Iran Lashes Out as Local Discontent Heats Up: Droughts a Rallying Cry

August 17, 2021

Without addressing the underlying problems, civil unrest, economic stress, and instability are just getting started in Iran.
Iranian Supreme Leader Ayatollah Ali Khamanei presents statements regarding ongoing protests across Iran against petrol price increases, in Tehran, Iran on November 27, 2019. Photo by Iranian Supreme Leader Press Office Handout via Anadolu Images

Iran has ushered in a new leader on August 5 as Ebrahim Raisi is sworn in as President. As the latest government takes the helm, they are faced with mounting pressure—both internally and externally. Countries around the world are facing mounting pressure in response to COVID19 and struggling economies (especially in Emerging Markets). In my previous article, I covered several of them, but given the current events in the Middle East, it is important to do a deeper dive on the inner workings of Iran.

President Raisi is a vocal anti-Western cleric and currently sanctioned by the U.S. for human rights abuses. His hardline political stance makes it very unlikely that protests will stop within the country; if anything, they will increase in frequency. Iran has made some headway in negotiations on a new deal with the West, but key differences remain, and given the new shift in governments, the lack of compromise and differing ideologies makes a new deal unlikely.

The U.S. and allies have maintained strategic assets in the region even as the U.S. looks to reduce personnel and equipment there. Even as some adjustments are made, the U.S. is maintaining a presence, with the USS Ronald Reagan Carrier Strike Group and USS Iwo Jima, as well as other military capabilities throughout the Middle East at strategic points.

So, while the numbers may diminish, the coalition’s ability to respond to threats remains in place. The elevated presence of naval capacity is meant to maintain safe passage through the Strait of Hormuz, a vital region for trade and choke point in the global supply chain. This is a place that has seen an increase in hostilities as Iran tries to flex its muscle and project power on the international stage.

Recently, two maritime events took place. The IRGC (Iranian Revolutionary Guard Corps) boarded the Asphalt Princess (a Panama flagged vessel) in the Gulf of Oman, but their plan was foiled by nearby coalition forces and the ship’s crew disabling the engines. The armed men escaped on another vessel as several naval ships approached the area. This closely follows an alleged Iranian attack against a different vessel—Mercer Street (owned by a Japanese company but operated by one out of Israel)—off the coast of Oman, which was struck by a drone, killing a British and Romanian crew member.

As economic pressures mount and local support wanes, the Iranian government will face more questions from proxies regarding funding and underlying allegiance. By striking outward, it provides a show of force and a deterrent to local protests, while trying to create a unified external enemy. The problem is: the issues internally have reached a breaking point, and these actions will only serve to further rally the masses against the government.

While ongoing issues progress outside Iran’s borders, tension is rising among locals facing an economy in shambles driven by shortages of basic necessities—most recently, water—and underlying inflationary pressures. Iran continues to be impacted by sanctions squeezing the federal balance sheet and limiting crude production and total exports. This has forced them to borrow extensively against energy assets and accept poor deal terms with countries such as China to bring in needed cash flow.

The Iranian Rial has fallen 48% since the beginning of 2020, which now sits at about 257,500 IRR per $1 U.S. dollar. The sanctions against Iran prohibit the use of U.S. banks and wires, limiting the ability to receive compensation for goods sold abroad, as well as repatriating cash. It forces businesses to sell products at steep discounts to offset some of the risk of doing business with Iran. This limits the natural movement of cash, impacts normal economic operations, and influences how businesses function, creating a robust black market to try to smuggle in USD and barter.

Iran is currently doing its best to stay relevant in the Middle East, but when looking at the full picture of the region, it’s clear that their attacks are not coming from a point of strength—rather, the opposite. Iran is facing a major internal conflict between the populace and the ruling party. When the JCPOA was first enacted, sanctions were removed from Iran, which provided a cash windfall. But they spent the money on proxy support instead of on the local economy, which created a great deal of strife internally since locals didn’t see the economic or financial benefit of the deal—they believe the government “squandered” the money.

