Back to the Future: Iran's Rulers Confront Return of Sanctions

(Bloomberg) -- As Iran hurtled toward this week’s resumption of U.S. sanctions, advice for beleaguered President Hassan Rouhani came from all quarters.

The Islamic Republic’s top leader, Ayatollah Ali Khamenei, urged him last week to deal firmly with the corrupt. The Revolutionary Guards’ commander said the president must show “decisiveness” in rescuing a slumping currency, and a sizable chunk of parliament moved to summon him to hear their harangues. Social media carried the venting of ordinary Iranians as well as mobile-phone footage of small, scattered protests.

Back to the Future: Iran's Rulers Confront Return of Sanctions

The Aug. 7 tightening of U.S. penalties on a nation that hoped its worst struggles were in the past is piling pressure on Iran’s ruling establishment, especially its public face -- the 69-year-old cleric Rouhani, who’s a year into his second term.

Central to the leadership’s troubles is the plummet in the value of the rial that threatens to turn a geopolitical confrontation into a full-blown domestic economic crisis once the vital oil industry comes under American sanctions in November.

“The situation is critical for everyone,” said Saeed Shahavi, 47, who sells watches in Tehran. “When my lease expires in three months, I don’t know if I can stay in Tehran with these astronomical prices. This is the first time in my life that I have checked price tags in the fruit market.”

The blow to Rouhani isn’t restricted to a reformist economic agenda supposed to deliver jobs and bigger salaries for a population where 60 percent are under 30.

Delicate Time

The showdown with the U.S. comes as a delicate time for the regime that has ruled Iran since the 1979 Islamic Revolution. With Khamenei approaching 80, Rouhani and his supporters are contesting the ideological future direction of Iranian politics with conservative opponents against a turbulent backdrop.

In December, anti-government protests linked to the rising cost of living spread through several cities, prompting a crackdown. While more recent demonstrations have been smaller, the growing anger is clear.

No Alternative

U.S. statements of support for protesters have been interpreted as a call for regime change. Yet Iran’s ruling elite, top clerics, elected officials and military commanders are rallying round because they understand that “there is no real alternative” to Rouhani’s brand of more moderate policies, said Aniseh Bassiri Tabrizi, a research fellow at the Royal United Services Institute in London.

A conservative populist candidate seen as favored by top leaders was roundly rejected in last year’s elections. “There is a realization that for now this is the only way forward,” she said.

In a message addressed to Trump on Monday night, Rouhani avoided confrontational rhetoric. He said his country welcomes negotiations to resolve the dispute only if the U.S. is “sincere.” But he added that such talks would be meaningless while his nation is being hit with sanctions.

Put Your Knife Back

“Negotiations at the same time as sanctions, what meaning does that have?” Rouhani said. “It means someone is facing a person who’s a rival and an enemy, if they use a knife and they stick the knife in their arm and then they say, ‘Let’s negotiate and let’s talk.’ The response to this is first all, they have to take the knife out and put the knife back in their pocket.”

The U.S. and Iran have been moving toward a confrontation ever since President Donald Trump won election vowing to exit the Obama-era 2015 deal that capped Iran’s nuclear program for sanctions relief. The pace accelerated as Trump delivered on his pledge in May, encouraged by Iran foes in Israel and the Gulf. The rial went into free-fall amid few signs that European powers will be able to provide guarantees for Iran that could save the pact.

The consequences of an Iranian crisis could be widely felt. Denied any hope of Western finance, Iran would likely accelerate its efforts to woo China. It has also vowed to retaliate against any disruption to its oil sales, perhaps by blocking the Strait of Hormuz -- a conduit for about 30 percent of the world’s seaborne-traded crude. The Gulf nations with which Iran is already fighting proxy wars would likely retaliate.

This week’s sanctions ban purchases of dollar banknotes by Iran, prevent the government from trading gold and other precious metals and block it from selling or acquiring various industrial metals. The measures also target the country’s automobile sector.

Authorities have taken steps to support the rial -- including the scrapping of recent foreign-currency restrictions, appointing a new central bank chief, and cracking down on profiteering. But they have done little to ease concerns of a economic meltdown as deep-seated problems in banking and other areas are exacerbated by some curbs on crude exports.

The Same Rouhani

Mayha Motiei, 24, who’s studying clinical psychology in the capital, is among those remaining supportive of Iran’s president.

“This is the same Rouhani of the past four to five years who achieved a nuclear deal,” she said. “Trump’s rise to power severely affected the situation. I also point the finger at hardliners at home” who have undermined the president’s agenda, Motiei added.

It’s unclear what the president can do to make a success of the remainder of his term. “Things have veered out of Rouhani’s control because of circumstances,” said Iman Baik, editor-in-chief of the Fanavaran-e-Etelaat technology daily. “The reins of the market have been practically in Trump’s hands in recent months.”

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