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Iran currency plummets: A sign US sanctions are taking hold?

The value of Iran's currency fell 10 percent Monday following President Obama signing new sanctions against Iran's central bank Saturday. Europe is also considering a ban on Iranian oil. 

By Staff writer / January 2, 2012

Iran's currency has hit a new record low compared with the US dollar, two days after President Obama signed a bill applying penalties against Iran's central bank as the West looks to pressure Tehran over its nuclear program.

Hasan Sarbakhshian/AP/File

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Washington

For years Iran has derided the impact of international sanctions on its economy, but that swagger is showing signs of becoming more of a panic as the country’s currency continues its slide in the wake of new US sanctions targeting the Iranian central bank.

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Iran’s currency, the rial, took about a 10 percent hit Monday following President Obama’s signing Saturday of a new round of Iran sanctions that, among other things, impose stiff penalties on foreign financial institutions that have dealings with Iran’s central bank.

In all, the rial has lost more than a third of its value since September and stood after Monday trading at about 17,000 rials to the US dollar, a record low.

As recently as Sunday representatives of the central bank were scoffing at the new American measures, saying they would make the US the brunt of jokes the world over as Iran’s oil clients continued their trade with Iran. The bulk of transactions for Iranian oil pass through the country’s central bank.

But by Monday the bank held an emergency meeting to deal with the tumbling rial, the Iranian Mehr news agency reported.

The US and other Western powers are hoping that a deepening bite from economic sanctions will persuade the Iranian government to curtail its nuclear program, which international nuclear specialists believe is aimed at delivering a nuclear weapon. Iranian officials insist that the program is designed solely for civilian-energy uses.

The US and the European Union, which has joined the US in imposing a series of new sanctions since last spring, want Iran to return to a negotiating table that has sat idle since an unproductive meeting in December 2010. Iranian officials signaled last week that they might be interested in resuming talks.

The tumbling Iranian currency is the latest sign of mounting tensions between Iran and the US, which have squared off in a tit-for-tat cold war that has led each side to commit increasingly aggressive actions in recent months. Iran continued a week of missile tests Monday designed to demonstrate Iran’s defensive capabilities in the event of a military attack, while the US, in addition to the strengthened economic sanctions, recently lost a sophisticated spy drone over Iranian territory.

Most Western Iran analysts believe sanctions are taking a toll on Iran’s economy, and they point to the sliding rial as one more reason the Iranians appear to be considering a return to talks with the so-called P5 + 1 group, referring to the five permanent members of the UN Security Council plus Germany.

But some economists say the US and the EU must also be wary of the impact their measures could have on the global economy. US friends Japan, South Korea, and India could find themselves caught up in the new US sanctions on Iran’s central bank, for example. Meanwhile the US measures could hit Europe’s already-slow economy and boomerang back to hit the US economy.

The EU says it will consider a full embargo of Iranian oil later this month, a move that could be a double-edged sword for the Europeans. The EU's threat is no doubt one reason Iran is considering a return to talks, but such an embargo might actually hit the Europe’s economy harder than Iran’s.

The new US legislation Obama signed Saturday calls for a phasing-in period of up to six months to allow foreign institutions some time to transition out of Iranian oil contracts and to find new sources of oil that don’t involve dealing with the Iranian central bank.

The law also allows Obama to exempt from punitive action the financial institutions of countries that may not have cut all ties to Iran but that have made a significant effort to reduce their oil trade with Iran. Turkey, for example, imports about a third of its oil from Iran and would be hard-pressed to shut that down quickly. 

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