Inside Iran: A rial fine mess

As demonstrators clashed with police outside the Tehran Bazaar on Wednesday, analysts questioned whether the protests are just localized dissatisfaction over the country’s crashing national currency or whether they are the first signs of deeper unrest as sanctions bite harder, exacerbated by Iranian President Mahmoud Ahmadinejad’s economic mismanagement.

“The free fall of the rial is due to a combination of President Ahmadinejad’s economic mismanagement and the international sanctions regime,” said Ali Alfoneh, an Iran expert at the Washington-based American Enterprise Institute.

“However, the Iranian public is first and foremost blaming the regime for economic hardships.

After all, the sanctions regime is the result of the regime’s reckless foreign policy,” he added.

Iran’s official exchange rate has remained at 12,260 rials to the dollar for years, but the exchange rate on the black market – where most Iranians get their hard currency – is much higher and has been growing rapidly as the rial collapses. On Monday that rate plummeted to 34,500 rials to the dollar, and the last rate posted on Tuesday pegged the rial at 35,500 to the dollar.

Until now Iran has maintained a defiant front in the face of increasing Western sanctions, vowing that the Islamic Republic would never capitulate and give up its nuclear program.

While Iran’s leaders have openly criticized US and EU banking, trade and oil sanctions, they have maintained that they would fail because Iran’s “resistance economy” could withstand the embargoes.

Although income from oil sales account for almost 70 percent of Iran’s revenue, the regime said the country’s economy would be able to ride out US and EU oil embargoes by selling to other markets like India and China and by using billions of dollars in foreign currency reserves.

However, as the rial continues to fall and Iran’s economy crumbles, Ahmadinejad has come under increasing pressure. In an extraordinary attack on Tuesday, the Iranian president lashed out at the Islamic Revolutionary Guard Corps (IRGC), the judiciary and lawmakers, saying they were largely to blame for the crisis.

Ahmadinejad, who had promised to fix Iran’s economy when he came to power in 2005, said his country’s national currency crisis was due to a “psychological war” perpetrated by enemies at home as well as abroad.

Only Iran’s Supreme Leader, Ayatollah Ali Khamenei, escaped direct criticism, although Ahmadinejad may have been hinting at Khamenei when he said that his government was the “only institution in the country responsible to the people.”

Ahmadinejad also blamed sanctions for the crisis, but denied that his own economic policies had anything to do with the situation.

In a political battle played out in Iran’s conservative media, however, other regime leaders, including Iran’s powerful Majlis (parliament) speaker Ali Larijani, loudly denounced Ahmadinejad for causing the crisis.

Iranian daily Jomhouriye Eslami’s lead story on Wednesday cited Larijani as saying that 80% of the country’s economic problems were down to economic mismanagement, while Tehran-e Emrooz, which backed Ahmadinejad’s rival Mohammad-Bagher Ghalibaf in the 2009 presidential elections, accused Ahmadinejad of evading responsibility for the crisis.

An editorial in Mashregh News, which is affiliated with the IRGC, slammed the Ahmadinejad-led government for failing to put any plan in place to deal with the effects of sanctions.

“This was not something that the government was unable to predict,” an editorial on the Mashregh site read. “But they have no systematic and effective program for dealing with the consequences of sanctions. The most interesting part of this has been their official public assurances that sanctions are ineffective.”

The editorial ended with a plea to the government to end its “dangerous apathy” in the face of sanctions or face “terrible consequences,” noting that Iran’s enemies are using the crisis to say that Iran is weakened.

Popular conservative news site Baztab, which is known for its criticisms of Ahmadinejad and which is considered to have close ties to former IRGC chief Mohsen Rezaei, suggested one reason why Ahmadinejad had lashed out at the IRGC over the crisis.

Ahmadinejad blasted the IRGC as a”security institution that involves itself in internal politics,” Baztab noted in an attack that included the IRGC-linked media outlet Fars News as well as lawmakers and the judiciary.

Baztab suggested that Ahmadinejad’s attack was linked to an arrest warrant issued against his chief deputy, Mohammedreza Rahimi, in connection with a massive fraud case that allegedly involves the Tehran governor’s office.

