Iran’s Currency Has Collapsed. A Sign The Sanctions Are Working?

Iran's currency has collapsed and there are riot police in the streets of Teheran. It appears the sanctions may just be working after all.

Thanks in large part to the massive sanctions imposed by the United States, and largely being complied with by most nations, the Iranian Rial has lost a massive amount of value in a very short period of time:

Iran’s already fragile currency, the rial, has fallen in value by about 40 percent over the past week, battered by a combination of potent Western sanctions over the disputed Iranian nuclear program and new anxieties among Iranians about their government’s economic stewardship, analysts said.

While the value of the rial has eroded for the past few years as Iran’s economic isolation has deepened, the severity of the drop worsened with surprising speed in recent days as Iranians rushed to sell rials for dollars. By the end of the day on Monday, it cost about 34,800 rials to buy $1 in Tehran. The rate had been 24,600 rials as of last Monday.

“It’s sort of in a full-blown stampede mode today,” said Cliff Kupchan, a Washington-based analyst at the Eurasia Group, a political risk consulting firm. “There’s very little confidence among many Iranians in the government’s ability to adroitly manage economic policy.”

In another ominous sign, 10,000 Iranian workers signed a petition addressed to Iran’s labor minister complaining about the declines in their purchasing power and other economic maladies, suggesting that the accumulated impact of sanctions is putting more political pressure on the Iranian leadership, The Associated Press reported. President Mahmoud Ahmadinejad has said the sanctions, which are designed to force concessions on Iran’s nuclear program, would fail.

Mr. Kupchan and others said the catalyst for the currency drop this past week appeared to be a policy change by the Central Bank of Iran on Sept. 23 that had been intended to reduce the volatility of exchange rates but had the opposite effect.

Under the new policy, the central bank established a “foreign exchange center” that gives preferential rates to importers of priority goods like meats, grains and medicine. But economists said the central bank may have inadvertently telegraphed fears that it was low on dollars, or at least lacked access to a large part of its estimated $110 billion in foreign exchange reserves. Some of that money is frozen in offshore accounts.

“What we have now is a massive dumping of rials,” Mr. Kupchan said.

Djavad Salehi-Isfahani, an economics professor at Virginia Tech, said the actions of Iran’s monetary officials showed that “the central bank doesn’t know what to do in crisis times.”

He said the situation had been exacerbated by Mr. Ahmadinejad’s insistence that rates for borrowers and depositers could not exceed the inflation rate. One consequence was that few Iranians keep their money in banks. Worries that the government was not being upfront about inflation may have been further aggravated, Mr. Salehi-Isfahani said, by its decision a few weeks ago to stop publishing the inflation rate, which is officially 23.5 percent but probably much higher.

The shriveling value of the rial is now contributing to fears in Iran of a severe inflationary spiral, as an increasing amount of rials are required to buy food, medicine and machinery needed from abroad. At the same time, Iran’s ability to sell oil, its main export, has been severely hampered by the sanctions on the nuclear program, which Iran says is for the peaceful development of nuclear energy but Western nations suspect is intended to produce nuclear weapons.

Today, there are reports of clashes between riot police and protesters in the streets of Tehran:

Riot police in Iran have clashed with protesters in the capital over sharp falls in the currency, the rial.

Tear gas was used to disperse the demonstrators, some of whom were setting fire to tyres and rubbish bins. There were many arrests, reports say.

Eyewitnesses told the BBC that scores of people gathered outside the central bank, calling for the governor to stand down, chanting anti-government slogans.

The rial has plummeted to record lows against the US dollar in recent days.

Money dealers were joined by traders from the nearby central bazaar, reports say.

Amateur video footage posted online appeared to show hundreds of people marching towards Iran’s central bank.

Eyewitnesses told BBC Persian that riot police fired tear gas to disperse the crowds.

Reports say many shops in the central Grand Bazaar have brought down their shutters in sympathy with the demonstrators.

Traders are angry at the lack of direction from the government in the crisis, which they say has led to more instability in prices and made trading almost impossible, according to commentators.

