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February 28, 2020 View On Website
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The Coronavirus Outbreak: Impact on Iran
By: Caroline D. Rose
Over the past two weeks, Iran has been dealing with an outbreak of coronavirus that has so far led to 388 infections and 34 deaths in the country. The government has struggled to contain the virus, and in barely more than one week, there have already been riots over its mismanagement of the outbreak. The virus has not only had political consequences but also economic ramifications, especially stemming from the closure of border crossings with some of its most critical trade partners. The dissatisfaction with the government’s handling of the outbreak comes at an especially vulnerable time for the regime. Over the past two years, the United States has applied a maximum pressure campaign on Iran that it hoped would squeeze the country’s finances, instigate social unrest and curtail Iranian influence in the Middle East. It has done so mainly through sanctions, which have crippled Iran’s economy and caused some degree of unrest but failed to weaken the regime to the point of collapse. The coronavirus outbreak, however, has the potential to undermine the regime in ways that U.S. sanctions never could.
Still, we don’t expect the government to completely crack under the pressure; Tehran will manage by implementing curfews, quarantines and other measures to crack down on anti-government sentiment. But coronavirus is yet another issue that will cause the public’s frustration with the government to rise. It highlights the growing distrust of the regime, as well as the government’s own resilience in the face of adversity.
Economic Implications
Many have highlighted the potential implications of the outbreak for Iran’s economy, particularly the effects on trade and Iran’s currency. But the country’s formal economy won’t take as big a hit as other affected countries like China and Italy. Sanctions have already crippled Iran’s economy, forcing the country to reduce its dependence on exports and rely increasingly on illicit trade. While the outbreak will certainly further discourage other countries from trading with Iran and affect its access to foreign currency, the list of willing buyers for Iranian exports is already limited, and the value of the rial has already declined substantially.
Instead, the outbreak’s largest economic impact will be felt in the shadow economy, which has been Iran’s greatest weapon against sanctions. Iran’s gross domestic product dropped by 4.8 percent in 2018 and an additional 9.5 percent in 2019, and its unemployment level rose to 16.8 percent last year. Import shortages, high living costs, drained foreign currency reserves, a strained pension system, and skyrocketing prices for bread, beef, sugar and milk have also contributed to the country’s deep recession. Iranians have therefore increasingly resorted to the informal market as a means of survival. In 2017, Iran’s informal economy was estimated to account for about 36 to 38 percent (worth $12.3 billion) of economic activity in the country. Experts estimated that $10 billion to $15 billion worth of products were smuggled across Iran’s borders annually. By contrast, non-oil exports traded through official channels were worth about $650 million in 2019. At a time of extreme economic hardship, therefore, smuggling has provided a source of income for thousands of otherwise unemployed Iranians.
The informal economy has also enabled Iran’s oil export market to survive. This is because U.S. sanctions only target trade of Iranian goods in the formal market. In May 2019, the U.S. announced a fresh round of sanctions with the intention of slowing Iranian crude production to zero. The campaign has been fairly successful: Iranian exports have fallen 87 percent from 2016 levels, and oil output decreased to 2.1 million barrels per day last October from 3.8 million bpd in 2018. Tehran has therefore been forced to turn to other means, including smuggling, to sell its most profitable export.
In 2018, experts estimated that between 5.3 million to 10.6 million gallons of crude were smuggled out of Iran daily – though this number has undoubtedly declined as production has fallen. Proxy networks and Iraqi Shiite militias loyal to Tehran have served as dependable intermediaries in Iranian smuggling networks. Militias within Iraq’s Popular Mobilization Forces, which the Iraqi government has entrusted with guarding certain border checkpoints, patrolling highways and protecting oil fields, have been particularly helpful. Iraqi Shiite groups and Iran’s Islamic Revolutionary Guard Corps have also helped smuggle Iranian crude into Syria, now the largest customer for Iranian oil. Crude is typically smuggled across the border using trucks and vans through unofficial or militia-guarded checkpoints, particularly along challenging terrain such the marshlands in the Maysan province. It is often offloaded between Iraqi Shiite groups with limited Iranian logistical supervision and transported along the al-Boukamal-al-Qaim highway at the Iraq-Syria border. Though trucks, which can carry only about 120 barrels of oil, and vans, which can carry only 12 barrels, are not as efficient as oil tankers, Iran’s wide network of proxies in Iraq has turned cross-border smuggling into one of the most reliable methods of distributing Iranian oil to external markets.
