The Global Risks of Iran's Sinking Economy

The collapse of the rial and Western sanctions are having devastating and still uncertain consequences across the country -- and potentially around the world.

Iran boat.jpg
The Iranian oil supertanker Delvar is seen anchored off Singapore in March of 2012. (Tim Chong/Reuters)

Western sanctions are moving Iran's economy into unknown territory as they press Tehran to give up controversial nuclear activities. The cracks in Iran's economic planning became plain as parliamentarians voted overwhelmingly on October 7 to reopen debate on a key government economic program. The vote came just days after the rial made a record plunge against the U.S. dollar as sanctions on oil exports limit Iran's access to hard currency.

Legislators said ordinary citizens cannot afford the government's anticipated second round of rollbacks to price subsidies at a time when the national currency is sagging. The government's reform program, which began in 2010, intends to progressively remove blanket subsidies on food and fuel in favor of direct cash payments to the needy. A date for the parliamentary debate has yet to be set. But the legislators' challenge throws into disarray a plan the government has said could save it as much as $100 billion a year and help move Iran toward a more efficient market-based system.

The parliamentary revolt, like the rial's loss of two-thirds of its value against the dollar over the past 15 months, are widely regarded as victories for the Western sanctions effort. But they also may be signs that the sanctions could disrupt Iran's economic planning in ways increasingly difficult to predict.

"It's not a far-fetched scenario where we end up with mass unemployment, shut-down in certain segments of the economy, where certain segments completely freeze, and there is a mass shortage economy where people struggle to find some basic commodity," warns Merhrdad Emadi, a regional expert with Betamatrix International Consultancy. He says sanctions are often a risky business that can pose problems both for their targets and their authors.

Tipping Some Scales

The most immediate problem for Iran is how to protect its rial from further slippage as sanctions limit Tehran access to new hard currency. The collapse of the rial set off clashes on October 3 between police and protesters angered by its freefall.

Tehran's strategy for shoring up the rial's value while protecting hard-currency reserves is to offer different classes of business access to different state-set rates. Importers of foods and medicines can exchange rials at 12,260 rials to the dollar compared to this month's all-time low of 35,500. Importers of basic goods like industrial materials can exchange rials for 25,550. But Tehran's strategy risks injecting still more instability into the economy if it sets off a scramble among all businesses to get access to the best rates. That could stoke corruption as well as anger among those excluded.

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