Tehran Stock Market Crash Signals Hard Days Ahead

Over the last few days, financial markets in Iran have collapsed, and the price of the dollar reached 21,000 tomans on January 18.

The last time the dollar was traded at this price in the Tehran market was on August 9, 2020.

As the dollar fell, gold prices also plummeted. On Monday, January 18, 2021, the price of a gram of gold fell below one million tomans and was traded for less than 920,000 tomans for a few hours. The last time this happened was on July 21, 2020, when the price of a gram of gold in the market was about 920,000 tomans [$43].

Over the last six months, the market price for coins fell to its lowest level. On January 18, coins were valued in the market at less than 10 million tomans [$476]; at one point, it dropped to as low as 912,000 tomans.

The stock market continued to fall.

At the same time, other reports indicate that the housing market was also diving sharply.  On January 19, the newspaper Donya-e Eghtesad ran a headline focusing on the housing market and efforts to prevent its further nosedive. The newspaper estimated that the average real price was currently around 22 million tomans per square meter, but if the price of the dollar continues to fall, more plummeting prices were expected in the coming days. But is this level of market decline worrying or does it actually indicate an improvement in the market?

Such levels of financial market collapse in any economy are worrying, but in Iran the situation is unique.

Some are watching the market plummet with hope. Falling prices for many could mean there is a chance the national currency could appreciate and prices could then adjust after a period of intense turbulence. But can people be hopeful that the value of the rial, Iran’s official currency, will increase? And more importantly, will the relative increase in the value of the national currency improve the living conditions of Iranian citizens, especially the middle class and people on low incomes?

Is there hope that the value of the rial will rise?

To answer this question, it is vital to answer another question first: What happened to make the situation go in reverse?

In recent days, many have attributed market developments to the fact that the presidency of Donald Trump is coming to a close, and in anticipation of  Joe Biden’s inauguration. Hope for future developments and The possibility that sanctions could be lifted and that there could be future developments in Iran’s relationship on the world stage has raised hopes that Iran's economic crisis could be resolved, or at least improved.

In 2013, the end of President Ahmadinejad’s era and the ushering in of Hassan Rouhani prompted a similar situation. In 2012, some days the price of the dollar in the Tehran market exceeded 6,000 tomans, but, with the change in political conditions, the dollar returned to a level of 3,000 tomans and experienced relative stability for a relatively long period of four years.

Today, a similar situation could reoccur, but it is unlikely. The situation in Iran today is far more fragile than it was at that time. The political crisis both within Iran and externally is much more severe than today than it was in 2013. At that time, even the most pessimistic individuals had some optimism that the Islamic Republic would solve its international problems. Today, even the most optimistic have little hope that the entrenched political and regional crises will be resolved. In addition, the tragic and traumatic experiences of the last four years have had a profound influence on the Iranian people: today, they are on the whole more pessimistic, and certainly a greater degree more afraid.

A credible solution has so far not been identified, not by Islamic Republic officials, and not by the incoming United States administration. In Iran, the current government does not appear to have the credibility to resolve the crisis, and yet, there is no political alternative within the country that has come up with a viable plan to negotiate with the United States to resolve the crisis. Ayatollah Khamenei remains a staunch opponent of peace with the United States, and his supporters, who are likely to take over the government in the next few months, will spare no effort to continue the crises in foreign relations.

Of course, the situation in the United States is unclear. Although there is much discussion of a Biden administration  returning to the nuclear deal, the Joint Comprehensive Plan of Action, given the growing political pressure, especially in the Middle East, against the normalization of relations with Iran, it is not clear that it will be able to do so easily and in the short term.

If it took approximately three years to reach a nuclear deal and for sanctions to be lifted in 2015, so it would probably take longer to reach a new agreement, especially given doubts over what benefit it can possibly provide for Iran's economic and political interests.

Political variables are complicated enough, and economic conditions are even more complicated: Iran’s economic infrastructure has been on the verge of collapse over the last decade. Iran's foreign exchange resources are depleted and there is no hope of replenishment in the short term.

In 2013, Iran’s foreign exchange reserves were more than $100 billion, but now the situation is so critical that talk about the possibility of freeing $7 billion in blocked Iranian money in South Korea has the ability to shock the entire Iranian economy. At present, $7 billion is a lot of money for Iran, but on a national scale with a trade balance of about $90 billion under normal circumstances, it does not represent a great deal of money.

Even if the sanctions on Iranian oil was lifted today, it would take at least a few months for Iranian oil production to return to normal. If that succeeds, there is still the obstacle of identifying a customer who will take on the risk of doing business with Iran. Which big buyers or foreign investors are willing to make a deal with a country that has spent the last 10 years under the most severe sanctions despite an international agreement? What refinery or reputable oil company is willing to enter into an agreement with a country that, along with North Korea, is on the Financial Action Task Force blacklist and regarded to be at the highest risk of money laundering and terrorist financing?

When it comes to the domestic economy, the situation is even more fragile. The structural crises of the Iranian economy have become much more complex and deeper in recent years. In 2016, when Iran's international problems seemed to be solved, President Rouhani’s one-time advisor and current aid Masoud Nili compiled a long list of Iran's major economic super-challenges, from a water crisis to an unemployment situation, none of which had a short-term or even a definitive solution. Certainly, the dimensions of these super-challenges are far greater today and the hope of resolving them is far more diminished than it has been in the past.

Another question is: is there any hope of improving the situation for the people, especially for the middle class and  lower-income groups?

Based on the facts, how much hope can there be for the future?

Even if one hopes that Iran could be entering a period of prosperity, there is still no hope of improving the situation in the short term. Iranian society has experienced an unprecedented decline over the last 10 years. Estimates show that the economic power of each Iranian (per capita GDP) has decreased by about one-fifth. In comparison, Iranian citizens are one and a half times behind their neighbors.

Compensating for the amount of backlog will be very time consuming and difficult if not impossible. Making up for the damage of the last 10 years will probably require decades of relatively stable prosperity — unimaginable in the current context.

In addition to the recession, inflation has meant Iran's social classes have experienced a record low. Extreme fluctuations have eroded the incomes of the middle and lower classes and created an emerging class of novices who are not easily willing to retreat from their new position. Bridging this social and class gap will not be any easier if it remains impossible to solve the recession.

In addition, the unemployment crisis, the structural problems of the economy, and environmental crises have exacerbated, and conditions are more difficult than before.

Under such circumstances, the temporary fall in the price of the dollar, gold, and housing market is, at best, a mirage of the hopes of a nation that has spent its life criticizing the inefficiency and ambitions of its political rulers.