Iran is currently experiencing the largest civil unrest since the 2022 “Woman, Life, Freedom” uprising. The regime is the weakest it has ever been: Its proxies, from Hezbollah to the Assad regime in Syria, lie shattered across the Middle East. There is no effective Chinese or Russian support behind the current Khamenei regime. The current civil unrest started after a budget bill presented in Iranian Parliament in which the government proposed removing the preferential exchange rate (285,000 rials to the U.S. dollar). Many middle class sections including business class suspected that without a credible, transparent replacement—would immediately raise prices for basic goods. That mix of rage at corruption and anxiety about inflation turned the debate over the exchange rate into a trigger for protest. The sharp rise in the exchange rate has effectively broken normal price-setting. The Iranian Rial is now quoting at 1.47 Million Rials for a dollar. Back in 2022, it was trading at 430,000 Rials to a dollar. The rapid depreciation is compounding inflationary pressure, pushing up prices of food and other daily necessities and further straining household budgets, a trend that could worsen by a gasoline price change introduced in recent days. inflation rate in December rose to 42.2% from the same period last year, and is 1.8% higher than in November. Foodstuff prices rose 72% and health and medical items were up 50% from December last year. This has led to businessman too joining bazaar strikes that have raised the hopes of anti-regime activists, as the bazaar played a crucial role in the 1979 overthrow of the shah. Alarmingly for the regime, truck drivers, students, and everyday Iranians have also joined the strikes, expanding the coalition regime. On the external front, Russia/China “patron” myth is weaker than Tehran hoped. U.S. President Donald Trump has delivered more than one warning to Iran about cracking down on the anti-regime protests. His comments may well have emboldened protesters who have long campaigned for an end to the Islamic regime, even if many don’t believe Washington has their best interests at heart. To summarise, this is the first major protest movement in the aftermath of Iran losing the June war. That loss demystified and humbled the regime undercutting its narrative that the people “stood with” it. Iran looks more vulnerable now than at any time since the early revolutionary period. There’s no redemptive storyline left for the regime (economy, proxies degraded, nuclear program damaged, sanctions, mismanagement, water crisis, legitimacy loss). Anger is abundant in Iran, only coordination is required. That is the only stumbling block before the current regime topples. From a market perspective, Iran civil unrest has introduced $3-4/barrel risk premium in the crude prices. Repeated threats from Trump about the potential implications of a forceful suppression of protests have raised the spectre of a potential miscalculation that could lead to a material escalation in Middle East tensions. In short term, most of the plausible outcomes of a change in leadership/regime imply heightened risk of both domestic and regional destabilization. But our own view is that Trump might not be needed to even intervene. Either the civil unrest itself will explode leading to a regime change with a moderate cleric face or Israel might push the stone over the cliff by attacking once again the key personnel of current regime helping the civil unrest. Hence in medium term, this implies a US friendly leadership change and less sanctions and more crude supply.