Daniel Drezner takes this as a sign that the sanctions are working and that the Iranians may be nearing the point where they’d be willing to make compromises regarding their nuclear program. Even Benjamin Netenyahu seems to be getting on the sanctions bandwagon. A report in yesterday’s New York Times indicates that the Prime Minister is looking to travel to Europe before the end of the year to push for hardening of the sanctions regime. This is likely a tacit admission on the part of the Israelis that they aren’t going to be able to take out the Iranian nuclear program on their own, and that the United States is not willing to back military action at this time. It may also be the result of the conversations he had at the United Nations with Secretary of State Clinton. In any case, one would think that these developments in Iran, coming so quickly after Netenyahu’s own speech to the U.N. General Assembly are going to be strong support in favor of the U.S. position that it is still possible to use sanctions to force the Iranians to the bargaining table.

Kevin Drum uses the developments in Iran to make this important point that’s relevant to the ongoing Presidential election:

Regardless of what you think about Iran’s nuclear program (and the sanctions regime itself), there’s a lesson here: foreign policy isn’t always — or even often — about who can bluster the hardest. Nor is it about “red lines” and toughness. It’s messy. No one just sails from success to success. But Obama has pursued a sensible and persistent course against Iran’s nuclear program: first getting the world on his side by demonstrating a genuine willingness to engage with Iran’s leaders; pushing relentlessly for sanctions when that didn’t work; declining to back down when Iran tried to split the coalition he’d built; consistently turning down policy options that might have turned Iran’s people against him; and keeping military threats visible but always in the background.

As Drum notes, we have no idea if these sanctions are going to work. The Iranian Government could use the sanctions and the ongoing currency crisis as a way to rile up civilian resentment against the West by saying that we are the ones responsible for the economic crisis. They could use force to put down any protests like they did in 2009. Or, the protests themselves could fizzle out as people try to figure out how to live day-to-day in a country whose currency is losing incredible amounts of value every day. On other hand, the economic crisis and the threat of additional sanctions could force the Iranians to realize that they aren’t going to get out of this showdown with the West without giving something up, thus opening up the door to negotiations. And, of course, the whole scheme could fail and we could find ourselves facing a decision about whether or not to go to war over Iran’s nuclear weapons program.

That day of decision isn’t today, though. These events suggest strongly that the sanctions are having an impact and that the Iranian people are blaming their government for the misery they are going through. As the Arab Spring has showed us, a populace that is both politically repressed and economically desperate can accomplish amazing things sometimes. Instead of listening to the John Bolton’s of the world who want us to bomb Iran two weeks ago yesterday, perhaps we should take this as a sign that these far less deadly means, combined with diplomacy if and when the Iranians show themselves willing to talk, are the better way to go.

FILED UNDER: Middle East, World Politics,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Tsar Nicholas says:

    Hmm.

    Well, Iran’s currency being debased is a good thing for oil consumers, although obviously it’s a very bad thing for Iranians. Even with the sanctions Iran is a big oil exporter. All other things being equal a cheaper Iranian currency means cheaper Iranian oil to the world markets. A debased currency also is destabilizing to the current Iranian regime, which could be a good thing. Presumably it would be a good thing. Subject to the laws of unintended consequences.

    I don’t know that we necessarily want to celebrate the idea of Iranian riot police in the streets. Riot police have batons and truncheons. Iranians have skulls and other bones.

    Sanctions didn’t work in Iraq. Unless you consider starving Iraqis and high infant mortality rates to be a “success story.”

    So I guess we’ll have to wait and see what happens.

    Ultimately, though, in the final analysis, the end game is inevitable. The Mullahs won’t stop in their quest to have nuclear weapons. If that means they have to kill many thousands of their own people they’ll do so. Many tens of thousands. Won’t matter. They’re batshit crazy.

    A nuclear-armed Iran is untenable everywhere except for Planet Chamberlain, which is right next to the Rwandan asteroid belt, if you catch my drift. Ergo there will be a war against Iran. The only remaining questions are when and who’ll win.

  2. Nikki says:

    Obama in a landslide.

  3. Jr says:

    Just more ammo for Barry in the second debate……….

  4. Cycloptichorn says:

    @Tsar Nicholas:

    They’re batshit crazy.

    There’s zero evidence that this is true. Can you point out the ‘batshit crazy’ actions that this group has taken, on the international level?

  5. C. Clavin says:

    “…Instead of listening to the John Bolton’s of the world who want us to bomb Iran two weeks ago yesterday, perhaps we should take this as a sign that these far less deadly means, combined with diplomacy if and when the Iranians show themselves willing to talk, are the better way to go…”

    Of course Republicans generally, and Romney specifically, are firmly in Bolton’s camp.
    A Romney Presidency would be dangerous…in terms of FP and the SCOTUS.

