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Analysis | The Rial World: What Led to 'Black Wednesday,' and What's Next


05 Oct 2012 17:25Comments
Mzamtoonoct01.jpgThe rial asunder: cartoon by Mana Neyestani for Radio Zamaneh.

[ analysis ] A heavy police and security presence was evident around Tehran on Thursday, apparently intended to discourage further demonstrations like those that took place a day earlier. Most shops in the grand bazaar remained closed and the Iranian Labour News Agency reports that stores in Isfahan have now also shut down due to the ongoing currency crisis. The officially sanctioned Islamic Union of the Bazaar issued a statement to the Mehr News Agency disavowing any involvement in the apparent trade strike and referring to the shop closures as "treasonous."

The demonstrations that took place in Tehran Wednesday, on Saadi Street, Imam Khomeini Square, Ferdowsi Avenue, and elsewhere, reflect Iranians' growing distress at their government's economic policies and the massive decline in the rial's foreign exchange value, in part a result of Western sanctions against the Islamic Republic. Many merchants closed their shops for the day in solidarity with the demonstrators.

Starting with a few dozen people from the grand bazaar and swelling to crowds several hundred strong and larger, according to video footage, demonstrators Wednesday chanted slogans against President Mahmoud Ahmadinejad and called on the government to deemphasize its support for Syrian President Bashar al-Assad's embattled regime and devote itself instead to addressing the Iranian people's growing economic woes.

Security forces descended on at least one of the protest marches with tear gas. Police arrested dozens of demonstrators and, according to Mehr News Agency, two foreign correspondents. While state media outlets were largely silent about the protests, IRIB Channel 1, which reported that a "group of traders in the 15 Khordad district in Tehran stopped working today asking the government to stabilize the currency market," blamed "a number of groups [for having] tried to create riot and unrest" -- acknowledging that protests had in fact taken place.

The government, warning against "speculators," also evicted "unlicensed" currency traders from the grand bazaar. The Ahmadinejad administration has asserted that these traders are behind the sharp uptick in inflation since last Monday, blaming them for colluding with foreign powers to cripple the economy. Paul Sullivan, a Georgetown University professor, describes this as scapegoating, because "the bazaaris do not exchange enough money to make this sort of a dent in the US dollar-Iranian rial exchange rate. The currency drop has a lot more to do with hyper-expansive monetary policy pushing inflation." Ahmadinejad's decision to not raise interest rates as "part of his broader policy of prioritizing growth over inflation concerns," in the description of a Tehran Bureau contributor, is likely to come back to haunt him under new scrutiny from his rivals.

Iranian newspapers, including the conservative Khorasan, are already criticizing Ahmadinejad in direct, strong terms. The Revolutionary Guard-aligned Javan opined about his press conference Tuesday, in which economic questions were central, "the reality is that all of the answers [he gave] were a kind of projection of blame...none of them connected the responsibility of the government." The reformist papers were harshest, BBC Monitoring reports: An Etemaad editorial said that the Iranian president "did not accept responsibility for any of the disorder" and that his star is fading. And a commentator in Hamshahri wrote that "one cannot ignore the role of mismanagement; inexpert, hasty, and incorrect decisions; and inattentiveness to the chaotic situation of the market on the one hand, and the bitter and ugly political fights and the settling of scores among factions and groups on the other."

According to a Dow Jones News Service report, there is widespread resentment among bazaaris toward the Revolutionary Guards because they are felt to be profiting from both the rampant inflation and the Western sanctions while Iran's traditional business class struggles to stay afloat. The Guards have

access to foreign currency rates and free customs clearance, according to a former revolutionary guard and businessmen who works with them.

"For them, the currency exchange rate is the official one," which is much cheaper than the black market rate private businessmen must rely on, the former guard says.

And as the country's main security agency, "they are advantaged for clearance" on imports which normally cost 10% to 50% of the goods value, he said.

Despite Ahmadinejad's efforts to deflect blame and reassure the country, it is expected that a sharp confrontation awaits the lame-duck president in the Majles, Iran's parliament, over the government's handling of the crisis, given the criticism being expressed in a wide range of Iranian media outlets. And, according to economist Djavad Salehi-Isfahani, the situation is likely to only get worse: "When a situation like this happens, people who need dollars now will have to buy at a very high rate, because others are basically hoarding their dollars," he told NPR. Meanwhile, the "prices of chicken, milk, cheese, bread, sugar and yoghurt, among other staples, are now rising almost daily," the Indian business news website Domain-B reports.