At least two Iranian lawmakers, including prominent conservative lawmaker Eliyas Naderan of the Principalist faction, have accused Rahimi of being the head of a corruption group known as the Fatemi gang, allegations Ahmadinejad has strongly rejected.

This week Naderan also accused Ahmadinejad of economic mismanagement, saying the president had deliberately kept the market agitated.

The Iranian government has made some stopgap attempts to control the rial’s free-fall, but these have not been successful.

In July, as the EU’s oil embargo went into force, Bank of Iran governor Mahmoud Bahmani said that the country had built up $150 billion of foreign currency reserves to combat the effects of sanctions.

On September 24, as the rial continued to fall, Bahmani opened a new forex transaction center in Tehran. The government plans to use revenues from petrochemical sales and 14.5 percent of its oil sales to provide dollars for the center, which will allow some importers to purchase dollars at 2 percent cheaper than the street exchange rate, Bahmani said according to the report.

Reports in Iran’s state media on Monday quoted Bahmani as saying the forex center would help Iran’s currency rise in value.

“The exchange rate in the market will go down because some of the demand [for dollars] will be met at this center,” Bahmani told Fars News.

However, other reports say that the state-run center has not been able to cope with demand.

On Wednesday, as reports emerged of clashes and spontaneous protests outside the Tehran Bazaar, the Iranian authorities moved their focus to attempting to block the spread of the unrest.

As news of the bazaar protests spread, Iranians began to report that websites listing currency exchange rates had been filtered, apparently because the Central Bank ordered them to stop posting the dollar-rial rate. On Thursday, leading currency exchange websites, including Mesghal, were still not reporting the exchange rate.

US-based Persian-language news outlet Radio Farda reported that its broadcasts had once again been jammed in Iran while state media reported on an alleged “cyber attack” against infrastructure and communications companies, which Iran’s Supreme Council of Cyberspace said forced a “limitation” of the Internet. BBC Persian also reported that Iran had jammed its broadcasts on Thursday.

Also on Wednesday, Iran’s police chief Esmail Ahmadi Moghadam announced that a new police unit would be established to “fight currency speculators.”

These and other attempts to deal with the crisis come as more reports of growing dissatisfaction and anger with Ahmadinejad’s economic mismanagement continue to leak out of Iran.

Some analysts are cautiously optimistic that the Tehran protests are signs that sanctions are working and that there could be deeper unrest to come, which may force Iran to back down over its nuclear program.

A recent report by international consultancy The Soufan Group warned that Iran is not likely to agree to any compromise over its nuclear program in the short term. However, the report predicted that by the second half of 2013, sanctions are likely to cause economic collapse in Iran, giving Iran’s leaders little option but to back down over their nuclear plans.

Iran expert Meir Javedanfar, who lectures at the Interdisciplinary Center Herzliya, believes the fact that Iran’s currency is folding fast is a “huge crisis” for Iran’s regime and serves as clear evince that sanctions are causing significant damage to the economy.

“Sanctions could turn into an existential threat for the regime,” he told Bloomberg TV this week, adding that Ahmadinejad’s denials over the issue will deepen the crisis of confidence among Iranian consumers.

Javedanfar said that while there is a risk that Iranians would blame the West for their economic woes, it is more likely they would hold the regime accountable because the 2009 election fraud that enabled Ahmadinejad to return as president damaged the government’s credibility.

American Enterprise Institute’s Alfoneh said the Iranian regime’s ability to deal with the unfolding crisis depends on its ability to reestablish Iran-Iraq war era rations to secure basic foodstuffs at subsidized prices to the urban middle class and also to appeal to the solidarity of the public.

Whether or not Iran will be able to prevent large-scale unrest also depends on whether the Islamic Republic can win its race to a nuclear bomb, he added.

“[It depends on] the regime’s ability to obtain the nuclear bomb sooner rather than later, after which the sanctions would be removed. The first two factors seem unlikely, but if the bomb is within reach, the regime may survive the economic crisis and social unrest,” Alfoneh warned.