Iran sinking deeper into crisis as currency drops to new lows

"The government's goal in raising the official exchange rate from 550,000 to approximately 640,000 rials per dollar was to sell the $5 billion it had taken from the National Development Fund at the highest price and, which means earning about 1 quadrillion rials from people's pockets," Hossein Samsami was quoted by Tasnim news agency as saying.

However, the Islamic Republic faces real economic pitfalls that have devastated the currency in the past 45 years. From a high of 70 rials for each US dollar in 1978, the currency was trading close to 800,000 per one dollar on Wednesday in Tehran's free market. In addition to its usual weaknesses, the economy has been hit hard with US sanctions since 2018.

In Iran's heavily state-controlled economy, the government has historically dominated foreign currency supply and import controls. Since 2012, when international sanctions triggered a sharp devaluation of the Iranian rial, the government has struggled to keep essential imports affordable.

To manage this, it implemented a multiple exchange rate system, which has become a breeding ground for corruption. Insiders with government-granted privileges, such as import-export licenses, have profited from the difference between the lower official exchange rate and the higher free market rate.

For example, the exchange rate of the dollar in the free market was nearly 800,000 rials per US dollar on Wednesday but the government-sanctioned rate was about 650,000 rials.

A portion of Iran's imports, such as medicine, is currently done using the government-subsidized rate of around 285,000 rials per US dollar, while other imports, like food, are conducted at different rates such as the "NIMA" system, which was about 500,000 rials per dollar until President Masoud Pezeshkian’s government raised it earlier this month. The move was justified as one step towards a unified rate to curb corruption.

Samsami’s accusation suggests the government is prioritizing short-term revenue generation over long-term economic stability and public welfare. He argued that simply unifying the exchange rate—the stated policy goal—will be ineffective without addressing deeper systemic issues.

"The policy of unifying the exchange rate," he emphasized, "will not be successful without implementing its requirements, such as implementing the law on combating smuggling of goods and currency, combating money laundering, and capital flight."

Samsami also challenged the claim that the exchange rates, designed to subsidize essential goods, are not reaching their intended beneficiaries.

However, he acknowledged the complexities of the system, noting that domestically produced goods, such as chicken, are still vulnerable to price increases.

"Domestically produced chicken, one-third of whose costs are covered by the 285,000-rial exchange rate and two-thirds by the NIMA and free market exchange rates, will see its production costs increase if the Nima and free market exchange rates rise,” Samsami explained.

He concluded with a stark warning about the inflationary consequences of the government's currency policy.

"With the government's jump in the official exchange rate, we will witness a wave of inflation in the next two to three months," he predicted. This prediction aligns with economic principles that link currency devaluation to rising import costs and broader price increases.

This phase began with the defeats of Hamas and Hezbollah, continued with the weakening of Bashar al-Assad and Iran’s diminishing influence in Syria, and is now advancing as Israel focuses on defeating the Houthis in Yemen.

Evidence suggests that even Iraq’s pro-Tehran Hashd al-Shaabi militia has scaled back its overt support for the Islamic Republic’s agenda, leaving Tehran increasingly isolated in the face of an alliance comprising the US, Israel, and even Europe. Domestically, severe economic challenges and widespread public dissatisfaction have created one of the most difficult periods in the history of the Islamic Republic.

In this context, the overall US policy is combining political, economic, and even military pressure to push the Islamic Republic to the negotiating table. The aim is to reach an agreement stricter than the JCPOA, either halting Iran’s nuclear and missile programs or exposing it to intensified pressure and even potential military action if it refuses to comply.

Despite its structural weaknesses and mounting international pressures, the Islamic Republic’s leadership remains defiant. Supreme Leader Ali Khamenei threatens nuclear weaponization and reclaiming Syria, while simultaneously sending signals of willingness to negotiate through diplomats like Mohammad Javad Zarif. However, it appears that the US, Israel, and even Europe are aware of the dangers of a resurgent Islamic Republic and are determined to prevent it from returning to a position of defiance and belligerence.

The chain of setbacks for the Islamic Republic began with Hamas’ attack on Israel in October 2023. Tehran mistakenly believed this assault would inflict an irreparable defeat on Israel.

Misguided analyses by the Islamic Republic’s leaders, particularly Khamenei and IRGC commanders, led to decisions that resulted in a series of defeats.

