‘ENDGAME: How Iran’s Hyperinflation Will Lead To Regime Change’ is how Business Insider headlined October 4th of last year. Similar stories were picked up by most media-outlets, many of them citing Steve Hanke of, the otherwise quite reputable Johns Hopkins University that Iran is experiencing hyperinflation of around 70% per month. It would be hard to write a less correct article on how the sanctions are hitting Iran if you tried.

Image courtesy of aslanmedia, © 2012, some rights reserved.

Image courtesy of aslanmedia, © 2012, some rights reserved.

While it is true that Iran is experiencing high inflation, potentially as high as 50% per annum, Iran is very far from experiencing hyperinflation. Moreover, the high inflation rate and its causes appear to be strengthening the regime rather than weakening it.

On October 3rd of 2012, clashes were reported in the Tehran Bazaar due to the dramatic fall of the value of the rial against foreign currencies. This report is absolutely correct; however, the problem is that from this one time event, people deduced that the protesters represented the general sentiment in Iran, which is far from correct. The Tehrani traders who hit the streets around the Bazaar on October 3rd are among the very few Iranians who have values denominated in dollars and who frequently trade in foreign currency. The decline in value of the rial did not affect the vast majority of Iranians, for whom the exchange rate matters little. The fall of the rial was likely a result of a combination of currency speculation on the currency ‘black market’, which is known to have occurred on several occasions, and a loss of faith in the economic policies of the Ahmadinejad administration.

These policies have been devastating to the Iranian economy, more so than the Western sanctions – or at least this seems to be the sentiment among most Iranians. Ahmadinejad spearheaded a cutback in government subsidies in 2010, but replaced them with cash-handouts to as much as 90% of the population. This action sparked an increase in inflation, but more importantly, the inflation lead to a loss of money for the richest (those without government handouts), and had relatively little positive impact on the regime’s poor, rural, and conservative support-base. Most Iranians blame Ahmadinejad, rather than Supreme Leader Khamenei, for the bad economic situation and for his lack of elegance in Iran’s dealing with the West.

This is no coincidence and has been an increasing trend since the Islamic Revolution, particularly since the death of Imam Khomeini. Khamenei frequently criticizes the government, even the parts of it directly answerable to him for their actions or lack of such – as was the case with the elimination of radicals from election lists ahead of the election. This is so that the government takes the fall, while Khamenei remains – thus, permitting the system to perpetuate itself.

However, this must not be confused with the divided nature of Iranian politics, which is a constant struggle for which faction gets to replace Khamenei after his death (soon to be 74). A good example is the recent rejection by Khamenei of the recently announced nuclear talks (that were) scheduled for February 26th  – which Khamenei framed as a testimony to Ahmadinejad’s weakness. That Khamenei rejected 65% of all proposals made by the Karroubi government is illustrative of how the system works and how divided it actually is. Despite being clearly unaccountable for the government’s failure to deliver promised results – Karroubi took the fall, and never really recovered.

Following widespread dissatisfaction with Karroubi’s failure to adhere to pre-election promises, massive anti-government protests were launched in 1999 by a predominantly student crowd. The failure of the Karroubi government to moderate the regime led to a sense of resignation amongst many young people and the situation remained relatively calm until the outbreak of protests in 2009. One can ask whether we are seeing the same thing happening this time, with the situation calming after the opposition was battered and broken by arrests, abductions and house-arrest of key leaders and sympathisers. Interestingly, a RAND Corporation study, a good source of information due to its predictable bias, examined Twitter activity during and after the 2009 protests and concluded that the sentiment expressed altered in favour of the government as the protests proceeded.

All of this brings us back to the sanctions. The U.S.-lead sanctions against Iran have so far achieved little apart from increasing the price of imported products, increasing the inflation, and forcing Iran to adopt a bartering system with its major trade-partners to sustain itself. That’s right, Iran never stopped trading: the initial shock of being disconnected from the SWIFT international banking system, deprived of insurance for ships carrying Iranian goods, and having its trade-partners refuse to pay them in major currencies has started to wear off. Iranian oil-exports are on the rise after a dip in exports last fall. Iran has developed a bartering system with its major trade-partners, allowing it to take payment in the form of bank-credit to be used to buy goods from its partner-nations – prominently Turkey, India, and China. Iran now offers guarantees for all ships carrying Iranian goods.

That is not to say that the sanctions aren’t having an effect; rather, the contrary is true, their impact is huge. The sanctions and the escalating inflation further perpetuate the class-divide in Iran. The sanctions are hitting the richest people the hardest, and while this may not sound too terrible, it is if you are a U.S. Policy-maker. The wealthy, liberal, and regime-critical upper class are obviously experiencing far more of the effects of high inflation. They are the people with money to lose: they are the people who buy the imported products and they are the traders in the Bazaars. They are the people being weakened by the sanctions while they simultaneously stand out from the crowd as ‘less patriotic.’ As such, playing class-divides ends up widening the gap between the liberal, urban rich and the conservative, rural poor.

The flash-point that is the holiday of Nowruz, Iranian New Year, has potentially been deflated by the announcement that the government will be handing out cash to roughly 60 million Iranians to help them celebrate the New Year. While this will increase the inflation – it will most likely also, in combination with the sanctions, strengthen the regime. The inflation/cash combo is essentially taking from the rich and giving to the poor, taking from the opposition and giving to the supporters. This being said, the chances of change in Iran are always present, all it takes is a big enough spark – which could be an election, the death of a grocer, or the death of an ayatollah.