With Rial In Free Fall, Iran Readies Emergency Measures On Eve Of U.S. Sanctions

As you’re probably aware, things aren’t going particularly well in Iran ahead of the re-imposition of U.S. sanctions.

Last week, protests cropped up in Arak, Isfahan, Karaj, Shiraz, Eshtehard and Tehran itself, leaving at least one person dead and dozens under arrest, according to various media reports.

The demonstrations have been described as “sporadic” and generally speaking, lack the kind of organizational backbone and unifying vision necessary to start the ball rolling in earnest when it comes to bringing about sweeping political change. That said, 2018 has been marked by a kind of rolling sense of angst among the populace and that consternation is in part due to the collapse of the Iranian rial.

Back in April, Iran attempted to arrest the slide in the currency and you can take “arrest” both figuratively and literally there. Specifically, authorities tried to unify the official rate with the black market rate by offering to sell dollars at 42,000 rials. Anybody caught selling at higher rates “will be dealt with severely” Iran’s First Vice President Eshaq Jahangiri warned at the time, adding that “any other price that’s offered in the market will be considered contraband, in the same way that illegal drugs are contraband.”

The government was responding to the parallel rate abruptly sliding to 60,000 (give or take). Iran blamed nefarious foreigners and they weren’t entirely wrong, although the “nefarious” characterization depends on what you think about the Trump administration’s hardline stance when it comes to dealing with Tehran. The threat of renewed U.S. sanctions is in large part responsible for the rial’s spiral and since April, things have gotten materially worse. As far as I can tell, the black market rate is now something like 112,000.

Clearly, efforts to rein in the black market have not been successful and late last month, Iran replaced central bank governor Valiollah Seif who, you might remember, was sanctioned by the U.S. Treasury back in May for his role in helping to finance the Quds.

It should go without saying that some enterprising Iranians have become arbitrageurs in this environment. “Rather than choking off the illegal transactions, the introduction of a fixed rate allegedly has encouraged some traders to profiteer by charging higher black market prices for goods imported with dollars bought at the lower official rate of about 44,050 rials”, Bloomberg wrote last month.

It’s against this rather unfortunate backdrop that the Trump administration is set to reimpose the first of two rounds of sanctions on Iran. The measures, which go into effect on Monday, include a ban on Iran’s purchases of dollars and also target Tehran’s ability to transact in gold and other precious metals. Apparently, Iran will no longer be able to export rugs or pistachios to America either.

The second wave of sanctions will go into effect on November 4, the date by which the U.S. is angling to persuade the rest of the world to cut imports of Iranian crude to zero. That effort has been met with varying degrees of success, with the likes of Japan and South Korea seemingly prepared to comply. Last month, America’s European allies were feeling the heat from Mike Pompeo and Steve Mnuchin who, according to letters described to the media by sources close to finance and foreign ministers of the U.K., France and Germany, summarily rejected requests for waivers from the secondary sanctions. On Friday, reports indicated that while China will not comply with demands to cut off its imports of Iranian oil, Beijing won’t move to actively undermine the sanctions by deliberately ramping up its purchases.

On July 24, Barclays hosted a symposium in New York to gather views from academia, consultancies, think tanks and government officials on “the risks to supply disruption and the implications for the stability of the Middle East” from the reimposition of sanctions of Iran’s energy sector.

“In the view of our non-government speakers, the administration is likely to be forced to dial back the severity of its sanctions implementation in the aftermath of the first six-month phase”, Barclays wrote last week, in a recap of their roundtable event, before noting that “the Trump administration’s stated desire to minimize the disruption to global oil markets means that its approach to significant reduction exemptions (SREs) for Iran’s oil importers may differ from one round to the next.”

Whatever the case, Iran is set to implement a series of measures aimed at stopping the slide in the currency, starting Monday. According to the semi-official Iranian Students’ News Agency, the central bank will impose limits on access to the official exchange rate and slash the amount of foreign currency permitted to tourists. Additionally, the judiciary will move to accelerate efforts to prosecute corruption and will prioritize currency-related misdemeanors.

This is unlikely to work, for a whole host of reasons. Of course U.S. officials are more than pleased with the turmoil in the Iranian economy, turmoil which the State Department pretty clearly thinks might be enough to spark the kind of widespread unrest that could ultimately lead to regime change.

Last month, at an event held at the Ronald Reagan Presidential Library in Simi Valley,  California, Mike Pompeo told members of the Iranian American community that Tehran “resembles the Mafia more than a government”. “For 40 years the Iranian people have heard from their own government that America is the Great Satan [and] we do not believe they are interested in hearing that #FakeNews any longer”, Pompeo said in a tweet that featured a snapshot from the event.

Mike is probably right. But when it comes to convincing the Iranian people that the U.S. is not, in fact, “the Great Satan”, it doesn’t help when the President of the United States decides to spend his Sunday evenings telling those very same people that he’s going to make them “SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE.”

And on that note, we’ll leave you with another passage from Barclays’ summary of the July 24 symposium mentioned above.

In the opinion of some of our non-government speakers, current US policy has not furthered the regime change objective; if anything, it has strengthened the regime among certain key constituencies. The US withdrawal of the JCPOA strengthened regime coherence and has led Rouhani to slide even further to the right, according to our Iran expert speakers. Though there is much discontent with the economy, the country is not yet in a pre-revolution stage, in the view of our Iranian domestic experts. It is also possible that the media is over-hyping the presence of protests, and one of our speakers noted over 1000 labor strikes in Iran in the past year. From the perspective of the Iranians being able to weather the coming storm, one speaker quoted a Central Bank of Iran official noting that this will be the fourth oil embargo and the 151st hard currency crisis in the past 30 years.