By Cyrus Sanati
FORTUNE -- Massive cuts to Iran's generous subsidy regime could lead to significant popular unrest in the country in the coming weeks and months.
The cuts, which coincide with the first day of the Iranian calendar, are necessary in order for the government to close the huge revenue gap brought on by the ratcheting up of international sanctions by the West. The potential unrest could push the Mullahs to work faster to resolve its nuclear issues with the West and finally focus on improving economic opportunity for their downtrodden citizens.
The Persian New Year, Nowruz, is supposed to be a happy time for Iranians. The holiday, which coincides with the vernal equinox, the first day of spring, signifies rebirth and good fortune. After years of trying to repress the pre-Islamic holiday, the Mullahs in power in Tehran have finally embraced it. Iran's new President, Hassan Rouhani, even tweeted out a new year's greeting on Thursday, wishing Iranians all over the world a happy and prosperous new year.
But for many Iranians, the year 1393 is starting out pretty, well, poorly. Overnight, prices across the country jumped sharply as government subsidies started rolling off. Over the coming days and weeks, gasoline prices are expected to triple while flour prices may double. Electricity prices will go up by 25% while water prices are expected to rise by 20%.
That's not all. The government is soon expected to introduce a new "means" test for the 90% of Iranians who receive monthly welfare checks from the state. Tehran is hoping to eliminate payments to millions of people they believe don't need the 450,000 rials ($18) per month handed out, which is costing the government somewhere around $50 billion a year and fueling inflation, which is now running around 37% per year.
This is all part of a plan by Iran's government to eliminate some 630 trillion rials ($25 billion) worth of subsidies from this year's budget. The subsidies, which make up some 25% of the total Iranian state budget of $400 billion, have simply become impossible to sustain as tighter Western sanctions have made it very difficult for the government to export oil like they used to. Overall, Iran's oil exports have been cut in half, to 1 million barrels per day, due to the sanctions. This deprived the Iranian government of around nearly $100 billion of hard currency last year.
The Iranian government decreased subsidies by a similar degree in 2007 and 2010. In both cases, riots and protests broke out in Tehran's streets, some rivaling those that occurred during 2009's "Green Revolution," when the city's middle class objected to the election results that gave then-President Mahmoud Ahmadinejad another term in office. The opposition movements were eventually crushed by the Islamic Republic, but they served as reminders to the Mullahs that there are limits to what they can do.
It is unclear how Iranians will react to the new price increases. They have already endured years of economic misery, but the last two years have been especially painful. The most recent round of sanctions has caused inflation to skyrocket, wiping out people's savings and bringing foreign direct investment to a screeching halt. As a result, Iran experienced a whopping 5% contraction in GDP last year. The Central Bank of Iran said last August that only 32% of the country's population was economically active -- an extremely low figure. Meanwhile, the government says unemployment is at 15%, but it is really probably around 30% or higher.
When you combine a relatively young population with this much economic pain, unrest is almost inevitable. Ayatollah Ali Khamenei, Iran's primary authority figure, warned that forgetting about the poor is "un-Islamic," which is "Mullah speak" for, "could cause us some trouble." President Rouhani tried to head off any possible trouble by handing out free food to Iranians earlier last month. But the long lines and poor quality food angered people who were used to getting a fat Nowruz check from the government. President Rouhani apologized for the debacle and set up 400 price-controlled markets where people could shop as they wish.
Eventually, though, those special markets will close, and Iranians will have to get used to making ends meet with the new prices. While some goods will still be heavily subsidized, several will soon be out of reach for many Iranians, especially foreign goods. The West will undoubtedly use the economic turmoil as leverage in their negotiations with Tehran over its nuclear program. In his annual Nowruz address, President Obama spoke of his desire to open a new chapter between the U.S. and the Iranian people this year.
In the end, as the noose around Iran's economy grows tighter, the Mullahs will be forced to decide which is more important -- nukes or their necks.
As 2013 draws to a close, it's time to tie up a few loose ends and put a ribbon on this year's top stories.
