U.S.-Iran Talks Will Falter Unless Abdolnaser Hemmati Is at the Table

By Esfandyar Batmanghelidj and Saheb Sadeghi

The United States and Iran may soon be sitting at the negotiating table once again. In just the last week, the Biden administration has offered to restart negotiations, and Iran has struck a deal with the International Atomic Energy Agency to slow moves to limit inspections of its nuclear program. A window of opportunity has emerged for the two sides to talk, likely in a format facilitated by the European Union. If and when the United States and Iran sit across from one another again, there is a key figure who ought to be present—Abdolnaser Hemmati, the governor of Iran’s central bank.

In many respects, Iran’s central bank was the primary target of former U.S. President Donald Trump’s economic war on Iran. Much of the economic hardship that Iran has experienced due to the reimposition of secondary sanctions can be attributed to the Trump administration’s success in limiting the central bank’s access to its foreign exchange reserves.

According to the International Monetary Fund (IMF), Iran retains access to just $8.8 billion of readily available foreign currency, roughly one-tenth of its total reserves. Without access to its reserves held in countries like Iraq, South Korea, Japan, and Germany, the central bank has struggled to forestall the weakening of Iran’s currency, which is today worth less than one-fifth of its value prior to Trump’s withdrawal from the nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). This deep depreciation made imported goods more expensive, contributing to annual inflation rates of nearly 50 percent.

Hemmati, a veteran banker, was appointed as central bank governor in July 2018, parachuting in just a few months before secondary sanctions were fully reimposed on Iran. He has performed remarkably well in difficult circumstances. Iran’s currency was regaining value for most of 2019, a trend disrupted by the COVID-19 crisis, which hit the country’s economy hard, throwing trade into disarray.

Since reaching a historic low in October 2020 of just over 320,000 rials to the dollar on the free market, the currency has since stabilized at around 250,000 rials to the dollar—with this stability helping to undergird Iran’s slow economic recovery. Along the way, Hemmati has proved an adept communicator, using his Instagram account, the central bank’s website, and even select interviews with international media to outline his priorities and reassure the Iranian public about the bank’s capacity to defend the rial from hyperinflation.

Iran has not faced a full-blown economic meltdown, despite the best efforts of the Trump administration. But the country finds itself in a painful period of economic stagnation, and sanctions relief will be needed should any government wish to deliver on promises of prosperity. However, Trump sought to make sanctions relief more difficult.

In September 2019, the Trump administration designated Iran’s central bank under a terrorism authority, a move that jeopardized long-standing exemptions permitting the bank to play a crucial role in facilitating the purchase of humanitarian goods such as food and medicine.

In February 2020, the U.S. Treasury Department issued a new general license to allay those concerns. But more troubling was the intention behind the terrorism designation, which was applied to Iran’s central bank for the express purpose of making it harder for a potential Democratic administration to lift sanctions on the bank in the future.

The Biden administration will likely need to remove this designation to bring the bank back to its original status under the JCPOA—but removing a designation ostensibly tied to Iran’s purported support for terrorism may prove politically tricky as part of U.S. reentry into an agreement focused exclusively on the country’s nuclear program.

Lifting sanctions was difficult even before the Trump administration’s cynical moves. Iran’s experience of sanctions relief following the implementation of the JCPOA was disappointing. International banks remained hesitant to process Iran-related transactions, citing unclear guidance on how to conduct business in a compliant manner and the risks of punitive fines if the remaining sanctions were inadvertently violated.

This limited the rebound in trade and, particularly, investment in Iran. While there had been some technical exchanges on banking during the JCPOA negotiations, including working-level exchanges with Iran’s central bank, these were largely focused on the unfreezing of Iran’s assets—the challenges Tehran faced in mundane banking blindsided the JCPOA parties.

In March 2016, then-Treasury Secretary Jacob Lew noted that the “experience with Iran demonstrates how difficult [sanctions lifting] can be.” Despite what Lew referred to as “widespread global outreach” by officials at the U.S. Treasury and State departments, the banking challenges persisted and continued to stymie trade and investment until Trump’s eventual withdrawal from the nuclear deal.

In an interview last July, Valiollah Seif, who was central bank governor at the time of the JCPOA negotiations, suggested that Iran had not had the right experts in the room. “The JCPOA could solve the problem related to oil sales at that time, but it could not solve our banking problems. … Our economic and banking expert team was weak in the JCPOA talks,” he said.

Understandably, Iranian leaders are keen to get sanctions relief right this time around. In a recent speech, Iran’s supreme leader, Ayatollah Ali Khamenei, insisted that any sanctions relief offered by the United States must take place “in practice” and not just “on paper.” Moreover, the efficacy of that sanctions relief will need to be “verified.”

What’s clear is that as new negotiations approach, the JCPOA parties cannot rely on diplomats to untangle the complex knots that have constricted Iran’s banking ties for so long. To ensure sanctions relief succeeds, Hemmati ought to be in the room as part of a high-level technical dialogue, which could eventually include top officials such as U.S. Treasury Secretary Janet Yellen and French Finance Minister Bruno Le Maire.

There are a few reasons why a dialogue on sanctions relief, which would be similar in structure to the pre-JCPOA exchanges on nuclear issues between then-U.S. Energy Secretary Ernest Moniz and Ali Akbar Salehi, the head of Iran’s atomic energy agency, ought to center on Hemmati.

First, Hemmati has emerged as a key figure of Iran’s economic diplomacy. In the last two years, he has made trips to Iraq, Oman, South Korea, and China in order to ensure Iran retained functional financial channels with key trade partners while the Trump administration sought to put pressure on the governments of these countries. His participation in the new talks would be a natural extension of this global outreach, and most of the sanctions relief benefits promised by the United States will need to be delivered via third countries. Hemmati is the only stakeholder to have full technical knowledge of the challenges U.S. sanctions have posed in economic relations with key trade partners.

Second, Hemmati’s stewardship will be critical for the implementation of both early and late-stage sanctions relief measures. Whether it is the easing of access to foreign reserves or the granting of Iran’s COVID-19 IMF loan—both under consideration as early economic gestures by the Biden administration—or the consideration of new economic incentives such as reauthorization of the “dollar U-turn,” an exemption revoked in 2008 that allowed U.S. banks to process Iran-related transactions in cases where a payment is being made between two non-Iranian foreign banks, effective implementation depends on Iran’s central bank.

Importantly, the international community will also expect Iran to continue to reform its banking sector in line with international standards. On this point, Hemmati has been a key champion, stating recently that if the JCPOA were revived, Iran would need to complete adoption of the action plan set forth by the Financial Action Task Force, a standards-setting body, in order to see the benefits of sanctions relief in the banking sector.

Finally, Hemmati would bring some technocratic continuity to the economic implementation of a restored JCPOA. There is considerable concern that the possible arrival of a new Iranian president in August could leave any diplomatic agreement vulnerable to changing politics in Tehran.

While it may be possible for some of Iran’s top diplomats to remain in their posts in a new administration, it is Hemmati, whose term ends in 2023, who is best positioned to offer institutional continuity on implementation issues. He has proved to be an adept political operator. By insisting on the central bank’s technocratic independence, he has largely avoided the attacks regularly made against members of the Rouhani government.

He also maintains a good relationship with Khamenei and has been able to turn to the supreme leader to insulate the bank’s policies from political attacks. It is often argued that restoring the JCPOA would help boost the fortunes of Iran’s political moderates, but it is equally important for U.S. President Joe Biden to strengthen the hand of Iran’s technocrats who work on policies, not politics.

The Biden administration’s early appointments made clear that when it comes to Iran, personnel is policy. The same holds true in Tehran. If the right people are not in the room during upcoming negotiations, not only will the agreed policies be deficient, but so too will implementation falter. The United States, the other permanent members of the U.N. Security Council, and Germany need to provide Iran a pathway to the normalization of its banking ties—to do so, it would make sense to engage Iran’s top banker.

Esfandyar Batmanghelidj is the founder of the Bourse & Bazaar Foundation.

Saheb Sadeghi is a columnist and foreign-policy analyst on Iran and the Middle East.

Photo: IRNA

Sanctions Are Driving Iran and Venezuela Into Each Other’s Arms

By Esfandyar Batmanghelidj and Francisco Rodríguez

Over the past few years, Venezuelans have seen thousands of shops shuttered, with business after business failing under the weight of a massive economic depression and crippling economic sanctions. So it was somewhat of an event when a huge new supermarket opened in eastern Caracas in July. Yet what was even more unusual was that shoppers who flocked to the store had a hard time understanding what they were buying: many of the products’ labels were in Farsi, not Spanish.

The supermarket opening was only the latest episode in the warming of the relationship between Venezuela and Iran—two countries subject to stringent U.S. economic sanctions. U.S. policymakers were quick to denounce the event, with acting Assistant Secretary of State Michael Kozak describing the store as an example of “an alliance of pariah states.” Over the past five months, Iran has sent gasoline tankers, parts, and experts to fix an ailing refinery, and a ship full of food to help the crisis-ridden South American nation.

Foreign-policy experts often classify Venezuela and Iran similarly—as pariah countries under pressure from U.S. secondary sanctions, which deter other countries from trading with them for fear of being punished by Washington.

Sanctions on Venezuela and Iran have been effective in cutting export revenues, contributing to one of the largest economic contractions in recorded Latin American history, and to a loss of more than two-thirds of the Iranian rial’s value and high fiscal deficits in Iran—but it is also driving the two countries into each other’s arms.

