Tracing the Duality of Iran’s New Central Banker

The appointment of Ali Salehabadi as Iran’s new central bank governor reflects the generational shift underway in Iranian policymaking—he was born just one year before the revolution that led to the establishment of the Islamic Republic. But beyond tapping youth, Iranian president Ebrahim Raisi, has also, at least on paper, appointed an individual with technocratic credentials and managerial experience. Since 2014, Salehabadi has served as the CEO of the Export Development Bank of Iran (EBDI). From 2006 to 2014, he led the Securities and Exchange Organisation, Iran’s capital markets regulator. In that role Salehabadi was largely successful in driving the development of the Tehran Stock Exchange, despite then-President Mahmoud Ahmedinejad’s skepticism of capital markets development.

Salehabadi holds a PhD in Financial Management from the University of Tehran. He is a faculty member at Imam Sadeq University, where he completed his master’s degree. His affiliation with Imam Sadeq University, which is shared by economy minister Ehsan Khandoozi and social welfare minister Hojjatollah Abdolmaleki, firmly places Salehabadi in the network of “revolutionary experts” from which Raisi has drawn his cabinet members focused on economic policy.

Perhaps even more so than Khandoozi or Abdolmaleki, Salehabadi’s education and subsequent experience have given him a grounding in both conservative political thought and liberal economic planning. As journalist Fatemeh Bahadori observed in a profile of Salehabadi published last year, “in his books and articles, you can see the combination of these two [educations].” It is this duality that has enabled Salehabadi to hold senior positions in state entities during both the Ahmadinejad and Rouhani administrations. Now, as Raisi pursues syncretic policymaking by his revolutionary experts, Salehabadi finds himself in the most important role in Iranian economic policy.

The Central Bank of Iran (CBI) is on the frontlines of the “economic war” that Iran currently faces. U.S. sanctions policy has directly targeted the operations of Iran’s central bank through designations and measures intended to interfere with the bank’s routine operations, especially the management of the country’s foreign exchange reserves. Salehabadi replaces Abdolnasser Hemmati, who oversaw the response in Iranian monetary policy to the reimposition of sanctions following his appointment in July 2018, just a few months after the Trump administration’s decision to withdraw from the Joint Comprehensive Plan of Action and to reimpose secondary sanctions on Iran.  

Hemmati, who left the central bank during his ill-fated run for the presidency earlier this summer, was largely successful in steering the bank through the sanctions-induced crisis. He implemented a centralised foreign exchange market that streamlined the repatriation and sale of currency by Iranian exporters for the benefit of Iranian importers. He also embarked on economic diplomacy, engaging officials in China, Iraq, and South Korea to pursue greater access to the foreign exchange reserves frozen as part of the Trump administration’s maximum pressure sanctions.

These efforts helped defend the value of Iran’s currency, and by extension alleviated inflationary pressures, at least for a time. Salehabadi will need to continue using the playbook set out by Hemmati—there are few better options. In the current environment, in which the Biden administration has maintained maximum pressure sanctions, Iran’s central bank lacks the policy space to fully shape Iran’s macroeconomic conditions. Exogenous forces, particularly the impact of sanctions on the country’s balance of payments, will determine Iran’s economic prospects—the central bank’s role is to mitigate the damage caused. 

Salehabadi appears to understand the mitigation strategies that are necessary. While leading EBDI, he had a hand in the Rouhani administration’s efforts to shore the economy, particularly as the Trump administration’s sanctions hit oil exports and access to foreign exchange reserves. Today, Iran retains ready access to just 10 percent of its foreign exchange.

Salehabadi has highlighted the role of non-oil exports in providing Iran resilience in the face of sanctions. In an October 2019 statement reflecting on Iran’s first year weathering Trump’s maximum pressure sanctions, Salehabadi highlighted the role that non-oil exports played in supporting the country’s economy. “Simultaneously with the intensification of sanctions and the reduction of oil revenues, there was a belief that non-oil exports could meet the country's foreign exchange needs, and fortunately this has been largely achieved through the repatriation of foreign exchange,” he noted. EBDI was also one of the banks through which money from the National Development Fund of Iran, the country’s sovereign wealth fund, was lent to Iranian exporters in order to support private companies during the economic downturn. As part of this strategy, Salehabadi helped facilitate increased lending to “knowledge-based” exporters, as part of the Rouhani administration’s wider strategy to achieve greater economic resilience through diversification.  

Raisi made big economic promises during his presidential campaign and also vowed to fulfil these promises within a “resistance economy” model, which is largely focused on boosting domestic production. But production can only rise in step with demand, and at a time of diminished domestic consumption, increased exports remain the best option for Iran’s economy to return to sustained economic growth. As such, truly restoring policy space for the central bank will require the lifting of sanctions.

Here, Salehabadi has experience that could help Iranian negotiators address the thorny problems surrounding the implementation of sanctions relief, especially the restoration of correspondent banking with a wider range of trade partners. While European export credit agencies favoured cooperation with private sector Iranian banks, Salehabadi was nonetheless involved in negotiations around increased bilateral banking ties during his time at EBDI. Despite initial enthusiasm, European export credit agencies ultimately failed to extend financing for trade with Iran due to the reluctance of European banks to process the related payments—a failure that cannot be repeated if sanctions relief commitments made under a restored nuclear deal are to be successfully met.

