As Iran’s Currency Dips, Central Banker Tries To Calm Markets

In a meeting of the ministry’s Strategic Council on Monday chaired by Defense Minister Mohammad-Reza Gharaei Ashtiani, a host of other officials were present, including directors of “ideological-political” offices, intelligence and counterintelligence, and managers of the ministry’s business subsidiaries, official government news website IRNA reported.

Iran’s defense ministry operates within the framework of the presidential administration, but the chief commander of all armed forces is Supreme Leader Ali Khamenei. The armed forces are divided to two separate armies, the Islamic Revolution Guard Corps (IRGC) and the traditional army, the Artesh. The IRGC carries tremendous political and economic power in the country, in effect controlling the traditional army.

The main tasks of the defense ministry is development of weapons and equipment for the armed forces. Most of the Islamic Republic’s homegrown military and dual-use technologies, such as drones, are developed by the ministry. This role was highlighted in the meeting of the Strategic Council, where the defense minister praised Mohsen Fakhrizadeh, the nuclear-military scientist who was assassinated near Tehran in November 2020, most likely by Israel.

The defense minister said that Fakhrizadeh was “a source of great services to the holy Islamic regime and he was able to make great strides in developing military industries.”

It is not clear what the exact plans for an economic coordination taskforce would be and the state-controlled media did not elaborate. But from the brief announcement made it seems that the defense ministry wants to marshal its capabilities to play a larger role in helping the economy in an environment of tough United States sanctions.

It is also possible that in a tough economic environment the ministry wants to establish more control over companies it controls. Various people or interest groups are benefitting from the ministry's resources, businesses and factories. Creating an economic task force could allow the leadership to channel all economic activities to benefit the ministry in a more meaningful way.

Ashtiani, mentioned the keyword “centralization” of economic activities as a necessity.

Since the early 1990s, after the end of the Iran-Iraq war, the IRGC was allowed to set up businesses and get involved in the economy. Then-president Akbar Hashemi Rafsanjani who made the decision thought that it could benefit both the country and the tens of thousands of veterans who had fought for years in the battlefield. But IRGC’s business ventures turned into a quest of building an economic empire that today dominates the country. The military force has become the biggest public works contractor in Iran, sweeping aside private businesses.

The same was emulated by the defense ministry to a lesser extent. Fakhrizadeh, who was a top defense ministry official had set up businesses, an Iran International report revealed last year after his assassination. His family indirectly respondedin an interview with the state TV in early December 2020, in which they acknowledged that he did indeed owned “knowledge-based” companies.

Occasionally, the president of the country and even Khamenei have urged to military to curtail their economic activities, but these calls have been met with IRGC’s pushback. In July 2017, President Hassan Rouhani had to retreat after speaking of a “government with guns”, referring to IRGC’s political and economic power.

On Monday, Ashtiani referred to the president and Khamenei when he said the new economic headquarters is meant to help meet their “expectations”.

He also mentioned, “Monitoring both domestic and foreign economic environment, identifying corresponding opportunities, economic policy-making,” and a host of coordinating tasks for the economic headquarters.

Iranian hardliners claim they have defeated US sanctions, simply because the Islamic Republic still stands, but the cost of defiance has been the economic ruin of the country, mostly borne by citizens.

Iran’s counterproductive approach in pursuing even a civilian nuclear program is evident from the Bushehr reactor, built by Russia for generating 1,000 megawatts of electricity. It became operational a decade ago. Iran spent up to $8 billion to build the reactor, which has produced around $5 billion of electricity, leaving a profit of just $3 billion in ten years. Meanwhile, its fossil fuel power generation infrastructure was neglected and no renewable energy investments, except ill-planned dams, were made. Today, Iran suffers from serious power shortages.

But this is just a small example of the damage Iran’s nuclear ambitions have inflicted on the country.

In 2020, based on World Bank estimates, Iran’s Gross National Product (GDP) reached $191.7 billion, which was one third of what it was ten years ago. The main reason for this huge economic retrenchment was international and United States sanctions against Iran since 2011, imposed to limit its nuclear program. The international community, including Russia and China, were concerned that Iran was pursuing more than a peaceful program and cooperated with the West to impose international economic sanctions beginning in 2010 and intensifying in 2011.

