Sanctions on Iran prompt concerns about rial's value as currency

By Thomas Erdbrink
Washington Post Foreign Service
Wednesday, September 29, 2010; 4:35 PM

TEHRAN - New sanctions against Iran, recently implemented by the United Arab Emirates, have led to a sharp drop this week in the value of Iran's currency, the rial, disrupting the country's markets and prompting the government to consider intervening to curb the rise in hard currency exchange rates.

But analysts say the rate increase means that the government - widely seen as on a drive to boost its income - will receive more rials for its petrodollars, even as the currency drop could contribute to inflation.

Iran's finance minister, Shamseddin Hosseini, told state radio Wednesday that "if the drop leads to a bubble, the government will stop it." He did not elaborate on which measures would be taken or whether Iran's central bank is selling foreign currency in a bid to lower the rates.

The rial, which is normally closely pegged to the dollar, has lost about 15 percent of its value against the U.S. currency since Sunday. It has also lost in relation to the euro.

Skirmishes broke out between money changers and security forces in front of the central bank's headquarters in Tehran on Tuesday, after the money changers learned they would not be able to buy dollars at a lower rate, as they had been promised. No foreign currency was being sold.

The central bank's governor, Mahmoud Bahmani, denied that dollars were not available in Iran. "There is no problem," he told reporters. "Anybody who needs foreign currency can buy it from banks and exchange offices."

But along Tehran's Jomhuri, or Republic, Street, where many currency exchanges are located, money changers were refusing Wednesday to sell off their dollars and euros.

"Nobody has foreign currency anymore, so I'm holding on to what I have for now," one said, speaking on the condition of anonymity. "Maybe the central bank will be handing out dollars on Thursday. We are waiting."

The currency drop comes as several gold merchants in the capital closed for a fifth consecutive day to protest the implementation of a 3 percent value-added tax. The Tehran steel bazaar, an important center of private enterprise in Iran, has also been on strike since Saturday.

The United Arab Emirates, especially Dubai, functions as a trade hub for the Islamic republic. In recent months, it has come under increasing pressure from the United States to create obstacles for trade and financial services doing business with Iran.

On Sunday, Iranian state banks in the Emirates stopped giving out foreign currency. Last Thursday, Emirati financial centers stopped facilitating money transfers for Iranians in the Emirates' currency, the dirham.

Both developments have unsettled a centuries-old system of remittances known as hawala, which Iranian businessmen use to bypass the increasingly severe financial sanctions imposed by the United States, the European Union and others.

"It is still possible to send money abroad, but prices are increasing," said Mohammad Taheri, spokesman for the Tehran Chamber of Commerce. "As for the rial, if the government doesn't quickly stop the devaluation of our currency, there will be a rush on foreign currency, which will undermine our financial stability."

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