By Saeed Ghasseminejad
September 12, 2020
Tehran announced on Tuesday that it would use 1 percent of its National Development Fund (NDF) – one Iran’s few remaining sources of hard currency – to stabilize the Tehran Stock Exchange (TSE). The announcement reflects the Islamic Republic’s urgent need to sustain the TSE bubble until after the U.S. elections in November, which Tehran hopes will result in a new administration prepared to lift sanctions.
Established in 2011, the NDF constitutes an investment and savings fund aimed at preserving revenue from Iran’s oil and gas industry for future generations. Over the past three years, however, Tehran has repeatedly diverted money from the NDF to finance its military operations and basic economic and development needs.
The TSE overall index had a 421 percent nominal return from January 1 until August 8, 2020. Since then, it has lost 25 percent of its value. At the same time, the rial has continued to depreciate, hitting an all-time low of 257,300 rials to the dollar on September 8.
The rise in prices happened across all stocks at a time when Iran has been facing three years of recession, currency depreciation, and high inflation, showing all the signs of a state-initiated, state-sustained bubble. The green light to spend 1 percent of NDF resources is a clear sign that the government in Tehran wants to sustain the bubble in the market.
Tehran has many reasons to perceive the existence of the bubble as the best of bad options right now. The bubble is the result of massive wandering liquidity and the household’s need for a short-term liquid hedge against inflation amid stagflation and a loose labor market. Other markets that can absorb the wandering liquidity are the currency market, precious metals, and real estate.
The injection of enormous wandering liquidity into these markets immediately creates an inflation shock in an economy that is already in a state of high inflation. The stock market, however, has the potential to guide the liquidity toward production and, by doing so, mitigate the inflationary effect of this liquidity.
As a result, over the last year, the regime has wooed millions of Iranians to put their life savings into the stock market. Now, a crash of the bubble would elicit the wrath of millions of Iranians, who would be losing all they had. This development could trigger nationwide protests. The regime has already survived two waves of widespread demonstrations over the past three years by killing hundreds of protesters and putting thousands in jail.
Tehran’s decision to prop up the stock market and sustain the bubble should be understood in the context of the upcoming U.S. presidential election. Regime officials have surely heard about former Vice President Joe Biden’s plan to reenter the 2015 nuclear agreement and lift sanctions if Tehran returns to compliance with the deal. As a result, the Islamic Republic hopes that Biden will win the election, thereby ending the Trump administration’s maximum pressure campaign, after which Tehran can manage the problem of the stock market bubble in a less hostile environment.
For Washington, the policy implications of Tehran’s decision are clear. No matter who wins the White House in November, Washington must not bail out the regime.
Foundation for Defense of Democracies