Iran is not doing as badly as Venezuela, but its deep recession and accelerating inflation have fed concerns that Iran is on the verge of a Venezuela-style economic collapse, where hyperinflation stokes unrest and the delegitimization of the government.

Yet the simple fact that Iran, which has faced a broad campaign of sanctions for more than a decade, has recently come to aid of Venezuela, which has been under concerted sanctions pressure for only a few years, suggests a remarkable degree of economic resilience. When comparing the two economies, the most salient question is not whether Iran will become like Venezuela, but rather whether Venezuela will become more like Iran.

Since the international community first levied broad economic sanctions against Iran in the mid-2000s, Iranian policymakers, particularly those with a conservative outlook, have repeatedly asserted that the country would respond by adopting a “resistance economy” which would aim to reduce dependency on imports and Western investment. These statements gave rise to the belief that Iran would embrace economic isolation as well. But as Parvin Alizadeh and Hassan Hakimian argued in 2013, characterizations of Iran’s “attitude and posture towards the global economy as wholly distrustful, apprehensive, or critical would be a simplistic stance.” While it may be anti-imperialist, it isn’t isolated.

In the year leading up to March 2020, Iran generated $41.3 billion of export revenue from nonoil goods. Around half of this total was from manufactured goods. In the same period, Iran’s oil exports totaled just $9 billion, marking a historic moment in its modern economic history where the country’s industrial sector, which employs around one-third of the labor force, earned double the export revenue generated by the country’s oil sector.

Remarkably, Iran managed to grow nonoil exports during a period in which it was subject to U.S. secondary sanctions for all but two years. One of the major consequences of sanctions pressure, the steep devaluation of the rial, actually served to make Iranian exports more competitive abroad.

The development of the Iranian private sector in the first decade of the millennium—encompassing improvements in the quality and efficiency of manufacturing as well as the capture of local market share—led to a larger number of manufacturing firms eyeing export potential. From March 2019 to March 2020, China was the top destination for nonoil exports, with Iraq, the United Arab Emirates, Turkey, and Afghanistan rounding out the top five destinations.

Iran still faces significant economic challenges because of U.S. President Donald Trump’s “maximum pressure” campaign. The knock-on effects of expensive and unreliable imports on Iran’s manufacturing sector not only short-circuit the push for nonoil exports, but also act as a driver for inflation. This vulnerability can be seen in the recent depreciation of the rial, where pandemic-related disruptions to trade pushed the rial lower.

But Iranian policymakers are already indicating that their response will be to double down on what Alizadeh and Hakimian have described as a long-standing feature of Iranian economic policy under pressure: the “search [for] beneficial opportunities for engagement with the international economy.” Iran’s recent outreach to Venezuela, with the new spectacle of Iranian exports for sale on supermarket shelves in Caracas, is the latest example of this opportunistic approach to international engagement.

Venezuela’s economy has been hit hard by U.S. financial and economic sanctions imposed over the past several years—a blow that followed the damage done by the administrations of former President Hugo Chávez and President Nicolás Maduro, which both mismanaged one of the largest resource booms experienced by any country in the region.

Yet, sanctions on Venezuela have been ineffective in generating the regime change U.S. officials want. Twenty months after the decision by the United States and a large number of European and Latin American nations to recognize Juan Guaidó as interim president of Venezuela, Maduro is, if anything, even more deeply entrenched in power.

Calling on Venezuelans to think of sanctions as the necessary pain that must be undergone to get rid of the Maduro regime is a message that plays a lot better in Florida than it does in Caracas. A recent unpublished survey by Venezuelan pollster Datanálisis found that 65.2 percent of Venezuelans are against oil sanctions. That may be one of the reasons why over the past 18 months opposition leader Guaidó’s approval rating has fallen from 61 to 28 percent, according to the same survey. Meanwhile, the dearth in foreign exchange revenue has forced the Maduro government to correct course in some areas.

For example, in September 2018, one year after the United States imposed financial sanctions and after a drop of around 800,000 barrels per day in oil production, the country overhauled its foreign exchange system, allowing the currency to become fully convertible for the first time in 15 years.

At first, these currency reforms were met with skepticism; it wasn’t the first time that Maduro had tinkered with exchange rate flexibility. Yet over time it became clear that the new system implied a stunning reversal in one of the key policy levers used by the Venezuelan regime. One of the standard measures of economic distortions in highly regulated economies is the black market premium, which is defined as the difference between the price at which dollars are sold on the black market and their legal price.

In Venezuela, this premium captures the size of the profits that would accrue to persons sufficiently well connected to gain access to scarce dollars sold by the government at the lower official exchange rate. The measure, which had reached a surreal 350,000 percent average in the 12 months before the reforms, averaged just 4 percent last month according to calculations based on foreign exchange and central bank data, and it is not unusual these days for it to be negative.

Just as with the partial liberalization in Iran, the end of the system of exchange controls in Venezuela had major macroeconomic implications. First, it implied the end of substantial rents that accrued to those who were able to gain access to preferential dollars. It also ended a huge implicit tax on foreign companies, including joint venture partners in the oil sector, who had been previously been forced to sell dollars at the overvalued official rate. Additionally, it put an end to the government’s attempts to enforce strict price controls on retailers, who previously were required to value their imported inputs at the official rate.

The rigid system of government-set prices in almost all sectors which had been in place since 2011 was replaced in 2018 by a system of “accorded prices” set in bilateral negotiations with the private sector. According to the liberal Venezuelan think tank Cedice, the government carried out only about 1,000 government audits of privately owned stores in the first seven months of 2019, in contrast to an average of 7,700 per year between 2017 and 2018. By 2020, accorded prices were denominated in foreign currency and were largely in line with private-sector requests.

The Maduro government in fact went further by not only tolerating but outright embracing the use of U.S. dollars for domestic transactions. When opposition candidate Henri Falcón promised to dollarize the Venezuelan economy if he won the May 2018 presidential election, Maduro reacted by accusing his adversary of wanting “to sell Venezuela out to imperialism.” But by November 2019, Maduro had completely changed tack, saying that he saw “nothing wrong with it.”

In an echo of Iran’s November 2019 move to reduce long-standing fuel subsidies, Maduro put an end to the decades-old practice of selling gasoline at a near-zero price. In a new scheme unveiled in May, the government will now ration access to subsidized gasoline yet allow buyers to purchase as much gasoline as they want at international prices. The retail sale of nonsubsidized gasoline will be carried out by privately owned stations. Notably, Maduro explained that the need to sell gasoline at market prices had to do with the fact that the country had to pay in cash for the gasoline it was purchasing from Iran.

It will be long before Venezuela can think of private-sector investment as leading a role in the economy’s recovery. But there is another way in which Venezuela has adjusted to the collapse of its oil industry which also makes it much more resilient. Over the past five years, more than 5 million Venezuelans—or around one-sixth of the population—are estimated to have left the country. Remittances have now become one of the main sources of foreign currency. Despite the COVID-19 pandemic, income from remittances has continued to flow into the country, allowing Venezuela to forgo further import substitution. Imports actually rose 3 percent year-on-year in the first four months of the year based on data from 31 trading partners, despite a complete collapse in oil exports.

Venezuela’s economic collapse has many causes, and it is hard to disentangle how much of it is caused by mismanagement and how much by sanctions. But what is clear is that both the government and the economy more generally have developed their own coping mechanisms to deal with a much more restrictive external environment—evidence that steps toward economic development can take place in periods of severe economic contraction. For Venezuelan policymakers, Iran’s push to grow nonoil export revenue, along with its increased reliance on the private sector, is a model to emulate.

Esfandyar Batmanghelidj is the founder of Bourse & Bazaar. 

Francisco Rodríguez is a visiting fellow at the University of Notre Dame’s Kellogg Institute for International Studies and a former head of the Venezuelan Congressional Budget Office.

Photo: IRNA

What You Should Know About Iran's Weakening Currency

The Iranian rial has hit a historic low against the dollar, adding to the perception that the country is in the throes of a deepening economic crisis. But the figures that are most concerning for Iranian economic policymakers (there are many) are rarely the most dramatic or those that make the headlines. The rollercoaster ride that has taken the rial to a historic low of IRR 215,000 to the dollar does not tell us as much about the health of the Iranian economy as is widely assumed.

Reporting on Iran’s currency focuses on the azad or free market rate, which is the price of purchasing a single, physical dollar bill at an exchange bureau in Tehran. The buying and selling of eskenas, or hard currency, represents a small proportion of the overall foreign exchange market in Iran, likely accounting for less than 20 percent of all foreign exchange transactions. 

There is also a fixed subsidized rate of IRR 42,000 for each dollar. This rate is made available to importers of critical goods such as food and pharmaceutical products, but the Iranian government has been seeking to shrink the number of goods eligible to be imported at this rate.

The most important rate, which is rarely cited in reporting on Iran’s currency woes, is the rate available in the NIMA exchange, a centralized electronic system established by the Central Bank of Iran in 2018 to streamline the purchase and sale of foreign exchange among Iranian companies. The NIMA rate has hit just over IRR 168,000 in the past week, also a historic low.