  6. C. Clavin says:

    Romney on Bolton…

    “…John has been a staunch defender of U.S. interests and values, both while he was in and out of government … I look forward to consulting with him as we campaign to restore America’s standing abroad and ensure that this century is an American Century…”

    “American Century” is clearly a nod to the “Project for a New American Century”…the collection of fools who brought us the invasion and occupation of Iraq…Bolton prominent amongst them.
    The Washington Times on potential Romney Cabinet members:

    “…John R. Bolton, the U.N. ambassador during the George W. Bush administration and specialist on arms control and security issues, is said to be a leading candidate for Secretary of State…”

    The last eight years of war not enough for you? Vote for Romney.

  7. @C. Clavin:

    Bolton is not going to be the Secretary of State nominee. He couldn’t make it through the Senate back in 2005 and there’s little chance he’d make it through again.

  8. grumpy realist says:

    @Tsar Nicholas: What evidence do you have that “the mullahs” want to make Iran a nuclear weaponed power? What evidence do you have that this isn’t a complete political game by the President of Iran?

    Oh, and what evidence do you have that the mullahs are “batshit crazy”? Why are they crazier than the Prime Minister of Israel?

    Given how Iran has acted since the Iranian Revolution, “batshit crazy” is not a term I would apply to the Iranian mullahs.

  9. michael reynolds says:

    So what we have here is smart foreign policy in action. As opposed to Mr. Romney wanting to outsource to Bibi Netanyahu for a disastrous war.

  10. Ben Wolf says:

    @Tsar Nicholas: The oil trade is conducted in dollars, not rials. A collapsing currency does nothing for oil importing nations.

  11. Rob in CT says:

    I’m not sold on this course of action, really, but it’s far superior to bomb bomb bomb, bomb bomb Iran.

    It is working in the sense that it’s crippling the Iranian economy, apparently. Ok. In order for it to actualy accomplish its goal, however, that economic pain has to result in Iranian leadership giving ground on their nuclear weapons ambitions. We’ll see.

  12. Rob,

    I’m not sold on it either. It ends up hurting the citizenry much more than the leadership and, as I said, there’s no guarantee that an economic crisis would put pressure on the regime to sit down and talk about their nuclear program. However, given that every assessment I read about military action envisions either an attack that accomplishes little or something that explodes into a wider war, this seems like the smarter alternative.

  13. Tillman says:

    @grumpy realist:

    What evidence do you have that “the mullahs” want to make Iran a nuclear weaponed power?

    It’s been fairly obvious for a while. I recall a deal Russia proposed which would have them enrich Iranian uranium for peaceful nuclear power purposes that Iran turned down.

    Oh, and what evidence do you have that the mullahs are “batshit crazy”?

    He doesn’t have any ’cause there isn’t any. He’s taking the fact that Iran is part-theocracy, part-democracy and turning that into a default batshit crazy.

    Persians are a crafty people.

  14. Tillman says:

    @Tsar Nicholas: Also, adding to what Ben Wolf said, oil prices are set by the OPEC cartel. Even if Iranian oil was cheaper, it’d sell far above its value on the world market.

  15. Moosebreath says:

    @Doug Mataconis:

    I think you underestimate how far of a right turn the Republicans have made by dumping the RINO’s who opposed him, like Lugar, Voinovich, Hagel, Chafee, et al.. If they win the Senate along with the Presidency in November, I think there’s a very significant chance he is confirmed.

  16. C. Clavin says:

    “…Bolton is not going to be the Secretary of State nominee. He couldn’t make it through the Senate back in 2005 and there’s little chance he’d make it through again…”
    ’05 was pre-Tea. The moderates are being driven out. See Lugar, Richard.
    If Romney wins and the Republicans take the Senate…crazy will rule the day.

  17. Gromitt Gunn says:

    @Tillman:

    He’s taking the fact that Iran is part-theocracy, part-democracy and turning that into a default batshit crazy.

    In other words, he’s using the modern GOP as a model.

  18. I believe you’ll find this article from August enlightening. Bolton’s name isn’t even on the list.

  19. Davebo says:

    Ben Wolf beat me to pointing out the obvious for Tsar.

    His knowledge of oil trading seems to be on par with his knowledge of most everything else.