Of course, the policy space afforded to CBI is also a function of the bank’s independence. Hemmati was an adept political operator and mostly succeeded in insulating CBI from the political attacks that dogged the Rouhani administration in its second term. This independence also improved the perception of bank among Iran’s business community. Hemmati made clear that financial corruption was a systemic problem in Iran and implemented policies to reduce opportunities for corruption. During his bid for the presidency, Hemmati claimed to have “dried the roots of corruption” while at the bank. While that claim is probably an overstatement, Hemmati himself was never implicated in a corruption scandal.

It remains to be seen whether Salehabadi, who is both young and drawn from conservative networks, will be able to assert his own independence and that of the bank. But what is clear is that a great deal is riding on his tenure. In a sense, Salehabadi’s success in steering Iran’s economy back to sustained growth would legitimate “revolutionary expertise” as the new dualism in Iranian economic policymaking.

Photo: IRNA

Survey Shows Iranian Pessimism on Economy, Pride in Healthcare Response

Recent Western reporting and analyses of Iran depict dire circumstances and make natural assumptions about how the population must be reacting to an economy battered by sanctions from the United States and ravaged by the COVID-19 pandemic. A public opinion survey conducted in September and early October by the University of Maryland’s Center on International and Security Studies and IranPoll provides data to compare with these assumptions. The telephone survey included a national probability sample of 1,004 respondents. Some results are surprising, and some are remarkably similar to public attitudes about the pandemic in the United States and European countries.

The survey finds that Iran’s public is more pessimistic about the economy than they were earlier in the Trump administration’s maximum pressure campaign. But domestic mismanagement and rising inflation appear to be bigger factors in this shift than the sanctions per se. Those most directly affected by COVID-19 are more negative about the economy. Yet, the Iranian public is generally satisfied by the government’s response to the pandemic and support public health efforts, even when they make a bad economic situation worse. 

Reactions to the Economy

Those Iranians who believe the economy is very bad and getting worse are more numerous now than at any time since CISSM first asked these questions in 2015. When asked to rate Iran’s economic situation, 74 percent called it either somewhat bad (22 percent) or very bad (now a 53 percent majority). Throughout 2018 and into fall 2019, those seeing the economy as “very bad” fluctuated between 40 and 45 percent. The October 2020 level of those saying “very bad” is a marked increase—13 points higher than a year ago. When asked about the direction of economic conditions, 72 percent said they were getting worse—18 points higher than a year ago (October 2019). Only 22 percent said they were getting better.

Optimism about Iran’s economic future has declined unevenly over time. The last time our polls recorded a plurality thinking the economy was getting better was in May 2015, shortly before the nuclear deal was signed. When JCPOA conditions for suspension of nuclear-related sanctions were met in January 2016 but the economy did not show tangible gains, pessimism began to gain ground. Its previous peak was in April 2018, shortly before the Trump administration fulfilled its threat to withdraw from the JCPOA if Iran did not make more concessions. As the Trump progressively ratcheted up its maximum pressure campaign by reimposing sanctions the Obama administration had lifted and adding new sanctions on Iran, the public remained generally pessimistic. Yet, the percentage holding that view declined ten points from April 2018 to October 2019 as the negative effects of new sanctions had less impact on everyday life than anticipated, unemployment decreased, and currency devaluation slowed. 

Respondents with higher nominal monthly incomes were progressively more likely to see Iran’s economy as very bad and getting worse. For example, of those in the highest income bracket (average household monthly income over 6 million tomans), 64 percent said the economy was “very bad” and 88 percent said it was “getting worse.” In the lowest income bracket (under 1 million tomans), a lesser 52 percent said the economy was currently “very bad” and 60 percent thought it was getting worse.

This suggests that the recent jump in economic pessimism is related to Iran’s steep currency de-valuation. Average consumer prices have increased by 30 percent this year, which is high – but lower than 41 percent last year. Higher-income Iranians have experience even steeper inflation, because the currency has depreciated sharply despite government efforts to stabilize it in mid-2019. The open exchange rate went from 11,369 tomans to one U.S. dollar in October 2019 to 29,740 tomans to one dollar in October 2020--a 162 percent increase.

We periodically ask Iranians what has the greatest negative impact on their economy: foreign sanctions and pressures, or domestic economic mismanagement and corruption. Given the emphasis placed by Western media and policy experts on “crippling economic sanctions,” it would be natural to expect that a majority of Iranians see this factor as paramount, but that has never been true in CISSM surveys.

In our most recent survey, 57 percent saw domestic issues as the bigger factor, while 36 percent blamed sanctions more. Before the Trump administration withdrew from the JCPOA, a slightly higher 63 percent called domestic mismanagement the more important issue. If the renewed US sanctions have affected general public attitudes at all, they have caused more Iranians to blame foreign pressures rather than their own government. Iranians with higher monthly incomes, however, are progressively more likely to attribute bad economic conditions to domestic mismanagement, with 75 percent of those at the top holding this view. 

