Plunge in Currency’s Value Unsettles Iran

NYTimes.com

Iran’s currency, the rial, tumbled in value to its lowest level ever against the dollar on Tuesday in panic selling caused in part by the country’s increased economic isolation from international sanctions, an unbridled inflation problem and worries that government officials there are ideologically incapable of devising a workable solution.

The rial’s value has been weakening for months, but the traumatic drop on Tuesday reflected what Iranian economists called a new level of economic anxiety in the country, exacerbated by conflicting information coming out of the Tehran hierarchy that reinforced a sense of indecision and confusion.

A report in Iran’s state-run news media that the government had decided to suspend trading relations with the United Arab Emirates in retaliation for that country’s support of American sanctions on Iran — denied later by Iran’s vice president — apparently contributed to a rush by Iranian merchants and trading companies to sell their rials for other currencies. The United Arab Emirates is a major gateway for Iran’s exports.

“This is the most serious financial crisis they’ve faced, with multiple things coming to a head,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech and an authority on Iran’s economy. “I have the feeling that really nobody is in charge of economic policy, nobody who can quickly think on their feet.”

By day’s end, Iran’s Fars News Agency was reporting that it cost 15,150 rials to buy one dollar in Tehran, compared with 13,400 rials to the dollar a few days earlier. In late October, it cost about 7,000 rials to buy one dollar in the capital city, which means the Iranian currency has plunged in value by more than 50 percent against the dollar in the past few months.

The currency crisis could hardly come at a worse time for Iran, which has been pummeled economically by the cumulative effects of four rounds of United Nations Security Council sanctions, as well as sanctions imposed by the United States, Canada and the European Union over the country’s suspect nuclear energy program.

An increasing number of international companies are no longer willing to engage in new business with Iran; the European Union has talked about imposing a boycott on Iran’s oil, its major export; and the Obama administration is expected to enact a harsh law soon that could severely penalize banks in friendly countries that do business with Iran’s Central Bank. Officials in Iran have spoken more frankly in recent days about the destructive impact of Iran’s isolation.

The United States Treasury Department added to the pain on Tuesday, putting 10 companies based in Malta on a blacklist for acting as front companies for the Islamic Republic of Iran Shipping Lines, which has already been blacklisted. The Treasury said in statement that it took the action because the Iranian shipping line and its subsidiaries “have increasingly relied upon multiple front companies and agents to overcome the impact of U.S. and international sanctions and increased scrutiny of their behavior.”

The rial’s loss in value partly reflects the impact of a stubborn inflation problem in Iran, caused in part by the government’s phasing out of subsidies for fuel and other staples that has caused prices to rise sharply. To cushion the impact on Iranian consumers, the government distributed cash payments, which in some ways worsened the inflation problem by increasing the supply of rials in Iran. Iran’s official news media have said the inflation rate was about 20 percent, although outside estimates were higher.

Economists said the Iran government is hampered in its ability to control inflation partly because of Islamic prohibitions on charging interest, which prevents banks from offering attractive rates that would encourage Iranians to keep their money in savings accounts. Such a step would take money out of circulation.

Some said the catalyst on Tuesday for the panic selling of rials in Iran was an announcement carried by the semiofficial Mehr News Agency that Iran had temporarily stopped imports from the United Arab Emirates “as a punitive measure” because its government had expressed support for the Western sanctions.

Later in the day, Vice President Mohammad-Reza Rahimi was quoted by Mehr as saying that the earlier announcement was an overstatement, and that Iran had only issued a warning because “the U.A.E. has done something, under the pressure of America, which does not hurt Iran but hurts itself.” He was further quoted as exhorting the Emirates leaders to “not succumb to American pressure.”

Artin Afkhami contributed reporting.

This article has been revised to reflect the following correction:

Correction: December 22, 2011

An article on Wednesday about a plunge in the value of Iran’s currency, the rial, caused in part by reports that Iran had suspended trade relations with the United Arab Emirates, quoted incorrectly from a statement by Iran’s vice president, Mohammad-Reza Rahimi, in which he warned the United Arab Emirates against supporting American sanctions against Iran. Mr. Rahimi said such support “does not hurt Iran but hurts itself.” He did not say “does not hurt the U.S. but hurts itself.”

A version of this article appeared in print on December 21, 2011, on page A8 of the New York edition with the headline: As Further Sanctions Loom, Plunge In Currency’s Value Unsettles Iran.