In response to the attack, Israel acted swiftly, strengthening its regional position within 15 months. This included large-scale military operations against Hamas, destruction of its military bases, and the assassination of senior leaders such as Yahya Sinwar, Saleh al-Arouri, and Ismail Haniyeh. Israel also ignored warnings from the US and the international community to launch an offensive in Gaza, leveraging force to reshape the Middle East.

The second major misstep by the Islamic Republic occurred when it urged Hezbollah to attack Israel’s northern borders in support of Hamas. Initially, Israel issued repeated warnings for Hezbollah to cease its aggression. When these warnings were ignored, Israel launched an operation dubbed New Order, which delivered surprising results. These included the destruction of Hezbollah’s command centers and equipment, as well as the killing of senior leaders, including Hassan Nasrallah. These developments fundamentally altered the region’s dynamics and demonstrated that, like Hamas, Hezbollah lacks the capability to withstand Israel’s extensive military campaigns.

On the international stage, the US and Europe, recognizing the Islamic Republic’s vulnerabilities, are now seeking to capitalize on this opportunity to drive significant changes in Iran’s regional policies. Meanwhile, Israel’s aggressive strategies aim to keep Tehran on the defensive.

Within Iran, widespread public dissatisfaction with the regime’s policies and economic mismanagement has deeply affected the country’s social and political landscape.

Popular protests and civil movements highlight the critical role of the Iranian people in shaping the nation’s future. The convergence of international, regional, and domestic pressures has created a historic opportunity to move beyond the Islamic Republic.

Hossein Shamkhani, son of ex-security chief Ali Shamkhani, oversees a network of companies central to facilitating weapons shipments across the Caspian Sea to Moscow amid its ongoing war in Ukraine, the report said.

Through his Dubai-based company Crios Shipping LLC, the younger Shamkhani began moving missiles, drone components, and dual-use goods last year, relying on at least two ships.

The Bloomberg report cited information provided by more than a dozen unnamed US, UK, and European officials, along with others familiar with the transactions.

These shipments, according to sources cited by Bloomberg, are part of a barter arrangement in which Moscow pays Tehran with oil cargoes in order to bypass sanctions restricting both nations’ access to international financial systems.

“My understanding is the Shamkhani network ties into the drone contracts for use in Ukraine,” said John Bolton, former US National Security Advisor, now a senior fellow at the Foundation for American Security and Freedom.

Shamkhani’s trading prowess highlights Iran's broader use of a vast network of companies spanning commodities trading and hedge funds.

A family legacy of influence and controversy

Hossein Shamkhani’s ascent in global commerce and politics is intertwined with his father Ali Shamkhani’s legacy. As a long-serving Iranian defense minister and national security advisor, Ali Shamkhani has remained close to Supreme Leader Ali Khamenei, leveraging his influence even after stepping down from the Supreme National Security Council in 2023.

The Shamkhani family has faced repeated allegations of corruption and abuse of power. Iran International’s investigative journalist Mojtaba Pourmohsen has reported extensively on family members’ involvement in high-profile scandals, including accusations of illicit business dealings, ownership of extravagant properties and bank accounts abroad.

One particularly contentious episode involved their role in the collapse of a building in Khuzestan province in 2022, a tragedy that left dozens dead. The building’s owner, a businessman linked to the family, was found to have violated multiple construction regulations.

Hossein Shamkhani has denied any wrongdoing and rejected claims of involvement in illegal arms shipments or sanction-busting oil trades.

A lawyer representing him told Bloomberg that the allegations are baseless and lack supporting evidence. Similarly, Mohamed Al Hashmi, managing director of Dubai-based Milavous Group Ltd—another firm tied to Shamkhani—dismissed allegations of involvement in Iranian or Russian oil trading.

Complexities of sanctions and enforcement

The cross-Caspian shipments highlight challenges in enforcing Western sanctions. Ships linked to Shamkhani’s network, including the Sea Castle and Sea Anchor, have completed multiple trips between Iranian ports and Russia’s Astrakhan in the past year.

These vessels, though modest in size by global shipping standards, are believed to have been sufficient for transporting weaponry on the short Caspian routes.

