Iran rial rheeling

Michael Ledeen:

Big news today from Iran, confirming once again that the hapless regime in Tehran proceeds down its death spiral. The first is the spectacular collapse of the national currency, which has lost 35% of its value since September. The second headline, in an extraordinary press conference by the effective commander of the revolutionary guards, is the admission that the incarcerated leaders of the green movement have so much powerful support that the regime dares not prosecute them.

The crash of the rial him has been linked to the latest round of sanctions, the ones aimed against the Iranian central bank. These are, at least for the moment, unilateral American sanctions, but their import is global, since they are aimed at anyone doing business in Iran’s oil sector. Those transactions invariably go through the central bank, and the American sanctions confront would-be purchasers of Iranian crude oil with an unpleasant choice: either do business with America or do business with Iran.

The ayatollahs, in their usual blustery way, have pooh-poohed the effect of the sanctions, insisting that Iran is so strong that even such harsh measures will have little effect.  But nobody in Iran believes that.  There are long lines at the money changers, and one leading government supporter puts the matter in chilling perspective:   Iranian industry “cannot continue to exist” with the rial at today’s level.

As the Washington Post’s man in Tehran says, this is a devastating blow to the regime, both because it further exposes their inability to cope with the Great Satan—whose destruction, after all, is the core mission of the Islamic Republic—and because the Iranian people know that their oppressors are making  out like bandits, as Treasury Undersecretary David Cohen explains:

The 39 percent difference between the central bank’s official rate and market rates on Dec. 21 was the largest in almost two decades, economists in Tehran and Washington said in interviews.

U.S. Treasury Undersecretary David Cohen said the gap between the two rates has provided an arbitrage opportunity exploited by officials and businesses affiliated with the IRGC, the elite military arm that’s under international sanctions for suspected nuclear weapons work and terrorism. They are among regime elements able to obtain foreign currency at the favorable official exchange rate and sell it for a profit in exchange bureaus at the market rate, he told the Senate Foreign Relations Committee in written testimony Dec. 1.

“Ordinary Iranians are urgently seeking out foreign currency such as dollars or euros for safety, yet they are having trouble accessing hard currency, and when they can, they have to pay the unofficial market rate,” said Cohen, the Treasury undersecretary for terrorism and financial intelligence.

There are stories from Tehran about people desperately trying to buy commodities, from gold to steel,  about people selling cars and motorcycles to get cash they can convert to hard currency, and, inevitably, about people offering their kidneys for sale (a story we’ve heard about desperate people everywhere from Africa to China.  Is it true?).

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I am not sure Cohen gets the arbitrage play correct, but there probably is one, if they can play the real market against the official one.  The real point of the rial story is that currency is rapidly losing value which means things are going to start costing much more because  of inflation.  This is not a new problem for the regime, but they have never dealt with it particularly well.  That happens when you have a faith based economic model.  In Iran's case they seem determined to God wants them to have nukes, but the price of having them is not coming cheap.