Iran: The risk of an economic backlash. Interview with Saaed Leylaz
Marina Forti 7 June 2018

“Iran will continue to respect the agreement regarding its nuclear programme even if the United States has decided to withdraw and for as long as the other signatories remain committed, with Iranian interests guaranteed.” This statement was made by the Ayatollah Ali Khamenei, Iran’s Supreme Leader, in the wake of Washington’s decision to leave the Comprehensive Plan of Action (JCPOA), as the Iran nuclear deal is officially known. Ayatollah Khamenei added that America’s decision proves he was right all along in believing that the nuclear issue was a pretext: “We have respected the agreement and restricted our activities, but American hostility has not ceased.” For his part, Iranian President Rouhani seeks, above all, to reassure his compatriots, saying that the country will remain able to protect its interests and its economy. The Iranian Central Bank has announced that it has sufficient currency reserves to meet the countries needs. The message is that Iran can deal with the blow.

Yet the reality is that uncertainty and pessimism prevail among Iranians; this was the case even before President Donald Trump announced his decision. “Iranians fear instability and crises. It is hard to believe in the future,” notes economist and political analyst Saeed Leylaz. Close to Iranian reformists (following the contested 2009 presidential elections he was sent to prison for criticising the then president, Mahmoud Ahmadinejad), Leylaz is now an advisor to the Rouhani government. I met him in Tehran on the eve of Washington’s announcement. “Even before walking away from the agreement, the Trump administration had worked on destabilising the Iranian economy,” he told me. All that was needed was to keep Iran on the fringes of international financial circles as European banks were reluctant to work with Iranian banks, fearing American reprisals. It is true that Iran was able to restart exporting oil and that commercial exchanges with Europe have increased. However, investments in major public works, infrastructure, ports and energy have more or less remained in the status of a “memorandum of understanding”. Over the coming weeks we shall see if and how European powers will manage to protect their relations with Iran to keep alive the In the meantime, uncertainty reigns.

The Exchange Offices in Ferdowsi Square, in the centre of Tehran, are a good reminder of the problems Iran is experiencing. On April 10th, the government ordered them closed, suspending free market exchanges in order to stem the collapse of the Iranian currency, the rial, which in just a few weeks had lost 35% of its value. In 2013, when President Rouhani began his first term, the US dollar was worth 36,000 rials. At the end of 2017, the exchange rate was 40,000 while last month a dollar cost 60,000 rials. Saeed Leylaz believes that “the rial’s crisis is caused more by political than strictly economic reasons.” To a certain extent there have been speculative manoeuvres undertaken by foreign financial centres with the specific objective of causing Iran problems. Then there is the massive capital flight. “Over the past two years over US$30 billion has left the country,” Leylaz says, “and in recent weeks many small savers, frightened by the rising tension, have raced to buy dollars, banknotes obviously.” He insists that “Iran has enough reserves in strong currencies to finance its imports; it might actually have a surplus. Every month, Iranian banks open credit lines worth five or six billion dollars. Capital exports have, however, changed the scenario because this involves a race to buy cash,” At the moment, it is only possible to exchange currencies in banks, in restricted amounts and with an official exchange rate of 42,000 rials to the dollar and 48,000 to the euro. But it is evident that, speculation aside, “in order to stop capital flight, one must persuade the Iranians that a stable economy is on the way”. Leylaz further notes, “And this cannot be controlled by the Rouhani government.”

To all of this, one must also add the wave of protests that engulfed many Iranian cities at the end of December. The dynamics are now known: protests against the high cost of living in the city of Mashhad – the second largest in the country and the seat of an important Shiite sanctuary – were organised by ultra-conservative forces. However, the conservatives lost control of the situation and protests extended to many other provincial cities, using slogans opposing the entire establishment, corruption, privileges and against the Supreme Leader Khamenei. “One must be careful not to blow things out of proportion. There were only a few tens of thousands of protesters in the whole country,” observes Leylaz (many direct witnesses speak of individual protests with only a few thousand people, while an analysis published by the Iranian Interior Ministry says there were about 40,000). All the same, “it was a warning sign for the entire system and perhaps for all conservatives, who had not expected an explosion of rage beyond their control.”