Reactions to the Pandemic

Iran’s weak economy and the ravages of COVID-19 are mutually reinforcing. When Iranians think about how their society should respond to the pandemic, large but not overwhelming majorities endorse strong measures, while a significant minority disagrees—a pattern similar to that found in Western countries. This is striking given the severity Iranians clearly see in the country’s economic situation. A clear majority of 58 percent thought the government should close restaurants and “workplaces where people work in close proximity” to prevent the virus’ spread--“even if this would damage Iran’s economy.” Twenty-nine percent disagreed, saying “it is more important for the government to encourage economic activities, even if this would lead to more people getting sick.” 

Experience of the virus in one’s own circle is a majority phenomenon in Iran. Fifty-nine percent knew someone who has gotten sick “among…family, friends, and acquaintances,” while 41 percent did not. Over a third (37 percent) report personally knowing someone who has died from the disease. The virus’ economic impact has also been harsh, with one in five (19 percent) Iranians reporting that someone had lost a job in their own household. Iranians who know somebody who has died from the virus or who have suffered a pandemic-related job loss are about ten points more likely to say that economic conditions are very bad than those who have not had these experiences.

For comparison with the United States, Kaiser Family Foundation found in September that a lesser 24 percent of Americans knew someone who has lost their life to COVID-19. On the pandemic’s job costs, Kaiser asked a broader question in the United States—whether someone in one’s household had “lost a job, [has] been placed on furlough, or had…income or hours reduced because of the coronavirus outbreak.” In October, 45 percent of Americans said yes. It appears that in the early fall, somewhat more Americans had been affected by job loss, while somewhat fewer had lost somebody they knew to COVID-19 than was the case in Iran. 

Despite the strain that the coronavirus has placed on Iran’s public health care system, we did not find widespread dissatisfaction. Asked to “rate the performance of the public healthcare system in Iran,” a strikingly high 85 percent called it “very good” (38 percent) or “somewhat good” (47 percent), with only 15 percent calling it somewhat poor (9 percent) or very poor (6 percent). Rural respondents viewed the system especially warmly, with 45 percent calling it “very good” (urban respondents, 35 percent). This may reflect past investments Iran has made in building out basic healthcare in more isolated areas.

Although Iran has been hard-hit compared to other countries in the region, most Iranians seem relatively satisfied with their government’s performance. We asked respondents to think of “other countries that are similar to Iran” and then ponder whether Iran’s response has been more effective, less effective, or about the same. Given this subjective yardstick, only 25 percent thought Iran had been less effective. Thirty percent thought it had been about the same, and 40 percent thought Iran had been more effective than other similar countries. The more dissatisfied quarter of respondents tended to be more urban, and more pessimistic about the economy than the average Iranian.

These numbers suggest that Iranians are less pleased with their government’s handling of the pandemic that citizens of some advanced countries are, but more positive than people in the United States and the United Kingdom. The Pew Summer 2020 Global Attitudes Survey asked respondents in 14 advanced countries whether their country had done a good job or a bad job with COVID-19. Top scores went to Denmark (95 percent) and Australia (94 percent), and Sweden (71 percent) was comparable to Iran, while the U.S. (47 percent) and U.K. (46 percent) had the lowest satisfaction levels.

We asked about personal compliance with COVID-19 guidelines and about closing schools during the pandemic. The responses were similar to attitudes in the United States. A clear majority of Iranians supports public health measures, but this is not unanimous. Thus, 91 percent said they “wear a mask over [their] mouth and nose” when going out in public, but only 57 percent said they “always” do so. When a vaccine “becomes available in Iran and is approved by Iran’s Ministry of Health,” only 10 percent said they would not take it; however, less than two thirds (62 percent) said they would definitely get themselves vaccinated. Nearly two-thirds (67 percent) said schools should remain closed while 27 percent responded that they should be open for in-person classes.

In conclusion, Iran’s public has a consensus that the country’s economic situation is worse than any time since at least 2015. But they do not see the United States as the primary cause of the country’s troubles. Iranians also seem quite aware that Iran is not the only country in crisis now. Their attitudes toward the pandemic are not different in kind from those found in richer countries, and they are generally proud of their public health service’s response. 

Photo: IRNA

Dysfunction at the Border Jeopardizes Growth of Iran-Iraq Trade

When the United States re-imposed secondary sanctions on Iran in November 2018, the Rouhani administration belatedly decided that increasing the country’s non-oil exports, particularly to Iran’s regional neighbors, would become a central aim of economic policy.

In 2019, Hossein Modarres Khiyabani, currently the acting industry minister, stated that Iran’s neighboring countries currently import USD 1.2 trillion worth of goods each year, of which Iran accounts for USD 24 billion, equivalent to a 2 percent share. The government aims to grow regional exports to USD 48 billion by the Iranian calendar year ending in March 2022.

Among these countries, Iraq has emerged as Iran’s leading regional trade partner. Iran and Iraq share religious and cultural connections and a border nearly 1,500 kilometers long. But it is Iraq’s large consumer market that makes it ideally suited to play a role in Iran’s non-oil trade agenda. The quality of products produced in Iran is compatible with standards in the Iraqi market, which means a wider range of Iranian producers can target exports to Iraq. This also makes Iraq an arguably more important export destination than China.

