Iranian President Mahmoud Ahmadinejad's recent sweep through New York for the UN General Assembly hit the usual rhetorical buttons, and kept headlines focused on possible nuclear negotiations and Iran's view of the "Arab Spring."
But the focus on foreign policy issues also served as a useful tactic to steer global attention away from Tehran's mounting internal concerns – especially the impact of US-led and UN sanctions and Iran's weakening currency.
Iranian officials have consistently said that the latest international sanctions, the harshest to date, haven't damaged the country's energy sector or slowed economic growth any more than previous UN sanctions.
What has become privately worrisome for Tehran is the rise in global implementation of financial sanctions unilaterally imposed by the United States Treasury, which have constrained the Central Bank of Iran's access to foreign exchange and hampered the country's oil sales by raising the transaction cost for purchases of Iranian oil.
Tehran's financial sector has faced constraints since as early as 2006, with the onset of tougher US and UN sanctions over the Islamic Republic's nuclear energy program.
The financial squeeze on Iran tightened considerably after 2007, as the US Treasury increased its efforts to persuade foreign governments and private entities to follow the financial sanctions against Iran that had long been in place but not consistently implemented, says Erich Ferrari, an attorney specializing in US Office of Foreign Assets Control (OFAC) legislation and author of The Iranian Transactions Regulations Practice Guide.
Revenues from crude oil exports – currently around 2.2 million barrels a day – serve as Iran's main source of foreign exchange, with earnings from oil sales deposited into National Iranian Oil Company (NIOC) accounts held in banks overseas. Revenues are then transferred to the Central Bank, which converts them into rials, Iran's local currency, and deposits them into the Treasury’s accounts for allocation into the state budget.
Sanctions' double whammy
Since 2010, the NIOC has experienced a decline in oil export sales and so been forced to store more unsold oil than the country's typical seasonal storage levels, according to oil ministry officials. Meanwhile, heightened international enforcement of financial sanctions against the Islamic Republic have constrained the NIOC's access to company earnings from oil sales overseas.
Since oil export revenues are Iran's primary source of foreign exchange, monetary policy makers inside the Islamic Republic's Central Bank are finding it increasingly difficult to facilitate foreign currency transactions and regulate the depreciation of Iran's currency, say local financial advisors and economists.
“Not only do they get less oil income," says an Iran analyst, speaking from Tehran on condition of anonymity, "but their ability to manage the exchange rate gets constrained as well.”
To manage the decline in oil sales and eliminate any unsold oil stored offshore, Iran has reduced daily oil production and offered discounts to foreign customers, who as a result of US and international sanctions must pay higher transaction fees and deal with a lengthier bureaucracy to buy Iranian oil, says a senior Iranian oil official.
“If we're sensitive about price, then oil stocks will rise again,” the official said. “We just want to sell.”
Iran hasn't released an official estimate of its foreign currency reserves since 2008, when the figure stood at just over $80 billion. Anecdotal evidence suggests that number has fallen by 35 percent to around $54 billion, according to interviews with local economists.
Since 2002, when Iran's Central Bank unified the country's street and official exchange rates to implement a managed floating-rate system, Iran's national currency has depreciated an average 3.25 percent per year, according to Central Bank statistics. Since the beginning of the Iranian new year in March, the exchange rate – currently around 10,600 rials per dollar – has depreciated an additional 3 percent.
Looking to Asian banks
Iran has managed to use small, local banks based in countries such as the United Arab Emirates, Turkey, and Malaysia to facilitate smaller cash transfers back to Iran. To deal with banking constraints for larger money transfers, the NIOC and Central Bank have engaged in book-to-book accounting with willing trading partners, primarily in Asia, whereby refineries buying Iranian oil pay the NIOC with the purchaser's local currency instead of US dollars.
Earnings from oil sales are deposited into locally held accounts and spent in that country to finance imports into Iran, according to Tehran-based financial advisors. Any surplus balance is used as collateral to obtain loans for project financing, in order to avoid having to obtain letters of credit, which are now more difficult to obtain as a result of sanctions.
Mr. Ferrari, the attorney specializing in US Treasury legislation, said such financial moves don't fall under the jurisdiction of OFAC-administered sanctions against Iran. “For Asian banks that don't have a presence in the US, we don't have authority to charge them or enforce the sanctions,” he says.
Between 2007 and 2008 alone, as enforcement of unilateral US financial sanctions against Iran's banking system increased, Iran's imports from Asian countries rose by an estimated 109 percent, before undergoing a mild decline in 2009 as oil prices fell due to the global financial crisis, according to International Monetary Fund data.
“The rest of their oil revenues go to other accounts overseas, and access to these reserves is very difficult,” the former official said. “Anywhere besides Asia, Iran is under severe financial constraints.” Iran's economic stability has widespread implications for the Middle East and beyond. The country is the world's fourth largest oil producer and the Organization of Petroleum Exporting Countries' second-largest oil exporter after Saudi Arabia.
The Islamic Republic's domestic political disputes and economic concerns directly impact Tehran's foreign policy and the effectiveness of US and United Nations sanctions against the regime.
Washington, to date, has pursued a carrot-and-stick approach with the Islamic Republic over its controversial nuclear program, combining harsh economic sanctions with diplomatic outreach.
Ahmadinejad and a strong rial
Money exchange dealers who work with Iran's Central Bank to facilitate monetary policy have said in interviews that keeping the national currency around or below 10,000 rials per dollar is considered a national security priority for the Iranian government.
A boost to the rial would be a boon for Mr. Ahmadinejad, whose administration is expected to face stiff competition amongst members of Iran's political elite, including former conservative allies, in the run-up to the country's parliamentary elections next March.
Any headway Ahmadinejad manages to achieve in his international political standing translates into a rise in his administration's popularity on the Iranian street, where improved relations with the US is highly regarded.
A strengthened rial-dollar exchange rate in the wake of considerable economic and international political pressure against the Islamic Republic will help fortify any increase in public approval Ahmadinejad manages to gain. “The president wants a strong rial as a sign of strength,” says the Tehran-based analyst.