Previous Quarterly Editions
Expropriation Risk: 75 75 75 74 ►Political Violence Risk:68 68 68 68 ►Terrorism Risk:50 48 48 45 ►Exchange Transfer and Trade Sanction Risk: 82 82 82 82 ►Sovereign Default Risk:82 82 82 82 ►
TREND ►
Protest intensity to date* 2022 2023 Medium MediumUnrest risk in 2024**Cost of living: Very HighAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
The Iranian government faces extreme political and economic pressures that contribute to its fiscal crisis. These risks are deeply intertwined with each other.
Political risk is always relatively high in Iran, but it hit a new high in September 2022, with the most serious nationwide protests since the 1979 revolution lasting several weeks. A government crackdown has since quelled large-scale protests, but popular frustration and anger are seething beneath the surface. Individual and small-scale cases of civil disobedience are widespread, chipping away at government authority.
Economic stresses contribute significantly — though not solely — to this political discontent. The population has now faced four years of inflation of over 40%. Increases in food prices are particularly high and hurtful. Sanctions and government mismanagement have badly damaged the economy.
While the government increased spending during the COVID-19 pandemic and again in response to the protest movement, Tehran faces major headwinds. Inflation cuts deeply into the impact that increased spending might have. Additionally, the budget still relies heavily on oil revenues, which are limited under sanctions.
In an effort to reduce fiscal reliance on oil, the government has increased taxes. While the tax increase helped to reduce the budget deficit in 2022, it added burdens on an already struggling population. Critics have argued that the taxes primarily fall on the Iranian people while exempting government-affiliated companies and bonyads (large religious organizations that are affiliated with the government, some of which engage in significant economic activity in addition to religious and charitable services).
Corruption also undermines the effectiveness of fiscal spending and increases political tension. Furthermore, Iran is particularly vulnerable to the impacts of climate change, and the government budget fails to provide sufficient resources to increase climate resilience.
The government in recent years has undertaken some subsidy reforms to try to improve its fiscal health, but those reforms also hurt the public. In several cases, ends to subsidies have prompted protests. The population lacks sufficient buffers to be able to cope with tax increases or subsidy reforms. Unemployment is high; the World Bank placed it at 11% in 2022, and youth unemployment is much higher. Poverty has increased in recent years, with one-third to one-half of Iranians now living below the poverty line. Many middle-class Iranians have fallen into poverty, while the most impoverished increasingly have struggled.
Over the past few years, the regime has ensured cohesion among ruling elites by increasingly sidelining moderate and reformist groups and individuals within the formal political process. Iran’s Parliament reviews and approves the budget, and members of Parliament can and do debate the budget and criticize the president’s administration, including, in some cases, placing some of the blame for inflation on the budget deficit; however, overall control of fiscal policy lies in the hands of the supreme leader and president.
x
Most Western companies affected by the sanctions on Iran have left the country, thereby making the overall risk of expropriation of assets far less relevant than it might have been. The effect of this has been to make Tehran increasingly reliant on China for investment and oil exports. Given this reliance on Beijing, Tehran is extremely unlikely to take actions that would alienate Chinese investors and importers.
One year ago, the death of a young woman, Mahsa Jina Amini, while in police custody ignited the most significant protest movement in Iran since 1979. Large-scale protests in nearly every Iranian city cut across class, ethnic and religious divides. Authorities responded with violent force and shut down internet service in many areas. Around 300 – 500 people, possibly more, were killed. The government formally executed seven protestors. Thousands more were injured, and human rights groups reported that more than 20,000 people were arrested, many of them subjected to abuse in prison.
The government response has quelled large-scale, organized opposition for now, and the movement lacks a clear leader; however, smaller forms of defiance are common across the country. In particular, many women — especially young women — now refuse to wear a headscarf, despite monitoring by morality police and security cameras. Anger at the regime and desire for change is still simmering.
