Summary

Over the past three months, a series of leaks and corruption allegations has rocked Iran's banking and financial sectors. The scandal has revealed, among other things, that civil servants and business executives are being paid as much as $230,000 a month. The revelation has provided President Hassan Rouhani's political rivals with new ammunition ahead of next year's election, planting yet another obstacle in Rouhani's path to re-election. Attempting to head off any further damage, Rouhani adviser Vice President Mohammad Bagher Nobakht announced July 26 that Tehran plans to cap government and private officials' monthly salaries at $3,200 and $6,200, respectively, a move that should put to rest the most controversial aspect of the entire affair.

The practice of generously compensating executives and government figures was in place well before Rouhani took office. But neither this nor the president's numerous economic achievements — inflation has fallen to single digits, oil exports have increased and foreign direct investment has risen to heights unseen in the past decade — will change the fact that the president has a hotly contested election ahead of him. With Iranian conservatives already leading a concerted effort to undermine Rouhani's social and economic reforms, another threat to the president's legitimacy may cut deep into his chances of securing a second term. 

Analysis

The salary scandal first broke in May, when leaked pay stubs showed that Central Insurance Company of Iran executives make as much as $24,000 a month, well above the maximum salary permitted by Iranian law. The company claimed to be settling numerous old payments, some delayed by up to seven years, in one sitting. The explanation was not enough to keep Finance Minister Ali Tayebnia from having to investigate the firm, though, and the inquiry eventually resulted in the resignation of the organization's chief. 

But that was not enough to lay the issue to rest. Instead, the Rouhani administration, Supreme Audit Court and other governmental bodies were forced to open their own investigations into other parts of the Iranian bureaucracy. Supreme Leader Ayatollah Ali Khamenei weighed in on June 22, voicing his disapproval of the exorbitant salaries and calling for quick action on Rouhani's part to resolve the situation. Eight days later, four of the country's biggest banks — Mehr, Mellat, Saderat Iran and Refah — became embroiled in the scandal and had their directors removed. Not long after that, the entire executive team of the National Development Fund of Iran resigned. Most of the employees accused of wrongdoing — so far over a dozen, though reports suggest several hundred may yet be let go — have been forced to return some of the money they were paid.

A Chance for Rouhani's Rivals

Many of Iran's hard-line lawmakers and media outlets, including Tasnim News Agency and Ensafnews, have seized the opportunity to chastise Rouhani for letting salaries get out of hand. The president, however, has been proactive in his response to the scandal, as evidenced by the rapid investigation of Iran's major banks. Some traditionally conservative figures, such as the powerful parliamentary speaker, Ali Larijani, have even lent their support to Rouhani's efforts.

Nevertheless, Rouhani has yet to escape the controversy. Iran's Majlis, or parliament, has opened an investigation of its own into the role Hossein Fereidoun, Rouhani's brother, played in the appointment of some of the fired bank directors. Moreover, the judiciary and the Islamic Revolutionary Guard Corps (IRGC) have taken a greater interest in uncovering and combating economic corruption since the salary scandal began. On July 19, the IRGC arrested Ali Rastegar, the director of Mellat Bank, whose hiring Fereidoun is thought to have had some say in. According to the IRGC chief, Rastegar was detained for his complicity in an "even bigger financial scam."

The growing interest of the conservative judiciary and IRGC, coupled with Rouhani's close (and potentially familial) ties to the scandal, will be important factors for assessing the president's political vulnerability to the leaks' fallout. In fact, the question of whether Rouhani will be the first president of the Islamic republic not to win re-election has already been raised.

Removing the President but Not His Policies

Rouhani's situation is not necessarily unique, and if history is any indication, things may not end well for him. The economic reforms of his mentors, former Presidents Ali Akbar Hashemi Rafsanjani and Mohammed Khatami, were stopped in their tracks in the 1990s by concerns of corruption, unfair advantages for well-connected political elite and the vast business empires of family members. When Mahmoud Ahmadinejad ran for election in 2005, he was able to galvanize public support by condemning the "oil mafia" that Rafsanjani and Khatami's economic liberalization policies had supposedly created. Because his message resonated with Iranian voters, he was able to garner enough support to win the presidency on a populist agenda, surprising analysts around the world.

By comparison, Rouhani's family is not nearly as entrenched in Iran's political economy as Rafsanjani's or Larijani's are. And many of the populist sentiments that Ahmadinejad was able to tap during his rise to power still exist in Iran, and they have been thrown into sharp relief by the latest scandal. Though inflation has dropped to its lowest point in 25 years, and foreign direct investment has risen to its highest peak in 10 years, the yawning gap between Iran's upper class and middle-to-lower classes remains. Meanwhile, many of the structural reforms meant to close the divide have been blocked or left unfinished.

Furthermore, the Iranian people were deeply upset by the salary scandal. Imams across the country have discussed the issue in their Friday sermons, and in mid-July Ahmadinejad delivered a speech about it at a mosque outside Tehran. Many attended the event, a testament to the popular pull Ahmadinejad still has among Iran's religiously conservative and economically at-risk constituencies, which could bode ill for Rouhani's political future.

Yet, even if the country's conservative elements succeed in blocking Rouhani's re-election, they may have less luck in halting his agenda of economic liberalization. Most of Iran's political factions, including conservative groups, recognize that liberal economic policies have become a necessity and that an isolationist figure such as Ahmadinejad is not what the country needs. And so, barring a major upset in Iran's relationship with the West, Rouhani's economic policies will likely stick around, even if the man himself does not.

This article originally appeared on Stratfor.com