What’s Next for Iran, the Iranian Rial and the Ayatollah?

As U.S mid-term elections approach, the U.S President has been a particularly busy one by historical standards. The trade war with China, an apparent denuclearization agreement with North Korea, an about turn on relations with Russia, trade renegotiations with the EU, ongoing talks with Mexico and Canada and fresh sanctions on Iran being joined by the latest economic attack on Erdogan and Turkey.

While the past week saw the markets balk at the latest Trump move to free Pastor Brunson, there may be a greater game afoot.

Sanctions on Iran

Enemy number one for the U.S President has been Iran and chastising the hard-fought nuclear agreement during the presidential election campaign, which was an early warning sign that things were going to change and change they have.

Solidarity on Iran sanctions in the past had left Iran with very little wriggle room, but things have changed and that’s down to Trump’s clear intention to just ruffle the feathers of anyone and everyone in the apparent interests of the U.S.

It’s been 2-years since sanctions were lifted and Iran reentered the global arena, with Western companies eager to get a piece of Iran’s oil Dollars.

Things haven’t quite panned out the way the Iranian regime would have hoped, with the U.S President finally refusing to ratify the nuclear agreement that ultimately led to last week’s introduction of fresh sanctions.

While Iran may have quite comfortably moved on in life with the knowledge that it would be doing little to no business with the U.S, the U.S administration’s warning to both allies and foes of punitive sanctions on any country doing business with Iran has weighed on the Iranian’s economy with a November target date of zero oil imports for any nation an alarming one, for Iran at least.

Of greater concern for Iran’s heads of states will have been the ongoing trade war and Trump’s willingness to hit any nation with tariffs irrespective of historic ties.

For Iran, there are hidden dangers, but even more so for the regime that has been in power since 1979 and, while the EU and other global powers protest against the latest move by the U.S, Trump’s strategy will likely have one of two outcomes, one likely to be considered hugely positive for the U.S and the other, a disaster all around.

Is Iran Heading for an Economic Crisis?

The Iranian economy is in tatters, the Iranian Rial has collapsed to record lows against the U.S Dollar, most of the collapse coming through the summer over the planned roll-out of sanctions in August and inflation is sky high as once optimistic businesses face the prospects of another eternity in the wilderness.

Last time around the impact of sanctions was amidst a grueling war that cost Iran and neighboring Iraq a million lives. This time around, there is no war, just global economic growth, and prosperity for those sitting on the right side of the fence.

Reports of 100,000 protestors hitting the streets of Iran in the wake of the latest sanctions, calling for the death to a dictator, this time their very one, spells trouble. Unemployment, a reported 50% rise in the cost of fruit and vegetables and a 50% slide in the value of the Rial against the Dollar are the aftershocks of the U.S sanctions and what the U.S administration will likely be hoping to be the final nails in the regime’s coffin.

To make matters worse and certainly generate more anger on the streets of Tehran is the knowledge that oil prices have recovered to $70 plus levels a barrel and the Iranian government has enjoyed oil Dollar revenues and money from foreign investment for over 2-years, with a continued devaluation in the Rial since late 2013. The Rial has tumbled from IRR12,000 levels against the Dollar to IRR44,000 levels at the time of writing. Government exchange rates are not the rates that are available to the Iranian population, however, with unofficial numbers seeing 1 Dollar buying as much as IRR112,000, according to figures reported over the last few weeks.

The divergence between the official and street value of the Iranian Rial is all too clear for the Iranian people to see. While the official Rial has fallen from IRR36,000 levels to IRR44,000 levels this year, the street value has fallen from IRR44,000 levels to over IRR110,000 levels year-to-date, with plunge starting back in April.

Unsurprisingly, official inflation figures and implied annual inflation figures have also seen a material divergence, with street vendors racking up prices to meet with rising costs and the falling street value of the Rial.

As at the end of July, the implied annual rate of inflation was reported to have been sitting at over 200%, while the official inflation rate was reported to be sitting at just over 10%, the divergence in official and implied kicking in from January and accelerating as the year progressed.

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What’s Next for Iran?

Sanctions on Iran’s oil industry don’t hit until November and already the country is in collapse and the Islamic regime has moved into close quarters, with even moderate Rouhani taking the cover of Supreme Spiritual Leader Ayatollah Ali Khamenei.

Moderate leader Rouhani’s return to the fold will likely anger the streets even more and with just a number of months remaining until oil sanctions hit, the Iranian regime’s only real choice is to hit the negotiating table and that goes against the very ethos of the spiritual leader’s stance on the U.S.

The alternative is to fight off a revolution domestically and further suppress the more vocal, while searching for ways to halt the slide in the Rial and address inflation, neither of which are going to be possible until Iran revises its current currency position and looks for an appropriate peg and more importantly, addresses the sanctions issue.

Does the West want another Iranian revolution and what would that mean to the current dynamics in the Middle East and ultimately on the price of crude oil?

Iran has played a meddlesome role in the Middle East and a domestic power struggle would certainly place it at risk of war, even with a Western appointed interim government or return of the exiled crown prince of Iran and son of the former Shah, Reza Pahlavi, who has been in talks with Israel and other enemies of the current regime for their support in a bid to return Iran to a monarchy.

Either way, it’s going to be a painful time and, the direction of the Rial will ultimately come down to stability in the coming months, continued unrest and a threat of a revolution likely to see further decline before steadying, while a return of Reza Pahlavi could lead to an immediate rally as the markets consider the likely close ties with the West and most importantly, the U.S.

For crude oil and possible supply disruption, it will ultimately boil down to how the current regime handles sanctions and whether the revolutionary guards fall back into the old habit of disrupting supply through the Strait of Hormuz. The current U.S President is unlikely to accept such antics, which could see the Islamic Republic face sterner action from the U.S and, for Trump the incentive would be to topple the regime. What a coup that would be…