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US sanctions on Iran lead Iran's economy towards total collapse


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© Atta Kenare, AFP | People buy fruits and vegetables in the Iranian capital Tehran on January 3.

US sanctions on Iran lead Iran's economy towards total collapse
The pace of the collapse of the Iranian currency is accelerating as the first package of US sanctions enters into force, expected on August 7, along with the war of words raging between Tehran and Washington.
The dollar hit 119,000 riyals in the parallel market on Tuesday, down 18 percent from Sunday when the exchange rate was 100,000 riyals.
As a result of this fact, which is well understood by the Iranian people, especially the big traders at the Grand Tehran Bazaar, the mullahs are afraid of new demonstrations on Tuesday, continuing protests against deteriorating economic conditions and corruption in state institutions.
The Iranian authorities chose the policy of escaping forward, with the currency falling to a new record high.
In parallel with the recording of the value of the Iranian riyal in the informal market 122 thousand against the dollar, on Monday, the authorities arrested dozens of people, on charges of causing economic confusion and the spread of corruption in the land, which carries the death penalty.
The authorities also threatened to arrest more in the coming days of those accused of trading in the currency on the black market, and the import of cars illegally.
The central bank has blamed what it described as "a conspiracy of enemies seeking to further exacerbate economic problems and spread anxiety among people."
But far from the rhetoric of conspiracies, Tehran is well aware of the real causes of the currency's deterioration, which are mainly linked to political changes.
Since US President Donald Trump announced his intention to withdraw from the nuclear deal with Iran last April, the riyal has lost about half its value due to increased demand for the dollar, fearing US sanctions.
The Iranian riyal continued its slide against the dollar on Tuesday and lost 18 percent of its value within two days after US sanctions against Iran were re-imposed in August.
Since the beginning of the year, the riyal has lost about two-thirds of its value. As of January 1, 2018, the dollar was worth 42,900 rials.
The price of the dollar, Tuesday, 119 thousand Iranian riyals in the parallel market, a decline of 18 percent compared to Sunday when the exchange rate of 100 thousand riyals.
In light of this severe cash crisis, Iranian President Hassan Rowhani last week replaced the governor of the central bank, Aliullah Saif, with Abdel Nasser Hamati.
On Monday, the central bank announced that the national currency fluctuated due to the "enemy conspiracy" and vowed to take new measures to counter the downturn.
The government sought to fix the price at 42,000 last April and threatened to pursue black market traders, but banks refused to sell the dollar at a low price, forcing the government to soften its position in June and allow greater flexibility for certain categories of importers.
The currency's decline is due to the announcement by the United States in May of its withdrawal from the nuclear deal signed with Iran in 2015, which lifted a set of sanctions in return for curbing Tehran's nuclear program.
The United States is preparing to re-impose its full sanctions on two payments on August 6 and November 4, forcing many foreign companies to suspend their activities with Iran.
The economic disaster in Iran is not surprising. It is known that the US withdrawal will restore sanctions and will force the Iranian economy to push it towards total collapse not because American companies are influential, but because other companies will find themselves under American sanctions and the biggest losers from the beginning of sanctions. An old report on Iran's economy before the United States lifts its hand from Iran's nuclear deal.
Iran's economy takes hit amid uncertainty over nuclear deal
Renewed nuclear sanctions would certainly cause severe problems for Iran's economy, but much of the damage has already been done by the uncertainty created by the US and myriad home-grown problems.
It was awkward timing for the annual International Oil Show in Tehran this week, which opened just two days before US President Donald Trump was due to make his decision on whether to rip up the 2015 nuclear deal and reimpose sanctions on Iran.
"The atmosphere was grim," said a European consultant who attended the conference on Monday.
"There were fewer foreigners, the stands were smaller, it was depressing."
Organisers admitted that foreign guests were down by a third compared to last year, according to the Hamshahri newspaper.
The only major oil deal that Iran has landed since the nuclear deal was a $5 billion exploration agreement with France's Total and China's CNPC last year, but its future hangs in the balance as executives wait to see what Trump will do.
Foreign banks remain terrified of touching any transaction even cursorily linked to Iran, even after they have been encouraged by their respective governments to facilitate trade and investment.
"We went to the French ministry of economy and they gave us a list of all the banks that would agree to work with Iran. But when we called them, every single one said no," said French entrepreneur Amaury de la Serre when he opened a branch of the high-end Sushi Shop restaurant in Tehran last summer.
Iran has piled up promises of investment with foreign firms, but many have held back on actually moving money into the country while they wait to see if US sanctions will return.
The World Bank says only $3.4 billion actually showed up in 2016 -- a far cry from the $50 billion Rouhani said he was targeting in the deal's first year.
The nuclear deal has been "a genuine disappointment", said Ardavan Amir-Aslani, an international lawyer with an office in Tehran who has written several books on the region.
"They're able to sell oil, OK, that's just enough to pay civil servants and maintain infrastructure, but it hasn't attracted even a fraction of the investment needed," he said.
"Our business has reduced to a trickle. All foreign investment has come to a halt. The meagre amounts promised have been put on hold."
Meanwhile, Iranians are scrambling for the lifeboats. One wealthy family said they had moved their entire fortune out of the country this week ahead of the Trump decision.
They had already lost millions thanks to the crashing Iranian rial which has lost a third or more of its value against the dollar this year.
The numbers are hard to verify but analysts and officials have said between $10 billion and $30 billion has left the country in recent months.
Iranian officials say all this amounts to a flagrant violation of article 29 of the nuclear deal, which committed the US to ensure "the normalisation of trade and economic relations with Iran".
The US counters that it never promised to lift non-nuclear sanctions related to issues such as human rights and Iran's missile programme, which were already complicating trade before Trump came to power.
And many of Iran's problems have nothing to do with Trump.
Iran's private sector is starved of investment, its banking system is crippled by bad loans, and record levels of unemployment mean a third of under-30s are out of work.
President Hassan Rouhani has tried to foster transparency and investment, but protests in December and January revealed the depth of anger at his limited progress.
"Much of the blame for Iran's lacklustre performance belongs to Rouhani's economic team, which has proved no match for the economy's mounting problems," Djavad Salehi-Isfahani, an economics professor at Virginia Tech in the US who specialises in the Iranian economy, wrote in an article for Project Syndicate.
He said Rouhani's efforts to move Iran towards a market-friendly, world-facing economy were now at risk of coming "to a grinding halt", to be replaced by his conservative opponents' preference for a tightly-controlled, inwardly-focused "resistance economy".

"The conservatives are not willing to negotiate on the missile issue or acknowledge the
presence in other Middle Eastern countries so even if Trump stays in, there will just be four more months of negotiations with the Europeans that will lead nowhere," said Amir-Aslani. "Inflation is ramping up, job creation is declining. At the end of the day it's an economic debacle." (AFP)
Source: Reports from agencies

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