Calculated based on the free market rate of the US dollar in Tehran, the size of Iran’s economy in 2020 was the same as it was in 2004. After a substantial growth around 2010 due to very high oil prices, the economy began to decline from 2012 when international sanctions left their deep mark on Iran revenues.

During the period since 2011, successive Iranian governments relied on internal borrowing financed by printing money to maintain their operations. As a result, liquidity grew tenfold exacerbating inflation and in effect devaluing the national currency. People began losing their purchasing power and gradually falling into poverty.

Since early 2018, Iran’s rial has dropped to more than 300,000 against the US dollar, while just four years ago the dollar was traded at 32,000 rials. Before the Islamic Republic, one US dollar bought 70 rials.

The government has been using the central bank as a money printing machine, instead of reforming the economy, and adopting policies to attract foreign and domestic investments. Government debt to the central bank and other state or quasi-state banks has grown tenfold in the past decade.

Based on estimates by the International Monetary Fund, government debt was 6.5 percent of Gross National Product from 2,000-2017, but in 2020 it had reached 33 percent of GDP.

The impact on ordinary people has been devastating. While the minimum income needed to live just above poverty, as the rial lost value, has grown 70-fold in the past 20 years, wages and salaries have increased only 38-fold. While blue collar workers earn around $100-120 per month, office workers make $150-180. The minimum monthly income needed for a family of 3.3 people is $400.

The real numbers speak volumes about official claims that the Islamic Republic has defeated sanctions. The country has simply become poorer.

The free market value of the US dollar in Tehran shot up to 300,500 rials Sunday, a historic low for the battered currency. On Saturday the dollar had reached to just over 300,000 rials.

Despite government efforts to claim that the nuclear negotiations are not dead and could continue in a few days, the public remained unconvinced, buying more dollars.

The government feeling market demand restricted access to dollars at official exchange outlets earlier in the week, but the move led to demand shifting to unofficial dealers.

The current exchange rate shows the rial has fallen 4,500-fold since the Islamic Republic was set up in 1979. During the monarchy one US dollar was equal to just 70 rials.

The Iranian currency has fallen more than ninefold since early 2018, when it became apparent that then-president Donald Trump was inclined to leave the JCPOA and impose sanctions on Iran. He did so in May of that year and the rial has kept falling ever since.

TheWashinton Beaconreported Friday that it had obtained a ‘non-notification’ provided to Congress signed November 19 that gave Iraq another 120 days to buy electricity from Iran without facing the threat of punitive US action.

The Free Beacon said the waiver was transmitted to Congress ten days later, on the day nuclear negotiations between Iran and world powers resumed in Vienna in an attempt to revive the 2015 deal, the JCPOA (Joint Comprehensive Plan of Action).

‘Goodwill concessions’

Hence the timing had prompted accusations, the Free Beacon continued, that the Biden administration was "offering concessions to Tehran to generate goodwill" as the JCPOA talks resumed.

Richard Goldberg, the former ‘director for countering Iranian weapons of mass destruction’ in Trump's White House National Security Council described Iraq’s electricity waiver as a "dressed-up Chanukah present to" Iran. Chanukah is a Jewish festival.

The Free Beacon was concerned that the Biden administration was responding to calls from Iran for the US to show ‘good will’ over the nuclear talks. “Good deal within reach if the West shows good will," Iranian Foreign Minister Hossein Amir-Abdollahian tweeted Friday.

But the renewal of the Iraq’s waivers by both the Trump and Biden administrations has been largely a routine matter in the past.

The Free Beacon did reports that the State Department had justified the waiver, granted "at the secretary [of state's] discretion" (under executive orders passed by Trump), remained "in the national security interest of the United States" and was necessitated by Iraq's failure to reduce reliance on Iranian electricity.

Electricity Shortages

Iraq leans heavily on Iranian electricity and gas. As highlighted by human rights groups, Iraqi hospitals and other public services have in recent years faced electricity shortagesas the health system struggles to recover from years of sanctions and war.

