Protest has a woman's face. How Iran's unrest is pushing the regime for real reforms

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A New President and a Weak Economy

Iran's economic problems have created an atmosphere and a general backdrop that further encourage and fuel the protesters’ anger. In 2022, the inflation rate exceeded 50%. The lower strata of Iranian society were the most susceptible to its negative effects. Prices continued to rise while the purchasing power of households fell, and GDP growth slowed. Thanks to high oil prices, the Iranian economy has not shown negative growth rates in 2021-2022. At the same time, the government did not do enough to solve the economic problems of the population.

In 2021 and early 2022, President-elect Ebrahim Raisi's actions in the economic sphere were leisurely and inert. This was largely due to the fact that the new ruler did not have much experience in managing the economy - he had built his career in the judiciary. Raisi's entire managerial career was limited to three years (2016-2019), which he spent at the head of a major religious foundation, Astan-e Quds Razavi. Judging by his statements, he tried to avoid innovation, focusing on the experience of his predecessors. In practice, this meant further implementation of the “resistance economy” model based on the principle of partial self-sufficiency. Raisi's economic program was built on populist statements: he was rightly concerned about unemployment, corruption, environmental problems. However, he had no clear action plan or new ideas for real solutions to the problems.

Raisi failed to assemble a strong economic team of like-minded people in his government. In the mid-summer of 2022, the Iranian press reported on a dispute between Vice President for Economic Affairs Mohsen Rezaei and Minister of Economy Ehsan Khandouzi over the interbank interest rate. The Ministry of Economy asked the Central Bank to lower the interbank interest rate, while the Vice President for Economic Affairs insisted that the interest rate should not be lowered because of high inflation. Such a dispute was far from the only one within the economic bloc. As a result, the ongoing contradictions within the team delayed the implementation of the necessary measures.

The difficult situation in the global oil and gas markets and the election of U.S. President Joe Biden in early 2021 did not help the Iranian economy either. Unlike his predecessor Donald Trump, Biden has not been as tough on enforcing the oil embargo imposed on Iran. At the same time, Tehran itself had already developed a scheme to circumvent the sanctions by bringing some of its oil to the world market. Rising oil prices and the fact that exports ensured an almost positive trade balance allowed Iran to generate additional revenues, which it was actively spending to maintain the political regime (see Table 1). This provided an opportunity for Raisi to reconsider his approaches to resolving the issue of the Iranian nuclear program. Despite initial expectations that Tehran would try to conclude a new agreement with international negotiators as soon as possible in order to relieve the sanctions pressure, it did not happen. On the contrary, the president's team chose a strategy of protracted negotiations.

At least a partial easing of sanctions pressure would have moved the Iranian resistance economy from survival to partial growth. This would not mean an immediate improvement of socio-economic indicators, but the lifting of sanctions would have had at least an indirect positive effect on them.

Change “from on high” did not work

By late spring 2022, Raisi put forward a plan for economic transformation that implied significant reform of the subsidy system. Iran abolished the subsidized exchange rate of the Iranian currency against the U.S. dollar, which had been used to buy and import essential goods. Targeted direct payments to the people were also attempted. Iran's population was divided into ten income groups, from the poorest to the richest. The first three low-income categories received a monthly amount of 4 million Iranian rials ($13.5 at the free market exchange rate), while middle-income Iranians in categories 4-9 received 3 million Iranian rials ($10.1). Those in the richest, 10th income group received no payments. Raisi said the money would be paid over two summer months before being replaced by an “e-coupon” system.

The economic reform plan was full of critical flaws, which served as another catalyst for the protests. The abolition of the special dollar exchange rate helped eliminate one source of corruption and embezzlement, but inevitably pushed up consumer prices of imported goods. The decision to restructure the payment of direct subsidies eased the burden on the budget in the long run, but accelerated the growth of inflation. No alternative mechanisms to curb inflation were proposed. On the contrary, the government steadily reduced the annual volume of issued bonds in the absence of demand, while private investment in the Iranian economy shrank under the pressure of public distrust of the government's economic policies. In different circumstances, both factors could have helped absorb the excess liquidity.