Bloomberg’s analysis of ship tracking data suggests these voyages accelerated in 2023, coinciding with Russia’s increased reliance on Iranian arms for its operations in Ukraine.

Shamkhani’s maritime network extends beyond these two vessels. Bloomberg cited sources describing an extensive fleet of tankers and cargo ships controlled through entities such as Oceanlink Maritime DMCC and Koban Shipping LLC.

While the US Treasury has sanctioned several of these ships and their associated companies, enforcement has been complicated by frequent changes in ownership and the lack of direct links to Shamkhani in official records.

“Sanctions enforcement against these barter networks is a lot harder, particularly when you consider Russia’s historic dominance in the region,” said Behnam Ben Taleblu, a senior fellow at the Foundation for Defense of Democracies.

He emphasized the importance of transparency and international cooperation to expose these networks and curb their activities.

Expanding business empire and diplomatic implications

Beyond shipping, Shamkhani’s network includes a hedge fund operating in financial hubs such as London, Geneva, and Singapore, and a Dubai-based commodities trading firm dealing with Western oil companies.

Despite these connections, he has not been personally sanctioned by the US or European governments. This lack of direct penalties has fueled concerns about loopholes in current sanctions regimes, particularly as entities within Shamkhani’s network continue to conduct significant business with Chinese buyers using yuan transactions, avoiding the US financial system.

Both Iran and Russia have acknowledged their growing military cooperation without detailing specific arms deals.

While their collaboration appears not to inherently violate international law, it exposes participants to potential sanctions.

A State Department spokesperson warned of the broader security implications, saying, “This partnership threatens European security and illustrates how Iran’s destabilizing influence reaches beyond the Middle East and around the world.”

The allegations against Hossein Shamkhani, if substantiated, underscore the resilience of global sanctions evasion networks and the complexities of monitoring illicit trade.

With limited transparency and persistent geopolitical rivalries, success in curtailing Iran's sanctioned trade has eluded the West and its allies.

New data from the Central Bank of Iran (CBI) reveals that the country's GDP growth has slowed since the beginning of 2024. During the summer, GDP growth stood at 2.7%, which is half of the 2023 growth rate.

The GDP growth rate has fallen across all sectors except agriculture. However, calculations by Iran International indicate that the Central Bank's figures are overly optimistic and, in some cases, manipulated.

For instance, while Iran's Statistical Center and the Research Center of the Parliament reported a 1% decline in the industrial and mining sector's share of the GDP during the summer due to repeated power outages, the Central Bank claims a 1.7% economic growth in this sector during the same period.

The industrial sector is important for Iran’s economy, as part of it is based on or related to oil-related sectors and accounts for around 15% of Iran's GDP and employs around a third of the country's 25 million workers.

Another example is the agriculture sector. According to the Statistical Center of Iran, this sector's output has been in decline since 2021 and the share of employment in the sector declined by 1% this summer, reaching 14.5%.

Yet, despite worsening droughts and widespread power outages, the Central Bank claims a 2.8% growth in agriculture during the summer.

The International Monetary Fund (IMF) previously predicted that Iran's economic growth would decline from this year until 2028, eventually reaching 2%.

Oil: The driving force of economic growth
In the last two years of Donald Trump's presidency (2018-2020), Iran faced negative economic growth due to US sanctions. However, with the Biden administration's policy of appeasement toward the Iranian government, Iran's economic growth turned positive again.

Details from the Central Bank's statistics show that the driving force behind Iran's economic growth over the past 3-4 years has been the oil sector. During this period, Iran's oil exports quintupled, reaching 1.6 million barrels per day in 2024 in average.

Iran exports 40% of its oil and gas condensate output, and the growth in this sector has had a significant impact on boosting the country’s economic growth.

It remains unclear how Iran’s economic growth will fare considering a sharp drop in oil exports this fall and the anticipated start of Donald Trump’s administration, which has promised to revive the "maximum pressure" campaign against Iran. Data from oil tracking companies such as Kpler and Vortexa indicate a 500,000-barrel-per-day decline in Iran's oil exports since October.

At the same time, the head of Iran's Agricultural Guilds Chamber recently reported a 30% reduction in autumn crop planting, and an official mentioned a 20% damage to poultry farms due to power outages in autumn.

