The
Biggest Energy Crisis Nobody is Talking About
Iran’s
Currency Collapses
by
DR. KENT MOORS
8
October, 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 intensif y 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.
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