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Iran's currency: Why did the rial tumble so precipitously? (+video)

US sanctions played a role. However, Iranians aren't blaming the US, they're blaming their own government.

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For the past two years, as US allies in western Europe and Asia deepened their implementation of US Treasury sanctions against the Islamic Republic – essentially isolating Iran from much of the global financial system – the Central Bank’s access to foreign exchange reserves held in accounts overseas has become severely constrained.

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Vulnerable Iran

This has left Iran vulnerable to currency speculation because it doesn’t have a thriving private sector, and unlike other oil producers in the Persian Gulf, hasn’t built up its foreign assets or laid aside enough oil earnings to be able to support its currency, says Hossein Askari, an economist at George Washington University

At the same time, Iran has endured a sharp decline in oil sales, which started to fall in late 2010 due to the rise in transaction costs for purchases of Iranian oil resulting from sanctions.  A European embargo against purchases of Iranian oil, imposed in July 2012, has pushed Iran’s oil sales down even further.  Today, primary purchasers of Iranian oil are refineries from Turkey, Japan, South Korea, China, Taiwan and India.

The country’s oil exports, which fluctuate between 900,000 to 1.1 million barrels a day, are 55 percent lower than what they were at this time last year. 

“The country has mismanaged countering the sanctions…and today, we are faced with a situation where oil sales are down, the country has less foreign currency, and the government can’t even transfer [most of] the money for oil it does sell back into the country,” the Tehran-based analyst says. 

Liquidity is now estimated by local economists to be seven times higher than what it was when Mr. Ahmadinejad first ascended to Iran’s presidency, in 2005. Though the official inflation rate stands at roughly 24 percent, economists such as Askari of George Washington University say that given the extent of currency depreciation, inflation in Iran is actually double that figure. 

Protesting the government 

Yesterday protests broke out in Tehran’s Grand Bazaar, one of the country’s most important financial hubs, after dozens of people started chanting slogans around the area housing gold merchants, asking store owners to close their stores. 

While some shops in that section of the Bazaar closed down as a show of sympathy with demonstrators, many closed for fear of looters, according to a family of gold merchants. 

Protests also broke out yesterday on the blocks surrounding the area, and demonstrators were aggressively pushed back by riot police with tear gas, witnesses said. Iran’s semi-official Fars News Agency, citing Iran’s judiciary, said security forces arrested 16 “illegal” street money traders and speculators. 

Many shops stayed closed today, the first day of the Iranian weekend, when Bazaar merchants typically open for half the day.

“People were just fed up with the dollar inflation … and were asking for support from the Bazaaris,” says a business owner in the Grand Bazaar. “Right now, the government doesn’t care. Hopefully, now that the people are out protesting, they might be pushed to sit up and actually do something.”

Analysts in Iran say that, for the time being, there are stringent limits to what the government can actually do to try and stem the tide of depreciation.  

“They’re running out of dollars and simply do not have enough foreign currency to service the market,” says a Tehran-based analyst.


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