Ahmadinejad has also blamed Western sanctions for the rial's hyperinflationary trajectory. The U.S. government was quick to claim credit for the fiscal turmoil as proof that sanctions were working to force Iranian concessions over its nuclear program, and Israeli Finance Minister Yuval Steinitz proclaimed the Iranian economy to be "on the verge of collapse." Some American commentators urged that the sanctions be increased in the hopes that more "social and political unrest" will force Iran to abandon its nuclear program, or even increase "the possibility of the failure of this illicit regime." State-aligned media outlets pushed back against such suggestions; a Resalat editorial, for instance, opined that "the effectiveness of the West's sanctions against Iran will reach a minimum" as winter approaches.

And despite his view that circumstances will become increasingly straitened for some Iranians, Salehi-Isfahani is skeptical that the national economy is on the brink of disaster:

While the Exchange Center has produced a lower rate than the parallel market and can potentially shield producers from the worst psychological effects of sanctions and war, the shock to the parallel market has caused a serious political if not economic crisis for the government of Mr. Ahmadinejad.

Does all this mean that Iran's economy is on the verge of collapse, as Israel's Finance Minster reportedly said? The answer is no, because most of the economy is shielded from this exchange rate, though not from the ill effects of the sanctions, which will continue to bite for a while. Would it cause sufficient economic pain that would push the Iranian government to make concessions in its nuclear standoff with the West? The answer is not likely. The multiple exchange rate system, as inefficient as it is, will protect the people below the median income, to whom the Ahmadinejad government is most responsive.

But the government can ill afford to ignore millions of Iranians, mostly upper income Iranians, who are affected by the gyrations of the parallel market. Among them are millions of people who are seeking a safe place for their savings, parents who send money to their children for education abroad or need to travel there to see them. They are not all importers of luxury items or those who want to take their money out of Iran. In allocating its limited -- perhaps shrinking supply of for foreign currency -- the government has a difficult time balancing the needs of the lower middle class and the poor with upper income Iranians that it cannot rely on for political support.

The rial's value began to drop more precipitously after expanded Western sanctions went into effect over the summer, though Paul Sullivan describes Iran's ouster from the international SWIFT financial transaction network in February as having perhaps had the greatest impact on the Iranian economy. According to analyst Daniel Cloud, Iraq's recent increase in oil production may have encouraged Western governments to finally take such steps, not unlike how in the mid-1980s, an increase in Saudi Arabian crude output that was encouraged by the United States undermined the Soviet policy of using hard currency payments for oil sales to pay for food imports.

Though a number of East Asian countries still import substantial amounts of Iranian oil, overall sales are down significantly. An Iranian economic analyst told the Christian Science Monitor that Iran "has less foreign currency, and the government can't even transfer [most of] the money for oil it does sell back into the country."

The marked increase in foreign currency exchanges since the beginning of the year is due partly to the psychology of sanctions. In August, Kevan Harris described here how confidence-building measures have not allayed people's fears:

In that sense, a certain percentage of the public -- and their expectations -- helped cause the more rapid slide. They don't think the Central Bank can stabilize the rial in the medium term. People who have money are buying gold, dollars, and real estate to protect their wealth. Everybody is making individual decisions that are pushing the rial down because everyone is holding onto foreign currencies. [...]

With increased sanctions, the demand went up for gold, foreign currency and anything independent of the rial. In fact, the real estate market in Tehran has been growing over the last six months. It had slowed in previous years due to a housing crash just like everywhere else. People are even putting money into real estate in poorer neighborhoods, which means people are continuing to take money out of the banks and investing it in housing.

Press TV reports that "Tehran says that it has enough hard currency to meet the country's need." But the policy of "providing dollars at the official rate of 12,260 [rials] to import basic goods" may have seriously backfired on the government when trading opened this past Monday, Reuters reports. Iranian gold prices soared in response to the rial's fall against the dollar as people started to fear that inflation could only get worse after the government set up an "exchange bureau" to handle below-market rate transactions for preferred importers.

Though officials claim that the grand bazaar will resume normal business activities by next week, the currency crisis and its political reverberations are surely far from over -- it seems certain that Ahmadinejad will continued to be grilled in the press and by parliament, and the prospect of a run on the banks looms.

Copyright © 2012 Tehran Bureau

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