There aren’t many places for Iranians to shelter their money these days. Inflation has surpassed interest rates. There’s a construction boom in Tehran, and gold and gems are popular, but hard currency is the safest commodity. And Iranians are fleeing the Rial for the dollar. As one U.S. official described it, they are voting with their currency against their government.
The Iranian Rial on Monday reached 36,000 to the dollar, nearly a 30% devaluation just since last week. The currency has lost half its value since the day I left Iran last month, when the Rial was trading at 22,500 to the dollar on the black market. (The official rate was, as it is today, roughly 12,000 Rial to the dollar). The upshot: U.S. sanctions are clearly having an impact.
Last month I traveled to Iran for the Non-Aligned Movement conference. While there, I took the opportunity to check out the local economy. As a testament to how stringent U.S. sanctions have become, I had to get a special license from the Treasury Department to spend money in Iran. (Subscribers can read my story on how the sanctions are impacting Tehran here.)
I heard several people complain that the government wasn’t doing more to shore up the Rial. For example, Tehran bought dozens of brand new black armored Mercedes to ferry dignitaries around – hard cash that could’ve been used to buy Rial. At the airport waiting for my flight to Dubai, I saw a dozen of the vehicles being loaded onto trucks near the tarmac and I wondered: Can one return barely used armored cars?
At a press conference in New York last week, Iranian President Mahmoud Ahmadinejad scoffed at the idea that Iran’s economy might be suffering under sanctions. “Certainly our economic situation is better than Europe or America,” he said. “The last 33 years we’ve had no trade ties with the U.S.”
What does the potential collapse of the Rial mean? Aside from economic pain for the Iranian people, not much. The Iranian economy is largely isolated from the rest of the world. And the Green Movement, which conducted anti-government protests in the wake of the 2009 election, seems to be too scattered to step into the void even if Iran’s regime were to weaken.
Where Iran’s economic distress could have an impact is in regional politics. Israeli Prime Minister Benjamin Netanyahu has threatened to bomb Iran over its nuclear program, but last week, in a speech before the U.N., Netanyahu conceded that sanctions are, for the first time, taking a toll on Iran’s economy. (He also said they have “not had an effect on Iran’s nuclear program,” citing an International Atomic Energy Agency report that Iran has doubled refinement in the past year.)
And over the weekend, Netanyahu’s finance minister argued that given the drastic scope and nature of the sanctions, more time was needed to allow diplomatic measures to work. “The sanctions on Iran in the past year jumped a level,” Yuval Steinitz told Israel Radio. “It is not collapsing, but it is on the verge of collapse. The loss of income from oil there is approaching $45-50 billion by the year’s end.”