Iran’s currency is in free fall — time for the US to exploit it

The Iranian rial plummeted this weekend to a record low of 58,880 to the dollar.  Usually, economic surprises are what drive a currency aggressively downward. But not this time. Rather, it was in large part a response to the news that President Trump selected John Bolton as his national security advisor.

Since last month’s announcement, the rial has lost 20 percent of its value, almost 15 percent of it in just the recent days. This week, as Bolton assumes his new role, the Iranian market fears the U.S. will pivot to more aggressive policies aimed at curbing Iran’s regional expansionism.

{mosads}The president should exploit this fear of his hawkish new advisor as his administration works to fix the flawed nuclear deal of 2015. Specifically, the White House should re-impose sanctions on the Central Bank of Iran to vindicate currency traders’ fear that it now plans to inflict serious damage on Tehran’s economy.

Based on our analysis of the Central Bank data, Iran’s currency has lost roughly half of its value, 46 percent, falling from 40,170 to 58,880 per dollar, since Trump put the future of the nuclear deal in doubt last October.  The Iranian economy looked particularly wobbly amidst protests in December when Iranians took to the streets to protest the regime-controlled banking sector, and lack of economic opportunity and political freedom.

Trump aides preparing to withdraw from Iran deal: report https://t.co/dDisDOZ9KO pic.twitter.com/ec1QIzoI84

— The Hill (@thehill) April 5, 2018

In February, Iran’s leaders tried to stop the free fall by arresting speculators, freezing the bank accounts of foreign exchange traders, injecting dollars into the market, and offering foreign currency-linked certificates of deposit (CD) as well as rial-denominated CDs with high interest rates and they had some success. But by March even these measures proved ineffective leaving currency traders in a panic. Traders scurried again on March 13 when President Trump announced that Mike Pompeo, a vocal opponent of the Iran nuclear deal, would replace Rex Tillerson as secretary of State.

The fear of new U.S. sanctions isn’t the only factor triggering the rial’s precipitous drop. Years of pervasive corruption and mismanagement by the clerical regime have left the economy deeply vulnerable. Tehran operates two exchange rates — one official and one for the street. Based on our analysis, on average, the difference between the two rates on Monday stood at more than 21,000 rial, as compared to the 6,000 rial spread reported in early December. When the spread rises, it amplifies risk and uncertainty for rial traders while inviting corruption from corrupt officials who can sell dollars at the higher market rate and buy them at the lower official one.

Additional pressure usually builds near the end of the Iranian fiscal year in March, when government officials allow the rial to depreciate, using the widening spread between the budget’s official exchange rate and the market rate to close the budget deficit by enabling the Central Bank to get more rial for each dollar it sells.  It’s also around this time, as the nation celebrates the Persian new year and upper middle class Iranians travel abroad, that demand for imported goods and foreign currency increases, leading to a further depreciation of the rial.

Amidst all of this, recent changes to the tax code in the United Arab Emirates — a popular jurisdiction for Iranian currency traders — have raised the cost on foreign exchange transactions, at least temporarily stifling Iran’s access to dollars through Dubai.

Hackers leave Iran message from US: “Don’t mess with our elections” https://t.co/voxhBUJMnQ pic.twitter.com/Yt6x0wyhYL

— The Hill (@thehill) April 8, 2018

With the rial already under so much pressure, the re-imposition of sanctions on the Central Bank of Iran could push it into freefall. Under the sanctions law applied prior to the nuclear deal, foreign financial institutions are generally prohibited from engaging in transactions with the Central Bank. In effect, the Bank’s foreign-held accounts are put on lock down, barring the regime from accessing its foreign exchange reserves.  On paper, Iran may get paid for its oil but the money sits in the purchaser’s country and is only available for Iran to buy goods from that country in the local currency. Without access to these reserves, the regime would find it much harder to defend the rial.

In January, President Trump announced that he was suspending sanctions against the Central Bank of Iran for the last time. Trump warned that unless Europe agreed to help him fix the nuclear deal and address the ever-growing list of malign Iranian behavior, he would bring back America’s toughest economic weapon. 

These sanctions, if re-imposed, may also represent the greatest opportunity to regain leverage over the regime on issues like human rights abuses, ballistic missiles, terrorism, and regional expansionism. Since the Central Bank serves as the financial backbone for Iran’s Revolutionary Guards Corps and its illicit activities in Syria and Yemen, sanctions are warranted regardless of whether or not President Trump remains a party to the nuclear deal. After all, nothing in the deal precludes the United States from imposing sanctions for non-nuclear reasons.

With the rial flatlining, President Trump, with his new secretary of State and national security advisor in place, should move quickly to stymie the flow of hard currency into Iran and ratchet up the economic pressure. 

The faster the rial falls, the weaker the regime becomes. The United States has missed many opportunities in the past to isolate Iran’s clerical leaders and empower its people. President Trump shouldn’t miss this one. It’s time to re-impose sanctions on Iran’s Central Bank. 

Richard Goldberg is a senior advisor at the Foundation for Defense of Democracies, where Saeed Ghasseminejad is a fellow. Follow them on Twitter @rich_goldberg and @SGhasseminejad.

Follow FDD on Twitter @FDD. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.