It will not just be about politics

The massive liquidity injections that central banks are pumping into the global financial systems should be enough to keep the world’s economy afloat in 2013. However, in spite of the vast network of monetary instruments in place, the economy remains fragile and could collapse in the event of a shock.

This year, politics is, and continues to be, the likeliest source of shocks: fiscal cliffs and sequesters in the US are weakening growth, elections in Italy or corruption scandals in Spain are preventing measures that have already been agreed upon from being implemented, while the upcoming elections in Germany are paralysing the design and implementation of any stimulus measure in Europe.

However, a political event that could have a sizeable effect on the world’s economy is not getting many headlines: Iran elects the substitute for President Ahmadinejad this month. These elections could easily be the most crucial in 2013 for two reasons: first, because of the likelihood of triggering some form of unrest and second, because of the very high impact that unrest in Iran might have on the rest of the world.

The previous election, in 2009, triggered demonstrations in which scores died. The risk in 2013 is potentially higher because of three fundamental changes that have taken place since then.

First, Iran has developed its nuclear technology, spurring tension with both Israel and the Gulf countries. Second, internal conflicts have developed within the political elite.

While in 2009 Ahmadinejad was the only official establishment candidate facing a reformist opposition, in 2013 there is no such thing as a consensus candidate representing the status quo. Ahmadinejad has completed two mandates and the constitution does not allow him to run for a third term; so the President is maneouvering to bring a close ally, his chief of staff Esfandir Mashaei, to power.

Meanwhile, Ayatollah Khamenei is trying to bring in a candidate through whom a more direct influence can be exerted. On June 21, the Council of Guardians excluded Mashaei from the official list of candidates.

Unity shattered

Ahmadinajad started to put pressure on the Ayatollah to re-examine the “unjust” exclusion. Regardless of the outcome of this fight, the unity that the Iranian political elite exhibited in 2009 is shattered, making the political outlook uncertain.

Finally, and most importantly, since the last election the economic situation in Iran has deteriorated sharply, mostly as a result of the international embargo that the country is suffering. The Iranian rial is depreciating quickly.

In 2011, 12,000 rials were enough to buy one euro. In 2012 the rial had depreciated to 27,000 and today it is being changed for around 60,000 rials to the euro. Consequently, prices have skyrocketed since the sanctions were imposed in June 2012.

Over the last year, gas and power became three times more expensive, which in turn has increased the cost of transportation and food; the price of a bread loaf in Tehran tripled to 70,000 rials and rice rose more than 50 per cent, now costing more than 80,000 a kilo.

The purchasing power of Iranian wages has, therefore, deteriorated rapidly. The salary of a clerk in Tehran hovers around eight million rials per month — less than €150.

Salary hikes have been unable to partially offset the impact of a 28 per cent annual official inflation, which in reality must be around twice as large.

Civil servants are less affected because their salaries adjust to inflation, at least partly: in 2013, they will receive salary increases of around 18 per cent. However, they only account for 16 per cent of the working population.

The situation for the 84 per cent of workers in the private sector is considerably worse. Salaries are adjusted following a company’s performance and given that most firms’ revenue came down since the sanctions, many workers have suffered salary cuts even in nominal terms. The unemployment level is much higher than the official 12 per cent and keeps rising as firms that need to buy from — or sell to — foreign partners get hit by the depreciation of the currency and the trade sanctions.

The dangerous combination of internal political conflict, demand for reforms, and rampant unemployment and poverty could spark unrest even before the elections, amid the political struggle following the ban imposed on some candidates, or after, if citizens perceive that the results have been rigged.

This context creates an urge for Iranian authorities to find a scapegoat and divert the attention of its population away from the dire economic situation. Any external conflict represents an opportunity to channel domestic frustration towards outside forces and will reduce discontent at home.

The possibility of such tension evolving into a fully-fledged conflict is, nevertheless, low, given the limited military and economic capacity of the country at this stage. However, the potential impact of a conflict is substantial: a third of the world’s traded oil crosses the Strait of Hormuz every day.

Even a short-lived closure would have a great impact on oil prices. An extended blockage could undermine the efforts of central banks and bring the global economy back into recession in 2013. The elections in Iran are a tail risk worth keeping an eye on.

— The writer is a senior economist at Asiya Investments, an investment company that currently manages assets in excess of $500 million.