuss the state of the economy. The deputies were left underwhelmed by his responses, although a request by some of them to refer the president to the judiciary was denied by Majlis-e Shura speaker Ali Larijani.

Some of Rouhani’s other ministers have not been so lucky: economic affairs and finance minister Massoud Karbasian became the second minister to be impeached by parliament last month, in a vote held on 26 August.

It is not all one-way traffic. In a letter published in Saham News on 2 September, Mehdi Karroubi called on members of the Majlis-e Khobregan (Assembly of Experts) to hold Khamenei accountable for the current state of the country. Karroubi has been under house arrest since emerging as a leader of the 2009 Green Movement that contested hardliner Mahmoud Ahmadinejad’s dubious presidential election victory.

Rouhani’s hard-line critics are all but certain to push for further changes to his policies and personnel; a move to oust the president cannot be ruled out. Precedent suggests it is normal for the pendulum of Iranian politics to swing towards revolutionary/‘principalist’ factions after a ‘moderate’ or centrist presidency (GSN 1,041/4, 1,037/1, 1,024/14).

President Donald Trump’s decision to reimpose sanctions and the Rouhani administration’s inability to tackle structural economic weaknesses seem to have accelerated the process.