While exports to China totaled USD 9.5 billion in the Iranian calendar year ending in March 2020, exports to Iraq were a close second at USD 8.9 billion. Yahya Ale-Es’haq, Chairman of the Iran-Iraq Joint Chamber of Commerce, notes that the composition of trade with China is dominated by raw materials, whereas trade with Iraq includes value-added goods that generate employment in Iran.

“Iran and Iraq set a 5-year target to increase bilateral trade to $20 billion per year in 2018. This has been hampered this year to some extent, partly due to the trade restrictions caused by the COVID-19 outbreak and partly because of Iraq’s reduced purchasing power, a consequence of depleting global oil prices,” Ale-Es’haq told Bourse & Bazaar.

In response to economic pressure at home, Ale-Es’haq explained, Iraq is trying to be more frugal and to address public demands to deal with rampant corruption.

“In reopening Mandali border crossing earlier this month, Iraqi Prime Minister Mustafa Al-Kadhimi said he aims to launch a full-throttle battle against corruption in the borders and customs offices. This is because the central government is not being given its share of customs revenues.”

Officials at the Islamic Republic of Iran Customs Administration (IRICA) describe the Iraqi prime minister’s vow to fight corruption as an internal matter.

“Our customs offices and checkpoints are disciplined and every step and procedure is documented in our electronic system. The Iraqi PM was addressing a matter of national governance as Iraq is a nation made up of different ethnic, religious, tribal and political groups. Each of these have their own regulations and practices which, of course, extend to economic activities of which all groups claim a share,” a spokesperson for IRICA stated.

But Iranian exporters feel that their own government should be doing more to support trade.

Ali Hosseini Sakha is the owner of Nasl-e-Jonoub-e-Karoun Trading Company, based in the southern province of Khuzestan. The company maintains an office in the Iraqi city of Basra. Sakha has been trading in Iraq for over 25 years and last year exported nearly USD 22 million worth of foodstuff, construction material, and minerals across the border.

Sakha also runs a research center under the auspices of the Trade Promotion Organization of Iran, an agency of the Ministry of Industry. He conducts market research and organizes trade forums to try to facilitate greater cooperation and trade on both sides of the border.

“Based on our latest research, the share of Iranian commodities in the Iraqi market amounts to no more than 3 percent. You can hardly find Iranian goods when walking through supermarket aisles in Iraq and that’s a shame,” he said.

Sakha points to a lack of coordination among government agencies. While the government provides a budget to wide range of agencies and to each Iranian province for export promotion activities, the funds are largely squandered on forums and meetings or allocated to those with “special interests.”

Moreover, Sakha explained that Iranian exporters are increasingly reliant on unreliable middlemen in the hopes of getting their products into the Iraq market without having to do the hard work of distribution themselves.

“Iranian exporters take their goods to the border for sale and usually end up making deals with middlemen because that’s how they think they can ‘get ahead in the game.’”

The unregulated middlemen then sell goods on to “the real Iraqi merchants.” Sakha noted that it is not uncommon for middlemen to disappear without having made payment for the goods they have just taken across the border.

He believes that customs officials and the joint Iran-Iraq chamber of commerce could do more to ensure exporters are engaging reliable Iraqi merchants and trading companies. “None of this takes place. The joint chamber is there and has no other business than to serve the interests of certain groups and individuals.”

Sakha’s sentiments were echoed by Hemmat Shahbaz-Beigi, owner of Arshia Gostar Trading Company in Kermanshah province’s Qasr-e-Shirin County. The company exports everything from construction materials, to home appliances, and even vegetables.

Shahbaz-Beigi did not hold back in complaining about the lack of support for Iranian exporters.  

“There are rules and regulations, yet, there is no guarantee that any of them will be executed or applied to your case if you ever come across a problem,” he said.

Shahbaz-Beigi recounted the saga of a USD 200,000 order fulfilled in 2015 than went unpaid. Five years year later, he has spent USD 40,000 in pursuit of payment but “hasn’t gotten a penny back.”  

Shahbaz-Beigi has met with Iran’s consulate general in Iraq but was “not to spend any more on the case and forget about my money altogether.”

He has also been unable to get help from the joint chamber of commerce. “This is just frustrating,” he lamented.

In a recent tweet, Ali Shariati, a board member of the Iran Chamber of Commerce, the nationwide body representing the interests of the country’s private sector, claimed that the Iran-Iraq Joint Chamber of Commerce had been operating without a statute for 16 months and that the chamber no longer comprises of individuals with an interest in developing bilateral trade.

The failure of the joint chamber to support bilateral trade is not unique to the experience of Iranian exporters in Iraq.

“This is how most of our joint chambers are functioning,” explain Farhas Ehteshamzad, former head of Iran Auto Importers Association and a respected figure in business circles. “If these bodies are not made to fulfill their responsibilities towards the private sector, they will not only hamper trade but the members will probably end up monopolizing trade in their areas of interest.”

When asked to comment on the matter, Hamid Hosseini, former general secretary of Iran-Iraq joint chamber and current member, described the complaints of Shariati, Ehteshamzad, and others as “their take on the issue.”

