The Forces Behind Iran’s Currency Crisis

In September and early October of 2012 the Iranian currency, rial, was in a state of free fall relative to the value of major world currencies and gold.  The government of Iran, as well as the Central of Bank of Iran (Bank Markazi), appeared to be helpless in stopping the nosedive.

The adversaries of Iran, particularly Israel and the US, were jubilant and attributed the currency crisis to the success of “crippling,” “paralyzing” or “lethal sanctions,” to use various descriptions of these sanctions by US-Israeli officials.  On September 30, 2012, Reuters quoted Israeli Finance Minister Yuval Steinitz as saying: “The sanctions on Iran in the past year jumped a level” and Iran’s economy “is not collapsing, but it is on the verge of collapse.” “The Iranians,” he went on to say, “are in great economic difficulties as a result of the sanctions.” Similarly, in a daily press briefing on October 1, 2012, US Department of State Spokesperson Victoria Nuland had the following exchange with a reporter:

QUESTION: Iran. The Iranian currency has lost about a quarter of its value in the last week alone. Is the Department pleased to see this? It seems to reflect the efficacy of the sanctions against Iran. Are you dismayed by it, or what is your view?

MS. NULAND: You’d like an adjective of choice?

QUESTION: I’d like a verb, really.

MS. NULAND: You’d like a verb, yeah. Well —

QUESTION: Delighted?

MS. NULAND: — simply to confirm what you are seeing, Arshad, our understanding is that the Iranian currency has dropped to a historic low today against the dollar in informal currency trading. This despite some frantic efforts by the Iranian Government last week to try to prop it up, rearrange the way it dealt with these issues. From our perspective, this speaks to the unrelenting and increasingly successful international pressure that we are all bringing to bear on the Iranian economy. It’s under incredible strain. Iran is increasingly cut off from the global financial system. Significant amounts of Iranian oil is also coming off the market. As you said, the currency is plummeting. And firms all over the world are refusing to do business with Iranian companies.

The jubilation and boastfulness about the success of sanctions were more subdued when the question was put differently to Secretary of State Hilary Clinton a few days later. In a press conference Clinton was asked about the efficacy of “hurting” the Iranian people by means of sanctions. She answered:

I think the Iranian Government deserves responsibility for what is going on inside Iran. And that is who should be held accountable. And I think that they have made their own government decisions, having nothing to do with the sanctions that have had an impact on the economic conditions inside the country. And of course, the sanctions have had an impact as well, but those could be remedied in short order if the Iranian Government were willing to work with the P-5+1 and the rest of the international community in a sincere manner.

What the Secretary was apparently trying to say was that the currency crisis was more due to the Iranian government’s economic mismanagement rather than sanctions levied against Iran.  If that is what she meant, she was not alone in her analysis.

There have been, indeed, various explanations as to what caused the recent economic crisis in Iran, particularly the free fall in rial. But, for the most part the explanations seem to concentrate on the effect of draconian sanctions imposed on Iran by Israel’s allies, the US and EU, as well as the ineptness of the Iranian government, led by President Ahmadinejad, in dealing with the sanctions. Which one is more to blame would depend on the political perspective of the analyst. The opponents of Ahmadinejad put the blame largely on him. For example, the speaker of the Iranian Parliament Ali Larijani, a political rival of Ahmadinejad, told the Fars New Agency on October 3, 2012, that 80% of the problem in Iran is due to mismanagement and 20% due to sanctions. Similarly, an opinion survey of some Iranian economists by the Iranian Labor News Agency on October 2, 2012, showed that they mostly blame the Iranian government for the “currency tsunami.”  These economists criticized the government for such things as disdain for the economic profession, doing away with the Management and Planning Organization of Iran, shrugging off the effects of sanctions, lacking any concrete plan to deal with sanctions, showing little transparency in financial matters, rent seeking, giving out cash subsidies after the removal of some price control, and arcane and arbitrary ideas of Ahmadinejad that interfere with the work of the Central Bank. Some even criticized Bank Markazi’s own inability and confusion as to how to deal with the economic woes of Iran.