The banking sector, too, has found itself in a difficult situation. According to Iranian economists, high inflation and declining revenues have been spurring small businesses' need for more credit. The banks, on the contrary, are either denying financial support to businesses in these conditions, or setting maximum interest rates.

In addition, the very model of “resistance economy” chosen by the Iranian leadership, without amendments, is unsustainable in the long run. Its application was able to stabilize Iran after the initial shock of the sanctions imposed in 2010-12 and 2018. However, this model has failed to solve the problem of their negative impact on the very foundations of the Iranian economy. The sanctions have hit the Iranian economy's ability to effectively develop its production base, attract foreign investment, use long-term foreign bank loans, and enter new markets.

The deterioration of Iran's production base will inevitably become a major obstacle to the country's economic development and stable budget revenues. U.S. sanctions have been one of the main reasons for the slowdown in Iran's oil and gas sector. Since 2017, there has been no direct foreign investment in any of the country’s major hydrocarbon projects, which means that no new foreign technology has entered the oil sector. Moreover, sanctions have partially stalled the development of Iran's natural gas sector, leaving the country, with its vast natural gas resources, a small player in the international market.

The food and textile sectors also reduced production in 2019-2022. It affected the country's foreign trade: Iranian exports have been declining in both value and weight terms, while the trade balance (excluding oil and gas) has been steadily trending negative.

Social background

The inability of Iran's leadership to convert slow economic growth into social development is another long-term structural problem. Since the mid-2010s, the purchasing power and incomes of Iranian households have been steadily declining. Moreover, basic needs expenses have shrunk in favor of housing payments (Table 2). By 2022, 60 percent of the Iranian population was either slightly above or just below the poverty line. Meanwhile, 18.4% lived in absolute poverty.

Young women are the face of the current protests, as they represent two of the most vulnerable groups in Iranian society: women and youth.

Iranian economists estimate that the unemployment rate among women is 13%, and half as much among men (7.2%). These figures are twice as high among young people between the ages of 18 and 35. According to other data, 77% (7.1 million people) of 15 to 24-year-olds are unemployed (diagram 1). There are also gender inequalities in employment. For example, only one in five women participates in the economy.

Loss of faith and violation of tacit agreements

Economic and social problems in Iran have set the stage for the current protests, political reasons serving as a catalyst: the Iranian people are losing faith in the very idea of the Islamic Republic. The historically low turnout in the de facto organized presidential election of 2021 and the number of invalid ballots exceeding the number of votes cast for the other candidates were the first warning signal for the Iranian political system.

People reacted negatively to the government's idea of mopping up the electoral landscape to ensure Raisi's victory. His failed socio-economic policies only made matters worse, destroying hope even among those who still believed in the ability of the conservative camp to rectify the situation. Meanwhile, the failure of Raisi's predecessors from other movements to make improvements has raised the legitimate question of whether there are forces within the current political system capable of ensuring development and prosperity.

The conservatives have become hostage to their own slogans that after the 2021 presidential election, they were able to achieve unity between the Supreme Leader of Iran, Grand Ayatollah Ali Khamenei, and all branches of the government. Now the government cannot use Iran's traditional political maneuvering, in which the president acted as a scapegoat whom Khamenei could blame for all the troubles and from whom he could demonstratively distance himself. Today, Raisi and Khamenei are perceived as a solid tandem. Which means that any attack on the president automatically means an attack on the Supreme Leader.

The final straw was Raisi's decision to deprive the Iranian population of the freedom for women not to wear a headscarf and to have “sinful pleasures” such as participating in noisy house parties, going to music nights in restaurants and consuming alcohol and drugs (both of which are officially forbidden in Iran). This was part of a tacit agreement between the people and the government: the population endured economic hardship but remained loyal in exchange for the right to ignore certain rules. Under the conservative Raisi, however, this arrangement, which served as a kind of safety valve, was broken, and with it the people's patience waned.

So far, the intensity of the protests suggests that Tehran will not be able to simply suppress them. Sooner or later, the Iranian political system will have to change. Moreover, the depth of the current discontent in Iranian society will not allow the political system to get by with minor transformations and reforms in the economic or political sphere alone.