Don’t count your chickens on an Iranian collapse
Anyone making bold predictions about Iran's future as a result of the tumult of the last few days had best be reminded of anaphorism of Twain’s: 'The gentle reader will never, never know what a consummate ass he can become until he goes abroad.'
The Islamic Republic of Iran and Mark Twain have at least one thing in common: rumors of their demise, at various times, have both fallen victim to exaggeration.
The current perceived wisdom is that the Obama administration, in getting the European Union on board with tougher sanctions targeting both oil exports and Iran’s access to the global financial system, is bringing Tehran to its knees. This week it was the vertiginous drop in the value of the Iranian currency that had critics of the clerical regime in a tizzy, salivating at the prospect of an imminent economic collapse. As the exchange rate for dollars skyrocketed from 29,000 Iranian rials to nearly 35,000, police used tear gas and batons to disperse money changers and traders outside the Central Bank demonstrating against president Mahmoud Ahmadinejad’s mishandling of the economy.
Prophets of doom in the West were quick to portray an economy and a president teetering on the edge of an abyss, like Louis XVI in the summer of 1789, oblivious to the seething, suffering masses who would eventually arise in popular revolt.
After all, the overthrow of Hosni Mubarak was caused in part by his failure to control rising food prices, which has been noted as a major factor in emboldening the Egyptian people to revolt. When the Nile regent broke the unwritten social contract that submissiveness was offered in exchange for sustenance, he had to go. Surely the same could happen in Iran?
Despite the glee felt in some circles, nobody can kill a party like an economist: Enter Virginia Tech Prof. Djavad Salehi-Isfahani. In a devastatingly low-key presentation at the Woodrow Wilson Center in Washington, D.C., on Wednesday, the former visiting lecturer at Harvard and Oxford calmly dismantled the argument that Iran’s economy is ready for its winding-sheet.
Along with pointing out that the fall in the rial over the last few days was nothing like the huge devaluations that rocked the Asian tiger economies in 1997, he also conducted an illuminating tutorial on the byzantine Iranian exchange-rate regime.
The Central Bank in Tehran sets different exchange rates for different commodities, depending on the priority the government attaches to the sectors involved. Thus, the price of essential imported items such as food and medicine are kept artificially low with the use of an exchange rate of about 12,000 rials to $1, while less essential items are traded at a higher rate. Iranians looking to purchase dollars for personal use have to pay a higher price again in “free” markets.
Salehi-Isfahani described how the Iranian government recently opened a special centralized exchange where licensed importers and exporters could trade with each other. A rate of around 15,000 rials to the dollar was expected to be the norm. The “free” market was also included in this central exchange. Between impatient industrialists not wanting to wait for preferential rates from the Iranian Central Bank and individual speculators banking on a total collapse, a short-term “perfect storm” sent these secondary exchange rates for non-essentials to the historic highs seen this week.
But while criticized by some Iranians for a lack of economic smarts, Ahmadinejad has insulated large swathes of the Iranian population − particularly the rural poor, from whom he derives his most support − from the worst effects of these currency shocks through a combination of price controls, subsidies and monthly payments of around $45 to every citizen.
“If this were the exchange rate for everything, there would be riots everywhere − because the price of bread, the price of chicken, everything would go up. Nothing like that has happened,” Salehi-Isfahani said. In fact, it seems that the Iranian government has learned from the mistakes of Mubarak as it quickly responded to protests last July in the city of Nishapur over the rising prices of basic foodstuffs. “Between the dollar market and the chicken market they need to pay ... attention to the chicken market,” Salehi-Isfahani added, insisting this is the more important priority for Tehran.
As such, it is well-off Iranians in northern Tehran, unlikely revolutionaries who are in need of dollars for their holidays in Turkey or Dubai, who will likely be most affected by this current crisis.
Along with these domestic issues, there are also international factors inoculating both those governing and the governed from the more virulent effects of economic sanctions. Despite the fact that sanctions have reduced oil exports, rising petroleum prices have resulted in average per capita income from oil increasing in recent years. Also, Iran is not Qatar, Saudi Arabia or the United Arab Emirates, where petroleum is the only game in town. And even as Europe has turned its nose up at Iranian crude, China and India have stepped in to vacuum up surplus supply.
While the Indian ambassador to the United States has insisted that Delhi is “on board” with sanctions, nearly half of its oil imports from Iran are now paid for in rupees and new financial sanctions are circumvented by routing payments through India’s state-owned UCO Bank.
As such, any foreigners making bold predictions about the future of Iran as a result of the tumult of the last few days had best be reminded of another aphorism of Twain’s: “The gentle reader will never, never know what a consummate ass he can become until he goes abroad.”