FORTUNE -- Different people mark the end of the year in different ways. One of my traditions is reviewing my work for the year, owning up to mistakes that I haven't already corrected, and following up on some of what I've written. It's not as much fun MOREAllan Sloan, senior editor-at-large - Dec 23, 2013 5:00 AM ET
How well-heeled money to conservative tax exempts triggered confusion and chaos inside the IRS -- and why the big bucks may be likely to surge.
By Lynnley Browning
FORTUNE -- The Internal Revenue Service's effort to scrutinize conservative groups, many bankrolled by "shadow money" from Wall Street to Kansas to Las Vegas, has sparked a political firestorm. But the aftermath may ignite donations to the secretive entities by right-leaning corporations and MOREMay 16, 2013 5:00 AM ET
No one says the President doesn't deserve his benefits. But it's hard to get past his plan to limit savers to half the value of what he'll walk away with.
FORTUNE -- President Obama's proposal to limit the value of 401(k)s, pensions, and other tax-favored retirement accounts to about $3.4 million certainly sounds reasonable. After all, at a time of big budget deficits, we shouldn't subsidize "the rich" with tax breaks, MOREAllan Sloan, senior editor-at-large - May 1, 2013 5:00 AM ET
Marty Nesbitt forming mid-market private equity firm.
FORTUNE -- One of President Obama's best friends is forming a private equity firm. Insert Mitt Romney's chagrin here.
The pal is Marty Nesbitt, who spent nearly a decade as CEO of Chicago-based airport parking company The Parking Spot (which was sold in December 2011 to Green Courte Partners). According to The Chicago Tribune, his partner will be Kip Kirkpatrick, the co-founder of Water Street Healthcare Partners MOREDan Primack - Jan 22, 2013 12:12 PM ET
President Obama's pick for Treasury Secretary may not be a Wall Streeter's dream, but he's not their worst nightmare either.
FORTUNE -- On the day reports surfaced that Tim Geithner would be nominated for Treasury Secretary back in November 2008, the Dow Jones industrial average surged 494 points. On Wednesday, Obama indicated that he would nominate Jack Lew to replace Geithner. The market shrugged, with most of its modest gains coming MOREStephen Gandel, senior editor - Jan 10, 2013 8:02 AM ET
A little Democratic idealism mixed with some old-fashioned fiscal discipline could be what Republicans need to get Americans back on their side.
By Sheila Bair, contributor
FORTUNE -- Over the past four years income inequality has worsened, particularly among minority groups. Continuing a long-term trend, the gap between rich and poor is the widest it has been in 40 years. Wealth inequality is even more skewed, with the upper classes enjoying MOREDec 19, 2012 5:00 AM ET
Like three presidents before him, Mitt Romney told the voters what they wanted to hear about taxes. But this time they weren't buying it.
By John Cassidy, contributor
FORTUNE -- Poor Mitt Romney. From the GOP primaries, when members of his own party labeled him a "vulture capitalist," to the start of the campaign proper, when one of his top aides vouchsafed that he would follow an "Etch A Sketch" strategy, MORENov 15, 2012 5:00 AM ET
The shock of more than half a trillion dollars in tax increases and spending cuts could send us into another recession. But with a little stimulus, it might be a blessing, not a curse.
By John Cassidy, contributor
FORTUNE -- With the election almost upon us, Wall Street is starting to focus on the possibility that, come Jan. 1, 2013, the economy could hurtle over a "fiscal cliff" consisting of $600 MOREOct 15, 2012 5:00 AM ET
Jack Welch's hiring history isn't much to tweet about.
FORTUNE -- Jack Welch, the former CEO of General Electric, has attacked the notion that President Obama and his policies are creating jobs. On Friday, Welch in a message sent through Twitter accused the administration, referring to it as "these Chicago guys," of changing the number in the monthly jobs report, which showed that the unemployment rate had fallen to the lowest MOREStephen Gandel, senior editor - Oct 9, 2012 5:00 AM ET
|GM's recalled Cobalt was a failure from the start|
|Michaels hack hit 3 million|
|Ousted Yahoo exec gets $58 million golden parachute|
|Detroit pension cuts hit civilian workers hardest|
|Canadians arrest a Heartbleed hacker|