Index trend
Previous Quarterly Editions
Expropriation risk: 66 67 67 67 ► Political violence risk:59 57 57 60 ►Terrorism risk:40 38 38 38 ►Exchange transfer and trade sanction risk: 63 63 63 73 ►Sovereign default risk:73 73 73 74 ►
Overall Risk Temperature: 68 (Medium high 3) TREND ▲
Special topic: Relationship with the 'global rules-based order'
Since the 1979 revolution, the Iranian regime has defined itself in opposition to the existing global order. The revolutionaries came from multiple groups that opposed the shah for several reasons, but the winning faction, led by Ruhollah Khomeini, cited the shah’s embrace of Western-style cultural and economic reforms as a major cause of discontent. Khomeini famously portrayed the U.S. as the “Great Satan,” but he also opposed all major powers. In 1980, Khomeini affirmed his “support for all movements, fronts, and groups which are fighting in order to escape from the claws of the Eastern or Western superpowers.” Khomeini and the regime rejected Western liberalism, communism, and Eastern aggression, often using the phrase “Neither East, nor West” but rather a different religious path. In the initial years after the revolution, the government emphasized exporting its own concept of “Islamic revolution,” which explicitly was in opposition to the global status quo. As time went on, the government’s fervor for exporting the revolution waned, but the idea remains an important part of its ideology and foreign policy.
The appeal of a resistance narrative and an independent path draws on Iranian history as well as on the specific ideology of the post-revolution regime. Outside powers — including Russia and the U.K. — have a long history of interfering in Iran and trying to establish their own spheres of influence in the country. Western countries’ extraction of Iranian oil — and efforts to ensure that Iran did not nationalize its oil resources — before the revolution fed into anger at the outside world. Iranians today take great pride in the history of the Persian empire, which adds to a sense of the country’s unique culture and global importance and independence.
The current government promotes the idea of a “resistance economy” that is self-sufficient and able to withstand sanctions. It also actively supports other movements that it sees as sharing its goals of resistance, including Hezbollah, the Houthis in Yemen, and some Shia militants in Iraq. While the government’s focus is often on resisting Western powers, especially the U.S. and Israel, it opposes the global order more broadly, which it views as serving the interests of major powers at the expense of the rest of the world.
Nonetheless, Iran participates in global institutions. It is an active member of the United Nations. Iran avoided requesting International Monetary Fund (IMF) assistance in the decades after the revolution but did make a request in 2020 as U.S. sanctions and the COVID-19 pandemic pressured the economy. To the extent that it has not been limited by sanctions, Iran has participated in the global economy and financial system.
Beyond the government, the Iranian people value their country’s independence and are well aware of a history of exploitation by outside great powers; however, many Iranians would like to engage with the broader world and dislike the country’s isolation from the global economy.
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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, Tehran is extremely unlikely to take actions that would alienate Chinese investors and importers; however, Iran occasionally seizes ships in nearby waters. Notably, domestic media reported that Tehran will confiscate the cargo of the Advantage Sweet, an oil tanker transporting oil to the U.S. that Iran seized in 2023. The move might be in retaliation for the U.S. confiscating oil in 2023 from the Suez Rajan tanker for allegedly violating U.S. sanctions.
Hardline candidates won most positions in Parliament and on the Assembly of Experts, the body tasked with choosing a new supreme leader when needed, in elections on March 1. Despite major efforts by the government to promote voting, Iran saw the lowest turnout for an election since the 1979 revolution; the official turnout was 41%, but many analysts suggested it was actually lower. Many moderate and reformist candidates were disqualified from running, leaving voters with few options.
In 2022, Iran experienced the largest and most widespread protests since the revolution. Authorities responded with violence, killing hundreds. Since then, brutal repression has quelled large-scale, organized opposition, and the movement lacks a clear leader. Security forces continue to arrest government critics. Many protestors from earlier are still detained, and human rights groups have reported systematic torture and other abuse of prisoners.
However, smaller forms of defiance are common across the country. Many women — especially young women — now refuse to wear a headscarf, despite monitoring by morality police and closed-circuit television cameras. Anger at the regime and desire for change is still simmering. 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, but the Guardian Council rejected the bill and returned it to Parliament for revisions. The council probably wanted to avoid provoking a public reaction before the March elections.
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. Hamas’ attack on Israel on October 7, 2023, and the subsequent war in Gaza increases the risks of instability in the region, including Iran.
Though previously rare, terrorist attacks in Iran have become a greater risk, largely due to Sunni extremists targeting Shia sites. On January 3, bombs, reportedly carried by suicide bombers, targeted a procession near the tomb of Major General Qassim Suleimani, in the city of Kerman. The attack killed 84 people and injured many more; it was the deadliest since the 1979 revolution. The Islamic State (IS) claimed credit for the attack. 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 IS. In October 2022, another IS-claimed attack on the same shrine killed 13 people. The 2021 Taliban takeover in Afghanistan increased the potential that IS and other violent extremist groups would find a haven for operations, increasing the risks for neighboring Iran; however, IS threats began before the Taliban’s takeover, with a 2017 attack in Tehran that was the first significant terrorist incident in the capital for years.
Iran also 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 January, in an unusual exchange, Iran launched a missile strike against militant groups based in Pakistan, and Pakistan responded with its own strike on militants based in Iran. Both countries tend to take a pragmatic approach to their border relations, but the incident raised concerns about potential escalation.
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 U.S. Tehran’s brutal repression of protests and provision of attack drones to Russia worsened those relations. In October, United Nations sanctions on Iranian ballistic missiles expired, but multiple countries — including the U.K., France and Germany — said that they will maintain the sanctions.
Tensions between Tehran and Washington have increased further since Hamas launched an unprecedented attack against Israel on October 7, 2023, and Israel responded with an extreme level of military force that has destroyed most of Gaza. Iran and its allies, such as Hezbollah in Lebanon and the Houthis in Yemen, support Hamas and oppose Israel and the U.S. Military strikes between U.S. forces and Iranian-aligned militants in the Middle East increased in the past few months. Washington also added even more sanctions designed to pressure Iran’s military and government. The current environment makes any steps toward a new agreement that might lift sanctions politically untenable. Furthermore, neither side has much incentive to engage in talks when the U.S. is holding presidential elections that could return Donald Trump, who withdrew from the original nuclear deal, to the White House.
The increased tensions since October also negatively affected Iran’s currency. The country has struggled with depreciation for years, and the Iranian rial took another tumble over the last few months, hitting a particular low on the free market — which the central bank does not recognize — on January 29. After the elections, the currency fell further. Government restrictions have failed to arrest the rial’s fall. Inflation remains a serious challenge; in October, the International Monetary Fund (IMF) placed annual inflation at 32.5%, though many sources suggest it might still be above 40%.
In 2023, the World Bank’s latest report on Iran found that increased oil and tax revenues improved fiscal performance in 2022 – 2023 above expectations, somewhat reducing the budget deficit to around 2.3% of GDP. In February, the IMF reportedly forecast 3.7% economic growth in 2024; however, Iran’s economy and fiscal policy continue to struggle. 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. It 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. The government’s proposed budget for the new fiscal year, which began on March 21, included significant tax increases, including on individuals, in an effort to address the deficit; however, such taxes on the Iranian people, who are already struggling with inflation and other economic difficulties, might be difficult to collect and could further fuel unrest.
