Is Iran Heading for an Economic Crisis?

The Iranian economy is in tatters, the Iranian Rial has collapsed to record lows against the U.S Dollar, most of the collapse coming through the summer over the planned roll-out of sanctions in August and inflation is sky high as once optimistic businesses face the prospects of another eternity in the wilderness.

Last time around the impact of sanctions was amidst a grueling war that cost Iran and neighboring Iraq a million lives. This time around, there is no war, just global economic growth, and prosperity for those sitting on the right side of the fence.

Reports of 100,000 protestors hitting the streets of Iran in the wake of the latest sanctions, calling for the death to a dictator, this time their very one, spells trouble. Unemployment, a reported 50% rise in the cost of fruit and vegetables and a 50% slide in the value of the Rial against the Dollar are the aftershocks of the U.S sanctions and what the U.S administration will likely be hoping to be the final nails in the regime’s coffin.

To make matters worse and certainly generate more anger on the streets of Tehran is the knowledge that oil prices have recovered to $70 plus levels a barrel and the Iranian government has enjoyed oil Dollar revenues and money from foreign investment for over 2-years, with a continued devaluation in the Rial since late 2013. The Rial has tumbled from IRR12,000 levels against the Dollar to IRR44,000 levels at the time of writing. Government exchange rates are not the rates that are available to the Iranian population, however, with unofficial numbers seeing 1 Dollar buying as much as IRR112,000, according to figures reported over the last few weeks.

The divergence between the official and street value of the Iranian Rial is all too clear for the Iranian people to see. While the official Rial has fallen from IRR36,000 levels to IRR44,000 levels this year, the street value has fallen from IRR44,000 levels to over IRR110,000 levels year-to-date, with plunge starting back in April.

Unsurprisingly, official inflation figures and implied annual inflation figures have also seen a material divergence, with street vendors racking up prices to meet with rising costs and the falling street value of the Rial.

As at the end of July, the implied annual rate of inflation was reported to have been sitting at over 200%, while the official inflation rate was reported to be sitting at just over 10%, the divergence in official and implied kicking in from January and accelerating as the year progressed.

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What’s Next for Iran?

Sanctions on Iran’s oil industry don’t hit until November and already the country is in collapse and the Islamic regime has moved into close quarters, with even moderate Rouhani taking the cover of Supreme Spiritual Leader Ayatollah Ali Khamenei.

Moderate leader Rouhani’s return to the fold will likely anger the streets even more and with just a number of months remaining until oil sanctions hit, the Iranian regime’s only real choice is to hit the negotiating table and that goes against the very ethos of the spiritual leader’s stance on the U.S.

The alternative is to fight off a revolution domestically and further suppress the more vocal, while searching for ways to halt the slide in the Rial and address inflation, neither of which are going to be possible until Iran revises its current currency position and looks for an appropriate peg and more importantly, addresses the sanctions issue.

Does the West want another Iranian revolution and what would that mean to the current dynamics in the Middle East and ultimately on the price of crude oil?

Iran has played a meddlesome role in the Middle East and a domestic power struggle would certainly place it at risk of war, even with a Western appointed interim government or return of the exiled crown prince of Iran and son of the former Shah, Reza Pahlavi, who has been in talks with Israel and other enemies of the current regime for their support in a bid to return Iran to a monarchy.

Either way, it’s going to be a painful time and, the direction of the Rial will ultimately come down to stability in the coming months, continued unrest and a threat of a revolution likely to see further decline before steadying, while a return of Reza Pahlavi could lead to an immediate rally as the markets consider the likely close ties with the West and most importantly, the U.S.

For crude oil and possible supply disruption, it will ultimately boil down to how the current regime handles sanctions and whether the revolutionary guards fall back into the old habit of disrupting supply through the Strait of Hormuz. The current U.S President is unlikely to accept such antics, which could see the Islamic Republic face sterner action from the U.S and, for Trump the incentive would be to topple the regime. What a coup that would be…