The NIMA rate has also risen in recent months, reflecting the reported shortages of foreign exchange available in the market due to trade disruptions brought-on by COVID-19 as well as the underlying difficulties facing Iranian banks, and particularly the Central Bank of Iran, in accessing foreign exchange held in accounts at foreign financial institutions.

After approaching convergence in the summer of 2019, the spread between the free market and NIMA rates has widened considerably, meaning that the devaluation of the rial in the free market is not the best indicator of the strength of the rial, nor an accurate reflection of concerns around inflation.

Since the NIMA exchange began operating in earnest in the last quarter of 2019, inflation, as measured by the consumer price index, has tracked most closely the NIMA rate and not the free market rate. This is to be expected. The NIMA rate reflects the price at which most foreign currency is bought and sold in Iran and crucially it reflects the price at which Iranian companies purchase foreign exchange in order to pay for imported goods.

On one hand, the devaluation of the rial over the last decade has benefited Iranian exporters, making their goods more attractive to foreign buyers. The more liberal approach to foreign exchange policy has helped Iran grow its non-oil exports—a lifeline for the economy as oil exports are constrained by sanctions.

But on the other hand, the more liberal approach to the exchange rate has had an impact on the price of imported goods, whether those are finished goods or raw materials and parts used in the manufacturing of finished goods in Iran. This relationship is most clear when comparing the changes in the NIMA rate with the price index for consumer durables, a category of goods more likely to have imported parts content. When the NIMA rate increases, so does the price of durable goods, contributing to the total cost of the consumer basket.

Often, reports about the plunging value of the rial suggest that the appreciation of the dollar in the free market reflects the erosion of Iranian purchasing power. But the relationship between the rial’s free market rate and inflation is limited. Unlike in other economies that have experienced currency crises, such as Lebanon, Iran’s economy is not dollarized. When ordinary Iranians exchange rials for physical dollars, they are acquiring an asset that they will most likely exchange back into rials at some future point, preserving the value of their savings in the process. Iranians purchase dollars for the same reason they purchase gold, real estate, and even used cars—they are seeking a hedge against inflation. Hard currency dollar appreciation does not depress the value of the rial as a medium of exchange.   

However, the free market rate could be a signal for price makers about expectations of future inflation, and therefore may influence producers and retailers to increase prices. Moreover, the free market rate may also have an impact on the price of real estate, which is also used as a hedge against inflation. In both instances, the devaluation of the rial in the free market could contribute to higher prices for Iranian households.

But when considering that the free market represents a small proportion of the overall foreign exchange market in Iran, fluctuations in the free market rate are perhaps best understood as a response to inflation, among other economic indicators. In fact, at a time when the central bank is pumping historic amounts of liquidity into the Iranian economy, the conversion of rials into dollars may actually serve to absorb some liquidity. 

This is perhaps the other parallel that can be drawn between the purchase of dollars and assets such as stocks and gold—the currency free market has some of the hallmarks of a bubble, particularly as the spread with the rates available on the NIMA exchange widen. The devaluation of the rial that can be observed in the NIMA exchange, which is equivalent to the rial losing about a third of its value since Iran reported its first two cases of COVID-19 in February, lags behind the devaluation in the free market exchanges, which has seen the rial lose half of its value in the same period.

Given the media attention both inside and outside of Iran to the rial’s free market fluctuations, it is perhaps no surprise that psychological factors may be responsible for the recent devaluation episode. Given that the NIMA rate is a better indicator of the vulnerability of the Iranian economy to inflation, both when considering how much foreign exchange is available in the market, but also when considering changes in the money supply in Iran, it is notable that the free market rate has deteriorated more sharply.

This divergence, which the central bank had worked hard to limit, is beneficial to a wide range of actors within Iran’s financial system, including those engaged in corruption. The arbitrage between the two rates incentivizes commercial enterprises that earn foreign exchange revenue to circumvent the NIMA system. The panic buying of dollars by working class Iranians benefits wealthy Iranians who are more likely to maintain a large portion of their savings in hard currency, or who can bring hard currency back to the country from abroad. Ironically, in the short term, the devaluation of the rial has probably created more wealth than it has destroyed 

Nonetheless, Iranians should be worried about inflation. The COVID-19 crisis has widened Iran’s fiscal deficit and also given rise to balance of payments challenges. There is growing concern that inflation will rise in the coming months as the central bank prints money.

Iran’s central bank governor, Abdolnasser Hemmati, has sought to calm nerves by arguing that increased liquidity is a “structural phenomenon” in the Iranian economy. His statements have yet to reduce demand for dollars, which has risen in anticipation of increased inflation. Nonetheless, the increased demand does not itself mean that Iran is presently experiencing or is set to experience the scenarios of “hyperinflation” that have been long predicted. Rather, those purchasing dollars in the free market are betting that the policymakers will fail to keep inflation under control as it edges towards 30 percent.

Photo: IRNA

Iran Delays Currency Reform Demanded by Private Sector

Despite sharp criticism from the private sector, the Rouhani administration has delayed a key reform to Iran’s currency policy, frustrating the country’s beleaguered business leaders.

In late June, government spokesman Ali Rabiei stated definitively that the administration has no plans to eliminate the subsidized foreign exchange rate made available to importers of essential goods. 

Iran’s current currency policy was April 2018 in the aftermath of a devaluation crisis that had formed in anticipation of the re-imposition of U.S. secondary sanctions as Donald Trump moved closer to his decision to withdraw from the JCPOA nuclear deal in May 2018. Subsequent rounds of sanctions and particularly restrictons on Iran’s oil exports have added further pressure to Iran’s currency markets.

Iranian policymakers responded to these pressures and the fast-rising cost of imported goods with a policy that plays into Iran’s multiple exchange rates and entails allocating foreign currencies to importers of essential goods at the “official” rate of 42,000 IRR/USD—a far lower rate than the current “open market” rate of around 120,000 IRR/USD.

The government operates a third rate, the NIMA rate, which is named for the online currency system that was established by the Central Bank of Iran (CBI) also in April 2018. The system is made available to exchange houses and banks that buy foreign currency and is where exporters are obligated to repatriate their export yields. In recent months, the NIMA rate has inched closer to the open market rate and now stands at around 110,000 IRR/USD.

For the private sector, the convergence of the NIMA and open market suggests the time is right to simplify the currency market. In late July, the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), the main representative body of the private sector, released a statement calling for the elimination of the subsidized rate and a long-term move toward rate unification.

The subsidized rate, the ICCIMA argues, contributes to already rampant inflation, enables rent-seeking activities and corruption, reduces general trust in government economic policy, and makes it harder for local manufacturers to compete with imports. Moreover, in the assessment of chamber members, the current policy of subsidization failed to prevent price increases for imported essential goods, which have outpaced inflation.

The ICCIMA has called on the Rouhani administration to eliminate the subsidized rate and move toward rate unification in the long-term by decreasing the gap between NIMA and open market rates in addition to levying capital gains tax on foreign currency trades. It has also said the government should redirect resources away from importers and instead subsidize the consumption of low-income households through cash subsidies, while also providing financing to local manufacturers to help reduce reliance on imports. Finally, the ICCIMA statement calls for the government to ease economic pressure on the private sector by repaying its outstanding liabilities to suppliers and contractors.

“Since the open market and NIMA rates have gotten so much closer, this is absolutely the right time to eliminate the subsidized rate,” ICCIMA board member Ferial Mostofi told Bourse & Bazaar.

“Let us accept that the official rate does not reflect the true value of our currency and try to focus on repatriating non-oil exports using the real rates so that we can have a chance at competing in international markets,” the prominent woman business leader added.

In early March, just before the start of the current Iranian year, the administration showed signs that it mulling whether to end the subsidization policy. CBI Governor Abdolnasser Hemmati admitted in a frank statement that subsidization had failed. “In effect, allocating subsidized currency to essential goods has failed to prevent their price hikes in the medium term due to the nature of market in the economy and the weakness of the distribution and supervision systems,” he said.

But in a June 23 televised interview, Hemmati did claim some success for the policy, noting that the price of essential goods rose by 40% on average during the previous Iranian year, whereas imported goods that did not receive the subsidized rate surged by 98%.

Furthermore, he argued that scraping the current three-tier currency policy during the current Iranian year was simply not worth the hassle. However, he did suggest that the government was trying to reduce the burden of the subsidized rate.

According to Hemmati, from the $14 billion that was approved by the parliament to be allocated to subsidize foreign exchange used to import essential goods in the current Iranian year, more than $3 billion was effectively eliminated when the government decided on April 28 to reassign four items previously listed as essential goods. Those items included meat products—which had experienced extreme price increase despite qualifying for subsidized foreign exchange– tea, butter, and beans.

From the remaining figure of less than $11 billion, Hemmati said, $5 billion was allocated by the time of his interview. Subtract an additional $3 billion that the central bank has said is required to ease imports of medicine and eliminating the remaining subsidy of less than $3 billion is deemed by Hemmati to be “not worth a new country-wide inflationary shock.”

Many private sector business leaders disagree. “There is no doubt that eliminating the subsidized currency policy will entail a price shock, but that shock will be short-term and very much worth it when compared to the long-term detrimental effects of the current policy,” ICCIMA’s Mostofi said.

In her view, if the main goal of the policy is to help middle to low-income families, policies should be adopted that do not spur corruption and waste away the country’s precious foreign currency reserves while the country is contending with a “maximum pressure” sanctions campaign.

