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Iran’s Currency Collapses

by | published October 8th, 2012

Matters are beginning to come to a head in Iran.

So far, the impact of Western sanctions – an EU embargo of oil purchases, European and U.S. restrictions on Tehran’s access to international banking, and a new move to intensify the trading restrictions even further – have had a devastating impact.

Iran’s currency, the rial, has collapsed.

Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.

This has all the markings of a full-blown crisis.

It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty.

I release my next Iranian report this evening.

I wanted to share with OEI readers the core analysis this afternoon.

Sanctions Paralyze Iran’s Economy

Indications are emerging from several quarters that the current sanctions regime has dealt a major blow to the Iranian currency. The developments are prompting foreign initiatives to paralyze the regime in Tehran.

“The current perception is that the sanctions may have to be increased before Tehran will show clear signs of relenting,” a source in the EU Energy Commissioner’s office told me on October 6.

Still, it remains too early to determine how far EU members are prepared to go in strengthening anti-trade restrictions. Nonetheless, several policy sources in Brussels, London, and Paris, confirmed last week that a rising consensus believes something additional is warranted.

A complete EU embargo of Iranian oil imports took effect on July 1. That action had widely been expected to put upward pressure on Brent prices in London. While some of that pressure has materialized, continuing demand concerns from the ongoing credit crisis and sluggish employment data have dampened the impact.

Still, a widening of the rift with Iran, coupled with the deteriorating situation on the Syrian-Turkish border, is certain to bring the problem to center stage.

Should Brussels and Washington orchestrate a new stiffening round of sanctions that expands beyond limitations on oil trade with Iran, a far more difficult environment for Tehran would emerge. It would comprise nothing less than an attempt to collapse the domestic Iranian economy, generate an escalation in internal popular unrest, and oblige the religious leadership to step in and delay the nuclear program.

There is now no doubt that the financial collapse has intensified. By the end of the trading week on October 5, the Iranian rial lost almost a quarter of its value. The plunge was due almost exclusively to the Western sanctions.

The list of moves against Iranian has been significant. It includes limitations on oil exports, including those against shippers, insurance underwriters, and financing entities. Next, Iranian access to international banking has been limited. And more recently, the U.S. added sanctions against Bank Markazi (the Iranian Central Bank) and its network. These events have had two overarching results.

And neither has been positive for Tehran.

First, sanctions have made it much harder to raise capital from foreign trade and have hurt Iran’s foreign currency reserves. The second has obliged Iranian reliance on ad hoc and indirect methods of financing trade and repatriating proceeds. Both have markedly increased the cost of trade and dramatically lowered returns.

A Currency in Sharp Decline

The overall impact is now clearly displayed in the currency free fall, a result that the Iranian leadership can no longer hide. By October 6, the rial collapse had accentuated. It fell 9% against the dollar on the previous day alone, exceeding the record low of 37,000 to the dollar set less than one week earlier.

Even that estimate, however, may not tell the full story. Traders say that the exchange rate had actually declined even more, approaching 40,000 rials to the dollar.

“The currency has lost about a third of its value since Monday of last week, when the government launched an “exchange center’ that was designed to stabilize the rial by supplying dollars to importers, but appears to have backfired,” a source had earlier reported on October 2.

Iranian President Mahmoud Ahmadinejad has often referred to the dollar as “a worthless piece of paper,” but must now contend with his own currency having dropped at least 80% in value against the dollar since earlier this year.

Acquiring reliable base figures from which to determine the real market fall of the currency has been difficult. According to the Iranian website Mesghal, generally regarded as a relatively objective source, the rial traded at 24,600 against the dollar on October 1. What seems beyond question, however, is the observation that the currency’s collapse is indicating that the sanctions are affecting Iran’s ability to earn foreign currency, and that its hard currency reserves are dwindling.

To emphasize the point, Iran’s deputy Majlis (Parliament) Speaker Mohammad-Reza Bahonar announced that national crude oil exports have dropped to around one million barrels per day during the first half of Iranian year (starting on March 19) on average. This figure in June and July fell to around 800,000 barrels per day. Iran’s oil export volume in 2011 was 2.3 million barrels per day, 18% of which was sold to European countries.

