Iran’s Currency Crisis: Shaking The Regime’s Legitimacy

ERBIL, Iraqi Kurdistan: Iran’s currency hit a record high against the US dollar, which observers say reflects the regime’s growing international isolation and the severity of new EU sanctions against its enforcer paramilitary, the Islamic Revolutionary Guard Corps.

Adding to ongoing mass protests sparked by the death of 22-year-old Jina Mahsa Amini in police custody last September, the currency’s collapse has defied measures such as replacing the central bank chief last month and fueled speculation that it would destabilize, if not bring down, the regime in 2023.

The rial has lost 29% of its value since the start of anti-government protests and the regime’s harsh crackdown late last year. On January 22, it was trading at around 450,000 Iranian rial to one US dollar, which is a new all-time high.

Dr James Devine, an associate professor in the Department of Political Science and International Relations at Mount Allison University, believes it’s Iran’s growing political isolation – due to its brutal crackdown on protesters, military support to Russia’s war against Ukraine and doubts about reviving the 2015 nuclear deal – which caused the value of the rial to plummet.

“All of this is compounded by mismanagement and corruption, which have hampered Iranian economic planning since the regime came to power,” Devine told Arab News.
Although Iran’s economic situation looks particularly grim at the moment, Emily Hawthorne, senior analyst for the Middle East and North Africa at risk intelligence firm RANE, calls the depreciation of the rial of serious, “but certainly not without precedent”.

“High inflation, international isolation, low investor confidence and low consumer confidence are all factors behind this decline,” she told Arab News.
The twin shocks of the rial’s depreciation and high inflation triggered a cost-of-living crisis, which in turn spread discontent and fueled anger against the regime.

Arach Azizi, author of The Shadow Commander: Soleimani, the US, and Iran’s Global Ambitions and PhD candidate in history at the New York University, says the currency collapse “has long had a significant psychological weight in Iran,” with potential political and economic consequences.
“Those who long for pre-1979 Iran, for example, usually like to talk about how a US dollar was worth 70 rials, compared to over 450,000 today,” Azizi told Arab News.
“It also continues to have a real downward effect on wages, which have not kept pace with inflation and the fall in the currency.

“Most of the products in Iran are imported and paying for these imports has become increasingly difficult for individuals and businesses. It has also made overseas travel very difficult for most Iranians, even to nearby places like Dubai and Turkey, although the latter has also seen its own currency collapse.
According to Hawthorne, the “poor and fragile” situation in the global economic environment makes this period worse than previous ones and creates “additional external pressure on the Iranian economy.”
“Additionally, some Iranians feel a growing anger against the government, as evidenced by the Mahsa Amini protests and some recent strikes and union protests, which contributes to feelings of economic insecurity,” she added.

However, Hawthorne doubts that the new EU sanctions against the Islamic Revolutionary Guard Corps will have “a significant impact on the rial, beyond the downward pressure already created by Europe’s growing sanctions on against other Iranian individuals and entities”.
For his part, Devine is convinced that with increasingly severe sanctions there is a cumulative effect which becomes serious for the regime.
However, if the collapse of the currency has increased the pressure on Tehran, it is not certain that this is the “most vulnerable point” of the regime.

“I haven’t seen any clear signs that the collapse of the currency or the sanctions are the straw that breaks the camel’s back for the IRGC,” Devine said. “The IRGC controls between 25% and 40% of the Iranian economy, so they will always have access to goods and services in Iran.”

Given this privileged position, the IRGC is best placed to take advantage of the black market and smuggling, according to Devine. And while it is undoubtedly feeling the pressure, neither its leaders nor its grassroots members are likely to consider changing course or defecting from the regime.
Devine added: “If the regime goes, the IRGC goes with it. It has no reason to be without the Islamic Republic. Furthermore, if there were a change of government, the leaders of the IRGC would likely be prosecuted at home and/or abroad.

“At the lower levels of rank, there may not be the same ideological commitment or the same privileges, but they are still better off than the average Iranian and the post-regime future is uncertain for them too.
“In short, it will take a lot of effort to decouple the IRGC and the security services from the regime.”
If the growing global consensus against Iran does not include China and Russia, the ability of the two non-Western powers to help reverse the rial’s decline is questionable.

China and Russia Share With Iran

“China and Russia share with Iran an aversion to unilateral sanctions by any country or institution and are likely to continue dealing with Iran, especially Russia, which is also isolated from the rest of the world community because of the sanctions related to his invasion of Ukraine,” Hawthorne told Arab News.
“Nevertheless, this will not be a sufficient lifeline for Iran to keep the rial afloat. On the contrary, it might allow some trade and exchange of goods and equipment, but will not save the economy.”
Devine also believes that even if Iran sells a “healthy” number of barrels of oil per day, mostly to China, it is unlikely to be enough to “revitalize the rial.”

Moreover, Washington has started cracking down on Iranian smuggling of dollars from neighboring Iraq, which also has a negative impact on the value of the rial.
“While Russia and China may not be able to bail out the rial, they can ensure that in the future Iran is not as economically isolated as it has been by the past,” Devine reported.

Hawthorne predicts there will be more “economically motivated protests” in Iran throughout 2023, but doubts that the Iranian government will collapse this year or in the near future, “although economic tensions will contribute to his unpopularity.

Azizi also claims that “the regime has long survived harsh economic crises and this one is no exception.” He added: “It accentuates his problems, but it does not seem to lead to the collapse of the state yet.”
Devine expects further protests due to rising prices and shortages of goods for Iranian consumers, which will further undermine the regime’s legitimacy and make it more dependent on coercive power to maintain control.
But whether or not this is a tipping point for the regime is a much more complicated question.

“I think the regime has the institutional and coercive capacity to survive the current level of unrest and probably a bit more,” Devine revealed. “However, he could lose control if he makes political mistakes.

“For example, if the regime overreacts to protests and starts killing large numbers of Iranians on the streets, especially young women. The execution of dissidents is also likely to provoke a backlash.”
Devine believes the “complicating factor” at play is “regime consistency.”
“Reformists and moderates criticized President Ebrahim Raisi for being too tough on protesters and by hardliners for being too lenient,” he told Arab News. “This kind of environment could lead the regime to misjudge its reaction.”

“At some point, the more moderate members of the regime can go beyond criticism and disavow the regime. If enough of them do this, it could have a snowball effect and lead to a crisis, especially if the regular army joins them.”
In the meantime, according to Devine, the protesters need better organization. While they can create “small disturbances”, he adds, they don’t seem to have the kind of organization that could really challenge the regime’s “control of the country and the economy”.
“Maybe the currency crisis will provide the impetus for this to happen, but I haven’t seen it yet,” he argued.

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