Photo: IRNA

Iran’s Currency Begins to Shrug Off Trump’s ‘Battle Rial’

Over the last 18 months, the Iranian rial has lost nearly 70 percent of its value, hammered by the Trump administration’s decision to reimpose secondary sanctions on Iran in violation of the  Joint Comprehensive Plan of Action (JCPOA).

A darkening economic outlook and rising inflation led Iranians to rush to exchange bureaus in order to purchase dollars, considered a safe-haven asset. Iranian companies struggled, or in some cases refused, to repatriate their foreign currency earnings, constraining supply in the foreign exchange market and leaving the market vulnerable to shocks.

Each time the Trump administration announced a new aspect of its maximum pressure campaign; the value of the rial would fluctuate. When the Trump administration took the dramatic step of targeting the IRGC under a new terrorist designation, the rial lost 4 percent of its value in just a few hours.

But there is a growing sense in Tehran that the currency market may have stabilized. When two oil tankers were attacked in the Sea of Oman on June 13—attacks widely attributed to Iran—the United States vowed a forceful response. But there was surprisingly little movement in the value of the rial.

Two weeks later, when the Islamic Revolutionary Guard Corps (IRGC) shot down a US spy drone near the strategic Strait of Hormuz, ordinary Iranians and currency speculators again braced themselves for a free-fall in the rial’s value. But the foreign exchange market barely moved—even after news broke that the US had been minutes from executing a retaliatory strike. 

That the rial has strengthened about 13 percent since the first week of May, corresponding to a period in which the United States revoked waivers permitting purchases of Iranian oil and in which Iran announced it would begin loosening its compliance with the JCPOA, has led some economic commentators in Iran to conjecture that the Iran’s foreign exchange market has developed an immunity to the escalating political tensions. The rial may be shrugging off the Trump administration’s “maximum pressure” campaign.

One possible explanation for the newfound stability in Iran’s currency markets is that while the Trump administration has nearly maxed-out its own maximum pressure sanctions campaign, the Central Bank of Iran has only recently begun to assert its control over the foreign exchange market. Late last month, Abdolnasser Hemmati, the governor of Iran’s central bank, struck a confident tone in an interview with state broadcaster IRIB, stating, “I promise to strengthen the value of the national currency—the situation is improving, the recovery can be felt.”

To defend the rial, the Central Bank has made several interventions. It has implemented a central marketplace to increase transparency and reduce arbitrage in Iran’s foreign exchange market. The Integrated Foreign Exchange Deals System, known by its Persian acronym, NIMA, has improved the reliability with which Iranian importers in need of foreign exchange can purchase currency, taking advantage of a rate slightly lower than the free market rate. Iranian exporters are required to sell their foreign exchange earnings through the NIMA system, ensuring that vital foreign exchange is not sold to currency speculators on the free market. Additionally, the central bank has for the first time engaged in open market operations, in an attempt to try and slow the inflation that has fed demand for foreign exchange.

While some of the stabilization is likely attributable to these interventions, it is also possible that the rial has stabilized due to the fact that the current exchange rate better reflects the relative purchasing power of the rial and the dollar. The rial had long been kept artificially strong by the Iranian government.

Looking at the demand side, it may be the case that the Iranian public has been inured to the economic uncertainty brought about by the reimposed US sanctions or that there is greater confidence in the management of the foreign exchange market by authorities. In both cases, individuals and companies are less inclined to flock to the dollar as a safe-haven asset, even if Iran’s general economic malaise—marked by high unemployment—persists.

The stability of the currency is all the more remarkable as the Trump administration drives down Iran’s oil exports. The revocation of waivers covering imports of Iranian crude has left China and Syria as Iran’s sole customers. Iran’s oil minister, Bijan Zanganeh, has insisted that Iran has the means to get its oil to global markets, though it is clear that exports have fallen sharply. While the Trump administration has crowed that reduced oil sales deprive Iran of vital foreign currency, it is worth considering that under the waiver system that governed Iran’s oil exports for much of the last decade, Iran had a limited ability to repatriate its foreign currency earnings. In that sense the current circumstances are not new.

There remain measures that the Trump administration can pursue to try and spur a new devaluation episode in Iran. Reports that the White House may finalize the designation of Iran as a “primary money laundering concern,” a move that could cut the country’s few remaining correspondent banking links, reflect one such measure. But for now, as economist Djavad Salehi-Esfahani has recently written, “Fears of ‘Venezuelaization’ of the Iranian economy (collapse) have subsided, allowing the government to revive its long neglected public investment program, which could boost employment and production.” The Iranian public, made weary by a year of economic hardship, will certainly hope that the stabilization of the currency is the first step to a broader recovery.

Photo: IRNA

Confronting Failure, Iran Government Mulls New Currency Policy

Despite mounting evidence that the Iranian government’s policy of allocating subsidized foreign currency for the importation of essential goods has failed, the Rouhani administration has signaled that it plans to maintain the policy for at least another year. But lawmakers and Rouhani’s own cabinet ministers may force the administration to change course.

On March 2, Iran’s parliament approved the allocation of USD 14 billion in oil export revenues for the import of essential goods, including food and medicine, during the upcoming Iranian year (beginning March 20). In doing so, MPs gave the green light for the Rouhani administration to continue to make foreign exchange available to importers of essential goods at the subsidized rate of IRR 42,000 to the dollar.

However, lawmakers also encouraged the government to consider an alternative approach that would require essential goods importers to purchase foreign exchange at the IRR 90,000 rate available on the centralized NIMA marketplace. The government would then redirect the savings from the elimination of the currency subsidy towards programs that directly assist Iranian consumers and manufacturers.

Despite the nudge from parliament to consider a new approach, it appears that the administration is intent on maintaining the subsidy for at least another year. The head of the Management and Planning Organization, Mohammad Baqer Nobakht, confirmed this to be the administration’s position in an interview just prior to the parliamentary vote.

The Rouhani government “unified” the country’s dual foreign exchange rates at IRR 42,000 to the dollar in early April as the rial hit new lows due to political uncertainty surrounding Iran’s nuclear deal and the possible reimposition of sanctions by the United States. The foreign exchange rates diverged again shortly thereafter, but the Rouhani administration has persisted in using the “unified” fixed rate for the importation of essential goods.

Rouhani recently claimed that he personally disagreed with the fixed rate when it was first proposed and only consented to rate unification after dozens of top economists backed the move. His administration has since maintained that the allocation of subsidized foreign exchange continues to be the best policy to stabilize prices of essential goods.

Meanwhile, high levels of inflation have dimmed prospects for Iran’s middle and lower classes. The Iranian public has felt the pressure of price hikes, and essential goods have not been spared, despite Rouhani promising otherwise on national television.

Beyond the lived experience of Iranians, new research has also cast doubt on the effectiveness of subsidization. On February 22, the Parliament Research Center published its findings of the government subsidized currency allocation policy. According to the PRC, the price of essential goods as a category increased by 42 percent during the first three quarters of the current Iranian year that ended on December 21.

By comparison, the price of imported goods not eligible for the subsidized rate increased 73 percent in the same period. However, the consumer price index increased by nearly 40 percent, meaning that the increase in the price of essential goods still outpaced general inflation by a significant margin. The question for policymakers is whether this minimal impact on the price of essential imports is worth the many adverse side effects for the wider economy.

At time when Iran’s foreign exchange revenues are being squeezed by  the Trump administration’s “maximum pressure” policy, the Iranian government cannot afford to misallocate USD 14 billion in oil revenue to a subsidization program that may serve to increase corruption and rent-seeking.

Iran’s central bank governor Abdolnasser Hemmati also admitted as much in a frank statement. “In effect, allocating subsidized currency to essential goods has failed to prevent their price hikes in the medium term due to the nature of market in the economy and the weakness of the distribution and supervision systems,” he wrote in a March 9 Instagram post. “Therefore, in most cases the subsidies have gradually moved away from consumers and benefited importers.” Hemmati signaled that a change in the policy may be in order by stating the government will “make the best decision.”

Economy minister Farhad Dejpasand later echoed Hemmati’s view, stating that “The government is currently studying several policies, and we definitely will adopt an approach to minimize the pressure on the poorest sections of society.

“Based on competitive open market principles, any fixed rates that diverge from the open market rate, such as the subsidized IRR 42,000 dollar exchange rate, are a mistake,” Mohammad Mahidashti, a macroeconomic analyst currently serving as an advisor at Iran’s Ministry of Economic Affairs and Finance told Bourse & Bazaar.

“There is simply no positive aspect in this subsidized currency allocation by the government, perhaps save for giving it a justification and a populist slogan to show that the administration is trying to decrease prices of essential goods,” he said.

Mahidashti believes the way forward is for the government to cut its losses as soon as possible by eliminating the subsidized rate and moving toward true rate unification, which he considers both doable and absolutely necessary.

Indeed, the PRC report also called on the Rouhani administration to either fully eliminate subsidized currency allocation or significantly trim the list of essential goods eligible to receive cheap currency. Even in the event of choosing the second route, the parliamentary think-tank said the subsidized rate must be higher and the IRR 42,000 rate is no longer justifiable.

Iran’s private sector, which has for years called for true rate unification would surely embrace such a move. Shortly after Hemmati’s admission of the failure of the subsidized foreign exchange policy, deputy president of the Iran Chamber of Commerce Pedram Soltani welcomed the announcement as a sign that things may be changing. He tweeted, “Subsidized currency is the source of rent and misuse. Let’s stop the flow!”