In fact, the latest policies of the Central Bank, as well as the Ministry of Finance, have raised the ire of many Iranians. Faced with the falling value of rial and rising inflation, the Central Bank has followed a complicated set of exchange rates: a fixed rate of 12,260 rial per dollar for imports of some essential items, a free or floating market rate for non-essential items, and a rate 2% less than the free market rate for items in between. Moreover, on September 23, 2012, the Central Bank created a “currency exchange center” that would offer dollars at the market rate minus 2%. Yet, the creation of this center failed to calm the market and the Central Bank was accused of not providing enough currencies to the center. Indeed, the measure came too late to have any calming effect.

The Iranian rial has faced troubles a number of times in the past two years. The first major currency crisis appeared in September of 2010, when in two days the Iranian currency gyrated from 10,850 to 13,000 rials per dollar and then back to 12,200 rials per dollar. The devaluation was actually bigger on a weekly basis. A week earlier rial had traded at the rate of 10,500 per dollar (Financial Times, September 29, 2010). As most financial reports pointed out, the same devaluation of rial had taken place relative to the value of other currencies and gold.

The next crisis in rial occurred in September of 2011, when the Iranian currency fell to 13,000 rials per dollar. As the result of intervention by Bank Markazi, in October of 2011 the Iranian currency gained some of its value and reached a high of 10,750 rials per dollar. But in December of 2011, once again, the currency nosedived, reaching 15,150 rials per dollar on the street (The New York Times, December 20, 2011). One day later, the Iranian currency was trading at 15,800 rials per dollar (AFP, December 21, 2011).

By January 1, 2012, rial was trading at 16,000 per dollar, and the day after at 17,800 ( The Central Bank of Iran intervened by providing liquidity in the form of foreign currencies, and on January 3, 2011, the rial rose to 16,200 per dollar.  But by January 10, 2012, the rial had once again fallen to the level of 17,200 per dollar ( On January 16, 2012, according to AP, Iran’s Central Bank deputy governor stated that “trading foreign currency outside of banks and licensed currency exchange operations was now banned.” The announcement did not do much to calm the market. On January 18, 2012, AFP reported that the Iranian currency was trading at 18,000 rials per dollar. The report also stated that Iran’s Minister of Economic Affairs and Finance Shamseddin Hosseini and Central Bank chief Mahmoud Bahmani were summoned before the Iranian parliament to explain the situation, and they “promised to bring the exchange rate under control.” In addition, the report stated that the price of gold coins in Iran had risen 16 percent in one week. On January 22, 2012, ISNA reported that the Iranian currency had fallen to 20,000 rials per dollar, and the following day The Christian Science Monitor reported that the “rial reached an all-time low today at 21,000 rials to the dollar.” Two days later, on January 24, 2012, Saham News was reporting that a dollar on Tehran’s street was selling for 23,000 rials. The Iranian currency was in a state of free fall.

On January 25, 2012, Reuters reported that “Ahmadinejad has agreed with the approval of the Money and Credit Council to increase interest rates on bank deposits to up to 21 percent.” Central Bank Governor Mahmoud Bahmani was quoted as saying: “Travelers, university students and patients will be supplied at an appropriate rate. . . The government will not give foreign currency for storage.” One day later, on January 26, 2012, Mehr News Agency reported that the Central Bank of Iran has set the official rate of exchange at 12,260 rials per dollar and would allow the currency traders to exchange dollar for 3-5 % more than the official rate. However, the report went on to say, those who sell at a higher rate than allowed by the Central Bank might lose their licenses. On the same day, an Iranian currency dealer, Mesghal, was offering dollar at the rate of 17,000 rials. Over the next few days the dollar steadily rose in the free market and passed 18,000 rials. It finally settled at the offer price of 18,980 rials in the market, while the official rate continued to be 12,260 rials.

