Iran Bazaar Strikes signal Misery, not Sanctions ‘Victory’

On Wednesday, the Tehran covered bazaar was closed, and the traditional market in some other cities such as Mashhad also went on strike, with demonstrators protesting the collapse of the Iranian currency, the rial. Until last November, the rial was about 10,000 to the dollar. Then it fell to 12,000. Last summer it hit 16,000. Some merchants were offering 35,000 to the dollar on Wednesday and expected the rial to decline further.

Although the US, the EU and Israel’s government will gloat that ‘sanctions are working,’ it is unclear that any such thing is true.

True, Western sanctions on Iran have gone beyond mere boycotts to a kind of financial blockade, in which obstacles are being placed in the way of Iran selling its petroleum to third parties, especially in Asia.

Iran had been producing 3.5 million barrels a day of oil, and selling 2.5 million abroad. It is now apparently only producing 3 million barrels a day and selling 2 (especially to China, India and some other Asian states). Iran is shipping to China in its own tankers and insuring them itself, which is producing some delays in delivery, but nothing the Chinese are worried about. The loss of 500,000 barrels a day in exports, and the extra costs of doing business (15%?), however, cannot possibly be causing the collapse of the value of the rial.

The West can blockade Iranian petroleum in this way because Saudi Arabia agreed to ‘flood the market,’ pumping as much as two million barrels a day more than normal. Iraqi output is also up about a million barrels a day over 2010 levels. But the addition of a couple of million barrels a day wouldn’t have been enough to allow this policy. In addition, the world economic slowdown has reduced the rate at which the demand for oil is expanding in Asia. At any point where Asian demand returns strong, Iran will likely be better able to evade sanctions.

Thus, although Iran’s petroleum sales have fallen, it is not clear that they have will have fallen dramatically when new trade arrangements with China, India, South Korea and so forth are implemented, getting around the US financial blockade. Europe stopped buying Iranian oil on July 1, and sales were hurt that month. But Iranian officials say that they are back up to normal sales volume this fall. Likely Europe will buy oil from other producers, denying it to previous customers in the global south, some of whom will turn to Iran. Iran’s government should be flush with billions of dollars of reserves, and should have the expectation of more, and there is no obvious reason for the rial to plummet this way.

In short, it is not entirely clear that these severe sanctions or the reduced oil exports are the only things responsible for the rial’s rapid decline against the dollar.

Hyperinflation is caused by printing too much money. President Mahmoud Ahmadinejad has for some time pumped extra money into the economy in the form of subsidies, which has caused the money supply to grow unhealthily in Iran. The rial has probably for a long time been over-valued, partly because of the support for it of an oil state. So it may be that years of easy money are now coming home to roost, in part because the severe sanctions have (irrationally) weakened the confidence of traders in the hardness of the rial, a confidence that itself had earlier been irrational.

Money traders in the neighboring United Arab Emirates are said to have been unable to quote a price for converting rials to dollars on Wednesday, because the rial was going over a waterfall in a barrel, falling by the second.

The money changers and merchants in Tehran and Mashhad were angered in part by an inability to price their goods (especially imported goods). Many of them had counted on keeping some of their assets in dollars, but suddenly dollars have disappeared from the Iranian currency markets, probably because they are being massively hoarded. There are rumors in the bazaar, say some close observers, that ‘mafias’ and cliques are doing the hoarding.

But reading these events as a ‘victory’ for sanctions goes too far. First, the demonstration in the bazaar may have had a narrow social base.

Here is a video of the closed-up bazaar in Tehran on Wednesday:

There is video showing a larger crowd, apparently middle class, some of whom demanded that the regime stop throwing money away in Syria and spend it in Iran instead. This theme is reminiscent of the chanting of the Greens in September of 2009 that Iranians should stop obsessing about Palestine and put the emphasis on Iran’s welfare instead. The remnants of the Green Movement press hailed the demonstrations and reported on them in detail.

Second, the demonstration may have been aimed at unseating President Ahmadinejad, whom the Iranian right and business classes have long loathed because of what they see as his populist and irresponsible mismanagement of the economy. (His subsidies for the working classes and the poor, and easy money policies grated on them). Ahmadinejad has been in bad odor with conservatives since his tiff last spring with the Supreme Leader over key government appointments, including in intelligence. The Supreme Leader won, as might be suggested by his title, and Ahmadinejad is a lame duck.

Although Ahmadinejad is hated in the West, Wikileaks revealed that he has often been the official most inclined to compromise with and negotiate with the West, being blocked by the Revolutionary Guards Corps and other hard liners to his right. For the Iranian far right to unseat Ahmadinejad is anything but a victory for the West.

Ahmadinejad himself blamed the currency collapse on ‘psychological warfare’ waged by enemies ‘abroad and within.’

