On Wednesday, the Tehran covered bazaar was closed, and the traditional market in some other cities such as Mashhad also went on strike, with demonstrators protesting the collapse of the Iranian currency, the rial. Until last November, the rial was about 10,000 to the dollar. Then it fell to 12,000. Last summer it hit 16,000. Some merchants were offering 35,000 to the dollar on Wednesday and expected the rial to decline further.
Although the US, the EU and Israel’s government will gloat that ‘sanctions are working,’ it is unclear that any such thing is true.
True, Western sanctions on Iran have gone beyond mere boycotts to a kind of financial blockade, in which obstacles are being placed in the way of Iran selling its petroleum to third parties, especially in Asia.
Iran had been producing 3.5 million barrels a day of oil, and selling 2.5 million abroad. It is now apparently only producing 3 million barrels a day and selling 2 (especially to China, India and some other Asian states). Iran is shipping to China in its own tankers and insuring them itself, which is producing some delays in delivery, but nothing the Chinese are worried about. The loss of 500,000 barrels a day in exports, and the extra costs of doing business (15%?), however, cannot possibly be causing the collapse of the value of the rial.
The West can blockade Iranian petroleum in this way because Saudi Arabia agreed to ‘flood the market,’ pumping as much as two million barrels a day more than normal. Iraqi output is also up about a million barrels a day over 2010 levels. But the addition of a couple of million barrels a day wouldn’t have been enough to allow this policy. In addition, the world economic slowdown has reduced the rate at which the demand for oil is expanding in Asia. At any point where Asian demand returns strong, Iran will likely be better able to evade sanctions.
Thus, although Iran’s petroleum sales have fallen, it is not clear that they have will have fallen dramatically when new trade arrangements with China, India, South Korea and so forth are implemented, getting around the US financial blockade. Europe stopped buying Iranian oil on July 1, and sales were hurt that month. But Iranian officials say that they are back up to normal sales volume this fall. Likely Europe will buy oil from other producers, denying it to previous customers in the global south, some of whom will turn to Iran. Iran’s government should be flush with billions of dollars of reserves, and should have the expectation of more, and there is no obvious reason for the rial to plummet this way.
In short, it is not entirely clear that these severe sanctions or the reduced oil exports are the only things responsible for the rial’s rapid decline against the dollar.
Hyperinflation is caused by printing too much money. President Mahmoud Ahmadinejad has for some time pumped extra money into the economy in the form of subsidies, which has caused the money supply to grow unhealthily in Iran. The rial has probably for a long time been over-valued, partly because of the support for it of an oil state. So it may be that years of easy money are now coming home to roost, in part because the severe sanctions have (irrationally) weakened the confidence of traders in the hardness of the rial, a confidence that itself had earlier been irrational.
Money traders in the neighboring United Arab Emirates are said to have been unable to quote a price for converting rials to dollars on Wednesday, because the rial was going over a waterfall in a barrel, falling by the second.
The money changers and merchants in Tehran and Mashhad were angered in part by an inability to price their goods (especially imported goods). Many of them had counted on keeping some of their assets in dollars, but suddenly dollars have disappeared from the Iranian currency markets, probably because they are being massively hoarded. There are rumors in the bazaar, say some close observers, that ‘mafias’ and cliques are doing the hoarding.
But reading these events as a ‘victory’ for sanctions goes too far. First, the demonstration in the bazaar may have had a narrow social base.