2 February, 2019, floods impact the Ahwaz region of Iran. Thousands of houses and farms were covered with water, which negatively impacted the people of the area, many of whom make a living out of agricultural produce. Recently, more protests have hit Iran over the lack of water. Photo by İRNA. Anadolu Agency.

The lack of infrastructure investment is on display with the current water shortage that is starving crops and driving more animosity against the government. Their political future is nearly impossible to predict, but a major shift will most likely happen over the next 24 months. It’s doubtful that a deal with Iran will take place in 2021, but to show strength and solidarity with their proxies, attacks will remain prevalent throughout the region. A deal is possible once the government feels more pressure from the local populace—they will try to do anything to stay in power, but by that point it will be too late.

The water shortage in Iran is just compounding existing problems and providing a spark for further protests against their living conditions.

The most recent pressure point is the shortage of water throughout large parts of the country, with the most recent flashpoint occurring in Khuzestan. The Ahwaz (Minority Arabs: 2% of Iran’s Population) kicked off protests in Khuzestan, which quickly spread into Lorestan and Tehran. The water shortage is just compounding existing problems and providing a spark for further protests against their living conditions. The Ahwaz sit on large parts of Iran’s Oil and Gas reserves, which is arguably some of the most mineral rich acreage in the world.

This has always been a source of contention as they live in an area facing pollution, dust storms, dried up wetlands, and extreme poverty—even though their land is worth billions. They have previously called for a separatist movement, but current protests are more focused on water shortages and underlying economic conditions. But the international sanctions (limiting foreign aid), weak harvest, and economic struggles are also a big source of anger that is culminating—the water shortage is just the rallying cry. Instead of responding with water, the government sent military equipment and personnel that have used live fire on protestors to disperse rallies resulting in civilian deaths.

The IRGC used the excuse of guns and military equipment moving across the Iraq-Iran border to bring such force into the mix. There have also been blackouts across parts of the country due to overwhelmed capacity from searing heat, but also driven by government actions to stop the protests. They have even gone so far as to cut the internet for periods of time to stop the spread of information on rallies and government actions against protestors. But nothing seems to stem the tide of anger throughout the country. The government wants to control the narrative, but they have been losing control slowly over the last two decades, and it has only accelerated throughout the last five years.

The Ahwaz are not the only ones impacted by rampant droughts; poor water management and aging infrastructure has plagued Iran’s system for years.

The Ahwaz are not the only ones impacted by rampant droughts; poor water management and aging infrastructure has plagued Iran’s system for years. Now, as Lake Urmia and the Karun River dry up, the failure of managing reservoirs and groundwater becomes a huge sticking point. Some of the water has been shifted to farmland and cattle, but previous farmland in Khuzestan is facing severe drought, with other sources diverted inland and away from normal flow patterns. Opening dams would provide a short-term respite but create broader shortfalls in cities such as Isfahan and surrounding provinces.

Along with Khuzestan, Sistan and Baluchestan are also seeing an uptick in protests and riots against the current government. The Iranian people have carried out many protests over the years, but they have always been met with violent suppression (many of them led by Qasem Soleimani, the head of the IRGC’s Quds Force). The death of Soleimani has eliminated the mastermind behind successful tactics within and outside their borders. He is responsible for the deaths of many U.S. soldiers and Iranian civilians while in control. Soleimani was an enemy to many, but his whereabouts and movements were typically shrouded in mystery—the Quds Force is a clandestine unit.

The populace has been turning away from the government over time, but the shooting down of the Ukraine flight in July 2020, the handling of COVID19, the new deal with China, and now severe drought have pushed people beyond their breaking point. Iran and India have been friends and allies for over a thousand years, and part of the China deal stipulated that India had to be “expelled” from current and future deals with Iran. India has built refiners specifically for their crude and has deals in place to build roads, rails, ports, and oil and gas exploration that was temporarily paused (but not stopped) when the U.S. sanctions came back into play.

The U.S. even turns a blind eye to some shipments of Iranian crude heading into India. After the Ukraine plane was shot down, the local Iranians stopped walking on Israeli and U.S. flags that were painted on the ground, with some even getting rid of them all together—symbolically showing that they were no longer eager to “trample on” and disrespect these countries. The U.S. also set up humanitarian aid through the Swiss Embassy during the COVID19 pandemic to show solidarity and support for the local populace.

