Iran’s Dive Against the Dollar

At the end of September, the exchange rate of the rial on Iran’s black market registered a sudden depreciation against the dollar, going from 10,500 per dollar to 13,000 in one week. At the same time, the official exchange rate of the dollar remained virtually unchanged at 10,200 rial. This event is significant.

In recent years, the central bank of Iran managed to keep the official and black market exchange rates quite closely aligned. The central bank, having large foreign exchange reserves, succeeded in stabilizing these two markets, while managing a slow depreciation of the rial. From 2005 until the end of September 2010, the dollar registered an appreciation of 13 percent against the Iranian currency. Without central bank intervention, the rial’s drop would have been much higher if one takes in account the very high rate of inflation in Iran since 2005, ranging from 10 percent in 2005 to nearly 30 percent in 2008. The central bank policy was to manage a very slow depreciation of its currency to avoid the inflationary effects of a stronger move. Not everyone agreed with this. Iranian exporters were quite critical of this policy choice which lowered their competitiveness abroad. On the other hand, networks close to the Iranian regime, especially companies controlled by the Foundations and the Pasdarans, clearly benefitted from this situation (and lobbied for it), since it lowered their import costs.

Clearly, the recent plunge of the rial against the dollar came as a shock. So what happened? It seems that the American-inspired sanctions have led to a disruption of relations between the Iranian banking system and their correspondent banks abroad. Under the sanctions regimen, is more difficult for Iranian companies and individuals to move money between Iran and the outside world. As exporters and individuals have trouble transferring dollars from abroad, there is a lower level of supply of the American currency in the Tehran black market for foreign exchange.

This is only one impact, of course, of the recent economic sanctions on the Iranian economy. The nation’s private sector, which is relying on the black foreign exchange market for most of its needs, faces a shortage of dollars. And the costs will spread to the rest of the economy as the official exchange rate has depreciated to close the gap between the official and the black market rates. On October 1, for instance, the dollar was quoted at 10,700 rials, up from 10,200 just the day before.

At the same time, the difficulty of moving money abroad is affecting imports. According to Iranian customs, the imports of goods have decreased by 13.9 percent in volume in the first three months of the current Iranian fiscal year which began in March, compared to the same period last year. Moreover, the recent announcement by big four multinational oil companies (France’s Total, Royal Dutch Shell, Norway’s Statoil and Italy’s ENI) that they are pulling out of the Iranian market shows that it is increasingly difficult for the Iranian energy sector to attract foreign investment.

Nevertheless, one should not leap to the conclusion that the sanctions are working. The Iranian government has sufficient foreign exchange reserves (due to the oil windfall from 2005 to 2008) and as long as the oil price does not crash (oil exports represent 80 percent of foreign exchange earnings), the Iranian economy will survive. Iranians have in the past showed great talent at finding alternative financial solutions when the usual mechanisms do not work. UAE still plays a central role in Iranian foreign trade, but there has also been a reorientation of Iranian commerce with Asia—China and South Korea being now the second and fourth biggest exporters to Iran. Sanctions on the energy sector may have an impact on the long term, but are unlikely to change Iranian government behavior on the nuclear issue immediately.

The most troublesome aspect of these sanctions, however, is that they are weakening Iranian civil society and reinforcing the networks close to the regime. The Iranian private sector, with no privileged access to the Iranian banking system, is suffering most acutely from the financial sanctions. It is the Iranian worker or member of the “educated” middle-class which will suffer from a higher inflation rate, if the rial depreciation goes on. The companies close to the Pasdarans and the Foundations have enough political backing to get access to the financing they need to survive in this difficult economic environment (they are controlling most of the illegal import networks which generate huge profits).

In fact, these sanctions, by limiting the economic exchanges between Iran and the outside world are constraining the reinforcement of Iranian civil society. This policy of isolating Iran is then in complete contradiction with the positive comments made by the American and European governments about the “mature and democracy-loving” Iranian civil society during the protests of 2009.