Ever stricter sanctions targeting Iran’s Central Bank, coupled with an oil embargo, have had a severe impact on the Iranian economy. While previous sanctions were no more than a hindrance to economic activity, the latest actions have all but eradicated the state’s ability to manage the Iranian rial, which has implications beyond just a devaluation of the currency. The Iranian rial is tightly controlled by the Central Bank, and it is not traded on the international foreign exchange market. As such, the Central Bank has until now been able to price the rial within a desired range by using foreign exchange reserves to manipulate supply and demand.
Given that the US dollar is integral to international trade – especially sanctions-dodging cash transactions – demand for the currency in Iran is very high, putting upward pressure on its price. Luckily for Iran, the country is endowed with abundant reserves of dollar-denominated oil. This has allowed the state to flood the economy with dollar oil revenues and relieve the upward pressure on the dollar, keeping the rial strong.
The problem with the latest sanctions and oil embargo is that Iran is suddenly starved of roughly $133 million of oil revenues a day, leading to a scarcity of dollars and a rapid increase in its price. In other words, the proverbial rug has been pulled from under the rial’s feet, as the increase in the dollar’s price corresponds to a loss of over 80 percent of the rial’s value in less than one year. This has grave consequences for an Iranian economy accustomed to international trade. In the world of Iran’s factional political system, the currency crisis has led to a nationwide game of hot potato. A disillusioned merchant class that is heavily represented in parliament has put the blame squarely on President Ahmadinejad’s economic policies. Speaker of Parliament Ali Larijani was more cautious, putting only 80 percent of the blame on him.
Ahmadinejad himself appears powerless and somewhat dazed, going as far as to blame the devil for the crisis. The Supreme Leader’s office, meanwhile, has been using its political clout to blame foreign adversaries. Supreme Leader Ayatollah Ali Khamenei has called on the Iranian population to embrace a ‘resistance economy,’ and has on a number of occasions invoked memories of Iran’s war-economy during the Iraq-Iran war as a way of tapping into nationalistic sentiment. Unusually, it is the oft-blustering Revolutionary Guards that have been conspicuously quiet. Over the years the Guards have amassed great wealth and power, often through state-sanctioned indigenisation and privatisation schemes. Their are also very smart political-chess players in Iran’s factional political system, always supporting the Supreme Leader, but extracting a higher price as their influence grows.
The Guards’ economic and political clout has positioned the sprawling organisation to profit wildly from the rapid devaluation of the rial. The reason for this is simple: to counter the loss of control over the rial, Iran’s Central Bank has imposed a number of strict restrictions on currency trading, leading to multiple exchange rates for the dollar and other in-demand currencies. Key industries and importers – dominated by the Guards – are the privileged few to maintain access to dollars at the “official rate” via the Central Bank (roughly a third of the price of what it is on the black market).
The intention is to avoid a total collapse of the economy by allowing key actors access to cheap dollars. The result is not exactly what was intended. Those who have access to dollars via the Central Bank can simply sell those same dollars on the black market for up to three times as many rials. Then, using the windfall of rials earned from selling the dollars on the black market, they can go straight back to the Central Bank and buy up to triple the amount of dollars. This is just one of numerous different ways to exploit the crisis.
Since there is no such thing as a free lunch, the economic burden of this profiteering is put on Iran’s foreign exchange reserves and other state funds. The Guards are effectively redistributing the nation’s wealth away from the people and the state, and into their own pockets. The Iranian people will suffer the most due to rapid inflation and unemployment, but their ability to participate in the political debate is severely limited by the Guards’ security apparatus. Growing dissatisfaction can also be careful stage managed by emphasising the political infighting taking place throughout the state, enabling the blame to lose focus and dissipate across the entire political system.
There is every chance that the Guards will continue to consolidate their power by allowing political infighting to fester. This will undermine Iran’s relatively robust state infrastructure, and purge many of the Guards’ opponents and competing centres of power. At the same time, Ayatollah Khamenei will feel increasingly cornered as his diverse power base slowly becomes homogeneous. Western policy makers may be rubbing their hands at the thought of forcing Iran into economic submission, but what they fail to realise is that they have effectively enriched the Guards and disembowelled the Iranian state; the tighter the sanctions screw, the more powerful the Guards become. The West may not be happy with the Iranian state, but boy will they miss them when they have to face up to the Revolutionary Guards instead.