Inflation and Iran's Regime

WSJ - Europe and the U.S. may be in grim economic straits, but the Islamic Republic of Iran is doing just fine—at least if Iran's leaders are to be believed. President Mahmoud Ahmadinejad has insisted relentlessly that his country's economy is healthy, while Supreme Leader Ali Khamenei has christened the current Iranian calendar year as the "Year of Domestic Production and Support for Iranian Capital and Labor."

The truth, of course, is very different. Iran's economy faces rising inflation and a significant depreciation of the rial due to tightening international sanctions. Against this backdrop, it is only natural for Iran's leaders to seek to reassure distressed citizens. But after the failure of negotiations over its nuclear program in mid-June, Iran is now weathering a new round of U.S. and EU sanctions, which kicked in July 1.

Nobody knows for sure to what extent this pressure will be effective against Iran, a country tremendously rich in natural resources. With the planet's third largest oil reserves and second largest natural gas reserves, Iran's economic fortunes should be bright. Regime officials are positioning their country as a major energy hub for the Middle East, inking new deals in recent months with Syria, Iraq and Pakistan.

But it is already apparent that sanctions have had a real effect on Iran's economic health. Statistics issued by Iran's central bank show inflation at 21%, but with the cost of staple goods rising by leaps and bounds, the actual experience of inflation is bound to be graver. The price of bread increased by 40% in the month of June alone, causing a nationwide outcry. The price of chicken and vegetables increased by 3.7% and 10% in a period of just two weeks last month. Iranian households now have to pay on average half of their monthly salaries just to keep food on the table.

These trends also come at a political cost for the regime. Members of Iran's embattled working class could well breathe new life into Iran's moribund opposition. This force, colloquially known as the "Green Movement," coalesced in mid-2009 but was successfully beaten back in ensuing months by regime forces. Back then, the Green Movement lacked the support of Iran's working class, which is mostly comprised of government employees who strongly support the regime as their source of livelihood.

But today, government policies are leaving Iran's workers behind. In its most recent appraisal of state salaries, the Iranian government chose to raise wages for state employees by 15%, significantly less than the national rate of inflation.

Stepped-up oppression from the regime, or passivity on the part of antiregime forces, might conspire to keep the Greens fragmented and ineffective. But Western sanctions would claim their greatest success if they convince Iran's working class to join the Greens in unified opposition against the current government.
—Ms. Issapour is a researcher at the American Foreign Policy Council in Washington, D.C.