Despite gains in bilateral relations and economic ties, one year after the signing of the Abraham Accords, there is an understanding in Israel that the agreements have not yet changed the “rules of the game” on a strategic level in the region.
On June 18, 2021, Iran will hold its presidential election at a significant moment in the history of the Islamic Republic, as the regime confronts mounting domestic and international pressure. Internationally, the U.S. “maximum pressure” campaign and deterioration of relations between Iran and its Arab neighbors has increased external political and economic pressure on Tehran. This has been compounded by recent agreements to normalize diplomatic relations between Israel and two Gulf Arab states through the Abraham Accords. Domestically, as economic conditions deteriorate in Iran, the rift between the state and its citizens has been visibly widening.
The February parliamentary elections had the lowest turnout since the 1979 Islamic Revolution largely due to widespread social dissatisfaction and economic hardship. Moreover, the upcoming vote will be the first presidential election since protests broke out across 21 cities in November 2019, sparked by gasoline rationing and price increases. The most burning issue in Iran’s economy is the devaluation of the currency. The value of the rial has fallen to a record low (about 260,000 rials to $1), boosting inflation and crushing purchasing power in Iran. The socioeconomic consequences of the dramatic decline of the rial have led to widespread political apathy. In view of the widening state-citizen rift, demonstrated by recent protests and low voter participation, it is no surprise that confidence is low among the Iranian public in the next president’s ability to resolve these issues.
In recent years, inflation has reached a historical high in Iran. By the end of September, consumer prices had increased 34.4% year on year and transportation costs had increased by 80%. Inflation has had widespread consequences for households and industries. As a result of the currency devaluation, purchasing power has declined. The majority of Iranian households have been forced to adjust their lifestyle and cut spending, even for essentials like food and clothing. Access to health care has also become unaffordable for many Iranians due to rising costs. By 2019, about 8 million Iranians did not have health insurance. Iranians are expressing their frustration over the constant devaluation of the rial and are sharing their stories on social media: The bazaar is half closed, and most shops change their prices depending on the dollar exchange rate.
Inflation has dramatically increased housing prices. According to the Central Bank of Iran, the average price for purchasing housing in Tehran reached 190 million rials per square meter (about $700). According to a study by the Research Institute of Strategic Studies at the Ministry of Science Research and Technology, on average over 66% of each household’s annual income is consumed by housing costs. In August, year-on-year inflation for housing costs stood at 44.6%. Over the past 25 years, the number of Iranian families renting homes in urban areas has increased by more than 70%. At the same time, more than 70% of residential properties in Iran are purchased as investment properties.
A number of government-owned and quasi-government-owned organizations (including 17 public and private banks) are actively investing in the property market in Iran. As the value of the rial declined over recent years, property investments, which are mainly speculative, became one of the most attractive forms of investment in Iran. The overflow of capital in the property market has raised the price of housing substantially and deprived Iranian households of access to affordable housing – 30% of the population cannot afford suitable housing. Shipping containers or tents on roofs have become common housing options for low-income Iranians. According to the Research Institute of Strategic Studies report, “40 years after the Islamic Revolution, not only the promise of protecting the poor and underprivileged did not materialize, but also many Iranians have been deprived of housing as a basic human need.” The deep-rooted frustration among Iranians over lack of access to affordable housing has been widely covered by social and broadcast media.
The decline of the rial has not only affected the livelihood of average Iranians, but it has also triggered a rise in prices for manufactured products and services leading to a deterioration of industrial activities. The purchasing managers’ index, a survey of trends in fundamental business activities, declined from 47.58% in July to 43.51% in October, reflecting a decrease in business output, new orders, supplier deliveries, raw material inventories, and employment.
To fight inflation, the government is considering changing the national currency’s name and removing zeros off its face value. While such measures may have limited and temporary positive impacts, they fall short of offering a sustainable solution for the deep causes of inflation. Devaluation of the rial will be the greatest economic obstacle the next administration will be expected to address.