The attacks on international assets cost money and move them farther away from striking a deal with the U.S. and Europe. The constant funnel of money to proxies is also a drain, as coalition forces hit sensitive Iranian and proxy targets throughout the regions. This only compounds the shortfalls created by sanctions, causing the Iranian government to run short on money (and time!) as the populace turns against them. This is on full display as intelligence leaks like a sieve from Iran and high-value targets continue to be eliminated.

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VIDEO: Iran’s Water Crisis | People & Power

Most recently, Mohsen Fakhrizadeh (a top nuclear scientist) was killed by assassins using a remote machine gun. This is a man who has a constant security detail and whose movements are a state secret due to the importance of their nuclear program. There were a barrage of similar “attacks” throughout last year, which have continued throughout 2021, with fires and explosions striking various assets in Iran.

All of these attacks have attempted to minimize civilian casualties but hit at government-owned and operated companies and facilities. It’s clear that local Iranians are now emboldened to strike out against a repressive government.

The mounting pressure internally has pushed the Iranian government to lash out with recent attacks on coalition forces in Iraq, KSA assets, and local ship traffic. Iran’s balance sheet is under pressure, which pushed President Rouhani to sign a deal with China agreeing to inject $400B of Foreign Direct Investment over 25 years into Iranian O&G and petrochemical businesses.

They also agreed to invest in their banking, telecommunications, ports, railways, and other projects (many of them already had deals with India). This new deal allows China to deepen their military cooperation through joint exercises, research, weapons development, intelligence sharing, and other integration metrics.

China has been increasing their purchase of Iranian crude at a steep discount, especially with new refiners and petrochemical facilities starting up within China that require the type of oil Iran produces. China has been given an opportunity to gain a footing in the Middle East, which is a place they have tried to increase influence through Belt and Road investments. Over the last several years, Iran has become an integral part of China’s BRI, and even after global calls to shut down travel with China due to COVID19, Iran was the last country to react.

This caused Iran to be one of the hardest hit nations at the outset of the pandemic and created even more animosity between the government and the local Iranians. The biggest concern now is the delivery of advanced ballistic missile capacity to Iran, which so far has been limited to older generation technology.

The new Iran government is facing headwinds that have only worsened over the last several years. In 2019, Iran was ranked 5th in the world for water scarcity, and based on the current protests and water levels, it has only been exacerbated since then. The water shortage creates multiple problems: from safe drinking to crop yields to maintaining animal herds. To fill the void of crop shortages, the country must rely more on the import market, which opens them up to global pricing pressures. The U.S. sanctions only complicate Iran’s ability to access the international markets for driving inflation to the stratosphere. The people of Iran have faced economic pressure and rampant inflation before, but as water and food (basic necessities) scarcity grows, it will drive people to action. We have seen it happen around the world—especially in Emerging Markets—where COVID19 has created significant stress on supply chains and underlying commodity prices.

The Arab Spring took place during a time of elevated political and social pressure, but it was also a time of droughts, heatwaves, and high food prices, helping to fuel the unrest. In today’s market, food prices are back to 2011 levels with a water situation that has only gotten worse since the Arab Spring. All of these factors leave Iran facing a powder keg of political uncertainty. Without addressing the underlying problems, civil unrest, economic stress, and instability are just getting started.

A financial industry veteran and renowned expert on global financial markets and supply-chain analysis. As Founder and CEO of C6 Capital Holdings LLC, he provides investment and consulting services to clients across multiple sectors with a pronounced focus on global product flows. That expertise has been crafted over many years in a variety of roles, including Senior Energy Analyst and Macro-Economist positions at Elevation, Candlewood Investment Group, and South Ferry Capital Management, as well as his formative experiences as a Portfolio Manager at FNY Capital and Morgan Stanley Investment Management, where he managed an eight-person team focused on developing a global trade platform to invest in rates, foreign exchange, commodities, and equities.

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