Iran-Economy-US dollar, gold coins

A Turning Point for the Islamic Republic’s Economy?

At the close of Tehran’s markets on Saturday Iran’s currency, the rial, stood at a historic low. According to the Islamic Republic Student News Agency (ISNA), it traded at 20,000 rial to the US dollar, 24,000 rial to the euro, and 30,000 rial to the British pound. While the currency has experienced a long decline vis-à-vis the US dollar since the Islamic Revolution of 1979, a fall of 6,000 rial to the dollar in less than one month represents one of the largest declines in recent memory.

The unpredictable fluctuations appear to be linked with rising uncertainty among the Iranian public about Iran’s economic future. On 31 December 2011, US President Barack Obama signed into law the National Defense Authorization Act (NDAA), which contains provisions that punish foreign financial institutions that do business with Iran’s central bank, Bank-e Markazi. Among other things, this provision is intended to make it difficult for other states to conduct basic financial transactions with Iran, including the purchase of Iranian crude oil. Petroleum products represent the overwhelming majority of Iran’s exports and a substantial proportion of the state budget. The most recent round of US sanctions were preceded by British sanctions which severed that country’s ties with Bank-e Markazi, and Canadian sanctions prohibiting financial transactions with Iran and expanding the list of prohibited goods to include all goods used in the petroleum section, among other things.

While Congress has given some leeway to the Obama administration in implementing the NDAA sanctions because of the effect a sudden withdrawal of Iranian oil could have on global oil prices, ultimately their scope and impact will likely rely on a number of factors. These include the implementation of the recent oil embargo by the European Union, whether China and others continue to import Iranian oil at current levels, and if Gulf Cooperation Council (GCC) and other oil producing countries can and are willing to increase output to compensate for the loss of Iranian oil. The signs thus far are not positive for Iran. For example, Chinese Premier Wen Jiabao’s recent visit to Saudi Arabia may signal a shift in China’s energy strategy in the Persian Gulf, lessening its dependence on Iranian oil.

This profound economic uncertainty has caused Iranians to buy up other currencies, especially the US dollar, gold coins (which recently rose to a historic high of 10,000,000 rial), and any other valuable assets, such as real-estate, which could preserving their value in the face of a falling rial. The government has held on tightly to its foreign-exchange reserves for fear of the effects sanctions could have on the Islamic Republic’s ability to acquire foreign currencies, perversely stimulating demand for these currencies and accelerating the rial’s fall even further. What is more, a sudden inflow of investment into real-estate could also stoke a rise in property prices and rent. Thus far, the state has marginalized the role of sanctions and blamed black market currency traders and international gold markets for the fluctuations, claims that appear out of touch with reality.

The Islamic Republic has survived a number of crises since its inception, not the least of which were severe economic issues linked to the dislocations of the Islamic Revolution, Iran-Iraq War, US sanctions, and structural economic problems linked to government corruption, incompetence, and mismanagement. The avalanche of sanctions beginning at the end of 2011 are different however, and may represent a turning point in Iran’s economic situation with grave consequences for social tensions and ultimately the regime’s political stability. Even for the most optimistic observers of the Islamic Republic, the picture must look bleak indeed.