Angry Iranians Are Forcing Their Leaders to Reboot Economy Plans

(Bloomberg) -- When he was studying in Tehran, Abbas would catch a pre-dawn train in from the provinces. A few scenes glimpsed through the window are etched in his mind: street-sweepers huddled around fires, men curled up under blankets in front of closed shops.

Student life didn't often take him to the affluent downtown, where glitzy malls sell Western-branded clothes and watches.

On the weekends Abbas would head back to the northwestern city of Zanjan, famous for hand-made knives and elaborately decorated shoes. The extremes of poverty and wealth on display in the capital were much less apparent in his hometown.

But Abbas, now a 36-year-old high-school teacher, sensed something else was wrong there. As a child he used to watch the town's most skilled bladesmith at work. “He should have opened 10 branches by now,'' said Abbas, who asked that his surname be withheld so that he could speak freely. “He's still in a workshop under the stairs, making a handful of knives a day.''

Stagnation and inequality were central to the grievances that erupted a few weeks ago into Iran's worst unrest for a decade. In cities across the country, including Zanjan, protesters smashed bank windows and clashed with police. The violence shook the regime -– and on both sides of Iran's sharp political divide, it's forcing a rethink of economic priorities.

President Hassan Rouhani had a clear vision for modernizing the nation of 80 million, spurring growth, and creating jobs. It hinged on an inflow of foreign investment, after sanctions were eased as part of a nuclear accord with world powers. Rouhani's government floated a figure of $50 billion a year.

But Iran has only gotten $25 billion over the past four years. President Donald Trump's threats to withdraw from the nuclear deal have added to the uncertainties keeping global business away.

And that's having a knock-on effect on investment by domestic companies, whose “mood is now more subdued,'' according to Djavad Salehi-Isfahani, a professor of economics at Virginia Tech University who publishes a blog on Iran's economy.

That means the “laissez-faire economy'' that Rouhani had in mind may not be an option, he said: “Iran cannot stay terribly open to the outside world when the outside world is closing in.'' Instead, it may have to tighten controls on trade and capital, with more economic management and a smaller role for markets, Salehi-Isfahani said in a phone interview.

That may be happening already. Last week Iran shut down nearly a dozen currency-exchange offices and arrested traders, seeking to halt the rial's slide against the dollar on unofficial markets. An almost unprecedented display of defiance in parliament forced Rouhani to dial back plans to cut subsidies and cash handouts for the poor in the coming year's budget.

Abbas isn't poor by Iranian standards. Still, his monthly salary of 24 million rials (about $525 at the free-market rate) -- even complemented by his wife's salary as a nurse, and the occasional odd job on the side – is barely enough to get by. It hasn't kept pace with inflation that's averaged almost 20 percent annually in the past decade.

Abbas says he didn't join the protests, but counts himself among the “Iranians who feel forgotten.'' More than two-thirds of the public see economic conditions as somewhat or very bad, according to a survey last month by Toronto-based IranPoll for the University of Maryland's Center for International and Security Studies. Two years earlier, the figure was 49 percent.

For Rouhani's hardline rivals, some U-turns are welcome. Crushed in last year's election, they've routinely criticized the president for neglecting low-income Iranians.

And they're naturally hostile to the idea that Iran could only bounce back with the help of foreigners – preferring what's often called an “economy of resistance,'' relying on domestic resources and leaving the country less vulnerable to enemies.

But in one key area, it's the hardliners who may be in retreat.

Leaked details about the millions of dollars allocated to religious institutions helped spur the protests. For years, Rouhani has called for conglomerates controlled by Iran's powerful Revolutionary Guard Corps – which has interests from energy to infrastructure -- and conservative Islamic foundations to give up their tax-exempt status.

Now, that concern appears to have registered with Iran's highest authority, Supreme Leader Ayatollah Ali Khamenei, who's often seen as closer to the hardliners. In January, Khamenei instructed the Guards and other branches of the military to sell off assets “irrelevant'' to their main function.

Such changes could help improve the business environment for locals and whatever foreigners are willing to venture in, said Bijan Khajehpour, managing partner of Vienna-based consulting Atieh International. It “won't happen fast,'' he said. Power in Iran is dispersed across various offices and institutions, including the supreme leader, president and Guards, so any reform requires “prolonged bargaining processes.''

Such political power plays seem remote to Abbas. He views his hometown as caught in a time warp, unable to benefit from the “fresh blood'' of foreign investment and tourism, or to think big. “Other countries think globally, they work with an eye to the outside world,'' he said.

And with a squeeze on the education budget (top government officials and wealthier Iranians prefer private schooling), he sees little dignity and few prospects at work. “I don't tell my daughter that I'm a teacher when I leave in the morning. I just say I'm going to the office.''

--With assistance from Matthew Martin

To contact the reporter on this story: Ladane Nasseri in Dubai at lnasseri@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Ben Holland, Kevin Costelloe