X

Install this web app on your phone: tap + and then Add to Home Screen.

Iran: ‘Rial’ trouble in Tehran

Iran: Economic panic is spreading in Iran, forcing it to the negotiating table.

Iran economy rial 2012 1 26Enlarge
Iranians count and exchang United States dollars and Iranian rial banknotes. The value of the rial has plunged in recent weeks. (Atta Kenare/AFP/Getty Images)

The back-and-forth debate over what to do about Iran’s nuclear program is as dangerous as it is frustrating, with both hawks and doves relying on subjective, anecdotal “evidence” on Iran’s intentions and the effectiveness of UN sanctions, along with a reliance on anonymously sourced US intelligence estimates that seem disturbingly similar to those that led to the Iraq war in 2003.

On Wednesday, however, an incontrovertible fact was added to the growing body of evidence to suggest that the latest round of US and EU sanctions has Iranian resolve beginning to crack: the country is in the midst of a currency panic.

The governor of Iran’s central bank, Mahmoud Bahmani, announced an 8 percent devaluation of the Iranian rial, from 11,300 to 12,260 to the dollar. Until 2010, the rial had been kept at a relatively stable 9,000 to the US dollar for years. The new official rate, as of Saturday, will be 12,600/USD.*

GlobalPost in Tehran: Iran economy hit by tensions with West

In fact, the crisis is far deeper as black market rates for dollars in Iran — the more relevant measure for the merchant class that has proven a resilient supporter of the Islamic regime thanks, in part, to central-government largesse — shot up to 23,000/USD on Wednesday.

Iran deployed its security forces to patrol the streets of Tehran and other major cities on Sunday, warning it would arrest anyone illegally trading dollars or carrying foreign currency without an official invoice.

The EU’s decision to prevent member states from importing Iranian oil — following a similar move by the US late last year — has provided the most important evidence yet that the Obama administration’s decision to pursue tough economic sanctions with the promise of wide-ranging talks is beginning to bear fruit.

The president, in his State of the Union address Tuesday, repeated the familiar phrase that “no options are off the table,” a reference to the possibility of preemptive military action if Iranian nuclear weapons capability seemed imminent.

But, with even Israel downplaying the idea of a military move and Tehran’s economy in free-fall, those options look increasingly unnecessary, leaving those who have argued for immediate, massive military action — including most of the current Republican presidential crop — looking rash.

More from GlobalPost in Tehran: War with Iran? Iranians aren't worried

Vali Nasr, a former advisor to Richard Holbooke, said this latest round of sanctions have genuinely hit home in Iran.

“These hardships have caused popular discontent. The next set of sanctions may bring street protests. Iran’s rulers fear a repeat of the demonstrations of 2009. They now see the US policy on Iran — of toughening sanctions and also, at the United Nations, addressing Iran’s human-rights record and support for terrorism — as one aimed at regime change,” he said.

Nasr and others worry this could backfire — that the regime, fearing an existential crisis, might react by ramping up uranium enrichment or by making good on its threat to shut down the Strait of Hormuz.

But others view the speed of the economic crisis overtaking Iran to be so great that Tehran will have no option but to negotiate. Indeed, on Wednesday, President Mahmoud Ahmadinejad reaffirmed Iran’s willingness to restart stalled nuclear talks with the so-called PS5+1 (the five UN Security Council powers, plus Germany).

Since late December, new sanctions imposed by the US against companies that do business with Iran have taken the economic costs of defying UN resolutions with regard to its nuclear program to new heights.

The collapsing rial comes as a body blow to Iranians who have watched their wages lose as much as 50 percent of their value since December 2010, and particularly for those who have stuck by the government and kept their savings in local currency.

More from GlobalPost: Top 10 ways US has tried to subvert Iran

Iran, whose relatively inefficient oil sector already requires prices of nearly $92 a barrel just to break even, already had suffered losses as slowing global growth depressed prices.

Now, with some of its most important customers halting purchases (or, in the case of EU countries, preparing to), Iran’s vast middle class is casting an important vote of no-confidence in the government.

Among Iran’s most important export markets, only China and India look likely to continue purchases of major amounts of Iranian oil — and even here, slowing growth in each could lead to decreases.

As for other major customers, both Japan and South Korea have pledged to seek alternate sources under US pressure, France has already halted purchases and Italy, Spain, Greece and other smaller EU customers must stop importing Iranian oil by July 1. (The EU accounted for 18 percent of Iranian sales in 2010, Japan 14 percent, South Korea 10 percent, and Turkey — which has yet to announce its stance — another 7 percent.)

In practice, this is grim news for Iranian businesses and the military and clerical elites that keep the government in power. A scarcity of foreign hard currency, many economists believe, would be the most devastating impact of all on Iran’s rulers, depriving it of the means of “buying off” various constituencies with luxury items, the privilege to travel abroad or even the promise of a better economic future.

More from GlobalPost: Has the war with Iran already begun?

With the decision of the EU to act forcefully on sanctions — and with US diplomatic pressure forcing difficult decisions for oil companies in Asia and elsewhere that have continued to do business with the Islamic Republic — Iran finds itself with few allies.

Saudi Arabia, perhaps the one country that could ensure a virtual embargo on Iranian oil, has publicly pledged to help replace lost Iranian supplies by ramping up its own production.

The Saudis, long rivals for dominance in the Gulf region, have grown increasingly embittered by Iran, accusing Tehran of fomenting rebellion among the Shiites of Bahrain and Yemen and supporting dissident Shiites inside Saudi Arabia’s own restive Eastern provinces. Last October, US agents charged a man allegedly acting on Tehran’s orders of plotting to assassinate Saudi Arabia’s envoy in the US — a charge Iran denies.

So isolated has Iran become that even Russia’s reaction to the new Western sanctions was muted. Foreign Minister Sergei Lavrov, noted for his occasionally fiery denunciations of US and European policy toward Tehran, merely expressed regret following the EU vote on Monday and a hope that talks would soon resume, lowering the temperature on the issue.

Russia has traditionally shielded Iran from the harshest proposals at the UN Security Council, but has grown impatient, along with China, at seemingly desperate talk from Iran of “shutting down the Strait of Hormuz,” a shipping channel through which much of the oil produced by Iraq, Saudi Arabia, Kuwait and the Gulf Emirates must travel. About 40 percent of world oil-tanker traffic passes through the Strait each year, a majority bound for East Asia.

Such a move would cause a huge spike in global oil prices — something that no doubt would benefit Moscow, a major oil producer itself. But many fear it would also provide justification for a major US-led military action against Iran, something even China might countenance if its vital oil supplies were so threatened.

China has struggled with how best to deal with Iran’s nuclear ambitions. Home to its own restive Islamic population, China has no interest in seeing Iran obtain such weapons — a message Prime Minister Wen Jiabao delivered publicly during a recent visit to Saudi Arabia, China’s most important source of oil.

But Iran ranks third in China’s oil-supply picture, and besides prefers sanctions to be blessed by the UN rather than driven by the US and EU, as is the case with the current round.

On Wednesday, China deemed the new EU sanctions “unconstructive,” but like Moscow, said new talks aimed at ensuring Iran does not develop a nuclear weapon were the solution.

Editor's note: The exchange rate calculations have been corrected. (Return to text)

http://www.globalpost.com/dispatch/news/regions/middle-east/120126/iran-rial-trouble-tehran