Between the beginning of 2018 and April 9, the value of the US dollar rose against the Iranian rial by 37 percent, forcing President Hassan Rouhani’s government to make tough decisions. To tackle the capital flight from the banking system and the domestic economic cycle, the government imposed a “single rate” for currency exchange, attempting to crack down on the currency black market by prohibiting any sale and purchase of dollars outside the state-supervised banking system. These decisions that target the government’s most reliable supportive base among the upper-middle class will pressure this class at least in three basic ways. Firstly, the upper-middle class will be prevented from protecting its wealth by investing in currency to hedge against the risk of economic collapse. Secondly, banning the exchange of currency at the market price impairs and disrupts the import of goods that is a primary income source for the upper-middle class. Thirdly, the new legislation creates a lot of obstacles and difficulties for foreign travel by Iranians in this group, the primary demographic for the overseas travel market, thus also negatively impacting Iran’s travel industry.
Whilst Rouhani’s government probably believes that this class has no option but to continue its support of Rouhani given the lack of any reformist alternatives, the absence of any prospect of the long-promised reforms, which grows more distant by the day, means that the possibility of this group abandoning their support for his administration should not be underestimated, as Rouhani’s mistake may push his remaining support base towards solidarity with regime change supporters.
The rial began its current fall in mid-October of 2017 when President Donald Trump announced he could not certify Iran’s commitment to the JCPOA nuclear deal. Since then, concern has risen steadily at the prospect of the US withdrawing completely from the deal, heralding the JCPOA’s possible collapse, which would mean a return to the previous crippling sanctions and end the honeymoon period which the so-called Islamic Republic enjoyed with the previous Obama administration; these tensions have inevitably led to increasing worry on the money markets, as a result, the markets have become worried.
In early 2018, a massive wave of popular protests rooted in economic concerns swept across Iran, with demonstrations taking place in over 70 Iranian cities for ten days; the regime responded with its customary brutality, with tens of people killed, hundreds wounded and thousands arrested and imprisoned.
The nationwide protest, the name protesters conferred on their uprising, did not overthrow the Islamic Republic’s regime but rocked the rial. In January 2018, President Trump announced that he would suspend Iran’s sanctions for the time being but added that if the European JCPOA partners failed to reform and repair the nuclear deal, the USA would withdraw completely from the JCPOA in May of this year. This announcement and the subsequent effects precipitated an acceleration in the devaluation of the rial against the dollar. In February, the Central Bank of Iran (CBI) announced plans for the presale of gold coins and sales of Certificates of Deposit (CDs) with a 20 percent interest rate for a one-year term. The measures were meant to deter speculators from continuing to bet against the rial as they had been doing over the previous months, which accelerated the currency’s drop in value. Regime officials warned that exchange currency traders on the foreign exchange market who violated these measures by trading at the then-market value of 60,000 rials to the dollar rather than the state-imposed rate of 42,000 rials to the dollar, would be arrested for breaking the law and corruption. Whilst this temporarily stopped the rial falling further for two weeks, since the beginning of March the rial’s value against the dollar has continued to intensify.
In mid-March, President Trump changed his administration’s foreign policy and appointed some new members to his security team, causing another severe blow to the already jittery Iranian economy and further destabilizing the rial’s value.
President Trump first dismissed his Secretary of State Rex Tillerson, announcing the move on Twitter, nominating as his replacement Mike Pompeo, the head of the CIA, a longtime Washington hawk and steadfast staunch opponent of the JCPOA deal. President Trump next bade farewell to his National Security Advisor H.R. McMaster, appointing John Bolton, a sworn enemy of Iran’s clerical regime, to replace him. Since the announcement of Bolton’s appointment on March 22, the dollar has risen 20 percent in value against the rial. On April 9th, Valiollah Saif, the Head of the CBI, announced the introduction of the new single currency exchange rate of 42,000 rials to the dollar, warning that the government and Central Bank would refuse to recognize any other rate and anyone trading at any other rate would be treated as a smuggler and subject to criminal prosecution.
According to Saif’s order, foreign currency trading and sale is prohibited to any individuals unless licensed by the government, while possession of more than 10,000 Euros is prohibited for anyone except those entities with special government certification, although the government will allow the sale of a maximum of 500 Euros to any individual travelling abroad, rising to 1,000 Euros for long-distance trips, with the cash to be purchased at the government’s stated official exchange rate. In the current situation, buying and holding foreign currency outside the framework of the government-authorized system is forbidden, placing even more serious limitations on foreign travel for Iranians. Regime officials have long complained about the high volume of overseas travel by Iranian citizens, with the latest moves showing that the implementation of these policies are not coincidental. Prior to the implementation of the single exchange rate, 43 percent of Iran’s imports were purchased using a currency exchange, the cheap, state-owned currency. These goods were mainly staple goods needed by all parts of Iranian society. Meanwhile, the other 57 percent of imports, were goods mostly used by the more prosperous middle and upper-middle class, Rouhani’s primary support base. It is very unlikely that Rouhani’s administration will allocate its state-owned currency holdings to import these goods. While there is little deeper meaning in the administration’s failure to assign state currency holdings to purchase these items, the severe shortage of these commodities and the excessive increase in their prices is likely to generate further anger among them. As described above, aside from the effects on the Iranian economy, the implementation of the single exchange rate will also have an especially negative effect on the Iranian upper-middle class, the bedrock of Hassan Rouhani’s support base which has been key in advocating on behalf of the country’s reformist movement. This demographic bloc, which has long opposed the policies pursued by Khamenei, the Islamic Revolutionary Guard Corps (IRGC), and theocratic fundamentalists generally, previously took to the streets in 2009 in widespread protests against the corrupt and dysfunctional policies of Mahmoud Ahmadinejad who was widely suspected to have won the election via vote-rigging.
With no other option offering an alternative specific agenda to oust the regime, this upper middle class demographic has, often reluctantly, supported the so-called moderate reformist Hassan Rouhani as the least worst option as a means of protecting its economic and financial interests. In return for this demographic group’s support and opposition to regime change and sanctions, Rouhani kept the tap of oil sales turned on, allowing the rich to benefit from the import of luxury goods and to enjoy a degree of freedom of travel not accessible to the majority. It should be noted that this privileged stratum of society doesn’t mostly consist of the notorious ‘Rich Kids of Tehran’, but comes from the small number of individuals who have benefited from the injection of funds from the country’s oil industry, allowing them lives of affluence which the majority can only dream of.
With the rial being obviously unreliable as an investment vehicle, this upper-middle stratum is attempting to protect its limited wealth by investing in foreign currencies. Viewing foreign travel as a temporary respite from the regime’s stifling theocratic restrictions, with purchasing foreign luxury goods seen as a way to maintain a sense of connection to a ‘civilized’ external world even while inside the Islamic Republic’s prison. The Rouhani administration’s new policy, therefore, is causing widespread anger amongst this group, threatening their savings, wealth, recreation advantages, travel, and consumer goods
The demonstrations in December 2017 and January 2018 and the continuing protests underlined that the Islamic Republic has completely lost the support of vital groups, such as the urban and rural working class, the poor, farmers and others. Despite the regime’s efforts to crush the protests, these groups have continued to stage demonstrations, with daily reports of protests in every corner of the country. While the more affluent strata of the middle class have to date maintained a silence during this period, the growing disenchantment of this upper-middle class layer of society with the Rouhani government poses a genuine danger not only to Rouhani but also to the entire establishment of the Islamic Republic. Any coalition and unity between the poor and prosperous classes in Iran would sound the death knell for the Islamic Republic, leading inevitably to it being ousted. With the more serious possibility of the return of the US crippling sanctions in the coming months, in particular the imposition of sanctions on the central bank, these more privileged classes may conclude that not only the reform of the Islamic Republic cannot be feasible as long as they are alive but rather, that any such reform is a fool’s dream, a raw fantasy inspired by wishful thinking of “no war and no peace” between Iran and the United States can guarantee the opening of the oil tap[oil sale] for the favor and interests of this class. In that case, perhaps upper middle class layers may conclude that it is better to accept the risk of participating in the process of regime change.
The international community is in a historic position to exploit the growing gap between the entire population of Iran and the Islamic Republic. A genuinely positive income could be achieved by the international community standing alongside the Iranian people and the opponents of the Islamic Republic and to bring an end to the clerical Republic’s terrorist regime. It is unclear how long this opportunity will be on the table, as the rulers of Tehran have shown that they are artistic pragmatic professors in fighting for survival. As Michael Ledin, my colleague at the Foundation for the Defense of Democracies, says, “Please be quicker!”
Opinions in this article reflect the writer’s point of view, not necessarily the view of Rasanah