With economic hardship in Iran at a historically high level, Iranians are deeply disappointed by the government of President Hassan Rouhani and have lost confidence in the regime to deliver on campaign promises. The economic mismanagement and resistance to change over the past four decades by a succession of regimes, as well as persistent policies of suppression inside and aggression outside of Iran, has demoralized supporters of conservatives, reformists, and pragmatists alike.
Before he was elected president in 1997, Mohammad Khatami promised political reform and expressed a willingness to normalize Iran’s relations with the rest of the world. His proposal for “dialogue among civilizations” even attracted attention from global leaders at the time. Mahmoud Ahmadinejad’s populist economic expenditure plans during his presidency (e.g., subsidies, cash handouts, and mega-government housing projects) combined with widespread corruption and rising sanctions left the economy in stagnation. Iranians hoped Rouhani would resolve these issues and deliver on the broken promises of previous presidents. Rouhani’s first election campaign promised to bring back the value of Iranians’ “passports and their national currency.” This message resonated with both rural and low-income citizens as well as the middle- and upper-class urban population. In his second term, Rouhani ran against Ebrahim Raisi, a close ally of Supreme Leader Ayatollah Ali Khamenei and a potential candidate to succeed him. In that election, Rouhani received the protest votes against Khamenei’s preferred candidate as well as those who genuinely believed Rouhani could resolve the country’s economic and political crisis with the United States. Nearing the end of Rouhani’s second term as president, Iran is internationally more isolated than it has been at any point since the end of the Iran-Iraq War, the value of the country’s national currency is at its lowest since the 1979 revolution, and half of the country is living in poverty. One of the most popular slogans during recent protests was “Reformists, Fundamentalists, this is your end.”
Nominating a candidate who can attract genuine support among Iran’s citizens will be a major challenge for the regime in the upcoming election. The majority of names on the list of potential candidates circulated in Iranian media have strong military links: Hossein Dehghan, a former Islamic Revolutionary Guard Corps officer and the former minister of defense; Saeed Mohammad, commander of the IRGC’s Khatam al-Anbia Construction Base; Ezzatollah Zarghami, a former IRGC officer and the former head of Iran’s state-owned broadcasting Islamic Republic of Iran Broadcasting.
The election of Joseph R. Biden Jr. as the next U.S. president could offer a glimmer of hope for Iran as he would be expected to end the “maximum pressure” campaign. Nevertheless, the domestic economic challenges are likely to endure as long as issues that are not related to sanctions (e.g., financial mismanagement, corruption, poor monetary and fiscal policies, and market regulation) remain unresolved.
Iran’s next elected president will be saddled with all of these challenges. In May 2019, in a meeting with a select group of students, Khamenei laid out the characteristics of an ideal presidential candidate as someone who is “young” and able to form a “pious government.” In 2014, he called for an “economic jihad” in which the country’s economic activities are managed in isolation from Western powers. Considering the majority of candidates put forward so far by local media are current or former members of the IRGC, regardless of the election result, the regime’s focus after the next election is likely to remain on expanding its defense capacity to protect itself against future internal uprisings, potentially sparked by mounting economic grievances, and the prospect of external hostilities.
Over recent years, the regime has increased pressure on dissent while failing to offer any meaningful solution to address declining economic conditions and growing poverty. In the short run, such strategies have worked in favor of the regime; in the long run, they will disintegrate social cohesion and lead to deep social destabilization. The next presidential election may well be a historic moment for the Islamic Republic. The regime’s nominated candidate is a shoo-in for the presidency and will form a government that would seem far more likely to continue current economic strategies, leading to more poverty and hardship for Iranians, than disturb entrenched interests by attempting to implement reforms to end decadeslong mismanagement of the Iranian economy.
is a non-resident fellow at the Arab Gulf States Institute in Washington. She is the Marie Curie Fellow at the German Institute of Global and Area Studies working on Iran’s economic diversification and economic resilience strategies.
The TotalEnergies deal with Iraq includes clean energy aspects that are a step in the right direction for the country to develop a more sustainable economy, but the focus is still on oil and gas.
Gulf actors will be paying close attention to the dispute to make sure it does not transition to more direct conflict that could further jeopardize regional stability and strategic Europe-Mediterranean-Africa market linkages.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More