Finally, for sanctions to ‘work,’ they would have to have the effect of deterring the Iranian state from purusing its nuclear enrichment program. There is no such evidence, and the likelihood is that regime officials will be cushioned from the sanctions because they control the state-owned oil company and can siphon off money to protect themselves.

Severe sanctions almost never work in producing regime change or even in altering major policies of regimes. In Iraq, the severe sanctions of the 1990s actually destroyed the middle classes and eviscerated civil and political society, leaving Iraqis more at the mercy of the authoritarian Baath Party of Saddam Hussein than ever before. The high Baath officials squirreled away $30 billion during the oil for food program, cushioning themselves But the sanctions that denied Iraqis chlorine imports disabled the water purification plants, giving the whole country constant diarrhea, a condition that easily kills infants and toddlers. Some 500,000 Iraqi children are estimated to have been killed this way.

Usama Bin Laden cited this death toll of Iraqi children as one of the reasons for his 9/11 attacks on the US. If the sanctions end up killing Iranian children, the US could be borrowing a lot more trouble for the future.

Moreover, the difficulty of maintaining the sanctions on Iraq was given as a reason by then deputy secretary of defense Paul Wolfowitz as a reason for going to war with Iraq. Severe sanctions often do not deflect wars but rather lead to them.

The collapse of the rial, then, may be a signal that the Iranian public is in for great suffering and that the savings of the middle class are about to be wiped out. But that would mean they would lack the money to pay for an insurrection. Moreover, while they are blaming Ahmadinejad now, they know that the US, the EU and Israel are behind their deepening misery, and they are likely to come to hate their torturers.

23 Responses

  1. Usama Bin Laden cited this death toll of Iranian children as one of the reasons for his 9/11 attacks on the US. If the sanctions end up killing Iranian children, the US could be borrowing a lot more trouble for the future.

    I think you mean Iraqi children in the first instance.

  2. “Usama Bin Laden cited this death toll of *Iranian* children as one of the reasons for his 9/11 attacks on the US.”

    I believe you mean *Iraqi* children, not Iranian.

  3. There are many strikes and worker actions going on Iran for the past year because of the economic crisis in the country and worldwide.

    Thanks for pointing out the internal differences and they also have been going on a very long time, wonder who the fringe so called left in the US and Stalinists will support then after the fall of the President who my just fall on his sword before his term is up in 9 months.

    A report saying after the President “Sanctions, Not Us, to Blame” declaration was directly opposite that of a Tuesday statement by Speaker of Parliament Ali Larijani, who repeated his assertation that sanctions carried 20% of the responsibility and Government mismanagement the rest.

  4. I think you meant that Usama bin Laden cited the deaths of Iraqi children, not Iranian children.

  5. “Moreover, while they are blaming Ahmadinejad now, they know that the US, the EU and Israel are behind their deepening misery, and they are likely to come to hate their torturers.”

    Such attitudes are like to persist even after a regime change.

  6. Fourth to last paragraph you mention Iraqi chlorine embargo, then next paragraph it is Iranians dying that has Usama upset. Is that a mistake?

  7. Yeah, yeah, yeah.

    And whom, what, do we leverage with, and how? Write another column about supporting Obama/Clinton/Likud because, well, Romney is worse.

  8. This missing element in all of this is Iran offering anything resembling a reasonable explanation for enriching uranium. Until that occurs, and with the alternative being violent attacks, I think we have to accept what is happening now as the best alternative. Its not pretty. But its a whole lot prettier than bombing.

    • A reasonable explanation, Andy, is that Iran, like any other nation, has a right to the peaceful use of nuclear power, which is what enrichment to the 3% to 5% level implies. Enrichment to the 20% level is for nuclear isotopes use in medical oncology and other diagnostics. Did you know, Andy, that half of all hospital patients, in the US and Europe, are treated, directly or indirectly with medical isotopes which can only be produced in reactors or in accelerators. Many people’s lives are saved every year throught the use of medical isotopes. Does that resemble a reasonable enough explanation?,

  9. In the 1st sentence of the 3rd paragraph from the bottom starting w/ “Usama Bin Laden cited this death toll of Iranian children …” you must mean “Iraqi children.” Your reference to Ahmadinejad being opposed by “the Iranian right and business classes” seems to suggest that Ah. is somehow on the left of the Iranian political spectrum. This is not credible at all.

