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THREATS AND PERSUASION—Why Iran’s government is likely to win the battle of wills over currency

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Analysts said the government's likely response to the stand-off would be to shift more currency trade out of the market and into official channels.

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October 9, 2012 10:15 by



A battle of wills between Iran’s government and foreign exchange traders may end with authorities taking over all legal trade in the rial, leaving many Iranians to seek hard currency illegally in a poorly supplied black market.

 

This arrangement would probably let the economy limp on in the face of Western economic sanctions. But it might also increase corruption, distort companies’ business decisions and fuel middle-class discontent with President Mahmoud Ahmadinejad.

 

In the past two weeks, the rial-U.S. dollar exchange rate has emerged as a fault line in Iran’s economy as the country resists foreign pressure over its nuclear programme, denying Western accusations that it is aimed at making weapons.

 

The sanctions have slashed Iran’s oil export earnings and triggered a rush by Iranians to change their savings into foreign currency, dragging the rial down. Early last week the rial was trading around 37,500 to the dollar, having lost about a third of its value in 10 days and two thirds in 15 months.

 

For Iran’s clerical rulers, who face threats of war from abroad and widespread if subdued discontent at home, preventing any destabilising economic crisis is a pressing concern.

 

Many economists estimate Iran may still earn more from exports than it spends on imports, giving the state leeway to resist Western pressure, as sanctions-hit rulers in the likes of Iraq, Serbia and Zimbabwe did in the past. But a loss of trust in the rial among Iran’s private savers means the government may now limit private dealing in the currency to staunch the flow.



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