  20. JohnMcC says:

    A very brief internet search would reveal that the embargo we placed on Iranian oil is more a financial maneuver than a naval one. In a few words, Pres Obama has forbidden dollar transactions for Iran’s oil. They’ve had to take Rupees and Rimandi. Their previous top ten customers included Italy, Turkey, Greece and Spain. Europe got 1/6th of their unrefined petroleum from Iran, That has been stopped.

    Obviously, and as several folks above remark, it must really suck to be a citizen of Iran these days. They are not cowering in air raid shelters, however, to Mr Netanyahu’s disappointment.

    As Mr Andrew Sullivan says so often about Mr Obama, “meep-meep.”

  21. Moosebreath says:

    @Doug Mataconis:

    Bolton’s not on the list but he is mentioned in the last 2 paragraphs of the article you cite:

    “One name that has not quite surfaced is John Bolton, America’s former ambassador to the U.N. under president George W. Bush. Bolton is not listed among Romney’s official coterie of advisers, but The New York Times‘ David Sanger reported that he holds outsized sway over the candidate’s international views, to the chagrin of some moderates on Romney’s team.

    If Romney’s thinking most closely mirrors that of the mustached American Enterprise Institute scholar and Fox News analyst, perhaps the idea isn’t so far fetched.”

  22. Stan says:

    The Iranians want nuclear weapons as a deterrent. If the sanctions continue to bite and if the US, Israel, and our Arab allies are willing to sign a non-aggression pact with Iran, I could see the Iranians mothballing their efforts to develop a bomb. If not, I think they’ll disregard the sanctions. The Iranian leaders saw what happened in Iraq and they don’t want it happening to them both because of their ideology and their fears for their personal safety.

    If Romney is elected and if Bolton plays an important role in the administration, I think either an Iranian bomb or war with Iran (or both) is a certainty.

  23. Neil Hudelson says:

    For claiming to be in the oil biz, Tsar knows shockingly little on how the oil markets actually work.

    Color me shocked.

  24. anjin-san says:

    Unless you consider starving Iraqis and high infant mortality rates to be a “success story.”

    As opposed to the risk of general war in the middle east, a depression caused by disrupted oil flows, or even WW3?

  25. Carson says:

    “Go ahead. Make my day”
    “General LeMay: your presence is requested”

  26. @Tsar Nicholas:

    They’re batshit crazy.

    Iran already has both chemical and biological weapons. If they’re that crazy, why are they waiting to get a nuclear bomb?

  27. john personna says:

    The Fed has obviously manipulated the Dollar Rial in a craven attempt to buy Obama the election.

  28. Catfish says:

    Did Iran ever pay back the money that is owed the US for properties and bank accounts seized during the 1979-81 hostage crimes? Has any restitution been paid to the hostages for the treatment that they endured? Have any of the criminals involved in those criminal acts been arrested and placed on trial ?

  29. Andre Kenji says:

    @Tsar Nicholas:

    Ultimately, though, in the final analysis, the end game is inevitable. The Mullahs won’t stop in their quest to have nuclear weapons. If that means they have to kill many thousands of their own people they’ll do so. Many tens of thousands. Won’t matter. They’re batshit crazy.

    No, they aren´t. Both Brazil and Argentina have relatively weak military forces and both countries tried without success to build a nuclear bomb in the 80´s. That´s one of the reason that Brazil, that´s crossed by the Ecuador Line, don´t manage to acquire technology to build a rocket to lauch satellites in the space. Pursuing a Nuclear program is a matter of nationalism and hubris all around the so called Emerging World.

    Iran is not going to put down their Nuclear Program just because a bunch of gringos are demanding it. By the way, that´s one of the reasons that sanctions do not work: even people in the opposition begins to support their government if they perceive their country to be bullied by a foreign power.

    But part of the problem is that Americans have a big difficult understanding how people that do not live in the US thinks and feels.

  30. Bill says:

    @Neil Hudelson:

    For claiming to be in the oil biz, Tsar knows shockingly little on how the oil markets actually work.

    Someone who pumps gas can claim to be in the oil business.

  31. stonetools says:

    @Doug Mataconis:

    If in fact Obama’s policy re Iran is far superior to Romney’s (most likely) militaristic approach, isn’t that more incentive to vote for Obama in a swing state, rather than casting a pointless vote for Gary Johnson- a vote that might result in a Romney win ?

    Just sayin’.