Iran Panics as Currency Sinks on US Sanctions

January 4, 2012  

New U.S. sanctions dealt Iran a potentially lethal economic blow this week even before they took effect, sending the local currency into a nosedive before the government artificially posted a higher rate for the “rial.”

President Barack Obama on Saturday signed a law that includes sanctions against countries dealing with Iran’s energy sector and its central bank, which handles virtually all transactions in the oil and gas industries.

The rial dived 21 percent in two days before the central bank on Wednesday stepped in and tried to declare its own rate at a higher value compared with dollars. However, many money changers refused to accept the official rate, while Iran encouraged citizens not to hoard dollars.

Foreign bank interventions to shore up local currencies generally are effective only over the short-term.

Iran denied there was any connection between the new sanctions and the crash in the rial.

“I declare absolutely that the international sanctions have not created any economic problem for the country. The enemies know that and are trying to create psychological tensions. But we won’t play their game,” said the head of the central bank Mahmoud Bahmani.

Foreign Ministry spokesman Ramin Mehmanparast claimed that the sharp loss of the rial was due to shifts in local capital.

Iran is almost totally dependent on oil exports for its foreign revenue, which will be drastically cut if the West takes the risk of setting off hyper-inflation from higher oil prices and boycotting Iranian oil.

The price of crude oil on the world markets already has passed the a$102-a-barrel mark since the new sanctions were signed into law Saturday, and analysts said that if Iran carries out its threat to punish the West by closing the Strait of Hormuz to oil tankers, the price of crude could reach $220 a barrel or more.

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