Iran | Impact of sanctions on domestic and regional risks

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Iran | Impact of sanctions on domestic and regional risks

Iran's domestic and foreign policy responses to US sanctions have so far been fairly predictable: it is pursuing a combination of what it terms 'resistance economy' and patriotic defiance.

It is seeking to limit the economic impact of the restrictions on its population and ensure that the public blames the US for a worsening situation, including price rises and goods shortages that have already led to protests. Internal political divisions and a political culture of street protest mean that this approach is unlikely to prevent further demonstrations. An additional effect of this is to empower hardliners’ rhetoric and actions that push up the risk of military incidents in the Gulf.

The Supreme Leader and President Hassan Rouhani still differ on how exactly Iran should respond to US sanctions. Ali Khamenei has backed Rouhani’s attempt to address corruption as a way to make the economy more efficient, but in a speech on Monday, 13 August, he blamed the government for economic mismanagement. He has also been unenthusiastic about Rouhani’s attempts to persuade the Europeans to continue to trade with Iran. Such divisions between supporters of Khamenei and other factions will continue to undermine Rouhani’s economic policies, including in parliament.

In a sign of that opposition, last week MPs voted to remove the president’s labour minister. Rouhani has also been facing growing pressure from politicians, officials and commentators to reshuffle his cabinet. So far his only change was to replace the unpopular Central Bank governor last week with a technocrat who has years of experience in the banking and insurance sectors. The bank’s former head of foreign exchange was also reportedly arrested as part of corruption investigations. Based on previous public comments by a presidential advisor, and given the possibility of ministers facing parliamentary impeachment, more changes in personnel are probable. But these would probably not affect government policy.

Heightened risk of political protest and hardship unrest

The Iranian cabinet met yesterday, 14 August, to discuss its economic strategy. It will prioritise the import of basic goods to address an ongoing currency crisis and to limit expenditure of foreign reserves. With sanctions on the oil sector – a major source of foreign currency – and on transactions with the Iranian Central Bank due to come in November, these problems will almost certainly deepen. There have already been demonstrations over the falling Iranian rial and the rising cost of goods. Opponents of the government, along with Bazaaris, seem to have played some role in encouraging such demonstrations.

The occurrence and intensity of protests over both political and economic issues has been unpredictable in the past. Demonstrations happen in both cities and rural areas countrywide, but particularly Tehran. Events of the last few months have also shown that poor or marginalised areas, including those with large Arab, Baluch and Kurdish populations, are most likely to see incidents of hardship unrest and violent rioting. We anticipate that as the economic situation worsens, which it almost certainly will do as US sanctions come fully into force, the risk of such protests will probably rise.

A prominent US-Iranian economist pointed out in a recent blog that the authorities have few real options available to lessen the impact of the sanctions on the public. Rather, we expect that the extent to which the authorities can persuade Iranians that the US is to blame for this hardship will be an important factor in determining the depth of opposition to the government or regime in the coming months. Recent corruption scandals have undermined this narrative, with well-connected individuals exploiting the system to import luxury goods or make a fortune through currency speculation. This is probably why the Supreme Leader, cabinet and judiciary agree that they need to pursue anti-corruption measures.

Nationalism and regional risks

Alongside these economic and anti-corruption measures, the Iranian authorities have played on Iranian nationalism to ensure public tolerance of hardship through defiant rhetoric and demonstrations of military prowess. In what seemed to be a deliberately provocative speech at a funeral in Hamedan in late July, the IRGC Qods Brigade commander made a direct challenge to US President Trump. In his statements broadcast on Iranian television, Qassem Soleimani suggested that Iran is prepared to fight the US directly. It came after US President Trump’s warned Iran in a tweet of ‘CONSEQUENCES…FEW…HAVE EVER SUFFERED BEFORE [sic]’.

The Supreme Leader is clear that Iran is not seeking military confrontation with the US, tweeting in English, ‘THERE WILL BE NO WAR’. His use of capitals almost certainly showed that he was responding to Trump’s earlier threat. Indeed, we have seen no indication that Iran is intent on entering into a direct military confrontation. This is partly because it is to Iran’s advantage to mount covert operations against the US, such as through cyber attacks and the use of other asymmetric tactics. As Soleimani hinted, Iran is already supporting various militant groups across the region, although it is not necessarily able to order them to mount attacks on US interests.

Rouhani has also taken a harder line in public statements, particularly over oil exports and the Strait of Hormuz. A recent Iranian naval exercise in the Strait in which forces fired a new anti-shipping missile was another example of this asymmetric approach. Such displays of force push the US to respond in ways that are financially costly, for example by deploying additional military resources to the region. But even though Iran does not seem to be seeking a confrontation, intensified military activity is again pushing up the risk of naval confrontations in the Gulf. These include near-misses with US and other military vessels, along the lines of incidents that occurred prior to 2013, when nuclear deal negotiations began in earnest.

Published: 15th August 2018