Photo Credit: IRNA

Iran's Currency Crisis Is Decades in the Making

The deliberate devaluation of the national currency is a staple of modern monetary policy. Its thoughtful application has led to decades of economic growth for export-oriented countries such as China. The Iranian government has allowed the rial to grow consistently weaker for decades. Why hasn’t the country seen the same economic windfall?

Economists answer this question with caution. The consensus view is that the most important factor in the success of the policy of devaluation is a country’s foreign trade balance. The policy works if a country is export-oriented, manufacturing globally competitive tradable goods. But being an oil-oriented economy and suffering from negative trade balance, as in the case of Iran, hinders the economy.

Emboldened by oil revenues paid in foreign exchange, subsequent administrations have sought to preserve the purchasing power of rial for the consumption of imported goods and not for domestically made products. In fact, the dominant policy in the last 40 years subsidized foreign commodity consumers, favoring importers, affluent Iranians enjoying dual citizenship, and even smugglers—groups whose spending depends on foreign exchange. These policies have letdown domestic manufacturers and ordinary Iranians, now victimized by a monetary policy that has created havoc across the economy, in a repeat of the currency crises of 1990s the 2010s

Experts have continued to recommend that the government allow market forces to determine equilibrium forex rates. If the monetary regulator does decide to intervene in supply and demand of hard currency, the real forex rate should be specified at a higher level with the constant adjustment of the nominal rate as per domestic and foreign inflation differentials. This approach is thought to incentivize exports and enhance import substitution , which is believed to ultimately contribute to economic development in Iran.

Exchange rates are likely to spike if government or domestic economic players bear large foreign exchange liabilities on their books at a time when the value of the rial drops or access to credit is limited. In such a scenario, the enhancement of exports and reduction of imports can balance trade payments. But once higher forex rate adjustment is not capable of exerting an acceptable amount of impact on export growth and import cuts, the current account balance may not remain sufficiently positive to help government or manufacturers meet their foreign currency debts and obligations.

This vicious cycle is made worse by groups with vested interests, which exert their pressure against the government reforms. Both quantitative and qualitative evidence suggest that the commercial and political interest groups play a major role in shaping the regime of exchange rates in Iran. Actors involved in international trade and business are more inclined to advocate a fixed exchange rate policy. These economic agents, regardless of domestic macroeconomic climate, seek predictability in currency prices in order to protect their own interests. On the other hand, there are importers and non-tradable commodity manufacturers prefer a floating exchange rate system, which allows them to benefit tremendously from rial devaluations.

Generally speaking, there are two mechanisms available to regulators to manage currency market volatility—endogenous management and exogenous management. The latter approach has seen the management of currency crises with the use of central bank forex reserves. But this mechanism, which is reactive and open to manipulation by interest groups, has never been able to bring lasting results.

Iranian officials must recognize endogenous management as the only tool at hand to minimize the incentives of the currency speculators, and push excess liquidity to other asset classes like the housing market or capital market. The Tehran Stock Exchange is already benefiting hugely from the capital exodus from the banking system due to rising inflation rate. Additionally, the housing market can absorb the liquidity if the proper measures are undertaken to encourage investment in the sector. Such an intervention could calm the currency crisis in the short-term and help protect job growth now that unemployment is set to rise.

As is evident today, failure to regulate foreign exchange markets can bring the whole economy to a standstill and raise real and expected inflation. When the exchange rate rises hand-in-hand with inflation, Iran’s economy sees stagflation, resulting in a severe loss of total national income. These were the dynamics when Iran experienced its first currency crisis in 1994-95.

Furthermore, the depreciation of the rial negatively impacts the economy given that foreign exchange revenues are considered to be essential resource for the importation of intermediate and capital goods. Under such circumstances, if exchange rates rise, the cost of manufacturing and, in turn, inflation stands to rise as well. Consequently, investment levels are decreasing. This will depress total demand leading to reduced business activities and a jump in consumer prices. This more dramatic scenario, which is taking root now, is similar to that faced by Iranians at the end of Ahmadinejad presidency in 2012-2013. The outcome this time round is hard to predict. 

Photo Credit: Depositphoto

Iran's Currency Crisis is a Supply-Side Story

On Monday, the Iranian rial sank to a historic low. But those Iranians who scrambled to convert their rials into dollars found it difficult to do so—as they have for months. Since April, reports on the accelerating crisis have consistently noted a lack of hard currency available at Iran’s exchange bureaus.

This important detail of the current crisis has gone largely unexamined in foreign reportage. While the determinants for demand for foreign exchange—widespread anxiety about the state of the economy and the return of sanctions—are well understood, the second determinant of market prices—foreign exchange supply—remains subject to mere passing mention. This is a mistake. Iran’s currency crisis is a supply-side story.

In the absence of data, it is hard to show quantitatively that the currency crisis is primarily a supply-side phenomenon, but there are numerous factors that make this likely. Iran has been prevented from repatriating its foreign exchange reserves held in Europe. Its regional neighbors have vowed to cease using the US dollar to conduct bilateral trade. Illicit networks that have long funneled US currency to the black market have been interrupted. Most tellingly, the Trump administration is being urged by its close advisors to “quickly exacerbate the regime’s currency crisis” by interfering with Iran’s foreign exchange supply.

While the government has no doubt failed to inspire confidence in its economic leadership, contributing to the ouster of both the central bank governor and economy minister, it is unlikely that expectations of rising inflation and economic recession alone would create so dramatic a rush to the safe-haven of the dollar.

In an interview with Euronews, economist Saeed Laylaz, offers more detail on how the historic exchange rate principally reflects a shortage phenomenon. “You might imagine that the dollar price of 12,000 or 13,000 toman accounts for 100 percent of the currency market, when in actuality we have various companies completing imports with a dollar at a price less than 8,000 toman in the secondary market,” Laylaz explains. In his assessment, while the 8,000 toman rate accounts for 80 percent of transactions on the secondary market, “the dollar bill is 12,000 toman.” Greenbacks are physically scarce and this accounts for the historic prices making headlines worldwide. 

For companies with access to dollars at 8,000 toman and especially for those enterprises with access to dollars at the government rate of 4,200 toman, the price of the physical dollar bill offers an immense opportunity for arbitrage. The temptation for companies to divert a portion of their foreign exchange into the most lucrative and speculative parts of the free market has proven hard to ignore. One example can be seen in the petrochemical sector, where major companies, including state-owned enterprises, have been slow to make their foreign exchange available for sale on the secondary market through NIMA, the country’s centralized marketplace, despite instructions from the central bank and oil ministry.

Economist Hossein Raghfar described these companies as “accountable to no one” when it became apparent that they may have sought to sell their currency at the free market rate, rather than at the lower official exchange rate, despite the government instruction. Nonetheless, in the assessment of Masoud Nili, the government's chief economic advisor, this kind of arbitrage activity is a symptom of the rising premium and not its root cause. Nili comes close to acknowledging that the government's focus on profiteering in the early months of the crisis was an attempt to deflect from more consequential interruptions in foreign exchange supply. 

It is likely that the primary cause of the currency crisis is a severe shortage in foreign exchange. This places the Rouhani administration in an especially difficult bind. It might seem straightforward that increasing the foreign exchange supply would help stabilize the rial and prevent the speculation enabled by the extreme scarcity of the dollar and euro. Mohammad Reza Farzanegan looks at some of these issues in his study of illegal trade in Iran from 1970 to 2002. He confirms that easing the ability of actors to “acquire more subsidized exchange” will lead to some part of the currency to be “sold in the black market of foreign exchange.” The actions of the petrochemical companies offer a perfect case study. 

This is especially important at a time when the incentives for illegal import activity are increasing. Farzanegan writes that “whenever state intervention drives a wedge between international and domestic prices… there is an incentive for underground activities.” In subsequent research he has shown convincingly that the “wedge between international and domestic prices” can be applied externally—sanctions spur “underground activities.” In this way, making foreign exchange more readily available may stabilize the exchange rate, but it can serve to accelerate rent-seeking and smuggling, the agents of which have historically used their trading networks to take their profits offshore.

The specter of capital flight looms large over the administration. In a recent address, newly appointed central bank governor Ehsan Hemmati announced that the country would not use oil revenues in order to prop-up the currency. In a likely related move, Iran has decided not to seek to transfer EUR 300 million in cash from its funds in Germany to Iran to increase foreign exchange supply. A report in Shargh, a leading newspaper, suggests that the government had decided not to intervene to support the rial in order to prevent capital flight by allowing the dollar to become a scarce and expensive "luxury item." 

A recent report by Iran’s Parliamentary Research Center estimated that capital flight in the year leading up to March 20 amounted to USD 13 billion dollars. By comparison, during the Ahmadinejad administration, that figure was possibly ten times higher, with reports suggesting that between USD 100-200 billion was taken out of the economy as sanctions tightened. Between 2005-2012 Iran generated USD 639 billion in oil revenues, with falling exports offset to a degree by historic oil prices. Yet Ahmadinejad left office with Iran’s foreign exchange reserves at only around USD 50 billion higher than when he entered.

