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Sanctions, currency chaos igniting unrest in outcast Iran

October 5, 2012 |  4:00 am

An Iranian shopper pays a fruit seller with 50,000-rial banknotes
Soaring prices at Tehran's cavernous Grand Bazaar have ignited violence this week as money traders and vendors clashed with riot police over the plummeting value of the Iranian currency, which is being gutted by international sanctions and mismanagement by the Islamic regime.

GlobalFocusWhat for most Iranians has been an abstract political dispute between their leaders and Western countries concerned about Tehran's nuclear ambitions has suddenly hit them in their wallets and pushed them to lash out. The rial has lost 80% of its value against the U.S. dollar in the last year, a decline accelerated by tightened U.S. and European Union sanctions now depriving the regime of half the hard currency it was earning from oil exports.

Iranian President Mahmoud Ahmadinejad blamed the deepening economic chaos on foreign enemies, contending there is "no economic justification" for the public scramble to dump rials in favor of dollars, euros and gold. Supreme leader Ayatollah Ali Khamenei also struck a defiant pose, reasserting Tehran's right to enrich uranium and vowing that Iranians "will never surrender to pressure."

But Iranian exiles and scholars see the angry outbursts in the marketplace as a sign that ordinary Iranians are finally fed up with a regime that has brought them isolation, insecurity and eroding living standards. They see a population, resentful of a crackdown on dissent three years ago, now edging toward rebellion.

The unrest also demonstrates that the U.S. policy of letting sanctions and diplomacy undermine popular support for the regime is having the desired effect, confronting Tehran with its gravest challenge since Islamic clerics came to power in a  1979 revolution, the experts say.

The street value of the rial has dropped by half in the last two months and plunged 18% on Monday alone. The unofficial exchange rate for the dollar -- more than 35,000 before back-alley trading halted -- is almost three times the official rate of 12,260. But that subsidized exchange rate is available only from state banks to a limited and shrinking number of key importers.

Money traders stopped selling dollars Tuesday, confused over how to price the swiftly deteriorating rial. Some vendors closed their shops in protest of the government's failure to intervene and prop up the currency; others boosted prices beyond what many shoppers can or will pay.  

Before harsher sanctions kicked in three months ago, Iran's government had been using a sizable share of its $100-billion annual oil earnings to subsidize dollar-denominated food and consumer goods, to keep prices stable and placate the population, said Abbas Milani, a Tehran-born academic who directs Iranian studies at Stanford University.

Milani said he suspects the government was initially using the economic downturn brought on by the sanctions to put an end to the costly dollar subsidies. But he now concludes that the regime has been forced to let the rial tumble because it has run out of the hard currency needed to stop the slide.

Riot police block Tehran's Grand Bazaar"We're not talking about a billion dollars or 2 billion to stabilize a currency that has gone down so far. The government would have to find enormous sums of money to pour in, and if they had it they would have done it by now," Milani said.

"I don't think the regime can survive this one," he said, unless Khamenei does the unthinkable and meets Western demands that Iran cease enriching uranium beyond levels needed for civilian nuclear programs.

Tehran officials recently told the International Monetary Fund that they had $50 billion on hand, enough to see Iran through the sanctions bite for at least four or five months, Milani said. He calculates that the regime should have saved about $300 billion in a rainy-day fund over the last eight years. That no intervention in the currency crisis has been forthcoming tells him that much of the oil windfall has been squandered or siphoned off into private accounts of the Revolutionary Guards and government leaders.

"Social and political cohesion in Iran will be deeply disturbed by this economic crisis," predicted Alireza Nader, senior policy analyst on Iran for Rand Corp. "And it's not just the economic crisis -- you saw Iranians take to the streets in 2009 for a number of reasons, and those tensions have been simmering below the surface. We see them coming up now."

Nader pointed out that protesters at the bazaar this week have shouted denunciation of the regime's politics as well as soaring inflation. Shouts of "Leave Syria alone and think about us!" could be heard in clandestinely shot video footage of the angry crowds, he said.

 The Iranian government has been the sole regional supporter of Syrian President Bashar Assad and his brutal suppression of a rebellion now in its 19th month.

"Eventually this is going to put enormous pressure on the Iranian government to concede on a number of issues, not just the nuclear programs but domestic political issues as well," Nader said. "It's already gotten to the point where people's livelihoods are at stake and they're not going to tolerate that situation. We can definitely expect to see more unrest in the coming months."


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Photo: An Iranian shopper on Wednesday pays a fruit seller at the Grand Bazaar in Tehran with 50,000-rial banknotes. The sanctions-battered Iranian currency has lost 80% of its value in the last year, spurring inflation and social unrest. Credit: Abedin Taherkenareh / European Pressphoto Agency

Insert: Riot police block an approach to the Grand Bazaar on Wednesday after arresting money traders and dousing fires lighted in protest of the falling rial currency. Credit: European Pressphoto Agency