LONDON – Iran is caught in a miserable economic crisis. Jobs are scarce. Food prices and other necessities are skyrocketing. The economy is shrinking rapidly. Iranians are increasingly disgusted.
The crippling sanctions imposed by the Trump administration have cut off Iran’s access to international markets, decimating the economy, which is now contracting at an alarming annual rate of 9.5 percent, the International Monetary Fund estimated. Oil exports were effectively zero in December, according to Oxford Economics, as sanctions have prevented sales, even though smugglers have transported unknown volumes.
The bleak economy seems to be moderating Iran’s will to intensify hostilities with the United States, its leaders aware that the war could profoundly worsen the national fortune. In recent months, public anger over unemployment, economic anxiety and corruption has become a potentially existential threat to Iran’s hardline regime.
Just a week ago, such feelings had been redirected by outrage over the murder of Iran’s main military commander, Major General Qassim Suleimani, on January 3. But the protests erupted again during the weekend in Tehran, and then continued on Monday, after the government’s surprising admission that it was, despite three days of denial, responsible for shooting down a Ukrainian plane.
The demonstrations were expressly an expression of contempt for the cover-up of the regime after the fall of the Ukrainian plane, which killed the 176 people on board. But the fury in the streets resounded like a reprimand for broader grievances, diminishing livelihoods, financial anxiety and the feeling that the regime is, at best, powerless against formidable problems.
Inflation is close to 40 percent, attacking consumers with a sharp increase in food prices and other basic necessities. More than one in four young Iranians is unemployed, with university graduates especially unemployed, according to the World Bank.
The missile attacks that Iran unleashed at US bases in Iraq last week in response to the assassination of General Suleimani seemed calibrated to allow its leaders to declare that revenge was secured without provoking an extreme response from President Trump, such as aerial bombardments. .
Hostilities with the most powerful military on earth would make life even harder for ordinary Iranians. It would probably weaken the currency and exacerbate inflation, while threatening what remains of the national industry, eliminating jobs and revitalizing public pressure on leadership.
The conflict could threaten a run in national banks by sending more companies in trouble. Iranian companies have been saved from collapse due to bank credit surges. The government controls about 70 percent of bank assets, according to a article by Adnan Mazarei, a former I.M.F. deputy director and now senior member of the Peterson Institute of International Economics in Washington. Approximately half of all bank loans are in default, the Parliament of Iran estimated.
Many Iranian companies depend on imported products to manufacture and sell products, from machinery to steel and grains. If Iran’s currency decreases further, those companies would have to pay more for such goods. Banks would have to extend more loans or companies would collapse, which would increase the ranks of the unemployed.
The central bank has been financing government spending, filling gaps in a tattered budget to limit public anger over cuts. That implies printing Iranian money, which increases tensions in the currency. A war could propel the richest Iranians to take assets out of the country, threatening a further drop in the currency and producing uncontrolled inflation.
In summary, this is the unpleasant option facing the Iranian leadership: it can keep the economy going by continuing to direct credit to banks and industry, which increases the risks of an eventual bank disaster and hyperinflation. Or you can opt for austerity that would cause immediate public suffering, threatening more street demonstrations.
“That is the spectrum that looms over the Iranian economy,” said Mazarei. “The current economic situation is not sustainable.”
Although such realities seem to be limiting Iran’s appetite for an escalation, some experts suggest that the regime’s intransigents might accept hostilities with the United States as a means to stimulate the anemic economy.
Separated from international investors and markets, Iran has focused in recent years on forging a so-called resistance economy in which the state has invested aggressively, subsidizing strategic industries, while seeking to replace domestic production with imported products.
That strategy has been inefficient, economists say, adding tensions to Iran’s budget and the banking system, but employment seems to have increased. The uncompromising could come to see a fight with the arch-enemy of Iran, the United States, as an opportunity to expand the resistance economy while fueling politically useful nationalist anger.