Who took part in these protests? Demonstrators were drawn mostly from the more modest social classes, the lower middle classes, workers and the long-term unemployed. It is not so much that the economy has deteriorated in general. Rather, it is people who have not seen their situation improve and have no confidence in the future that are joining the protests, demanding a just share of the economic pie.

“It is the law of expectations. Economic data has improved slightly over the past two years, but not quickly enough,” acknowledges Leylaz. Industrial production is once again rising and is higher than in 2010 (before the collapse that occurred during the last two years of the Ahmadinejad administration). Unemployment has fallen slightly, real salaries of workers are improving and “consumption is rising, as shown by the 900,000 more cars sold every year,” continues Leylaz. But the lower classes are the last to see the benefits of these improving economic indicators. In recent years, labour conflicts – albeit very localised – have been on the rise.

In the end, the protests have had some effect. In February, the government decreed a 20% increase in the minimum wage. Given that inflation is no higher than 10%, “in real terms this was the clearest rebalancing in favour of workers since the days of the revolution,” says Leylaz. “But there are still fundamental issues to be resolved. We have six million young people enrolled in higher education and every year one and a half million qualified young people enter the labour market. Investments are needed in order to create an adequate number of jobs.” (During an informal conversation, a well-known sociologist blamed the Rouhani government for having disappointed the young, saying, “We have a young, educated workforce with great aspirations. But the government has been unable to turn them into a force for development.”)

Another source of tension is Iran’s current drought, the worst experienced in the last fifty years. “About seven million people risk not having enough drinking water next summer and a further seven million farmers risk losing their harvests. All together they amount to 20% of the Iranian population,” says Leylaz, who fears a summer of conflicts and perhaps worse. “The welfare system is on the verge of collapse, the banking system is precarious, and the fiscal system needs to be reorganised. Furthermore, transparency must be returned to the economic system,” he adds.

This brings us back to the ongoing power struggle in Tehran. The Rouhani administration has tried to impose transparency measures and to tax the religious foundations, among which there are a number of powerful players. These include the billionaire Astan Quds Razavi, the foundation of the Mashhad mausoleum, a holding at the head of numerous companies and manufacturing businesses, as well as the pilgrimage industry (directed by Ebrahim Raisi, the former presidential candidate defeated by Rouhani last May). It is clear that taxing these religious foundations means attacking the more extremist and less transparent power centres in the Islamic Republic. The government has had mixed success in its attempts to implement these tax measures. The same applies to efforts at reigning in the economic influence of the Revolutionary Guard, which controls entire sectors of the economy (telecommunications, ports, infrastructure) and manages a vast range of commercial interests.

“There is, however, only one thing at stake,” observes Leylaz, speaking of the future structure of the Islamic Republic when the Ayatollah Khamenei leaves the stage. Never explicitly mentioned, succession to the leadership of the Islamic Republic has already been on the table for some time. “It is now clear that on that day, there will be change. How? More than predictions, one can express hope for formal continuity in the country’s institutions and a freer civil society. Many predict behavioural freedom in civil society but robust control over the political system.” So, something like the Putin model, I suggest. “There is only one institution in Iran that has the ability to exercise such control over the country, and that is the Revolutionary Guard. But it will not necessarily be a despotic system; to govern Iran, the military needs the reformists, namely political forces endowed with legitimacy.” What is certain is that the military’s influence is constantly increasing. “Never in Iran’s history has nationalism been so strong. And it will save Iran. There is no one here who wants to see the country destabilised; we will not end up like Iraq or Syria.” If the Trump administration’s objective was to damage the regime in Tehran or its armed forces, it has had the opposite effect.

AFP PHOTO / ATTA KENARE