The announced total of 800,000 was lower than the International Energy Agency (IEA) estimate of about one million barrels, made only a few days earlier.

Iranian official statements are prone to discount the effect of Western sanctions on the oil industry. The Oil Ministry still maintained that crude production for the remainder of the year would hold steady. But Bahonar was noticeably taking a different, and unusually frank, route in his comments this time around, especially following a higher (though still dramatically reduced year-on-year) figure already public from the IEA.

The West Plans a New Round of Sanctions

Tehran on October 6 indicated it might be prepared to renew talks, but the trial balloon went nowhere. “Been there, done that,” was the way one veteran of the previous fruitless “six plus Iran” talks put it.

The British, French, and German governments are pressing for new measures that will be agreed upon by the EU, possibly by the foreign ministers’ meeting on October 15. To emphasize their determination, the foreign ministers of France, Germany, and the UK issued a joint communiqué requesting their EU counterparts to agree on new measures against Tehran.

“We must let Iran know that we have not exhausted our options,” Laurent Fabius, Guido Westerwelle, and William Hague wrote in the letter, a copy of which was seen on October 6.

Versions of what will be proposed vary, depending on the source.

However, the following appears to be the substance of the proposal coming from London. British diplomats have indicated that the three countries were discussing new sanctions ahead of the October 15 ministers’ session to include additional financial, trade, and energy sanctions.

These would include heightened measures to ban transactions with Iranian banks to include exchanges beyond either those directly with the central bank network of subsidiaries and surrogates or those related only to oil/gas sales and purchases.

Primary targets here are expected to be private banking avenues (similar to the alleged $250 billion plus channel using London’s Standard Chartered Bank) and “gray area” transactions on the fringe of the Dubai Exchange that still require bank client activities through European banking houses.

On the trade side, the three countries will push to restrict an expanding category of EU trade with Iran. This would intensify the difficulty of obtaining equipment and material that could constitute dual usage, thereby impairing the ongoing nuclear development program. Yet there are increasing signals both London and Paris (and perhaps Berlin too) are now viewing an increasing trade ban as a more concerted attempt to use domestic economic instability as a way to destabilize the existing leadership structure.

On the energy front, the proposed approach, labeled “a significant new departure” by one British source, is intended to ensure that Iran cannot bypass the oil embargo and continue obtaining finance that could be directed to the nuclear program.

As the opposition grows in the legislature, divisions were beginning to be seen publically among the ministers over the best course of action to combat the currency crisis. On October 2, Minister of Industry, Mines, and Trade Mehdi Ghazanfari called on security forces to intervene in the open foreign exchange market and control foreign exchange market fluctuations.

Ghazanfari said that the currency trading price fluctuations are not just an economic matter, but a cultural, security, and politic issue.

Iran Takes Defensive Action

While attention is currently focused on the recent sharp drop in the rial’s value, the problem has been recurring for over a year. To combat it, Tehran established a Forex Trade Center (FTC) on September 23 to prevent a continuing drop against foreign currencies, providing dollars to importers of essential foodstuffs, medicine, and fuel at a fixed price.

The official version puts the rate at 2% below the open market’s figures. However, sources have confirmed that market irregularities have forced regulators to exceed that level, straining Bank Markazi hard currency reserves and pressuring the rial even further. In less than the first week of FTC operations, the currency’s effective market rate declined by more than 30 %.

Ghazanfari said that security forces should have a more direct role in controlling the open forex market, all but acknowledging the failure of the FTC and the dwindling options of the government. Earlier, the chief of the Iranian Revolutionary Guard Corps (IRGC) Major General Mohammad Ali Jafari said that the IRGC would intervene in the open forex market to battle against illegal profiteers.

This was followed in quick succession by a complete disintegration in the administration’s ability to control the currency situation. Late on October 2, Tehran moved to suspend all gold and foreign exchange trading as a result of uncontrollable pricing fluctuations, Iranian media outlets quoted head of the Gold and Jewelry Union Mohammad Kashti-Aray as saying.

Punctuating the volatility, Iran’s Majanex website, which covers gold and foreign exchange prices, has gradually eliminated the price of the dollar since the evening of October 1, explaining that it has not been able to get accurate and reliable information about the dollar exchange rate.