“There will be those who will argue that we cannot maintain the current situation if we do not have a war,” said Yassamine Mather, a political economist at the University of Oxford. “For the Iranian government, living in crisis is good. It has always been good, because you can blame all economic problems on sanctions or the foreign threat of war. In recent years, Iran has sought adventures as a way to divert attention from economic problems. “
Whenever Iran’s leaders proceed, experts assume that economic concerns will not be paramount: Iran’s leaders prioritize one goal over all others: their own survival. If the confrontation with external powers seems promising as a means of strengthening their control of power, leadership can accept economic pain as a necessary cost.
“The uncompromising are willing to impoverish people to remain in power,” said Sanam Vakil, deputy director of the Middle East and North Africa program at Chatham House, a research institution in London. “The Islamic Republic does not make decisions based on purely economic results.”
But Iran’s leaders only need to examine their own region to recognize the dangers that economic distress can pose to established powers. In recent months, Iraq and Lebanon have seen furious demonstrations fueled in part by the decline in living standards amid corruption and abuse of power.
Recently, in November, Iran’s dangerous economic state seemed to pose a fundamental threat to the regime. As the government hastened to secure cash to finance aid for the poor and the unemployed, it eliminated gasoline subsidies, which raised the price of fuel by up to 200 percent. That provoked furious protests in the streets of Iranian cities, and protesters openly called for the expulsion of President Hassan Rouhani.
“That is a sign of how much pressure they are under,” said Maya Senussi, a Middle East expert at Oxford Economics in London.
By unleashing the drone attack that killed General Suleimani, Trump effectively relieved the leadership of that pressure, undermining the strength of his own sanctions, experts say.
In Iran, the murder resonated as a violation of national sovereignty and evidence that the United States had malicious intentions. He silenced the complaints that prompted the November demonstrations (regrets over rising prices, accusations of corruption and bad economic practice in the midst of leadership), replacing them with a man celebrated as a national hero.
A country plagued with complaints addressed directly to its main leaders had apparently joined the anger against the United States.
“The murder of Suleimani represents a milestone, not only in terms of diverting attention from internal problems, but also of bringing Iranians around their flag,” said Fawaz A. Gerges, professor of international relations at the London School of Economics.
Trump had provided the Iranian leadership “time and space to change the conversation,” he added. The Iranians were no longer consumed by the “wrong and failed economic policies of the Iranian regime,” but rather “by the arrogant US aggression against the Iranian nation.”
But then came the government’s admission that he was responsible for tearing down the Ukrainian passenger plane. Now, Iran’s leaders are again on the wrong side of angry street demonstrations.
For now, the regime is trying to crush demonstrations with riot police and warnings to protesters to return to their homes. But if public anger continues, intransigents can turn to challenging American interests in the hope that the confrontation will force Trump to negotiate an agreement to eliminate sanctions.
Iran can threaten the passage of ships that transport oil through the Strait of Hormuz, the passage for more than a fifth of world consumption of liquid oil. The interruption there would restrict world oil supplies, raising the price of the vital product. That could sow alarm in world markets while limiting global economic growth, jeopardizing Trump’s re-election offer, according to logic.
Previously, Iran had a different path to get relief from sanctions: under a 2015 agreement forged by President Barack Obama, the Sanctions were eliminated in exchange for Iran’s verified promise to dismantle large sections of its nuclear program.
But when Trump took office, he resigned that agreement and resumed sanctions.
The Iranian leadership has called for European support for the resumption of the nuclear agreement, seeking to exploit the divergence between Europe and the United States. Europeans are not happy with Trump’s renewed sanctions, which have faded the hopes of German, French and Italian companies that had sought greater commercial opportunities in Iran.
Whatever comes next, Iran’s leadership is painfully aware that getting out of US sanctions is the only route to lift its economy, experts say.
The nuclear agreement was intended to give Iran’s leaders an incentive to reduce hostility as a means to seek the release of sanctions. Trump’s abandonment of the agreement effectively left them with only one means to achieve that goal: confrontation.
“They see climbing as the only way to get to the negotiating table,” said Ms. Vakil. “They cannot capitulate and come to the negotiating table. They cannot commit, because that would show weakness. By demonstrating that they can climb, they are not afraid, they are trying to create influence.”