The Iranian people are dealing with an economy that has high unemployment and the basic costs of living are increasing, yet the regime has cut subsidies to the poorest Iranians while increasing its military spending. One of the issues that continues to add more pressure on the Iranian economy is the fact that international banks are hesitant to work with the Iranian banking system. Why?
First, the Iranian government and the United States have continued to struggle diplomatically, despite the 2015 nuclear deal. Additionally, the Trump administration has been actively focused on the Iranian regime, using sanctions and the threat of walking away from the 2015 agreement to create change in the Middle East.
Secondly, the Iranian banking industry shows signs of systemic corruption. To be removed from a list of money laundering countries, Iran agreed to join the Convention for the Suppression of Financing for Terrorism. Based on this agreement, Iran would have to sanction 23 individuals and 61 institutes that Resolution 2231 has sanctioned. Its own missile program would also have to be sanctioned. Needless to say, there are doubts that Iran will follow through on its commitments to stay off the money laundering list.
Another recent example of the regime’s corruption can be found in the exchange rate of the rials. On Tuesday, April 10th, the Iranian government declared the exchange rate of the U.S. dollar to be 42,000 Iranian rials. In order to keep this rate, the regime made it illegal for any currency exchanges outside of this price.
The regime has also claimed that they do not have a foreign exchange problem and that they can provide the necessary amount of currency to the market.
On Thursday, April 12th, first Iranian Vice President Eshaq Jahangiri, noted that a “sense of hopelessness” was contributing to the exchange crisis, as well as the issues facing the survival of the nuclear deal. Members of the Iranian Parliament are also questioning Iranian President Rouhani about the market fluctuations, as well as the price of the dollar.
“While emphasizing that the cusp of the questions pertained to the sudden rise in the price of foreign currency, Jabar Kochakinejad (MP) stated, ‘80% of the foreign exchange market is in the hands of the government, and so with the currency that they have, the government should be able to control the market, the question here is why then is there such turmoil happening in the market.’”
Jahangiri has admitted that the issues surrounding the exchange rates are political, and he noted that it has caused many individuals to worry about the future, causing them to think it is a protection to buy foreign currency and keep it on hand. Even buying currency and real estate outside of Iran is giving them confidence because they have something that the regime cannot impact.
“Certain world powers and nations… have united in order to hurt Iran. Some western countries have created a think tank to reach these goals, making Iran’s situation quite sensitive. One wrong decision or miscalculation can change the fortunes of millions of people. The Saudi’s young crown prince has been traveling throughout the world, speaking against Iran, and creating a negative atmosphere. Certain extremist in the USA and the west, along with dissenters and some of the nations in the region are actively trying to damage us,” said Jahangiri.
However, this ignores the fact that Iran is continuing its military activities throughout the region, disrupting the stability of the Middle East even further in Yemen, Iraq, Lebanon, and most critically, Syria.
The regime is attempting damage control, as hardliners are calling for the resignation of Valiollah Seif, the Governor of Iran’s Central Bank. However, the key decisions regarding the foreign exchange market are being made at the Presidential level, making Seif irrelevant, except as a scapegoat.
Members of the Parliament are considering protesting Seif’s next appearance and speech in front of the representatives, while others noted that the people are worried and angry. That is translating into pressure onto the representatives that they do not see as dealing with this foreign market disarray.
According to Professor Steve Hank, from John Hopkins University in the U.S., “The Iranian Rial has plummeted and inflation has increased to 66% per year.”
These factors have impacted the risk that the international community sees in the Iranian economy, which is extremely high and that it is also a high-risk country in terms of investment.
COFACE, a global trade credit insurance company in France, noted that “Iran is part of a category of countries where the threat against any trade is extremely high.”
Reuters also reported that the United States has welcomed reports that the EU is considering new sanctions against Iran, and the Trump administration has continued to emphasize that the risk is high for those who invest in Iran and make deals with the Iranian government.
This news, regardless of whether or not it occurs, is already having a cooling effect on investment in Iran. For the Iranian people, this does not spell economic relief but continued chaos as the regime continues to struggle internationally and at home.