To prevent capital flight on that order, the Rouhani administration can prioritize rate convergence and stabilization over interventions that would significantly lower the price of the dollar. The Central Bank of Iran has sought to "bridge" the two sides of the market that Laylaz describes, announcing that "authorized exchanges can sell foreign currency bought from exporters and other sources registered through the SANA system, in the form of banknotes in the open market." The banknotes would be purchasable upon request from the central bank. In this way, any increase in the supply of banknotes at the upper end of the market will be associated with reduced supply at the lower end, helping push the rate to convergence, even if the rate remains historically high. A high exchange rate may be a necessary evil in order to protect fragile economic growth.

In a study of the Iran’s economy from 1981-2012, Hoda Zobeiri, Narges Roshan and Milad Shahrazi of the University of Mazandaran identify a strong negative relationship between capital flight and economic growth in Iran. By trapping capital at home, even devaluing rials, the Rouhani administration might hope that wealth is committed domestically towards investments and capital formation that can sustain growth. Some evidence that this may be taking place can be seen in the fact that the Tehran Stock Exchange is on a historic bull run.

Laylaz and others have criticized the administration for “adding fuel to the fire of the market” by failing to curb the demand for foreign currency. But by focusing on demand, critics will miss important supply-side phenomena, such as how the currency shortage may slow the capital flight that has historically preceded the reimposition of sanctions. Whether or not this is an intentional outcome of the Rouhani administration’s policy, that the inability or unwillingness to increase foreign exchange supply may be consistent with attempts to limit illicit trade and capital flight is a surprising outcome and one that deserves to be formalized as part of wider efforts to manage and minimize rent-seeking in Iran.

Photo Credit: Depositphotos

Iran's Government Steps in to Address Paper Crisis, But Papers Over the Cracks

Among currency fluctuations and returning sanctions, Iran is now battling a paper crisis. Gradual price hikes have been increasing pressure on book and newspaper publishers over the last year, but the scale of the crisis became clear when Culture Minister Abbas Salehi announced on August 4 that the country has just enough newsprint paper in storage to meet two months worth of demand. In response to the shortage, some newspapers have been forced to cease publishing, while others, including the popular reformist newspaper Shargh, have put up a pay wall.  

The government has rolled out a support package that includes importing paper as an essential good. This will most likely calm agitated publishers in the short-term, but will prolong a vicious cycle and defer the real reform needed to address a decades-long problem of corruption and inefficiency. The paper crisis represents something bigger.

Mahmoud Sadri, a veteran journalist who currently heads the publishing department of Donya-e-Eqtesad, Iran's foremost business daily, sees the paper crisis as just the latest manifestation of “Iran's economic inefficiency.” Speaking to Bourse & Bazaar, Sadri explained, "We have no phenomenon called a paper crisis as a separate and standalone phenomenon. It's not accurate to just say paper is in crisis since many goods are in crisis.”

In Sadri’s view, the paper crisis has its roots in the time of the 1979 Islamic Revolution, during which the government took on the mission to foster cultural production and provided for all the paper and raw material needs of the publishing industry. In order to do that, the Iranian government has typically opted for one of two options: they have either purchased the paper and offered it at cheap subsidized rates or offered handouts directly to private importers.

This misguided approach created conditions ripe for rent-seeking and corruption. Importers sought to abuse the cheap money they were being provided instead of creating actual in-demand value.

Such rent seeking accelerated in recent months, as the Iranian rial came under increased pressure due to returning US sanctions. "A group of profiteers and rent-seekers have entered the market and are making things much harder for paper consumers," Abolfazl Roghani Golpaygani, president of the Iran Paper and Paperboard Syndicate said in a recent interview.

But the government seems intent to maintain the longstanding subsidies. On August 6, the Ministry of Industry announced that paper used for publishing had been added to the limited list of essential commodities that will be imported using the preferential government exchange rate of IRR 42,000 to the dollar. That rate is to remain unchanged until at least March 2019 as President Hassan Rouhani promised recently. Furthermore, the ministry agreed to immediately import 20,000 tons of paper to address the shortage.

Many journalists and publishers, like Sadri, are critical of this arrangement. They believe that the government should not use taxpayer money for handouts to publishers who often publish content simply to maintain their license, or who wish to publish content in accordance with their own political and economic leanings. There are growing calls for for a free market approach to publishing  in order to encourage competition that will boost newspaper quality and balance prices.

"How and based on what logic has paper been considered an essential good under the current circumstances?" asked Saeed Laylaz, a prominent journalist and pundit in a recent interview. He also referred to the decision as "explicit theft.”

However, cutting the flow of government support will mean that hundreds of book, newspaper, and magazine publishers will fold, with the potential for thousands of job losses at a time when high unemployment is a major challenge for the Rouhani administration. It should come as no surprise that the administration is unwilling to take a leap and reform the paper subsidies, despite Rouhani’s longstanding intention to reduce subsidies across the economy.

"The other issue is that the majority don't accept that government paper subsidies are wrong in essence," Sadri adds. In this way, Iran's government is failing to address the long-term problem by dealing with the current paper crisis as a short-term phenomenon.

But while change to the government policy may not be imminent, Sadri does believe it is inevitable. "Even if no prospects of change are foreseeable at the moment, it will happen either way," he said, pointing out that many countries have undergone similar processes of reform that on many occasions took decades to realize. In publishing, as with other parts of Iran’s economy, reform remains a waiting game.

Photo Credit: Deposit Photo

Rising Prices Push Homebuyers Out of Iran's Capital

A 41 percent rise in Tehran City’s average home prices has left some residents, especially renters, with no option but to leave the capital for more affordable housing units in suburban areas close to Tehran.

Figures released by the Ministry of Roads and Urban Development show that 37,700 housing units were sold in Tehran city during the first quarter of the current Iranian fiscal year (March 21-June 21, 2018) at an average price of IRR 70 million per square meter. A year-on-year comparison indicates 6 percent and 41 percent increases in total number of home deals and the average prices, respectively.

The rental market has also experienced a surge in recent months. No public statistics are yet available about current year rentals in Tehran. However, Hessam Oqbaei, the deputy director of the Iranian Realtors Association, reported in a recent interview a 51 percent increase in Tehran’s rental price index in the past few months. This is while the Central Bank of Iran reported 12.5 percent growth in rental index of urban areas across the country during the third month of Iranian year.

Oqbaei believes that home prices are the key factor impacting rentals in Tehran, explaining “the surge in rents cannot be lower than the growth in home prices.” “Rentals are expected to increase rapidly in coming months,” he said, adding “This is beyond what citizens can afford.”

Monthly data released by Tehran Realtors’ Association also indicates a sharp 22 percent drop in number of rental contracts in the city during the month to June 21—the number is down from 22,143 last year to 17,200 this year. 

Price Shocks

As per the latest national census conducted by Statistical Center of Iran in 2016-17, Karaj was the top destination for residents moving out of Tehran during the five years to December 2017.

In just the last three months, more than 53,000 individuals have moved from Tehran to Karaj City. In the first quarter of the Iranian fiscal year, the Karaj housing market recorded 65 percent growth in home sales and an 18 percent increase in the average price of residential units.

New housing developments and easier transport links, including expanded highways and suburban rail connected to Tehran’s subway network, have attracted homebuyers to the city. 

Following Karaj, several less expensive areas also saw increased market activity. Pakdasht in the south-east of Tehran Province and Andisheh, located south of Tehran City, recorded significant growth in home deals in the first quarter—75 percent and 56 percent, respectively.

Homebuyers paid an average of IRR 900 million in Pakdasht and IRR 1.73 billion in Andisheh City, which is closer to the capital. By comparison, the average price of sold residential units in Tehran stood at IRR 6.5 billion in the same period.

The same trend can be observed in Kamal Shahr and Mohammad Shahr, which saw the highest number of home deals in Alborz Province after Karaj. More than 1,178 deals were recorded by realtors in Kamalshahr at an average price of IRR 650 million.

The Role of Speculation

Homebuyers are not the only players in Iran’s real estate market. Choas in parallel markets such as the currency market, rising inflation, and low returns on bank deposits, have spurred speculative activities in the housing market.

Speculation in smaller towns remains risky, as sudden increases in home prices could reduce the attractiveness of the suburban markets.

The government is also taking various measures to help real homebuyers in the face of speculation—this has been on top of the Ministry for Roads and Urban Development’s agenda since President Hassan Rouhani took office.

In a recent interview, the deputy minister of roads and urban development, Hamed Mazaherian, cautioned speculators over their presence in the housing market and recommended they exit the market before they bear losses.

“The ministry will soon start addressing speculation in the market by levying taxes on vacant housing units and lands…Lawmakers are also studying a bill to levy tax on revenues earned from home sales,” he declared.

The bill proposes levying taxes equal to 80 percent of the difference between the value of residential units at the time of purchase or sale. However, an exemption is considered for deals in which the owner sells the residential unit at a lower price than the money they paid at the time of purchasing it.

More than 490,000 residential units are left vacant in Tehran City, according to roads minister Abbas Akhoundi. The Ministry of Economic Affairs and Finance has also said it strongly supports the measure, for it helps balance the housing market.

In a futher move, the ministry is also considering a series of measures to support renters. According to Mazaherian, a bill has been proposed in parliament, which suggests increasing the minimum period of rent contracts from one year to two years or more.The proposed measure also includes setting a 10 percent cap for rent increases.