    When mentioning “His subsidies for the working class and the poor” you link to a 2011 IMF report. I haven’t read the report thoroughly, but it’s actually referring to Ah. removing the subsidies, so-called “subsidy reform,” thereby allowing prices to dramatically rise. As far as I know, the subsidies had been around from the time of Khomeini, and I don’t know why you’re giving Ah. credit for them. E.g., here’s a report on the arrest & imprisonment of Iranian economist Fariborz Raisdana for having criticized Ah.’s gov’t for harming the poor & working class by cutting the subsidies:
    link to en.irangreenvoice.com

    Ah. has had a populist style, but that doesn’t make him a friend of the workers:
    link to iranhumanrights.org
    Ah. belongs to the right of the Iranian political spectrum, which is beset by factionalism. His gov’t has been implicated in corruption, one case being the largest in IRI history, and mismanagement:
    link to huffingtonpost.com

    Also, to claim that the 10/3 protests in the video you posted may have been organized by the Khamenei faction is far-fetched given their slogans regarding Syria, which you mentioned, and given that it got almost no coverage in IRI media, except when referred to as “rioters” and “mischief makers” who were subdued by security officers.

  10. Where did you get the $30 billion dollar statistic for the Oil for Food illegal revenues?

    GAO said the regime got $10 billion dollars in illegal revenues (smuggling, kickbacks, etc).
    Volcker report said the regime received $1.8 billion in illicit income.
    $30 billion isn’t even close to those estimates.

  11. “Moreover, while they are blaming Ahmadinejad now, they know that the US, the EU and Israel are behind their deepening misery, and they are likely to come to hate their torturers.”

    That’s why Clinton tries to put all the blame on Ahmadinejad and not on sanctions.

    • Actually, Joe from Lowell, there is something the Iranian regime could do to begin instilling confidence that their nuclear program has no weapons component, and thus lay the groundwork for lifting of sanctions. They could offer the IAEA inspectors complete and unfettered access to all–and I mean all–of their nuclear sites and the production records at each, not holding back on any of them. If Iran’s claims are true, and the IAEA can verify the claims, that would go a long way toward rendering the sanctions unnecessary.

        • “Maybe Israel should do that, Bill. And, while they are at it, Israel could sign the Nuclear Non Proliferations Treaty, as Iran has.”

          I could not agree with you more, Mr. Martin. Israel’s perceived national interest very often does not coincide with the U.S. national interest at all. Israel’s West Bank settlements, Netanyahu’s push for an attack on Iran, and Israel’s nuclear policy are all examples of area’s in which our national interests diverge. And Netanyahu’s public attempt to bully the U.S. into setting “red lines” was a disgusting display of arrogance. Yet, Israel has always gotten a pass from the U.S., under both Republican and Democratic administrations.

          Nevertheless, the topic of this post concerned sanctions against Iran, not Israeli nuclear policy. I generally try to comment on the topic.

      • Bill,

        I have long considered the threat of Iranian nukes to be overhyped, because I have long considered that Iranian regime, while quite nasty, to be a basically rational actor.

        But for them to endure this punishment instead of opening their facilities, or just buying the stuff from Russia instead of making it themselves, is quite irrational. It demonstrates a willingness to accept damages completely out of proportion from any real-world gains.

        • “But for them to endure this punishment instead of opening their facilities, or just buying the stuff from Russia instead of making it themselves, is quite irrational. It demonstrates a willingness to accept damages completely out of proportion from any real-world gains.”

          Agreed, Joe from Lowell, which brings up the quite reasonable question of why they would do it unless they perceive the real-world gains to be worth the punishment. Perhaps (just perhaps) they are being rational within their own frame of reference, particularly when they see how North Korea time and again has managed to extract and extort gains during the whole nuclear charade we have played with that regime since 1994.

  12. As there is as yet no proof that Iran is working on a nuclear bomb only suspicion, the sanctions are a crime against Iran’s sovereignty and because of their disastrous effect on the economy of Iran, an act of war. This is the same process that preceded and eventually led to the invasion of Iraq. Obama’s approach may be slower than Netanyahu’s but it is leading to the same end.

  13. Thanks for this update on Iran.

    Minor quibble: “Hyperinflation is caused by printing too much money.”

    Ordinary run of the mill inflation is caused by expanding money faster then production, or production shrinking faster then money supply as might also be the case here. Hyperinflation like in Weimar Germany is caused by debt denominated in foreign currencies or bullion (like the war indemnities in the Weimar case). If one suspect hyperinflation one should look at Irans current accounts to see if there is a sustained trade imbalance. However, this so far can be ordinary inflation coupled with the usual speculation.

  14. “the sanctions are a crime against Iran’s sovereignty and because of their disastrous effect on the economy of Iran, an act of war.”

    Regardless how distasteful you may find the sanctions against Iran, they are not an “act of war.” International law recognizes a blockade as an act of war, but not sanctions. Sanctions at times have been in place against several countries, including Burma, among others, and no one has considered them an “act of war,” because they were not. And neither are sanctions against Iran.

    • To the hyper-punctilious pecksniffian, labels trump reality every time. And do a good job of hiding the reality.

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