ENDGAME: How Iran's
Hyper-inflationary Currency Collapse
Could Lead To Revolution
Iran has captured a lot of attention this week
as inflation spirals out of control and the
Iranian rial is quickly becoming worthless.
Yesterday, the rapidly falling value of the
rial sparked serious street protests in Iran.
Now, the question becomes: Is the
hyperinflation currently underway in Iran
going to be the straw that finally breaks the
camel's back?
The West certainly hopes so.
That's the whole point of the forceful Western
sanctions placed on Iran's oil exports and
even imports of basic goods and the Iranian
banks being completely frozen out of the
international financial system.
The sanctions have been in effect since July,
but the situation is really just now starting
to get worse as it becomes crystal clear to
Iranians that their monetary authority has
completely run out of the foreign exchange
reserves they need to defend the value of
their quickly plunging rial.
The first realization that the CBI (Iran's central
bank) had run out of firepower,
says BNP Paribas head of CEEMEA strategy
Bartosz Pawlowski, came two weeks ago when the
Iranian government opened a "foreign exchange
center" in which it pledged to sell U.S.
dollars for 2 percent below the black-market
street price. This was supposed to curb black
market trading, which has been driving the
devaluation of the rial.
However, the plan backfired when Iranians
realized that everyone was rushing to the
center to exchange rials for dollars.
Pawlowski told Business Insider that this mad
rush ended up making "the demand for hard
currencies more visible and tangible."
Pawlowski went on to say that "since there
hasn’t been any reports of the government
stepping in to limit depreciation and/or
providing subsidies for basic goods, which
prices have also surged, the worry is that
those reserves have shrunk quite fast."
At that point, the hyperinflation went
parabolic.
And now, this week, frustrated Iranians have
taken to the streets in protest.
Does the hyperinflation lead to revolution,
then?
Renaissance Capital chief economist Charles
Robertson says it might. He wrote in a note to
clients back in March, when there was
uncertainty surrounding how the Iranian
population would react to the first elections
since the massive "Green Movement"
demonstrations following the 2009 elections –
that at the firm, they "do see the risk of a
violent political transition that could lift
oil prices higher."
Robertson also quantified the risk, based on
historical regime changes:
There is a 3.6% chance of democratisation in
an autocracy with per capita GDP of
$10,000-19,000 or 5.1% if incomes are
shrinking, and a 6.4% chance at $6,000-10,000
or 15.5% if incomes are shrinking. Iran’s per
capita GDP in 2009 was $10,622. This tells us
not to make a revolution a base case for 2012,
but it represents a serious risk.
Iran's GDP per capita was estimated by the IMF
to be $12,200 in 2011, but sanctions have
taken a serious toll this year. Furthermore,
incomes are shrinking in real terms as the
rial loses value.
And the outlook for Iran's current situation
is not very bright.
The problem, as complex systems scientist
David Korowicz told Business Insider, is that
given the international political dynamics,
Iran has little recourse in their current
situation, and that it "could be catastrophic
for the Iranian people."
Korowicz painted a troubling picture of the
immediate future that Iranians may now face:
Where you have a hyperinflation problem,
basically what happens is the whole society is
out trading anything they can for food.
Food becomes the thing that outbids everything
else. If people start spending because they
have to, and everything goes on more and more
of the essentials, you effectively kick out
most of the rest of the economy.
So, if I wanted to buy furniture, I'm not
going to buy furniture in that environment –
or anything discretionary or
semi-discretionary.
That can add to the acceleration in the price
of essentials, but of course, you also have
got the hyperinflation on top of that. You can
literally very quickly just kick over the
whole discretionary economy. That's it.
So, I think Iran in that situation is in a
much more dangerous situation.
It's unclear at this point whether Iran has a
single remaining option to stave off a
complete economic collapse, other than giving
in to the demands of the West over its
controversial nuclear energy program. BNP's
Bartosz Pawlowski told Business Insider that
"reports already point to remarkable increases
in prices and these things tend to feed on
themselves so we may still get some
troublesome news going forward."
He also gave a poignant reminder about last
time food prices swelled in the Middle East,
saying, "As you know, spiking food prices were
one of the reasons which led to the so-called
Arab spring last year."
And Dennis Gartman said in his Gartman Letter
publication today that "the total collapse of
the currency shall give rise, as such
collapses always do, to chaos and perhaps,
hopefully, to regime change."
However, University of Michigan professor and
Middle East expert Juan Cole disagrees. In a
post on his blog, Cole pointed out that
sanctions of the sort that the West has
imposed against Iran rarely lead to regime
change.
Instead, the hyperinflation will just fall on
the shoulders of the Iranian people and not
necessarily the ruling regime, writes Cole:
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 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.
It certainly seems possible that the regime's
days are numbered, but as ever, uncertainty
persists.
Monday, October 8, 2012
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.