Photo Credit: IRNA

Closure of Tehran Bazaar Reflects Fierce Elite Competition, Not Popular Politics

The closure of Tehran’s Grand Bazaar yesterday, and the closure of the consumer electronics bazaar the day before, seemed to be part of the regular and widespread protests that have roiled Iran over the last few months, spurred by economic volatility. Many saw the bazaar’s closure and subsequent protests as a meaningful escalation, a sign that perhaps popular discontent was spreading to key institutions and that coalitions were forming that could challenge the government more directly. After all, the bazaar has historically been seen as the heart of Iranian civil society, an institution where people of all walks of life could cross paths. As a physical institution, it was long a rare incubator for solidarity: “the rooted nature of the market… establish[es] the necessary foundation for communal allegiance, with its confined nature fostering long-term and face-to-face interactions among bazaaris.”

But this conception of the bazaar is an artifact of an earlier time. The bazaar in Iran today can no longer claim to be what historian Roy Mottahedeh eloquently described as “the assessor that sets the valuations politicians must use when they trade.” Over the last few decades, the bazaar has been cleaved from Iran’s civil society, no longer standing at its heart, but rather in isolation, losing its former role as a cite for broad civil society politics, and acting instead in its economic self-interest as the recent protests so transparently expose. Understanding this transformation is fundamental to an assessment of the recent protests. 

The networks of the bazaar that linked the merchants to civil society were deliberately disrupted and broken following the 1979 Islamic revolution. As detailed by Arang Keshavarzian in his seminal Bazaar and State in Iran, the new revolutionary government, concerned about the continued role of the bazaar as a site of contentious politics, sought to constrain the role of the bazaar in civil society via two processes.

First, those bazaar merchants loyal to the revolution and the new Islamic Republic were co-opted into the state, offered positions as the heads of ministries and bonyads. The regime rewarded namely the members of the group of the Islamic Coalition Association (ICA), a small segment of bazaar merchants, who had “financed and organized many political rallies and events… became part of the new ruling elite.” Incorporating these bazaaris into the regime gave them new incentives and power, changing their relations with the bazaar—indeed, they are no longer referred to as bazaaris by other merchants but instead called dawlati, meaning “of the government.” Personal gain motivated the separation from the bazaar. With the economy under state control, officials were in the position to take advantage of power for personal gain, with, “direct access to rents via exclusive importing licenses, tax exemptions, subsidized hard currency, and control over procurement boards and industrial establishments. The bazaaris who have established patronage channels have used them for personal and exclusive ends, and not as a tool for the benefit of the entire bazaar.”

Second, a new kind of profiteering was introduced to the bazaar. During the Iran-Iraq war, the government of the Islamic Republic saw its coffers emptying rapidly. Iran’s economy was increasingly cut-off from global markets for goods and services as a result of economic sanctions.  Some goods were unavailable, others became more expensive. Turning a crisis into an opportunity, elements in the bazaar began to engage in smuggling both in order to gain access to goods that would be sold for high prices in the market, but also to engage in profiteering and to secure rents that could be funneled to quasi-state institutions. Dawlatis in the bazaar enjoyed state-sanctioned access to black market goods that they could sell at market for large profits. They could also benefit from preferential access to foreign currency.

To be clear, these changes did not make the bazaar apolitical. On the contrary, the merchants continued to mobilize in a coordinated fashion, but with a new and more self-serving outlook. Bazaar closures like those seen this week are relatively rare, but did occur numerous times during the the Ahmadinejad years, with notable closures in 2008, 2010, and 2012. It would be easy to assume that these closures were due to the general economic malaise and popular dissatisfaction that marked Ahmadinejad’s tenure, but the fact that the bazaar did not engage in any significant mobilization in 2009, when sustained mass-protests emerged in response to Ahmadinejad's disputed reelection, demonstrates that civil society solidarity was not the motivating factor. The merchants of the contemporary bazaar do not mobilize for the people. They only mobilize for their own interests.

These is a clear line that can be drawn from the bazaar mobilizations of a decade ago to those of today. The Ahmadinejad years saw the rise of a new kind of rentierism in the Iranian economy, where quasi-state entities extended their role in Iranian enterprise. Iran’s Islamic Revolutionary Guard Corps (IRGC) ambitiously expanded their industrial operations, taking advantage of free-flowing contracts and financing made available by the Ahmadinejad government. A new kind of corporatist rentierism was emerging. Rather than rely on smuggling and arbitrage, quasi-state groups leveraged political connections to provide more valuable products and services to the economy than mere market commerce, sensing an opportunity as the Iranian private sector was squeezed by international sanctions and international companies reduced their presence in the market.

The nascent rivalry between the bazaari class and the IRGC would have been unthinkable in at the outset of the bazaar’s post-revolution transformation, but as IRGC generals saw opportunities develop in the boardroom, new fault lines have emerged, particularly in light of Rouhani’s pursuit of economic reform.

President Rouhani was elected in 2013 on a mandate to liberalize the economy through two interrelated processes: improve monetary policy and overall transparency in the economy and boost foreign trade and investment. He has been a vocal critic of the IRGC and its role in the economy. But it should be noted that corporatist rentierism is not entirely incompatible with liberalization. Rouhani has always positioned himself as giving the IRGC leaders a choice—they can either engage in business or serve proudly in the military, but they cannot do both. Faced with this choice in a liberalizing environment, an entity with links to the IRGC that is a beneficial owner of a company can either profit by offloading its shares in that company to a non-IRGC linked firm (phenomenon which has been observed in several cases) or it can clean itself of its IRGC links in order to position itself to benefit from expected foreign trade and investment. The availability of these options also help explain why liberalization has received a relatively robust endorsement from the supreme leader, Ayatollah Ali Khamenei, including a recent statement that parliament must “must independently make legislation on issues such as terrorism or combating money laundering.” Khamenei’s concern is mostly about the pace of liberalization and the provisioning of its fruits, not its intended structural effects.

Importantly these structural effects threaten the bazaar as it operates today. The fundamental source of rents in the bazaar is arbitrage. Access to goods is secured at a low price, either through smuggling or manipulation of the foreign exchange markets, and then goods are sold at a high price. The disproportionate economic muscle of the bazaar network, stems from rents generated by high-value items such as gold and jewelry and electronics.

As the consumer electronics bazaar shut in protest over the currency fluctuations, Mohammad-Javad Azari Jahromi, the Iran’s Minister of Information and Communication Technology, sought to expose the predatory arbitrage. He disclosed that while consumer electronics sellers in the bazaar were sold a total of EUR 220 million of foreign currency at the official exchange rate in order to purchase stock, only approximately EUR 75 million of mobile phones were imported. So two-thirds of the foreign currency provided cannot be accounted for.

The implication is that approximately EUR 145 million in foreign currency was siphoned-off to be sold at the black market rate, likely allowing the traders to nearly double their investment in the foreign exchange. As demonstrated by Jahromi’s resolve to expose such fraud, these types of activities would become impossible if the Rouhani administration can successfully implement the liberalization measures currently being pursued. Whether it is improving tax collection mechanisms, bettering customs controls, raising accounting standards, introducing stronger financial crime laws, or instituting tighter controls on foreign exchange, including a unified rate, such reforms would spell the end of the bazaar’s cash generation, now seen as a drag on the economy at large. 

Meanwhile, IRGC-linked development companies are among those building a plethora of malls across Iran, slowly eroding the bazaar’s long-standing role as the a pillar of Iran’s consumer-driven economy. Ironically, in undermining the bazaar in this way, the Islamic Republic is achieving something the Shah had always sought to accomplish. In 1979, the bazaar mobilized against the Shah largely due to his declared dislike for their “worm-ridden shops” and his attempt to curtail their economic influence. In his own words, the Shah “could not stop building supermarkets. [He] wanted a modern country.” But he never got the chance to render the bazaar obsolete.

Four decades later, economic liberalization and modernization is finally chipping away at the bazaar’s customer base as consumers habits see hours spent in malls and supermarkets rather than in the labyrinthine bazaar. The benefactors of this shift in consumer habits are both Rouhani and his private sector supporters and the opportunistic elements of the IRGC. The losers are the elite traders of the bazaar.

To be clear, not all merchants are part of the predatory elite. There remain plenty of humble grocers and shoe-sellers and spice merchants who can count themselves among those under relentless economic pressure. For these merchants, participating in a closure is not always a matter of choice. Journalist Reihaneh Yasini, in her reporting from the bazaar on Monday, spoke to merchants who described being ordered to shut their shops unwillingly. One young bazaari said, “It was about 11 o’clock when some people came by and said everyone must close their shops. We got scared and also closed.” Another added, “They were angry. They said they would use bricks to smash the windows. They appeared to me to be people complaining about rising costs. It was right for us to close the shop after this happened, though in reality closing the shop has little cost for us. Our sales are so low that closing the bazaar for one day will make little difference to us.”

It is unlikely that the closures were spontaneous. This has not been the historical norm for mobilizations at the bazaar and accounting for historical trajectories and the intense competition of Iran’s present-day economy, the bazaar’s mobilization is best understood as a manifestation of elite competition. Bazaar elites sought to co-opt the voices and slogans of a frustrated and economically insecure population in order to undermine their political opponents and put the brakes on threatening reform processes.

In this sense, the bazaar closures may follow the same playbook as some of the initial mobilizations in Mashhad at the end of last year. These tactics must be called out. There is a very real risk that genuine civil society frustrations are becoming instrumentalized by elites in an effort to preserve the kind of predatory economic activity that has led to so much economic suffering among the Iranian people. Outside observers must remember than the success of civil society protests in Iran depends principally on the independent collective action and claims-making of those mobilizations, not merely on the spectacle of the protests themselves.