This fall, in addition to power cuts, Iran has drastically reduced gas supplies to industries, exacerbating the recession in these sectors.

A Look at key economic indicators for Iran in 2024
The year 2024 has brought significant challenges for Iran, including severe electricity and gas shortages, a sharp depreciation of the rial, two direct confrontations with Israel, weakening of its regional proxy groups and the fall of Bashar al-Assad's regime in Syria as well as the end of Joe Biden's presidency.

This summer, Iran faced a 25% electricity deficit, which has been continuing in autumn due to gas shortage. In fall, the daily gas shortage peaked at 30% of the country's gas demand.This seriously impacts industries, particularly the steel sector, which has witnessed a 46% decline this year.

Since the beginning of 2024, the US dollar's value in Iran has surged by 60%, and inflation, even according to official estimates, has exceeded 32%. Over the past six years, Iran has consistently ranked among the ten countries with the highest inflation rates.

Official statistics show that despite the addition of 5 million people to Iran’s population since 2018, when US sanctions were reintroduced, the number of employed individuals has only increased by 300,000 to 25.1 million.

Poverty rates in Iran have also risen during this period. Even according to the Islamic Republic's official statistics, about 28% of Iran’s population was below the poverty line in 2018. Now, this figure has climbed to 33%, with some parliamentarians, experts, and domestic media outlets claiming the real number exceeds 50%.

One of the few positive aspects of Iran's economy is the increase in oil exports to China. Data from Kpler and Vortexa shows that Iran's average daily oil exports in 2024 stood at approximately 1.6 million barrels in average, 34% higher than in 2023 and almost double the 2022 levels, but the figure plunged to 1.3 mb/d in November.

Iran’s economic vows will worsen if Donald Trump acts upon his threats to reduce Tehran’s oil exports to China, which provided close to $40 billion in revenues until this fall.

The head of the Isfahan Chamber of Commerce, Amir Kashani, told Bourse Press earlier this month that he estimates a total annual loss to the steel industry at around $4 billion.

In an interview with state television last week, an official of Abbas Abad Industrial Compound in the southeast of Tehran said the industries based in the compound are facing power cuts of up to 14 hours a day.

The industrial area is home to dozens of factories producing electronic and household appliances, car parts, plastic, and dairy products.

Mohsen Zabihi, the coordination deputy of TAVANIR, Iran's government-owned energy company, said on December 15 that low winter temperatures and the increase in domestic gas use have caused serious shortages in the supply of fuel to power plants, particularly in the northern areas of the country.

He announced that all industrial units have been informed that they must reduce their electricity consumption by 50 percent from 6am to 5pm, by 90 percent between 5pm to 12am, and by 70 percent until 6am the next day.

The continued disruption to production is putting many workers in danger of losing their jobs. In an unusually candid admission, Chief Justice Gholamhossein Mohseni-Ejei said on Monday that production companies are facing serious issues including cash flow problems and inability to pay the workforce due to power shortages.

Producers say power cuts are damaging their machinery and products, particularly food with poultry farmers reporting extensive deaths of young chickens, and dairy producers' products saying their products are spoiling during power cuts.

With the drastic deterioration of the economy in the past few years, workers’ strikes to protest low wages and long delays in the payment of their salaries have become more common.

If the situation worsens, the risk of protests looks increasingly high, with Mohseni-Ejei briefing security and intelligence officials to ready for such unrest, reminiscent of the nationwide protests of 2019.

Around 80 percent of Iran's electricity is produced from fuel. Officials say the private sector owns around 65 percent of fuel power plants.

However, many companies described as private are owned fully or partially by various state entities such as Bonyad-e Shahid, Bonyad-e Mostazafan, and government-owned banks such as Bank Sepah.

As in most other sectors, there is no transparency in data on electricity production, profits, and losses of fuel power plants but experts say they have been consistently accumulating huge losses since 2018 for various reasons including the government’s strict control of prices and failure to pay its debts to them.

Iran's minister of energy, Abbas Aliabadi, recently told reporters that "a considerable number" of organizations or individuals have been putting strain on the grid due to illegal Bitcoin mining. However, this includes state bodies such as the Revolutionary Guards (IRGC), the burden only adding to existing issues such as the dilapidation of power plants and the government's failure to store enough fuel for running them in the winter.