Iran’s Currency Plunge 10% After Fresh US Sanctions

By: EW News Desk Team   Date: 2 January 2012

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02 January 2012

The Iranian Riyal fell to a record low against the US dollar on Monday, after fresh US sanctions imposed severe penalties and restrictions on foreign financial institutions that had dealing with the Iranian central bank.

Late on Monday, Iran’s currency exchange rate was hovering at around 17,800 riyals to the US dollar, as compared to Sunday's rate of 15,900 riyals to the dollar. This marked a more than 10 percent slide in the value of the riyal in just one day, and was a significant drop-off in its value since trading at just 10,500 riyals to the US dollar back in December 2010.

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The drastic one-day slump was blamed on a new bill signed by US President Barack Obama on Saturday, which included an amendment barring foreign financial institutions that do business with Iran's central bank from opening or maintaining correspondent operations in the United States.

In all, the riyal has lost more than a third of its value since September 2011, with the Associated Press reporting that Iran’s central bank has since called on Iranian experts to meet this Wednesday to discuss the turbulence in the currency market.

Still, the nation’s authorities chose to remain publicly defiant to the sanctions, with Iran’s trade and industry minister Mahdi Ghazanfari arguing that the "enemies of Iran will not achieve any result through imposing sanctions.”

"The world will laugh at the US for imposing sanctions on Iran's Central Bank,” scoffed Iran’s central bank governor Mahmoud Bahmani to the Mehr News Agency.

The latest round of US sanctions targeting the central bank is also an "unsuccessful choice,” added Iran’s Economy Ministry Shamseddin Hosseini.

However, most analysts believe that the new sanctions from Washington would force foreign banks to change their behaviour towards Iran, resulting in serious ramifications for the Iranian economy.

"The sanctions will force a choice between buying Iranian oil or engaging in the US financial system, the largest in the world. That is going to change the risk calculus for a lot of folks," said Brian Katulis, a security expert at the Center for American Progress, in an interview with Reuters.

"They are going to wait to see how this signal is received before they take any further steps,” he added.

The new US legislation will allow for a phasing-out period of up to six months to allow foreign institutions some time to transition out of Iranian oil contracts and to find new sources of oil that don’t involve dealing with the Iranian central bank.

The law also allows the US to grant waivers to financial institutions of countries that may not have cut all ties to Iran but have made a significant effort to reduce their oil trade with Iran.

According to the Associated Press, Iranian President Mahmoud Ahmadinejad said last week that his administration would do everything in its power to stave off further steep depreciation in the riyal's value, including the use of its hard currency reserves.

The Iranian government also threatened last week to close down the strategically important Strait of Hormuz if any new sanctions were imposed on the country, though little action have occurred on that part so far.

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"No order has been given for the closure of the Strait of Hormuz. But we are prepared for various scenarios," said Iran’s navy chief Habibollah Sayyari on Monday, as quoted by The Guardian.

Most analysts though believe that Iran’s threat is mere bluster, while the latest round of US sanctions can be expected to strengthen Washington’s hands going into any new talks with Iran over the nation’s nuclear program.

"This is the book-end to a series of measures that began late last spring in coordination with the EU," said George Lopez, a sanctions expert at the University of Notre Dame.

"It sends a strong message to (Iranian President Mahmoud) Ahmadinejad and also to domestic constituents that we're not backing off. But it is also a strong message that they should come back to the table."

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