Responding to Shariati’s tweet regarding the join chamber’s statute, Hosseini noted that the statute must be renewed every year during an “assembly with two thirds of the members are present.”

“We have more than 400 members and most of them live in the provinces bordering Iraq. So it’s been hard organizing such an assembly given that we are currently experiencing a pandemic. But we’ve recently been given the permit to hold the assembly online and this will solve the problem,” he explained.

Hosseini added that the joint chamber has an arbitration center with Iraq where disputes are settled, but the problem is that trade between Iranian and Iraqi partners is usually carried out traditionally on the basis of mutual trust rather than robust contracts.

“In such cases, no contracts are signed and there are no documents proving that a commercial interaction has taken place. That’s why these merchants can’t win their cases and the joint chamber should not be made to take the blame for this.”

Despite these challenges, companies committed to export growth can persevere with the right mindset, argued Ali Dorhi, a senior executive at Dina Food Industries, which produces Iran’s beloved “Cheetoz” cheese puffs.

Dorhi believes most Iranian enterprises lack an “export-oriented mindset” and that only “30 percent” of the problems facing Iranian firms eyeing export opportunities can be attributed to bureaucracy and red-tape.

“There is often no market research and trade takes place at the very gates of the borders. Products are not customized or at least adapted a bit to suit the tastes of the destination markets,” Dorhi noted.

“In Iraq, for example, customers demand that product information be written in Arabic on boxes and containers. Many Iranian producers will not meet that request. This is why we end up having an insignificant share of less than 2 percent in Iraq’s lucrative food industry market.”

With oil exports having earned Iran just USD 8.9 billion dollars in the Iranian calendar year that ended in March 2020, the government is finally recognizing the importance of non-oil exports. But what has been neglected, particularly in the case of trade with Iraq, is the need to support exporters with better regulations, better market research, and more responsive trade bodies and chambers of commerce.  

During Al-Khadimi’s recent trip to Iraq, Hassan Rouhani reiterated that Iran and Iraq intend “to expand bilateral trade ties to USD 20 billion”—a figure that reflects the effective doubling of Iranian exports to Iraq. Whether the two countries can reach that lofty goal will depend on whether Iranian authorities and exporters can address the dysfunction at the border.

Photo: IRNA

Confronting Failure, Iran Government Mulls New Currency Policy

Despite mounting evidence that the Iranian government’s policy of allocating subsidized foreign currency for the importation of essential goods has failed, the Rouhani administration has signaled that it plans to maintain the policy for at least another year. But lawmakers and Rouhani’s own cabinet ministers may force the administration to change course.

On March 2, Iran’s parliament approved the allocation of USD 14 billion in oil export revenues for the import of essential goods, including food and medicine, during the upcoming Iranian year (beginning March 20). In doing so, MPs gave the green light for the Rouhani administration to continue to make foreign exchange available to importers of essential goods at the subsidized rate of IRR 42,000 to the dollar.

However, lawmakers also encouraged the government to consider an alternative approach that would require essential goods importers to purchase foreign exchange at the IRR 90,000 rate available on the centralized NIMA marketplace. The government would then redirect the savings from the elimination of the currency subsidy towards programs that directly assist Iranian consumers and manufacturers.

Despite the nudge from parliament to consider a new approach, it appears that the administration is intent on maintaining the subsidy for at least another year. The head of the Management and Planning Organization, Mohammad Baqer Nobakht, confirmed this to be the administration’s position in an interview just prior to the parliamentary vote.

The Rouhani government “unified” the country’s dual foreign exchange rates at IRR 42,000 to the dollar in early April as the rial hit new lows due to political uncertainty surrounding Iran’s nuclear deal and the possible reimposition of sanctions by the United States. The foreign exchange rates diverged again shortly thereafter, but the Rouhani administration has persisted in using the “unified” fixed rate for the importation of essential goods.

Rouhani recently claimed that he personally disagreed with the fixed rate when it was first proposed and only consented to rate unification after dozens of top economists backed the move. His administration has since maintained that the allocation of subsidized foreign exchange continues to be the best policy to stabilize prices of essential goods.

Meanwhile, high levels of inflation have dimmed prospects for Iran’s middle and lower classes. The Iranian public has felt the pressure of price hikes, and essential goods have not been spared, despite Rouhani promising otherwise on national television.

Beyond the lived experience of Iranians, new research has also cast doubt on the effectiveness of subsidization. On February 22, the Parliament Research Center published its findings of the government subsidized currency allocation policy. According to the PRC, the price of essential goods as a category increased by 42 percent during the first three quarters of the current Iranian year that ended on December 21.

By comparison, the price of imported goods not eligible for the subsidized rate increased 73 percent in the same period. However, the consumer price index increased by nearly 40 percent, meaning that the increase in the price of essential goods still outpaced general inflation by a significant margin. The question for policymakers is whether this minimal impact on the price of essential imports is worth the many adverse side effects for the wider economy.

At time when Iran’s foreign exchange revenues are being squeezed by  the Trump administration’s “maximum pressure” policy, the Iranian government cannot afford to misallocate USD 14 billion in oil revenue to a subsidization program that may serve to increase corruption and rent-seeking.