But this method will be jeopardized if Iraq closes its border over coronavirus fears. Iraq has already closed some crossings for several days to stop the virus from spreading. The economic impact will depend on how strictly Baghdad enforces the border closures and prohibition on travel to and from Iran. Smuggling won’t end entirely, as poorly defended border crossings will continue to enable illicit trade. But the element of fear will certainly have an impact on Iran’s informal economy. All of the reported infections in Iraq and Lebanon have been linked to Iran. People involved in the trafficking of goods will be increasingly hesitant to deal with Iranians, particularly as cases in the region continue to rise in countries that lack protective gear, medical services and well-staffed hospitals. Even if the Iraqi government does not enforce the border closure as strictly as it says it will, the virus could take a toll on Iran’s informal economy.
Political Unrest
Most importantly, the virus comes to Iran at a politically inopportune time. In its first two weeks of the outbreak in Iran, the government has already shown signs of unpreparedness. Sanctions and the recession have stripped Iran’s health care system down to its bones, depriving it of critical medical equipment, personnel and expertise. As of 2019, the World Health Organization recorded the country had only 10 doctors per 10,000 people. (For comparison, in the U.S. there are 45 doctors per 10,000 – and the Association of American Medical Colleges considers even this a shortage.) Reports have poured in from Iran about the lack of protective masks, hand sanitizer and adequate medical equipment in both rural and urban environments. And the government’s track record of reporting infections has upset opposition lawmakers and citizens alike. Tehran announced the two cases that hit Qom on Feb. 19, two days before elections to the country’s parliament, or Majlis, and withheld information about an additional 18 cases and two deaths (translating to a higher mortality rate than the global rate of a little over 3 percent) two days later.
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But the government had a powerful interest in underselling the scale of the outbreak, less than two months after it sparked protests when it accidentally shot down a Ukrainian passenger airplane during a missile barrage targeting U.S. forces in Iraq, and ahead of an election that was already fated to be controversial. In January, the Guardian Council barred 6,850 reformist candidates from the ballot, causing widespread outcry over a lack of democratic representation and leading to calls, particularly in urban areas, to boycott the vote. The last thing the government needed, then, was a mass viral outbreak that would further damage the credibility of itself and the election. In the end, the election’s outcome was favorable for Supreme Leader Ayatollah Ali Khamenei, with 30 conservative hardliners gaining seats in the Majlis. Just 42.57 percent of Iranians voted, the lowest participation rate since the 1979 Islamic Revolution and down nearly 20 percentage points from the previous election in 2016. Fear of infection certainly played a role in keeping Iranians from the ballot box, and the government didn’t shy away from accusing its “enemies” of sensationalizing the outbreak to influence its internal affairs – even if, in the end, the low turnout probably worked to the government’s advantage.
In the wake of the election, as the extent of the outbreak has become clear, there have been riots over the government’s mishandling of the virus. In Talesh, a city in Iran’s northern Gilan province, people protested the government’s secrecy and mysterious quarantines outside a hospital on Feb. 23 until security forces dispersed them with tear gas. In Isfahan, medical students protested in front of the University of Medical Sciences over the lack of protective gear and supplies, while in Rasht, protesters started fires in the streets to oppose unexplained street closures, where they were met with crackdowns from security forces. And in Najaf, protesters upset with the government’s refusal to close the city’s international airport attempted to block travelers’ access.
In the face of rising unrest, Tehran has tried to nip political threats in the bud. On Feb. 26, Iran’s cyberpolice unit arrested 24 people accused of spreading rumors about the virus, and warned news outlets and social media users against reporting cases that contradicted official reports. The government is gradually shutting down social gatherings, religious sites, schools and sports matches in affected provinces as well as the cities of Isfahan, Mashhad, Tabriz, Shiraz and Tehran, which will soon turn into full-fledged quarantines and curfews. Under such restrictions, large anti-government gatherings will be difficult to coordinate. But that doesn’t mean political resentment toward the regime won’t continue to fester.
In unstable countries such as Iran, the coronavirus outbreak is not only a health crisis but also a political and economic threat to the regime. In the face of a crushing sanctions campaign, the government has been struggling to keep the lights on, keep protesters off the streets and keep up its campaign to spread its influence in the region. The hospitals are lacking proper medical kits and virus protection to treat patients. Panic risks crippling its illicit economy, which has struggled to make up for its teetering formal economy. With such political and economic uncertainty, Iran’s government cannot finance this outbreak and come out unscathed. However, after everything the regime has endured in recent years, it will likely take much more than the coronavirus to force regime change.
