Thursday, October 04, 2012

Major Unrest Hits Iran Over HyperInflation, Shortages

The above video shows unrest in Tehran as demonstrators call for bazaris and shopkeepers to join them in a general strike.

As I pointed out about four years ago, Iran has been an economic basket case for some time.

As with most Islamic regimes, Iran has discouraged capital investment. Inflation has always flirted with double digits, and unemployment is rampant,particularly among what I call the cannon fodder ages of 18-29 at around 30%

The regime was able to stave off a second Iranian revolution for some time by using part of its oil profits to provide subsidies on food, cooking oil and other staples but once Iran became a net importer in 2009 and began spending increasing amounts on its nuclear and imperial adventures, the subsidies became impossible over time.

The Iranian rial, always a bastard child among the world's currencies has fallen through the floor as Iran is now experiencing hyperinflation:

Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.

I would take issue with the above only in its implying that this is all due to western sanctions, since countries like Russia, China and Turkey are openly violating the sanctions and the Obama Administration has literally given waivers on following the sanctions to moist of Iran's major trading partners and anyone else who's asked.

This is a deep seated problem based on the skyrocketing cost of food staples and other items versus a static Islamic economy.

Since most westerners ( except perhaps those who came of age in the old Soviet Empire) are unaccustomed to a black market in currencies, here's an explanation. the Iranian regime has an official, fantasy 'official' exchange rate with other currencies that vastly over-inflates its value. Since Iran's exports are mainly oil, which is traded in dollars, the official rate of the rial isn't particularly a factor there. But when Iran imports anything and attempts to pay in rials, the price is increased dramatically.

This especially effects merchants dealing in foodstuffs and other staples who use private money lenders in the sort of primitive export and exchange system used in the region. Want to import rice from Armenia? Forget about the official rate when there are money lenders in Tehran or Shiraz who will trade you rials for dollars at the black market rate, in spite of the regime's attempts to clamp down. This also leads to hoarding, as 10 kilos of rice bought today will fetch a far better price in a month or so. If the rice is priced in dollars and paid for in rials, these price increases are simply passed down to the customers who buy it. With the rial now buying less than half of what it once did and heading south, you can imagine what this is doing to the average Persian.

And that is not good news for the Iranian regime.For all the threats and bellicose language, Iran is simply unable to fight a war at this time financially.As such, the Obama Administration, if it actually had a coherent Middle East policy could do far worse than reaching out to the Iranian dissidents and assisting them in a covert fashion.

In fact, if the trend continued, Iran's financial woes could even lead to Iran being convinced to give up its nuclear weapons program in exchange for some realistic assistance on its economy.It might even lead to regime change.The west might be able to capitalize on this and call Iran's bluff at favorable terms.

On the other hand, knowing this as the Iranian leaders do and in reality, not particularly caring about the people they rule, this might entice the mullahs to take a long shot and risk everything on one violent throw of the dice, perhaps against some of the oil-rich kingdoms in the region.As I've observed before, we're not dealing with rational actors here.


nazar said...

Why are you so convinced that the Iranians are not rational actors? Maybe they use the bad cop good cop strategy, where they trot out ahmendinijad as their sort of rabid pit bull to scare the West while the ayatollas(who actually run the country) sit back and laugh as the west shits its pants.
This gives them leverage when it comes to sanctions and even holding on to power. I find it highly doubtful that Iran would actually use its nukes. I mean, N.Korea is about as batty as they come, and they have never used nuclear weapons, so I find no compelling reason to think Iran would.

Rob said...

Hi Nazar,
Nice to have you drop by.

I'm not as accepting as you are of the idea that Iran would forbear to use its nukes. The Ayatollah Khomeini himself said that he was willing to 'let Iran burn' if it advanced his Islamic Revolution and his brand of Islam.

North Korea lacks something the mullahs have in abundance - a millenarian view based on their religion.

The Twelver sect that dominates Iran believes that the Hidden Imam will rise out of war, destruction and violence to rule the world for Islam. According to their beliefs, a nuclear exchange might be the sort of thing that would bring the Hidden Imam into the game.

During one of his speeches at the UN, Ahmadinejad talked at length on this subject.

Given the Shi'ite tendency towards suicidal 'martyrdom' there's no doubt in my mind that the mullahs might assemble in Qom some day and decide the time is right to pull the trigger.

During the Iraq/Iran War, the Ayatollahs bought thousands of plastic keys from Taiwan.

They gave these keys to children as young as twelve years old, told them these were their 'Keys to Paradise' and used the children to clear Iraqi minefields for Iran's troops and tanks.

In fact, Ahmadinejad's occupation during that war was to help train and indoctrinate these children to be martyrs for the regime.

Rational actors? Not as far as I'm concerned.