Following its lows in January of 2012, the Iranian currency slowly rebounded. On May 13, 2012, the offer price of the dollar in the currency market stood at 15,750 rials (Mesghal Online).  But in July and August of 2012 another free fall in the value of rial started. By early July the offer price of a dollar in the currency market stood above 19,600 rials and by early August it went over 21,000. Bank Markazi, which still tried to maintain the value of currency at the official rate of 12,260 rials per dollar, appeared to be powerless in dealing with the currency crisis. Indeed, the entire government of Iran seemed to be unprepared to deal with the effect of accumulating sanctions, particularly the EU sanctions that became officially effective on July 1, 2012. AP reported that according to Vice President Mohammad Reza Rahimi, authorities in Iran had already stockpiled imported goods and hard currency to help cushion the blow to the economy. Similarly, the same AP report quoted Iran’s Central Bank Governor Bahmani as saying: “We have not remained passive. To confront the sanctions, we have plans in progress.” However, the subsequent economic difficulties did not support the existence of any meaningful contingency plan. Indeed, the July 7, 2012 meeting of heads of three branches of the Iranian government to draw up policies to combat sanctions, which was reported by Mehr News Agency, indicated a lack of any serious plan to deal with the draconian sanctions. Some at the highest level of the Iranian government even tried to downplay the seriousness of the sanctions. For example, on July 7, 2012, Ayatollah Khamenei was quoted by AFP as saying: “Westerners are making much hype about sanctions against Iran but they don’t understand that they have vaccinated the Iranian people themselves by imposing sanctions over the past 30 years. . . [Iran] has resisted all sanctions and is now 100 times stronger than 30 years ago.”

By the end of August 2012 the offer price of the dollar stood at 21,930 rials, while the Central Bank Governor Bahmani was promising lower rates soon (ILNA, August 29, 2012). Then a free fall in the value of rial started. By the end of September the price of dollar was in zones never seen before, 30,500 rial per dollar (ILNA, September 30, 2012). Frantic meetings of government officials, the Central Bank’s complicated scheme of three rates of exchange, creation of the currency exchange center, and repeated promises that the relief is on the way, did not stop the free fall. On October 2, 2012, Mesghal Online posted its offer price per dollar: 35,500 rials.  Then the website stopped posting the price of dollar in rial. On the same day ILNA reported even a higher price for the dollar: 36,200 rials per dollar! Cleary rial was now in a state of free fall. There were protests in the streets of Tehran and, in particular, in the bazar. Arrests were made and a few individuals were charged with creating market disturbances. Trading stopped on October 4 and then resumed on October 6, with the price of the dollar falling to 28,500 rials.

The September-October 2012 currency crisis in Iran is therefore not new.  Such crises have been coming in waves. But each time a new lower value for rial is established. Like many economic crisis elsewhere, past or present, it is difficult to say what is causing these waves. Usually, a massive economic crisis appears to be multifaceted, the result of a perfect storm. The repeated currency crises in Iran seem to be no exception.  A number of problems that have led to the creation of the recent crisis were mentioned in the survey of Iranian economists referred to above. Among these, however, two problems stand out: the accumulation of ruthless sanctions imposed on Iran and the ineptness of the government and the Central Bank of Iran to plan for, and deal with, the effects of these sanctions.

The sanctions imposed on Iran by the US and EU, mostly as a result of pressure from Israel, are adversely affecting the Iranian economy. This is, indeed, what the “crippling,” “paralyzing,” or “lethal sanctions” are supposed to do: destabilize the economy, inflict pain on the population, bring about panic and riots, overthrow the government of Iran, and install a US-Israel friendly government. That is why people such as Israeli Prime Minister Benjamin Netanyahu continuously threaten Iran with military actions. The threats are intended mostly to bring about harsher and harsher sanctions. They are also intended to create fear and uncertainty in the financial and productive sectors of the Iranian economy.

The Iranian government and the Central Bank of Iran have shown to be mostly inept in dealing with the effect of these sanctions. As some Iranian officials have at times admitted, the US-EU sanctions are tantamount to declaring an economic war on Iran. Iran, therefore, faces a war economy and the resulting inflationary pressure. Yet, for the most part, many Iranian officials at the highest level of power refuse to admit this. Some continue to boast about the ineffectiveness of the sanctions. Others, particularly Iranian military officials, add to the fear, uncertainty and speculative bubbles by repeatedly talking about an impending military attack on Iran by Israel, US, or both, and how Iran can withstand such an attack and even retaliate. Such utterances actually play into the hands of Israel and its US-EU allies.

Ruthless sanctions and threats of war are creating financial instability in Iran, and this could easily escalate into a massive and uncontrollable economic crisis followed by social unrest. Unless these sanctions are taken seriously by the Iranian government and drastic actions are taken to calm the market, Iran’s adversaries could accomplish what they set out to achieve.

Sasan Fayazmanesh is Professor Emeritus of Economics at California State University, Fresno. He can be reached at:

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Sasan Fayazmanesh is Professor Emeritus of Economics at California State University, Fresno, and is the author of Containing Iran: Obama’s Policy of “Tough Diplomacy.” He can be reached at: