The repercussions of demonstrations on the Iranian economy and global energy prices

ByRasanah

The demonstrations in Iran started on December 28 in the city of Mashhad. Later, they spread to more than 70 cities, including Tehran, Isfahan, Shiraz, Qom and other cities. This unrest disrupted everyday life in several Iranian cities as many shops closed, as many squares, streets and subway stations were shut down. In Tehran, schools were closed for at least two days as demonstrations intensified. The interruption in commerce, resulting from the unrest, no doubt disturbed the market, in particularly price stability levels, and worsened when the security disturbances spilled over into a wider geographical area.
The demonstrations have squeezed the Iranian economy and hiked energy prices since their onset. This is illustrated as follows;
» The impact on the stock market
The security conditions have been reflective in the country’s main stock exchange. The Tehran Stock Exchange turned red for days at a time.
Figure 1: A chart showing the decline in the Iranian stock market following the demonstrations

Source: “Eghtisad News” in Persian
The country’s main stock exchange lost more than 2% of its value after a week of the protests. The Tehran Stock Exchange lost nearly 2,000 points until 3 January 2018 (13/10/1396 in the Persian calendar) compared to 97899.2 points on 27 December 2017 (6/10/1396 in the Persian calendar).
The Tehran Stock Exchange recorded its worst decline in a short period of time. The stock market is always the first to face the brunt of any unrest in a country.
Foreign Exchange Rates:
The demonstrations shook the stability of the foreign exchange market. The Iranian Tomans fell with the Euro and the US dollar by 8.2% and 5%, respectively.
Figure 2: A chart showing the Euro vs the Iranian Tomans

Source: “Eghtisad News” in Persian
The European currency recorded its highest gains, as the Euro rose by 8.2%, up from 5064 Tomans to 5600 Tomans per Euro until this very moment. The US dollar rose by 5% up from 4203 Tomans to 4420 Tomans per dollar. This is from the Iranian radio station “Farda”, which compared exchange rates with the rates just before the start of the demonstrations.
Therefore, the continuation and expansion of demonstrations will, no doubt, have a bearing on the domestic economy from several points;
• Financial losses, resulting from an interruption in supply
• Commerce stagnation, stemming from infrastructure being shut down
• A freeze in the source of income of a large number of workers, especially daily workers.
• A continual decline in the value of the Toman, resulting in inflationary pressures.
• A decline in foreign investment.
• A stock market crash
» A reflection on energy prices
On the global level, the Iranian demonstrations have disturbed energy prices. Brent crude recorded its highest level since mid-2015, as it rose by almost 1.5%, surpassing the barrier of $ 67 per barrel on January 2, 2018. The Iranian unrest coincided with the announcement of a shortage in US crude stocks, which hiked prices. Although the Brent crude price is not as high as expected as compared to before the demonstrations, (around $ 66 per barrel on December 27, 2017), it broke the highest recorded price for more than two and a half years and showed further potential in shooting up in the near term. Furthermore, geopolitical tensions in the Middle East have disturbed global oil prices. If the security unrest in Iran continues to expand, we will notice only a slight impact on energy prices if the unrest remains far from the Iranian crude oil exports. However, if the unrest targets Iran’s oil production or export facilities, prices will skyrocket. Thus, the intervention of countries with surpluses will be needed to compensate for the shortfall in the world’s oil supply. This scenario is possible and depends on the coming developments in Iran.

Rasanah
The Institute Management