Photo Credit: Thomas Cristofoletti

Iran’s Currency Crisis Spurs Action in Financial Reform Efforts

In the 2017 anti-money laundering (AML) index report published by the Basel Institute on Governance, which develops standards for financial regulations and compliance, Iran topped the list of the world’s 10 highest-risk countries failing to comply with AML standards. This index, published since 2007, ranks 140 countries in terms of their efforts combatting dirty money transactions and countering terrorist financing (CTF). Iran has made little progress to date in improving its standing. Yet, the recent reunification of Iran’s exchange rates by central bank is seen to be an effective step toward more economic transparency and part of wider efforts against smuggling and rent seeking in their diverse forms.

The high-risk assessment of Iran highlighted in the Basel Institute report is primarily due to weak AML/CFT regimes practiced in the jurisdiction. High rates of perceived corruption combined with poor financial sector regulations are major drivers of the structural and functional failures in the Iranian economy. Importantly, these are among the critical issues, which the Financial Action Task Force (FATF), an intergovernmental organization which develops politics to combat financial crime, had mandated Iran to address as part of its "action plan."

Following an extension granted in February, the deadline for Iran’s compliance with FATF’s action plans is set for June 2018. This means that Iranian authorities have limited time at their disposal to earn the continued suspension of counter measures against Iran. Lack of membership in organizations such as the World Trade Organization and the FATF, in particular, has led to a myriad of problems in the implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal agreed by Iran and E3+3 in 2015. Due to shortcomings in meeting FATF technical requirements and Basel II and III banking regulations, Iran has failed to expand its business and correspondent banking ties with International financial institutions, with significant consequences. For example, the number of letters of credit  opened since “Implementation Day” has been far lower than expected.

As such, financial reform in Iran is motivated by the need to spur economic growth. The mandate that the Supreme Leader of Iran Ali Khamenei gave to the Rouhani government to start negotiations with world powers over Iran’s nuclear program reflects the wider policy of the state to continue interacting with the international bodies on economic matters. To that end, cooperation with the FATF is set to carry on unless that authorization is withdrawn. Yet given the importance of such reforms, this authorization may remain in place regardless of what happens on May 12 with respect to President Trump’s decision to extend sanctions waivers issued as part of the JCPOA.

According to some estimates, the magnitude of organized money laundering in Iran amounts to some USD 26 billion per year. Transacting such sizeable amount of money outside the official financial system is impractical and requires that criminals abuse the conventional financial system to support their illegal activities. The Central Bank of Iran is seeking to increase its powers of supervision to monitor and prevent suspicious money transfers and smuggling of goods, ensuring the integrity of Iran’s financial system.

The central bank's recent moves to stem currency market volatility will make financing of illegal businesses in the economy more difficult. CBI’s new policies prohibit purchasing or holding of more than USD 10,000 or its equivalent in international currencies. In the same parallel, any bank account that whose aggregate debits and credits exceed IRR 50 billion rials  will be subject to anti-money laundering probes to monitor for suspicious activities.

Although it will remain possible to find loopholes in the new regulations, these moves reflect significant progress after years of unfulfilled promises to unify the dual foreign exchange rate regime. The move is also viewed as an important step towards obtaining approval from FATF in respect to countering money laundering and removing the rentierism prevalent in the country’s largely state-controlled economy.

In addition, based on the new legislation, revenues from petrochemical exports that are not repatriated to the country will be subject to greater supervision. Firms in the industry will now be required to report their trade transactions in the same system used to record the oil companies’ export revenues.  Previously earnings from petrochemical products sales were kept outside Iran in offshore bank accounts in the absence of proper supervision over their transactions and trades.

Interestingly, to further reinforce its oversight, the central bank has launched the an integrated system for monitoring foreign exchange deals or known as NIMA. This is a system which will monitor the activities of four groups of actors who shape the currency market: merchandise and service importers who purchase foreign currency, exporters of goods and services who earn foreign currency, banks and brokerages who act as intermediaries, and the policymakers who seek to manage supply and demand.

According to CBI governor, Valiollah Seif, the operationalization of the NIMA, will change CBI’s current reactionary response mechanism to one that is more proactive and will make controlling hazardous speculative or systematic fluctuations in foreign exchange markets possible by enabling the calculation of the effective demand so that the bank can aptly manage the available foreign exchange reserves.

In sum, the implementation of these targeted measures by CBI is expected to gradually put an end to capital flight and massive conversion of rial to other hard currencies. These moves can also undercut crimes such as smuggling and money laundering by increasing oversight and the likelihood of penalties for their perpetrators. But the effectiveness of CBI’s mandate will be determined by the political will of both the government and the state to fully enforce the letter and spirit of the new regulations and laws. A great deal is at stake. If the Rouhani government can continue to persist in its long-awaited macroeconomic policies and resist pressure from vested interests, then it remains possible that Iran’s economy could find new momentum after years of recession.

Photo Credit: Tasnim

Rouhani Government Unifies Iran’s Exchange Rates in Decisive Move to Stabilize Currency

In a decisive move intended to stop the further devaluation of the rial, the Rouhani government announced it would unify the official and free market dollar exchange rates, settling on an official rate of IRR 42,000.

First Vice President Eshagh Jahangiri made the announcement last night, declaring that trading dollars above the new rate would be a serious crime.  "Just like the smuggling of drugs, no one has the right to buy or sell [above the new rate]... If any other exchange rate is formed in the market, the judiciary and security forces will deal with it," he warned.

"There should not be such incidents in an economy that always has a surplus of foreign currency. Some say interference by foreign hands is disrupting the economic climate and some say domestic machinations are spurring these things in order to destabilize the climate in the country," added Jahangiri.

Earlier in the day, the Economic Commission of Iran’s parliament had summoned Minister of Economic Affairs Masoud Karbasian and Central Bank Governor Valiollah Seif for an emergency meeting regarding the careening value of the rial, which had reached a record low of IRR 60,000 to the dollar.

Speaking to reporters after the meeting, Karbasian continued the government line that the devaluation was not a reflection of the true state of the economy. Rather, he obliquely suggested that the “security agencies” ought to be summoned to explain the real cause for the fluctuations. His comments were an apparent reference to rumors that certain actors opposed to the Rouhani government, likely in the security establishment, were hoarding dollars in order to exacerbate speculation and undermine confidence in the government’s economic management.

However, in the face of this significant political pressure, the Rouhani administration made a bold move, instituting a policy that has eluded the country’s economic planners since the 1979 revolution. Rate unification has long been considered a necessary step to introduce more stability in Iran’s monetary policy and foster a better business environment for the country’s enterprises.

Iran's last major currency crisis of a similar scale took place in 2012. Then president Mahmoud Ahmadinejad similarly blamed psychological factors for the rout, arguing in a speech, "Are these currency fluctuations because of economic problems? The answer is no. Is this because of government policies? Never … It's due to psychological pressure. It's a psychological battle." His government similarly tried to unify rates at IRR 12,260. But sanctions made it difficult to generate sufficient supply of hard currency in Iran, and the unified rate collapsed after just a few months. 

During this most recent currency crisis, the rial had lost about one-third of its value against the dollar over the last Iranian new year, which ended on March 20. The devaluation accelerated beginning in December, and the rise in the free market price of the dollar tracked closely with that of gold. Both gold and the dollar have been typical “safe-haven” investments for Iranians wishing to hedge against inflation and general economic uncertainty. However, inflation had remained flat over the previous twelve months, and real estate prices were relatively stable, suggesting little change in the purchasing power of the rial. The net effect was a rampant devaluation more akin to a bubble, fueled by rising doubts among Iranians about the survival of nuclear deal.

Though clearly responding to the recent turmoil, the Rouhani government had already begun the groundwork necessary for such a unification. In March of last year, Catriona Purfield, a senior economist at the IMF, suggested that Iran could perhaps unify the rates earlier than expected, stating, “Half of imports have been put on the market rate and most of the goods are now at the flexible rate. Interbank FX market has been reestablished. Therefore all the elements are there, so an early move is possible.”

The new rate of IRR 42,000 is closer to the rate economists expect would be necessarily for unification. Economists Mohsen Bahmani-Oskooee and Sahar Bahrami looked at exchange rate data from 1979 to 2015. They concluded that had Iran’s rial been allowed to depreciate in accordance to changes in purchasing power parity, the exchange rate in 2015 would have been around IRR 47,000. The rial’s purchasing power has been relatively stable in the last few years and so this is likely a fair estimation of the current dollar rate in PPP terms.

Yet, despite the clear economic rationale behind the rate unification, it will remain to be seen whether the political gamble pays off for Rouhani. The official exchange rate presented a lucrative arbitrage opportunity for quasi-state actors, who could purchase dollars at the lower official rate then sell the hard currency on the black market. These entrenched interests will no-doubt see the unification as a direct challenge by Rouhani, and a further example of his administration's continued efforts to reign-in rent seeking in the economy.

But for the general public, such a confidence-inspiring move should serve as an indication that the Rouhani cabinet, despite the claims of infighting and mismanagement, remains capable of the kind of coordinated policymaking necessary to reform the economy.

Photo Credit: Vahid Salemi