Bloomberg News

Iran Bazaar Sees Rush to Dump Rials as Sanctions Squeeze Economy

January 18, 2012

Jan. 12 (Bloomberg) -- In Tehran’s shopping district, a crowd gathers round a man standing on a raised platform with arms aloft to display his merchandise: a stack of 500-euro bills.

The Bazaar Arz, the narrow 19th-century arcade that’s the center of Iran’s foreign exchange market, is crammed with people trying to sell their currency as sanctions tighten and tensions with the U.S. escalate. In nearby shops, imported laptops and smart-phones change price hourly. The rial weakened 20 percent in the past month at the official rate offered to Iranians traveling abroad, and by even more in the bazaar, where demand for dollars and euros is surging.

It’s increasingly tough for Iranians to satisfy that demand. Websites posting currency rates were blocked last week, many official change bureaus were closed, and the government has halved the amount of dollars that Iranians planning trips abroad can buy. Central Bank Governor Mahmoud Bahmani denied the sanctions are causing problems, then linked the rial’s plunge to the political standoff. “The enemy is depending on creating psychological tensions,” he said. “If we are intimidated, we will be playing into the enemy’s hands.”

The rush for hard currency shows those tensions spreading among Iranians, even before the latest sanctions are fully implemented. The U.S. and European Union are moving toward an embargo on oil purchases from the world’s third-biggest exporter and restricting dealings with its central bank.

‘Real Pressure’

“The run on Iran’s currency is significant because it shows the sanctions are having a true impact,” said Ted Karasik, director of research at the Dubai-based Institute for Near East and Gulf Military Analysis. “Iran, while being extremely clever with skirting around previous rounds of sanctions, is perhaps facing real pressure this time.”

President Barack Obama signed legislation on Dec. 31 to deny access to the U.S. financial system for companies or countries that do business with Iran’s central bank. The EU is discussing the terms of an oil embargo and may adopt it this month. Obama and his allies say the sanctions aim to halt what they say is a covert effort by Iran to acquire nuclear weapons.

Iran says its atomic program is for peaceful purposes. Vice President Mohammad Reza Rahimi said on Dec. 27 that Iran may close the Strait of Hormuz, passageway for about a fifth of globally traded oil, if sanctions are imposed. Crude jumped to an eight-month high above $103 a barrel last week.

Before the sanctions, growth in Iran’s $480 billion economy was set to accelerate on higher oil prices. The International Monetary Fund predicted an expansion of 3.4 percent this year in an August report, up from 2.5 percent in 2011.

‘Symbolic Defeat’

The central bank’s official exchange rate yesterday was 11,252 rials per dollar, according to its website. The second official rate, offered to Iranians who can prove their foreign travel plans, was 13,630 per dollar, up from 10,800 less than a month ago. Iran last week halved the maximum amount of foreign currency that would-be tourists can buy to $1,000. At the Tehran bazaar, the rate was 17,000.

The trifurcation of exchange rates is “a symbolic defeat” and “embarrassing for the leadership,” which has spent two decades trying to eliminate such differentials, said Kevan Harris, a researcher at Johns Hopkins University who visits Iran often. “Because there’s no functioning currency market in the traditional sense, the swings in prices become much wider.”

Parliament passed a law on Jan. 8 to penalize unofficial currency trades, with the penalty set at twice the transaction amount. The law hasn’t yet been implemented and it’s not clear when it will enter force.

‘Economic Shock’

The rial’s plunge will add to the threat of inflation that has been growing since Iran scrapped more than $50 billion of subsidies, mostly on energy, a year ago under a plan praised by the IMF.

Inflation, which has averaged about 15 percent in the past decade, according to IMF data, accelerated to almost 20 percent in November, local newspaper Donya-e-Eqtesad reported Dec. 7, citing central bank figures. It’s likely to reach 21.6 percent by the end of the Iranian calendar year on March 19, if the country doesn’t experience any “economic shock,” Deputy Economy Minister Mohammad-Reza Farzin said on Dec. 20.

The recent exchange-rate movements may threaten that forecast. Karim, who runs an information-technology business and declined to give his surname on the grounds authorities can penalize people who talk to foreign media, says the prices he pays for basic products from China, such as hard drives, monitors and memory chips, have jumped 20 percent in two weeks.

Profit Squeeze

Vendors at Paytakht, Tehran’s main electronics center, now make him pay upfront for computers and parts instead of offering payment terms as they used to, Karim said. His clients still expect to be given time to pay, and the lag is eroding profits as the rial slides, he said.

For most Iranians, a higher priority is the price of food staples, which may also be pushed up. Iran will import 1.3 million tons of rice this year, almost as much as its own harvest, according to the United Nations Food and Agriculture Organization. Total cereal imports are forecast at 6 million tons, about a quarter of consumption.

Iran’s oil output, which averaged 3.6 million barrels a month in 2011, keeps trade and current-account balances in surplus and has helped the country build up defenses that will cushion the blow from sanctions.

Foreign currency reserves of almost $80 billion as of last year were enough to cover 9.5 months of imports, according to the IMF. That compares with coverage rates of about four months in Egypt and Turkey, the two comparably large regional nations.

Oil-dependence is also a vulnerability. The government will fund about a quarter of this year’s spending from taxes, and the rest from oil revenue, according to the IMF.

‘More Customers’

If EU nations stop buying, “Iran can find more customers for that crude,” albeit at a discount, said Crispin B. Hawes, director for the Middle East and North Africa at the Eurasia Group, a political risk analyst. A bigger threat is sanctions which “could affect countries’ ability to trade with Iran, specifically to clear payments” through its central bank, he said.

At the currency bazaar, traders said the government sought to intervene last week by fixing the rate at 14,000 per dollar, a price that no sellers of hard currency were willing to accept.

There are no visible signs of security, other than cameras monitoring the fluorescent-lit courtyard.

“You never know what you’ll see here, and that’s what I love,” Mehdi, a trader in his mid-forties, said in an interview there on Jan. 5. “Yesterday, for the first time, I saw two women in the bazaar. They came in, bought $100,000 in U.S. dollars, and left.”

Get There Earlier

Availability at official outlets is limited. At a branch of Bank Melli, one of Iran’s biggest lenders, in the Tehran suburb of Sadeghieh, an official told disappointed customers to get there earlier next time, since dollars typically run out by about 8:15 a.m., a quarter-hour after the bank opens.

Iranians were already stepping up purchases of gold and foreign currency before the latest sanctions, as inflation eroded the rial’s purchasing power. Now demand has intensified.

Rasool, a 33-year-old office worker who declined to give his full name, earns about $600 per month and bought $300 from a co-worker last week at 15,900 rials. Asked why he wanted dollars so badly, he replied that all of his colleagues were buying them and he didn’t want to be left behind.

“A rumor is good enough to create these sorts of effects,” said Harris at Johns Hopkins.

--With assistance from Glen Carey in Riyadh and Ladane Nasseri in Dubai. Editors: Ben Holland, Andrew J. Barden, Digby Lidstone.

To contact the reporter on this story: Jason Rezaian in Tehran via the Dubai bureau at To contact the editor responsible for this story: Andrew Barden at barden@bloomberg.net.


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