Iran’s central bank governor Abdolnasser Hemmati also admitted as much in a frank statement. “In effect, allocating subsidized currency to essential goods has failed to prevent their price hikes in the medium term due to the nature of market in the economy and the weakness of the distribution and supervision systems,” he wrote in a March 9 Instagram post. “Therefore, in most cases the subsidies have gradually moved away from consumers and benefited importers.” Hemmati signaled that a change in the policy may be in order by stating the government will “make the best decision.”

Economy minister Farhad Dejpasand later echoed Hemmati’s view, stating that “The government is currently studying several policies, and we definitely will adopt an approach to minimize the pressure on the poorest sections of society.

“Based on competitive open market principles, any fixed rates that diverge from the open market rate, such as the subsidized IRR 42,000 dollar exchange rate, are a mistake,” Mohammad Mahidashti, a macroeconomic analyst currently serving as an advisor at Iran’s Ministry of Economic Affairs and Finance told Bourse & Bazaar.

“There is simply no positive aspect in this subsidized currency allocation by the government, perhaps save for giving it a justification and a populist slogan to show that the administration is trying to decrease prices of essential goods,” he said.

Mahidashti believes the way forward is for the government to cut its losses as soon as possible by eliminating the subsidized rate and moving toward true rate unification, which he considers both doable and absolutely necessary.

Indeed, the PRC report also called on the Rouhani administration to either fully eliminate subsidized currency allocation or significantly trim the list of essential goods eligible to receive cheap currency. Even in the event of choosing the second route, the parliamentary think-tank said the subsidized rate must be higher and the IRR 42,000 rate is no longer justifiable.

Iran’s private sector, which has for years called for true rate unification would surely embrace such a move. Shortly after Hemmati’s admission of the failure of the subsidized foreign exchange policy, deputy president of the Iran Chamber of Commerce Pedram Soltani welcomed the announcement as a sign that things may be changing. He tweeted, “Subsidized currency is the source of rent and misuse. Let’s stop the flow!”

Photo Credit: IRNA

Iran's Government Steps in to Address Paper Crisis, But Papers Over the Cracks

Among currency fluctuations and returning sanctions, Iran is now battling a paper crisis. Gradual price hikes have been increasing pressure on book and newspaper publishers over the last year, but the scale of the crisis became clear when Culture Minister Abbas Salehi announced on August 4 that the country has just enough newsprint paper in storage to meet two months worth of demand. In response to the shortage, some newspapers have been forced to cease publishing, while others, including the popular reformist newspaper Shargh, have put up a pay wall.  

The government has rolled out a support package that includes importing paper as an essential good. This will most likely calm agitated publishers in the short-term, but will prolong a vicious cycle and defer the real reform needed to address a decades-long problem of corruption and inefficiency. The paper crisis represents something bigger.

Mahmoud Sadri, a veteran journalist who currently heads the publishing department of Donya-e-Eqtesad, Iran's foremost business daily, sees the paper crisis as just the latest manifestation of “Iran's economic inefficiency.” Speaking to Bourse & Bazaar, Sadri explained, "We have no phenomenon called a paper crisis as a separate and standalone phenomenon. It's not accurate to just say paper is in crisis since many goods are in crisis.”

In Sadri’s view, the paper crisis has its roots in the time of the 1979 Islamic Revolution, during which the government took on the mission to foster cultural production and provided for all the paper and raw material needs of the publishing industry. In order to do that, the Iranian government has typically opted for one of two options: they have either purchased the paper and offered it at cheap subsidized rates or offered handouts directly to private importers.

This misguided approach created conditions ripe for rent-seeking and corruption. Importers sought to abuse the cheap money they were being provided instead of creating actual in-demand value.

Such rent seeking accelerated in recent months, as the Iranian rial came under increased pressure due to returning US sanctions. "A group of profiteers and rent-seekers have entered the market and are making things much harder for paper consumers," Abolfazl Roghani Golpaygani, president of the Iran Paper and Paperboard Syndicate said in a recent interview.

But the government seems intent to maintain the longstanding subsidies. On August 6, the Ministry of Industry announced that paper used for publishing had been added to the limited list of essential commodities that will be imported using the preferential government exchange rate of IRR 42,000 to the dollar. That rate is to remain unchanged until at least March 2019 as President Hassan Rouhani promised recently. Furthermore, the ministry agreed to immediately import 20,000 tons of paper to address the shortage.

Many journalists and publishers, like Sadri, are critical of this arrangement. They believe that the government should not use taxpayer money for handouts to publishers who often publish content simply to maintain their license, or who wish to publish content in accordance with their own political and economic leanings. There are growing calls for for a free market approach to publishing  in order to encourage competition that will boost newspaper quality and balance prices.

"How and based on what logic has paper been considered an essential good under the current circumstances?" asked Saeed Laylaz, a prominent journalist and pundit in a recent interview. He also referred to the decision as "explicit theft.”

However, cutting the flow of government support will mean that hundreds of book, newspaper, and magazine publishers will fold, with the potential for thousands of job losses at a time when high unemployment is a major challenge for the Rouhani administration. It should come as no surprise that the administration is unwilling to take a leap and reform the paper subsidies, despite Rouhani’s longstanding intention to reduce subsidies across the economy.

