Taking the government by surprise, Iran is experiencing the largest demonstrations since the Green Movement in 2009 in which protestors contested Mahmoud Ahmadinejad’s election victory. Protests erupted in Mashad on December 28, subsequently spreading to many cities across the country. Initially, protestors were expressing their grievances against the rising cost of living, and demonstrations remained peaceful. However, in the past few days, the protests became increasingly violent and rhetoric escalated to include anti-regime slogans, such as calling for the end of Iran’s clerical leadership. Clashes between police and protestors caused 22 deaths and saw hundreds of arrests.
Despite common grievances among Iranians, at this point in time the protests are not organized and lack a leader to voice their concerns towards the government.
Nevertheless, the protests are unlikely to subside quickly. As a result, business operations will likely be negatively impacted in the short-term. Executives should assess potential implications on local business operations, and prepare contingency plans for downside risks. Despite the current development, Iran remains a large market for many MNCs, and executives and their teams should remain committed to their plans in the market, but adjust strategies and targets as the situation unfolds.
Why are the protests happening?
While Iranians have been facing tough economic conditions for many years, several recent factors contribute to growing economic grievances that led to the sudden outbreak of protests:
- Rising living costs – Since taking office in 2013, President Rouhani managed to cut inflation from more than 30% to around 9%. Nonetheless, the annual cost of living continues to rise significantly, for example, protestors cited the rise in egg prices by around 50%. Further, growth in real wages is not enough to compensate for inflation. Unemployment is around 12% as more people try to enter a stagnant job market.
- Unmet expectations – In Rouhani’s campaign platform, he promised economic recovery and prosperity. Growth was meant to be unlocked after the implementation of the nuclear deal in 2016, but Iranians have yet to see any benefits, and confidence is falling due to Trump’s hostile rhetoric toward Iran and the nuclear deal. Even more importantly, Rouhani did not prepare Iranians for the painful reforms it would take to boost the economy, such as a hike in fuel costs and cuts to cash subsidy payments as outlined in Rouhani’s draft 2018/2019 budget. Instead, Iranians had expected that renewed oil exports and their revenues would trickle down to them
- Corruption revealed – In a speech to parliament in December, Rouhani spoke of fraudulent state institutions that are manipulating the exchange rate and receive government funds without transparency or accountability. This also sparked anger in Iranians, many of whom feel marginalized by the government
- Domination of foreign policy – Over the past few years, Iran has intensified its proxy activities in the Middle East, from Syria, to Yemen, Lebanon, Iraq, and Gaza. Iranians are increasingly frustrated that massive funds are being spent abroad, instead of domestically.
FSG does not expect the protests to evolve into a mass organized movement as Iran saw in 2009, due to protestors’ lack of organization and leadership. However, this lack of organization leaves an open space for Iran’s rival parties, the conservatives and the reformists, to vie for influence and address the protestors’ grievances. This battle is likely to play out in the review and amendment of Iran’s 2018/2019 draft budget. Rouhani and the reformists must effectively communicate how reform and austerity measures will benefit the economy, and also may offer more social freedoms to calm the protests. On the other hand, Iran’s conservatives are likely to advocate for maintenance or even expansion of the cash subsidy program. This is something the government would be unable to financially afford, but if this policy moves forward, Iran would likely increase its oil production and exports, cheating on or even abandoning its obligation to OPEC’s production cut deal, to increase public revenues.
- Private consumption is likely to dampen in the short-term
- To quell the protestors, public funds could be redirected away from ministry procurement spending, and toward more subsidy spending, causing a short-term decrease in public demand for MNCs
- Government disruption or interference to mobile data services to control communication among protestors could also hinder MNCs’ communication with their local partners and customers
- Should the government impose a curfew, MNCs are likely to experience lower sales in the short-term, and should adjust their targets accordingly
Downside risks to watch:
- Violence between pro- and anti-government protestors – As a response to the anti-regime protests, pro-government rallies have also been organized. So far, the two groups have demonstrated in isolation from one another. However, should clashes erupt between the two groups, unrest is likely to be prolonged in Iran, severely hurting economic confidence.
- Nuclear deal disruption – If the government and police intensify violence and crackdowns against the people, for example by deploying the Iranian Revolutionary Guard Corp (IRGC), aggressive action from the US could follow. There are several legal deadlines coming up between January 11 and 17 in which President Trump must certify whether or not Iran is meeting its obligations to the nuclear deal and whether to continue the temporary waiver of US nuclear sanctions on Iran. An increase in government violence against Iranians could be Trump’s excuse to re-impose nuclear sanctions and end the nuclear deal, setting the country back economically and closing the opportunity that many non-US firms had to do business with Iran.
- Escalated tensions with Saudi Arabia – Figures in the Iranian government have blamed the protests on foreign influence, particularly Saudi Arabia. Iran could choose to escalate tensions with Saudi Arabia by intensifying its proxy activities in Yemen, Lebanon, or Gaza, potentially encouraging more direct attacks from Yemen into Saudi Arabia. Intensifying its regional activities would continue to strain Iran’s public finances and dampen investor and consumer confidence not only in Iran, but also in the GCC.
For our latest updates and insights on Iran, FSG clients can access the latest Iran Market Spotlight.
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