In its contrast to the value of gold, on the other hand, the rial is virtually disappearing. Where it can still be obtained, a single Bahar Azadi (a gold coin minted and sold by Bank Markazi) was going for at least 10,350,000 rials on October 6, up from 10,250,000 only one day earlier.

We are now rapidly moving into a very tense crisis environment.

I’ll keep you posted on what happens next.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Adrian Shiner
    October 8th, 2012 at 13:37 | #1

    The Mesghal website is not accessible from the UK right now.

  2. ron bayliss
    October 8th, 2012 at 14:22 | #2

    Kent, Always thanks for your great work/writings. This “Iran’s Currency Collapses”, is well presented and the world should be reading. Why-O-Why can’t the U.S. Medias enlighten us as you do? From the northern Rockies, always the best to you. rb

  3. October 8th, 2012 at 14:53 | #3

    dear kent,reading your report i am left with little doubt that the result will be a third world war
    the russians and chinese have already said they will not hesitate to come to irans aid
    what can we do ? start praying ! cw

  4. Peter
    October 8th, 2012 at 14:55 | #4

    We are fast passing the point of no return.

  5. eric taylor
    October 8th, 2012 at 15:26 | #5

    Great article Kent, they are tearing down nuclear power stations in Japan, Switzerland, Germany, and who will be next? We are still subsidizing coal, nuclear, and the dirtier forms of oil and gas extraction here in the U.S., maybe we should move away from nuke electricity, as well, and Iran surely would be wise to do so, and all of the West could help them move into environmentally friendly technologies for cleaner industrialization if Iran were to leave nuclear energy. Turkey and Syria at war’s door, will Iran be next?

  6. October 8th, 2012 at 16:41 | #6

    If Iran realy believes some of their CEO’S recent comments I will not
    be suprised if they attack Isreal with intermediate range rockets while
    simultaneously attacking a nearby rich country. When you see that you
    can’t win in a checker game then unsetting the checker board is not a
    bad delaying strategy.

  7. Bob
    October 8th, 2012 at 16:49 | #7

    If weekend reports from Debka.com can be believed, Israeli airspace was violated by drones from Lebanon, thought to be sourced from Iran as a message to Israel, delivered via Hezbollah and Hamas. The drones flight path came along the Lebanon and Israeli coastlines, and hovered for some time over Israel’s newly discovered mammoth gas finds. The message seemed clear, “if you attack our nuclear facilities, we will hit your new energy facilities.”

  8. Werner
    October 8th, 2012 at 16:52 | #8

    @chris webb
    The US has not yet overcome its humiliation of the Tehran hostage crisis to start with.
    If now it were to be drawn into another war in the Middle East, possibly simultaneously against Russia and China – I am afraid the das of US’s status as world power will be numbered, if not the days of the greater part of this planet. Verey dark perspective ahead.

  9. David Read
    October 8th, 2012 at 16:57 | #9

    It would seem that the Iranian government will use, as probably is using, this situation to heighten the “hatred” for the West by saying they are only trying to protect the country and the Iranian people. Whether it is prepared to go “down in flames” to prove a point is unclear but there doesn’t seem to be a good outcome to this. If the present government does collapse we will probably get soemthing worse in its place. And with our, and the world’s current economic situation, this does not bode well for anyone.

  10. October 8th, 2012 at 17:26 | #10

    What happened to 1380 proposal??

  11. Les
    October 8th, 2012 at 19:40 | #11

    Russia and China have way too much to lose by interfering too much here. There will be no world war.
    I had been hopeful the conflict would have come to a head internally, with removal of the Iranian regime, and following that, a defanging of the religious madmen. It would be nice to see the average, sane Iranian go on with a productive life. Unfortunately they are plagued by hideous fanatics running, and ruining their lives.

  12. Bill Auric
    October 8th, 2012 at 20:40 | #12

    Word to the wise: You better get some gold and silver for same fate awaits the Dollar Euro Yen and Pound.
    Central Banks are counterfeiters.

