Iran - Economy on the Brink

In Israel in the early eighties, inflation reached 1000% p.a. The black market rate for USD went crazy and people were withdrawing Israeli lira from the banks in boxes (I kid you not) and running to the arab market and exchanging the devaluating currency for USD. I happened to witness all this while working for an Israeli bank in Jerusalem. The USD were placed under floorboards, bed mattresses and in private safes at home but mainly at the bank. At the end of the day the banks collapsed, were nationalized by the government and the stock market was closed. It took years for the Israeli economy to recover, but that was then and this is now.

So much has been written about Iran's nuclear potential and the sanctions imposed, we will hurdle over the preamble and begin in the present. In order for a country to survive today's economic climate, a viable currency is required. The Iranian currency, the Rial has been devalued by 50% in the last month. Black market rates have rocketed to well above the official rate as the Iranian Government reacts and raises interest rates from 14% p.a. to 21%p.a. This in an attempt to support the currency. Official figures for inflation are probably incorrect. Prices of all imported goods will eventually have to rise by 50%. Sanctions, in conjunction with a covert war, appear to be having a strong psychological effect on the citizens of Iran, increasing economic insecurity and sending them scuttling to the black market to save what they can.

Even though Europe and the US has declared an embargo on Iranian oil, this only accounts for 30% of Iran's exports. Such is the market, that they will clearly find a buyer(s) for their oil. This is not the key problem. 95% of International business is conducted in USD and Euro, and are subject to Central Bank rules. To simplify this, If I transfer USD100 from my account at CIBC to an account anywhere in the world, that amount, by law is transferred through a correspondent bank in the home country of that currency. In this case, through a bank in the USA, where the US Central Bank can either permit or block the transfer. So Canadian dollars all go through Canada and Euro through the European Central Bank apparatus. As a result, Iran cannot participate in any international transaction using USD, British pounds or Euro. So the key problem is not the sale of oil, but how they will be remunerated for it.

Their easiest solution would be to trade oil for food or machinery etc. Or possibly try to do trades in Japanese Yen or Swiss Francs. Whether they like it or not, the US controls the International Monetary System, so banks doing business with Iran may find themselves blacklisted. Whichever way one spins it, the sanctions are beginning to bite. Its not over by a long way, but it would be fair to characterize the situation as a possible beginning of the end. Ahmadinejad is teetering and we are more than curious which way he will vacillate.

An appeaser is one who feeds a crocodile—hoping it will eat him last - Churchill W.