In advance of the one-year anniversary in September 2023, authorities launched a new wave of arrests, reportedly targeting activists, former protestors and the families of protestors who had been killed. After a temporary halt to morality police patrols, the government resumed such patrols in July. While the government has appeared to avoid direct confrontations that might spark new protests, it has stepped up measures to enforce hijab mandates, including using cameras to identify women and issuing fines and threats. In September, the Parliament also passed a law that would impose even more extreme punishments on women who do not conform to government hijab mandates.
Iran remains at high risk for significant protests and political violence due to the combination of deep public anger toward the government and the regime’s determination to increase its control. Additionally, Iran’s border regions consistently face low-level political violence, and the country’s broader political risks also intensify those long-standing ones.
Terrorist attacks in Iran remain relatively rare; the 2017 Islamic State attack was the first significant terrorist incident in the capital for years; however, in August 2023, a gunman attacked the Shah Cheragh shrine — a major Shia holy site in Shiraz — killing one and injuring others; the Iranian government blamed Islamic State. In October 2022, another attack on the same shrine had killed 13 people and was claimed by Islamic State. These recent attacks suggest increased Islamic State activity in Iran and related risks. The Taliban takeover in Afghanistan increased the risks that Islamic State and other violent extremist groups would find a haven for operations, increasing the risks for neighboring Iran.
Iran experiences regular low-level violence involving separatists and other groups in areas with large ethnic minorities — primarily Kurdish, Balochi and Arab groups. Ethnic minorities played an unusually significant role in last year’s nationwide protest movement, which has increased violent incidents in some border provinces.
In September 2023, Tehran and Washington agreed to a deal to swap prisoners (five each) and to allow Iran to access US$6 billion dollars that had been frozen in accounts in South Korea; the funds were transferred to Qatar, and Iran can use them to buy goods within limits. The talks reportedly took more than a year and were the first major diplomatic agreement between the two countries since talks on a nuclear deal stalled in September 2022.
The future of sanctions on Iran depends on the multilateral nuclear deal negotiations and, more generally, on Iran’s relations with Europe, Canada and the United States — all of which imposed additional sanctions in response to the Iranian government’s actions against the protestors as well as sanctions to demonstrate their opposition to Iran providing attack drones to Russia for use in Moscow’s war in Ukraine.
More sanctions are regularly added; for example, on September 15, 2023, the U.S. Treasury imposed sanctions on 29 individuals and entities “in connection with the Iranian regime’s violent suppression of nationwide protests.” In October, United Nations sanctions on Iranian ballistic missiles will expire, but the United Kingdom, France and Germany have said that they will maintain the sanctions.
The prisoner swap has raised some hopes that nuclear deal talks might restart; however, while the prisoner agreement could help create more diplomatic space, a return to a nuclear deal that would lift most sanctions remains unlikely in the short term, especially while the United States holds presidential elections in November 2024 that could return Donald Trump — who as president in 2017 to 2021 withdrew from the original nuclear deal — to the White House.
In April 2023, the International Monetary Fund (IMF) placed inflation at 42.5%. Iran also struggles with currency depreciation; in June, Forbes ranked the Iranian rial as the “weakest currency in the world.” In late February, the rial reached a record low against the U.S. dollar, and the government imposed new restrictions on sales of foreign currency to try to arrest the rial’s fall.
The World Bank’s latest report on Iran found that increased oil revenues and tax revenues improved fiscal performance in 2022/2023 above expectations, somewhat reducing the budget deficit to around 2.3% of GDP. The IMF put Iran’s general government gross debt at 32% of GDP. The World Bank noted that the budget assumes an average oil price of US$85 dollars per barrel, adding that the price and expected export volumes are “optimistic.” The World Bank reported that “the 2023/24 budget would result in a more than doubling of the fiscal deficit compared to the 2022/23.”
Under pressure from sanctions, inflation, unrest and increasingly extreme climate risks, the government is not undertaking the types of major structural reforms that might improve the economy’s ability to cope with such headwinds. Iran’s government has raised tax rates and cut some subsidies over the past few years, partly in response to sanctions, but that also increases tension with a population that is already struggling to make ends meet.
Return to contents Next Chapter