  13. Bob Wiles
    October 8th, 2012 at 21:20 | #13

    The Iranian rial has dramatically collapsed as you indicate. However you weaken your argument with the note about a one day change to 10,350,000 rials per gold coin up from 10,250,000 only one day earlier.
    That is less than 1%. The USD /CDN dollars have fluctuated a lot more than that.

  14. October 8th, 2012 at 21:27 | #14

    Hi!, Patrons Of Oil & Energy Et Al:

    Sense I see the international view of Thomas Edison as taking precedance over other observers; that not one person on this plantet knows even 1 millionth of 1% about anything, such articles as these should be examined while taken with a grain of salt in my present estimations.
    For example the US is shooting itself in the foot regards employment administering sanctios against Teran for their stated reasons which may not be true at all, because we were told about Sadaam Husein’s weapons of mass destruction which he never had but via psycho politics we were made to believe the untruth weren’t we? So, sanctions, that cut off American businesses from doing business with Iran only aborts our stated intentions via the statements by Helicopter Ben Bernanke to utilize the tools of QE3 to help OUR economy recapture fuller employment. No matter how much stimulas Ben applies to the US economy, we can not have it both ways can we?
    If Iran is truly attempting to build up their nuclear potentials, in order to facilitate building nuclear power plants to supply their growing consumer population with the modern ammenities of electrical power use, then we and OUR sanctions program is inhibiting human progress on this planet utilizing inexcuseable inhumane methods against innocent victims of our own self imposed paranoia but for what?
    As far as the fall in the purchasig power of the Irianian Rial, have we studied the Chart Book from the American Institute for Economic Research in Great Barrington, Mass., (888)528-1216, to watch the fall in the purchasing power of OUR own US $ from around 140 pennies per $ to the present 2 pennies per US $ for loss of around 98%? The fall in the Iranian Rial is not going to rescue the losses we are suffering here in the US from the loss of OUR $’s purchasing power at home & no matter what transnational comparisons are provied to help us compromise OUR $ to the worldwide wolves of inflation/devaluation. The last time I checked the price of fuel for my Van it has risen astronomically in US $ terms again. Several people have announced to me that what’s needed is for the lot of US citizens to declare a moratorium on gas purchases, in order to bring the price down to affordable levels. About 4 Christmasses ago while visiting a co-worker about 2 blocks South of me, a TV program showed a guy at either an Iraqi or an Iranian gas station holding up a $ bill to the TV camera asking us viewers how many gallons of fuel we thought he could buy with the 1 $? He allowed a pause for a few seconds and then announced he could buy 25 gallons which is 4 cents a gallon coming out of a 2 cent $. Get the Institutes’ Chart Book & sudy the objective issues in the privacy of your home for yourself and you will become convinced as I am that forces overlording themselves over our economy like that being accomplished elsewhere in our diversely chaotic world such as in Iran are at work in our daily lives here in the US as well!! My deceased mentor once explained to me that we are in for a world overridden with malcontents everywhere and boy has he been proven 100% correct sense he told me that about 20 years ago.

    RUSS SMITH, CALIFORNIA (One Of OUR Broke States)
    resmith@wcisp.com

  15. homeless kitty
    October 8th, 2012 at 22:04 | #15

    @Peter
    Peter, it is with deep regret that I say this but we are well beyond that point.

  16. Croploss
    October 9th, 2012 at 15:15 | #16

    Well Russ, where do you think Syria got their WMDs. Yes, they didn’t find anything in Iraq except deadly risen, delivery systems, the equipment to make WMDs including biological and nuclear, and that Sadaam used homemade biologicals on his own countrymen, before he sent the rest to Syria. So like the rest of your diatribe, it is a little short on the facts on which you base your opinions.

  17. Ahmed
    October 30th, 2012 at 09:29 | #17

    I am glad that economical and political sanctions are showing great impacts on renegade regime like iran…I beleive they should continue and intensify as this regime may collapse if starved of power of money and supplies…The other important and `crtical thing to do along these sanctions is to wtach for sanction busters that are working out of the western and eastern countries and minimize theris negavtive effect. Otherwise Iran would be able to survive these sanctions with least impact. These black traders could undermine these sanctions as hwta happened with severla previous cases in the middleeast..very important is the control tight the application of these sanctions…

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