U.S. Sanctions Take a Toll on Iran’s Currency

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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.”

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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.”

24 comments
ahandout
ahandout

They don't care about their currency.  Heck, the US doesn't care about our currency. 

SRSwain
SRSwain

What about the horrible hangover we already have from the time wasted in all these stupid flummeries (er, the 18-month ongoing "campaign" do baffle them with BS)?  Neither side has a clue how to get to the bottom of what ails our economy.  "It's the economy Stupid!" still applies, writ large.  The fact is that we were collectively robbed, raped, and thrown under the train (except for the people who pulled off the crime).  Now these two clowns are arguing over who owes the liability insurance premium.  This is very, very dire.  And who is going to call them on it?  

Maybe in the debates... (Har•Har•Hardy•Har•Har•Har!)  We need to wake up.  The slippery slope has already turned into a 60 degree angle.

HudsonValleyTim
HudsonValleyTim

Any bets on how Romney is going to spin this in the debates? My guess is that he's going to mirror his economic argument and go with "Sure, sanctions are working...but not nearly as well or as quickly as they would under a Republican administration". Come to think of it, he would have a point there...the Republicans have been way more effective at imposing economic hardship on the working class than Democrats.

DonQuixotic
DonQuixotic

The sad thing is the regime doesn't care how much its own people suffer because of this (and neither does Netanyahoo).

nflfoghorn
nflfoghorn

It seems like:

Hebraic life > Iranian life

and vice versa.

Paul Dirks
Paul Dirks

It's a sad fact that the less democratic a government is, the less effective sanctions are at changing the behavior of the leadership. Which isn't to say that they shouldn't be tried before resorting to violence.

sacredh
sacredh

It's also very possible that the violence will be internal rather than a strike from the outside.  The Iranian people are going to be the ones that suffer in any case. One of my fears is that if violence starts from within Iran that the ruling mullahs lash out beyond the borders in an attempt to keep power.

DonQuixotic
DonQuixotic

If the sanctions are kept up perhaps it will, but I'd be very concerned that the regime would just roll over any internal resistance similar to what's currently happening in Syria.  They've done it before.

rokinsteve
rokinsteve

What ever happens would be all Pres. Obama's fault in Romney

/Ryan world.

sacredh
sacredh

JNS, you've been writing some interesting articles on foreign policy. Are you going to do some in-depth analysis of the foreign policy debate between Obama and Romney?

Jay Newton-Small
Jay Newton-Small

Thanks, sacredh. I'm thinking about it. Probably... Though, to be honest I've done my best to stay away from this campaign. 

JNS

carotexas
carotexas

Jay, thank you good post.  

sacredh
sacredh

I hope you do cover it. You've had some interesting takes. Maybe having stayed away from the campaign so far will give you/us some insights that we're not getting because everyone else has been so focused on the election. Thanks for responding too.

Curious_Quiche
Curious_Quiche

It really is a shame that a society like Iran has been kept in this state simply because it allowed the highest echelons of power to be maintained by hardline religious fanatics that don't represent even a very large percentage of the population. A LESS CIRCUMSPECT MAN MIGHT USE THIS STATE OF AFFAIRS AS AN OBJECT LESSON OR AN AESOP OR SOMETHING, I DON'T KNOW. *ahem*

Seriously though, Iran isn't a third world sty, they wouldn't have to put up with this if they could just get that that last clingy bit of 5th century off of their shoes.

nflfoghorn
nflfoghorn

Nahoohoo, a graduate of the Glenn Bleck School of Props.

rokinsteve
rokinsteve

Bleck went to school?  News to me.

sacredh
sacredh

This sounds like a few questions for the presidential debate on foreign policy. I wonder if Mitt will deny that sanctions are working?

Razor Man
Razor Man

Sanctions work albeit insidiously and slowly, allowing sufferers to claim their effects are caused by other forces. If you really want to see the devastating effects of sanctions, look at the magnitude of the highest note when the Zimbabwean dollar collapsed. And factor in the fact that the government had already lobbed of no less that nine zeroes earlier. An egg was in the regions of a quadrillion Zim dollars. And that was one note.

SmilingSmartBlonde
SmilingSmartBlonde

Netanyahu conceded that sanctions are, for the first time, taking a toll on Iran’s economy.Read more: http://swampland.time.com/2012...

This is very good news.

Now the question is whether Netanyahu will stop "using"  Romney. Romney is Netanyahu's puppet, so it seems.

Laura L. Connolly
Laura L. Connolly

@SRSwain:disqus Which isn't to say that they shouldn't be tried before resorting to violence. @Loise, you make $28h thats great going girl good for you! My story is that I quit working at shoprite to work online, seriously I couldn't be happier I work when I want and where I want. And with a little effort I easily bring in $34h and sometimes even as much as $92h…heres a good example of what i'm doing,..KingofProfits2012.webs.com

charlieromeobravo
charlieromeobravo

"

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."

This is the sort of thing that brings down a government.  I wonder how long this can go on before there's serious trouble, unrest over there.  And, if the people do revolt, what would take the current government's place?  We seem to have a special talent for not backing replacements that are both acceptable to the general populace AND that are friendly to us...

Jacob Blues
Jacob Blues

Likely six months to a year. 

Iran is losing income at the rate of $40 to $50 billion a year, and the country has reserves in the range of $50.0 billion to $106.0 billion. 

But as financial conditions deteriorate, this rate will accelerate. 

Then, the real pain kicks in for Iranians. 

Jacob Blues
Jacob Blues

According to al-Jazeera, Iran has hard-currency reserves in the range of $50.0 Billion to $70.0 Billion (though Iran's last internal estimate was $106.0 Billion).

Based on the burn rate mentioned at the end of the article, by Yuval Steinitz, Iran can cover the lost income with its reserves for maybe another year to two years.  But that's at the high end of the balance sheet estimate, and the low end of the lost income. 

But as the reserves get spent, and Iran's economic situation deteriorates, the burn rate will increase, which means that Iran could be looking at a dry bank account by mid-year 2013, especially given the growing inflation and tack on the reality that the world will kick you when you are down. 

Once the Country runs out of hard currency, the negative economic spiral will accelerate.  Then the real economic pain kicks in on the Iranian middle class.