"The other issue is that the majority don't accept that government paper subsidies are wrong in essence," Sadri adds. In this way, Iran's government is failing to address the long-term problem by dealing with the current paper crisis as a short-term phenomenon.

But while change to the government policy may not be imminent, Sadri does believe it is inevitable. "Even if no prospects of change are foreseeable at the moment, it will happen either way," he said, pointing out that many countries have undergone similar processes of reform that on many occasions took decades to realize. In publishing, as with other parts of Iran’s economy, reform remains a waiting game.

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Closure of Tehran Bazaar Reflects Fierce Elite Competition, Not Popular Politics

The closure of Tehran’s Grand Bazaar yesterday, and the closure of the consumer electronics bazaar the day before, seemed to be part of the regular and widespread protests that have roiled Iran over the last few months, spurred by economic volatility. Many saw the bazaar’s closure and subsequent protests as a meaningful escalation, a sign that perhaps popular discontent was spreading to key institutions and that coalitions were forming that could challenge the government more directly. After all, the bazaar has historically been seen as the heart of Iranian civil society, an institution where people of all walks of life could cross paths. As a physical institution, it was long a rare incubator for solidarity: “the rooted nature of the market… establish[es] the necessary foundation for communal allegiance, with its confined nature fostering long-term and face-to-face interactions among bazaaris.”

But this conception of the bazaar is an artifact of an earlier time. The bazaar in Iran today can no longer claim to be what historian Roy Mottahedeh eloquently described as “the assessor that sets the valuations politicians must use when they trade.” Over the last few decades, the bazaar has been cleaved from Iran’s civil society, no longer standing at its heart, but rather in isolation, losing its former role as a cite for broad civil society politics, and acting instead in its economic self-interest as the recent protests so transparently expose. Understanding this transformation is fundamental to an assessment of the recent protests. 

The networks of the bazaar that linked the merchants to civil society were deliberately disrupted and broken following the 1979 Islamic revolution. As detailed by Arang Keshavarzian in his seminal Bazaar and State in Iran, the new revolutionary government, concerned about the continued role of the bazaar as a site of contentious politics, sought to constrain the role of the bazaar in civil society via two processes.

First, those bazaar merchants loyal to the revolution and the new Islamic Republic were co-opted into the state, offered positions as the heads of ministries and bonyads. The regime rewarded namely the members of the group of the Islamic Coalition Association (ICA), a small segment of bazaar merchants, who had “financed and organized many political rallies and events… became part of the new ruling elite.” Incorporating these bazaaris into the regime gave them new incentives and power, changing their relations with the bazaar—indeed, they are no longer referred to as bazaaris by other merchants but instead called dawlati, meaning “of the government.” Personal gain motivated the separation from the bazaar. With the economy under state control, officials were in the position to take advantage of power for personal gain, with, “direct access to rents via exclusive importing licenses, tax exemptions, subsidized hard currency, and control over procurement boards and industrial establishments. The bazaaris who have established patronage channels have used them for personal and exclusive ends, and not as a tool for the benefit of the entire bazaar.”

Second, a new kind of profiteering was introduced to the bazaar. During the Iran-Iraq war, the government of the Islamic Republic saw its coffers emptying rapidly. Iran’s economy was increasingly cut-off from global markets for goods and services as a result of economic sanctions.  Some goods were unavailable, others became more expensive. Turning a crisis into an opportunity, elements in the bazaar began to engage in smuggling both in order to gain access to goods that would be sold for high prices in the market, but also to engage in profiteering and to secure rents that could be funneled to quasi-state institutions. Dawlatis in the bazaar enjoyed state-sanctioned access to black market goods that they could sell at market for large profits. They could also benefit from preferential access to foreign currency.

To be clear, these changes did not make the bazaar apolitical. On the contrary, the merchants continued to mobilize in a coordinated fashion, but with a new and more self-serving outlook. Bazaar closures like those seen this week are relatively rare, but did occur numerous times during the the Ahmadinejad years, with notable closures in 2008, 2010, and 2012. It would be easy to assume that these closures were due to the general economic malaise and popular dissatisfaction that marked Ahmadinejad’s tenure, but the fact that the bazaar did not engage in any significant mobilization in 2009, when sustained mass-protests emerged in response to Ahmadinejad's disputed reelection, demonstrates that civil society solidarity was not the motivating factor. The merchants of the contemporary bazaar do not mobilize for the people. They only mobilize for their own interests.

These is a clear line that can be drawn from the bazaar mobilizations of a decade ago to those of today. The Ahmadinejad years saw the rise of a new kind of rentierism in the Iranian economy, where quasi-state entities extended their role in Iranian enterprise. Iran’s Islamic Revolutionary Guard Corps (IRGC) ambitiously expanded their industrial operations, taking advantage of free-flowing contracts and financing made available by the Ahmadinejad government. A new kind of corporatist rentierism was emerging. Rather than rely on smuggling and arbitrage, quasi-state groups leveraged political connections to provide more valuable products and services to the economy than mere market commerce, sensing an opportunity as the Iranian private sector was squeezed by international sanctions and international companies reduced their presence in the market.

