Currency crisis in Iran as sanctions start to bite

The rial has been falling for almost a year since Mr. Ahmadinejad slashed costly fuel and food subsidies, stoking inflation

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Police are on the streets of Tehran to enforce a ban on black-market currency trading amid a drastic slide in the value of the rial. With its currency plunging in response to the tough new western sanctions expected over its nuclear programme, the embattled regime has matched heavy-handed measures at home with ominous warnings to the Gulf Arab states not to support a worldwide embargo on Iranian oil. Iran's foreign minister, Ali Akbar Salehi, told Saudi Arabia yesterday to reconsider its "unfriendly" pledge to compensate for any shortfall in Iranian oil exports.

The president, Mahmoud Ahmadinejad, ordered security increased for all of Iran's nuclear workers after the murder last week of a nuclear scientist, which Tehran blamed primarily on Israel.

Despite escalating tensions, both the West and Iran insist they are open to new negotiations. Meanwhile ordinary Iranians complain western sanctions over the nuclear programme are hitting them rather than their government.

The Iranian currency has shed about 40 percent of its value against the dollar this month. The soaring costs of food, rent and utilities are constricting the average urban family's monthly income of about Dh2,000.

Wealthier Iranians grumble that the price of luxury goods, such as a coveted Apple iPhone 4S, re-exported from Dubai, changes by the hour, costing 30 percent more than it did just weeks ago.

To dampen demand for dollars, the central bank last week instructed banks to raise interest rates on rial deposits to 21 percent from as little as 14 percent. The official inflation rate, however, is about 20 percent: unofficial estimates put it much higher. The central bank reportedly also pumped US$200 million into the market this month after the new US sanctions were announced.

The authorities warned on Sunday they would arrest and prosecute those dealing in the rial on the black market as well as anyone carrying foreign currencies without an invoice.

Money-changing shops are open but are largely reluctant to do any business, while most street dealers have melted into the shadows to trade secretly. "The market is full of security agents," one dealer said, and there has been little business since Sunday.

The US dollar was selling yesterday at the unofficial rate of 17,100 rials (Dh5.5), Iran's ISNA news agency reported. The official rate imposed by the Central Bank of Iran is 14,000 - a price at which many dealers refuse to sell.

The currency problem is a political headache for Mr. Ahmadinejad ahead of parliamentary elections on March 2. He does not want the rial's decline to be seen as a consequence of western sanctions, which he has long insisted would not hurt the economy. For months, Iranian officials have peddled the line that Iran's economy is in robust health while those of its western enemies are on the verge of collapse.

The rial has been falling for almost a year since Mr. Ahmadinejad slashed costly fuel and food subsidies, stoking inflation. But the currency plunged sharply in early January after Barack Obama, the US president, signed into law by far the toughest financial sanctions yet against Iran. These would penalise companies that do business with the central bank and, if fully implemented, could make it impossible for most countries to pay for Iranian oil. The EU is set this month to ban imports of Iranian oil.

Iran's Opec governor, Mohammad Ali Khatibi, yesterday warned an EU oil ban would be "economic suicide" for Europe. Iran is Opec's second-largest oil producer, and oil exports account for 80 percent of Iran's foreign currency income. Iran sells about 20 percent of its oil exports to Europe. Iran's political and military leaders have repeatedly warned that if their country is unable to export its oil, they will stop other Gulf countries, including the UAE, from sending their oil through the Strait of Hormuz.

US and EU sanctions are aimed at curbing Iran's nuclear ambitions, which the West believes are aimed at achieving a weapons capability. Tehran insists they are solely peaceful. Some of the new sanctions could take months to come into effect, but are causing anticipatory jitters among the Iranian public and business community.

Many Iranians have been buying dollars and gold instead of depositing their money in local banks despite rising interest rates on deposits. The price of gold coins has rocketed 7 percent to record highs since Monday, according to Iranian news websites. With fiscal measures failing to shore up the rial and stave off economic panic, the authorities are relying on increasingly harsh disincentives.

Threatened arrests aside, the Iranian government has reduced from $2,000 to $1,000 the amount of dollars travellers can take with them when they leave the country. The authorities have also resorted to censorship. Text messages containing the word "dollar" were blocked recently, as was a website that provides up-to-the-minute rates for foreign currencies and gold.

The climate of fear and uncertainty is a hotbed for rumours. One is that some well-connected parliamentary candidates with access to dollars at the official exchange rate are selling them on the open market for huge profits, using the proceeds to fund their election campaigns. A high-level delegation from the UN's atomic watchdog is due to visit Tehran at the end of the month to discuss issues it has over Iran's nuclear programme.

An Israeli general warned yesterday a nuclear-armed Iran could make it tougher for Israel to act against enemies closer to home. Military planning division chief Major-General Amir Eshel said if Tehran attains atomic weapons, that could constrain Israel from striking the Iranian-backed Islamist groups in Lebanon and Gaza, Hizbollah and Hamas. "If we are forced to do things in Gaza or in Lebanon, under the Iranian nuclear umbrella it might be different," he said at a briefing in Jerusalem. He warned a nuclear-armed Iran would set off an atomic arms race in the region, leading to "a global nuclear jungle".