The US sanctions waiver for Iraq to receive electricity and gas exports from Iran has been renewed several times since 2018 when former President Donald Trump withdrew from the 2015 Iran nuclear deal with world powers, Joint Comprehensive Plan of Action (JCPOA), and took powers to sanction any third party dealing with Iran.

The Trump administration renewed Iraq’s waiver for 90 days on January 4 before handing the administration over to President Joe Biden. The Biden administration renewed the waiver for 120 days on March 31, ahead of the first round of nuclear talks with the administration of President Hassan Rouhani, and for another 120 days in early August before President Ebrahim Raisi took office.

Iran owed $6bn

Iraq owes over $6 billion to Iran for electricity and gas imports, which has been frozen by Iraqi banks wary of possible US punitive action. Tehran has struggled to access the payments despite both Iranian and Iraqi officials saying they are working for a mechanism to pay the debt.

Repeated suggestions that, with dollar payments blocked, Iran might receive payments in kind, either though using dinars or barter, appear not to have borne fruit.

Citing a "reliable source" in March, an official of the Iran-Iraq Chamber of Commerce, Hamid Hosseini, said Iran had received some payments from funds frozen in Iraq, including the state-owned Trade Bank of Iraq, after Washington’s agreement. Hosseini said the Iraqi government had a variety of explanations, including US sanctions, not to pay Iran for natural gas.

In June the Central Bank of Iran governor Abdolnaser Hemmati said the bank had made progress in talks with Iraqi officials over using frozen Iranian resources to buy humanitarian goods, but Iraqi officials have not confirmed such claims.

Iranian authorities in recent days devised ways to show that the national currency was actually rising against major currencies as its diplomats met representatives of major powers to discuss a possible revival of the 2015 nuclear deal, the JCPOA. However, talks adjourned on Friday with no results except pessimism among European negotiators and disappointment on the part of the United States.

"Iran right now does not seem to be serious about doing what's necessary to return to compliance, which is why we ended this round of talks in Vienna," US Secretary of State Antony Blinken told the Reuters Next Conference on Friday.

The Iranian currency has fallen more than ninefold since early 2018, when it became apparent that then-president Donald Trump was inclined to leave the JCPOA and impose sanctions on Iran. He did so in May of that year and the rial has kept falling ever since.

US sanctions on oil exports and international banking has deprived Tehran of its main foreign currency revenues that financed half its government budget. The solution for officials was to print money, short of negotiations and a new agreement with Washington. Liquidity more than quadrupled in the past three years, pushing inflation rate to 50 percent and the rial down to Saturday’s level against the dollar and other major currencies.

A week ago, Iran tried to protect its currency by limiting legal purchases by small buyers. According to the law, every Iranian citizen can get $2,000 a year with a slightly favorable dollar rate for travel abroad and other needs such as medical care or wire transfers for students abroad.

Some people sold this right to others who needed more dollars, by using their national ID card to buy the currency. The government clamed down on the practice by tightening the requirements, demanding firm evidence of impending travel, such as the original copy of an air ticket. Buyers flocked to street dealers, instead of official bank exchange offices and the dollar rose to more than 300,000 rials.

Only once before the rial has lost so much value and that was before US presidential election last year, when people were nervous that Trump would be reelected and would increase pressure on the Islamic Republic. Once Joe Biden got elected, the pressure on rial declined somewhat, as he has already announced his intention to revive the JCPOA.

State-controlled media has begun blaming conspirators for the fall of the rial, as they have done on previous occasions, but the reason for having a battered currency and an economic crisis is obvious to most Iranians.

Noor News, a website close to the national security council said Friday that the fall of the rial “is a fully planned” conspiracy and blamed neighboring countries, in a clear reference to the United Arab Emirates and Saudi Arabia, who see Iran’s nuclear program and regional expansion as a serious threat to their security.

The government’s official IRNA news website blamed “greedy traders” and enemies who spread “fake news” about the lack of prospects for the success of nuclear talks.