The nascent rivalry between the bazaari class and the IRGC would have been unthinkable in at the outset of the bazaar’s post-revolution transformation, but as IRGC generals saw opportunities develop in the boardroom, new fault lines have emerged, particularly in light of Rouhani’s pursuit of economic reform.

President Rouhani was elected in 2013 on a mandate to liberalize the economy through two interrelated processes: improve monetary policy and overall transparency in the economy and boost foreign trade and investment. He has been a vocal critic of the IRGC and its role in the economy. But it should be noted that corporatist rentierism is not entirely incompatible with liberalization. Rouhani has always positioned himself as giving the IRGC leaders a choice—they can either engage in business or serve proudly in the military, but they cannot do both. Faced with this choice in a liberalizing environment, an entity with links to the IRGC that is a beneficial owner of a company can either profit by offloading its shares in that company to a non-IRGC linked firm (phenomenon which has been observed in several cases) or it can clean itself of its IRGC links in order to position itself to benefit from expected foreign trade and investment. The availability of these options also help explain why liberalization has received a relatively robust endorsement from the supreme leader, Ayatollah Ali Khamenei, including a recent statement that parliament must “must independently make legislation on issues such as terrorism or combating money laundering.” Khamenei’s concern is mostly about the pace of liberalization and the provisioning of its fruits, not its intended structural effects.

Importantly these structural effects threaten the bazaar as it operates today. The fundamental source of rents in the bazaar is arbitrage. Access to goods is secured at a low price, either through smuggling or manipulation of the foreign exchange markets, and then goods are sold at a high price. The disproportionate economic muscle of the bazaar network, stems from rents generated by high-value items such as gold and jewelry and electronics.

As the consumer electronics bazaar shut in protest over the currency fluctuations, Mohammad-Javad Azari Jahromi, the Iran’s Minister of Information and Communication Technology, sought to expose the predatory arbitrage. He disclosed that while consumer electronics sellers in the bazaar were sold a total of EUR 220 million of foreign currency at the official exchange rate in order to purchase stock, only approximately EUR 75 million of mobile phones were imported. So two-thirds of the foreign currency provided cannot be accounted for.

The implication is that approximately EUR 145 million in foreign currency was siphoned-off to be sold at the black market rate, likely allowing the traders to nearly double their investment in the foreign exchange. As demonstrated by Jahromi’s resolve to expose such fraud, these types of activities would become impossible if the Rouhani administration can successfully implement the liberalization measures currently being pursued. Whether it is improving tax collection mechanisms, bettering customs controls, raising accounting standards, introducing stronger financial crime laws, or instituting tighter controls on foreign exchange, including a unified rate, such reforms would spell the end of the bazaar’s cash generation, now seen as a drag on the economy at large. 

Meanwhile, IRGC-linked development companies are among those building a plethora of malls across Iran, slowly eroding the bazaar’s long-standing role as the a pillar of Iran’s consumer-driven economy. Ironically, in undermining the bazaar in this way, the Islamic Republic is achieving something the Shah had always sought to accomplish. In 1979, the bazaar mobilized against the Shah largely due to his declared dislike for their “worm-ridden shops” and his attempt to curtail their economic influence. In his own words, the Shah “could not stop building supermarkets. [He] wanted a modern country.” But he never got the chance to render the bazaar obsolete.

Four decades later, economic liberalization and modernization is finally chipping away at the bazaar’s customer base as consumers habits see hours spent in malls and supermarkets rather than in the labyrinthine bazaar. The benefactors of this shift in consumer habits are both Rouhani and his private sector supporters and the opportunistic elements of the IRGC. The losers are the elite traders of the bazaar.

To be clear, not all merchants are part of the predatory elite. There remain plenty of humble grocers and shoe-sellers and spice merchants who can count themselves among those under relentless economic pressure. For these merchants, participating in a closure is not always a matter of choice. Journalist Reihaneh Yasini, in her reporting from the bazaar on Monday, spoke to merchants who described being ordered to shut their shops unwillingly. One young bazaari said, “It was about 11 o’clock when some people came by and said everyone must close their shops. We got scared and also closed.” Another added, “They were angry. They said they would use bricks to smash the windows. They appeared to me to be people complaining about rising costs. It was right for us to close the shop after this happened, though in reality closing the shop has little cost for us. Our sales are so low that closing the bazaar for one day will make little difference to us.”

It is unlikely that the closures were spontaneous. This has not been the historical norm for mobilizations at the bazaar and accounting for historical trajectories and the intense competition of Iran’s present-day economy, the bazaar’s mobilization is best understood as a manifestation of elite competition. Bazaar elites sought to co-opt the voices and slogans of a frustrated and economically insecure population in order to undermine their political opponents and put the brakes on threatening reform processes.

In this sense, the bazaar closures may follow the same playbook as some of the initial mobilizations in Mashhad at the end of last year. These tactics must be called out. There is a very real risk that genuine civil society frustrations are becoming instrumentalized by elites in an effort to preserve the kind of predatory economic activity that has led to so much economic suffering among the Iranian people. Outside observers must remember than the success of civil society protests in Iran depends principally on the independent collective action and claims-making of those mobilizations, not merely on the spectacle of the protests themselves.

Photo Credit: Thomas Cristofoletti