The Iranian rial has been in free fall for the last few days. Inflation has been ramping up for the last few months as the rial has lost more than 50 percent of its value over the last year. Unemployment is up to maybe 25 percent plus, and quite a [...]]]> via Lobe Log

The Iranian rial has been in free fall for the last few days. Inflation has been ramping up for the last few months as the rial has lost more than 50 percent of its value over the last year. Unemployment is up to maybe 25 percent plus, and quite a bit higher in some of the poorer parts of the country.

Iran’s oil exports have been slammed by sanctions. Even with Iran’s attempts to sneak some out in various ways, such as registering tankers in Mongolia of all places; the sanctions hunters found out about that one fairly quickly and shut it down with some diplomatic moves in Ulan Baator.

Then there is the purchase of 2 million barrels of stranded oil in Sid Krir in Egypt that the Egyptian government wants to purchase. US-Egyptian relations are not exactly the best these days and President Morsi visited Tehran recently. He might have embarrassed his host by mentioning his views on Syria, but he still went. Egypt also looks like it might be working towards improving relations with Iran. Turkey may be buying some oil from Iran with gold or other barter methods. Other states may be setting grain and goods for oil barter arrangements.

The financial system of Iran has been hit hard with the sanctions. The closing down of Iran’s access to the SWIFT system was significant. This may have done more damage to Iran’s ability to do business internationally than many of the other sanctions combined. The sanctions focused on persons and banks are good politics, but have historically not been that effective. Closing the country from a major clearing house is like slamming a large financial door in their faces.

Indeed, Iran is in a tight spot. I would expect runs on banks to follow on to this if the government cannot stem the flow of the psychology of financial contagion that seems to be sweeping the country. The government is clearly in a panic. They are blaming the usual “outside forces” and “22 conspirators” who of course were arrested quite publicly today. Then they blamed the black market money changers in the bazaars of Tehran for the collapse. This last one makes less than no sense. The bazaaris do not exchange enough money to make this sort of a dent in the US dollar-Iranian rial exchange rate. The currency drop has a lot more to do with hyper-expansive monetary policy pushing inflation. There is clearly a sense that there are way too many rials chasing at a faster velocity the goods that are in stock and are flowing into Iran. See this article for some supporting monetary and other data.

The huge rise in the stock market of Tehran is also due to nominal reasons, as we economists would like to say in such circumstances. The money flowing into the economy via the policies of the Central Bank of Iran has pumped up not only the prices of goods, but also stocks. This huge increase in money supply has also pumped up the price of land and housing in Iran. Also driving the stock, land and housing costs is the shortage of alternative investments. Sanctions have taken a bit out of the Iranian economy on that account.

Iran’s economic policies have actually magnified, not countered, the effects of the sanctions. One of the major culprits was expanding the broad money supply by 100 percent in the last 5 years.

This said, what is happening now shows not only the results of sanctions but counterproductive economic policies and more. The current economic status of Iran also shows how the credibility of the regime is weakening.

I am certain that there are many people in Iran who are questioning the worth of the country’s nuclear program and especially the leadership’s global defiance on this issue in light of the growing resulting problems they’re facing.

Developing about 90 percent of the entire nuclear fuel cycle is very expensive. This could have been costing Iran about 10 percent or more of its GDP for many years. That is 10 percent that could have been invested in industries that produce jobs, agriculture, education, and more.

Expansive nuclear infrastructure development is not necessary given the existence of global trade in low enriched uranium for nuclear plants. It is also unnecessary given the small amount of raw uranium that exists in Iran. This is also counter-intuitive given that Iran flares off the equivalent of four nuclear power plants of 1200 MW each of natural gas.

There are many reasons why Iran’s government should focus on its economy and its people, rather than on defiant nuclear brinksmanship.

The Iranian leadership may find that their brinkmanship is about to bring their country to the brink.

Despite a long-held policy of going after regime figures and their associations — and not “Jamshid Average” — the Washington Post reports [...]]]> The U.S.-led sanctions effort against Iran is indeed ‘biting.’ But rather than only eat away at the plates of those the sanction’s target, the program is also ‘biting’ lots of everyday Iranians.

Despite a long-held policy of going after regime figures and their associations — and not “Jamshid Average” — the Washington Post reports that planes operated by Iran Air are unable to refuel in most of Europe as the result of a deal struck last month between four European oil companies and the United States.

Thomas Erdbrink writes in the Post that this is part of a broader move to “discourage international businesses from dealing with Iran.” Thus, going after the refueling of Iranian jets

illustrates a shift away from an earlier U.S. policy of reaching out to the Iranian people and trying to target mostly state organizations central to Iran’s nuclear program. Officials now admit that the increased pressure is hurting ordinary Iranians but say they should blame their leaders for the Islamic republic’s increasing isolation.

[...] As a result of the canceled jet fuel contracts, all Iran Air planes departing from destinations such as Amsterdam, London and Stockholm are now forced to make lengthy fuel stops either at an airport in Germany or one in Austria, where Total of France and OMV of Austria are still providing the 66-year-old airline with jet fuel until their contracts run out, possibly as soon as next month. At that point, Iran Air could be forced to cancel or severely reduce flights.

Iran Air flies reports to fly about 500,000 passengers each year between Tehran and 11 European capitals and other destinations.

At his press conference on Friday, State Department Spokesperson P.J. Crowley told reporters (with my emphasis):

We want to see the Iranian people have the same opportunities to travel, to engage as others in the region and around the world have. And the only thing that’s impeding Iran from having that kind of relationship with the United States and the rest of the world is the government and policies of Iran. If they change their policies, if they meet their obligations then certainly, as we continue to offer the prospect of engagement and a different kind of relationship, that depends squarely on what Iran does and what policies it chooses to pursue.

Of course it is untrue that the behavior of the Iranian leadership is the only thing preventing Iranians from traveling around Europe. The U.S. sanctions program certainly bears some responsibility.

Crowley’s statement clearly conflates the Iranian leadership and the nation’s people: “Iranian people…impeding Iran…policies of Iran…they change their policies…what Iran does and what policy it chooses.”

If Secretary of State Hillary Clinton sticks by her claim earlier this year that Iranian is drifting toward a military dictatorship, and if anyone in the administration buys into the idea that the 2009 Iranian elections were fraudulent, it seems pretty tough to understand how the U.S. administration could be holding the Iranian people responsible for the actions of their leaders.