Rial Attack! International speculators manipulate Iranian currency downwards

International Business Times
Tue, 02 Oct 2012 06:40 UTC

Iran's currency plunged 17 percent on Tuesday, hitting an all-time low of 37,500 against the U.S. dollar and extending a one-week decline that has lopped off more than a third of the currency's value.

The collapse of the rial marks yet another effect of the international sanctions that have hammered the $480 billion economy. Reports of ordinary Iranians exchanging the rials for gold have increased as trading volumes on Tehran's main gold exchange jumped nearly 20 percent in a single session on Monday.

Iran's government blamed the currency's tumbling value on "speculators."

Industry Minister Mehdi Ghazanfari told the state news agency the security forces would "root out" speculators behind the rial's decline. The currency has lost around 75 percent of its value in the past year, according to currency website mesghal.com.

Iran's alleged nuclear weapons program has escalated tensions in and around the Gulf region as President Mahmoud Ahmadinejad's second term at the head of government comes to a conclusion.

President Barak Obama told the United Nations General Assembly last week that the U.S. would "do what we must to prevent Iran from obtaining a nuclear weapon." And Israel has long maintained that Tehran is close to developing such a weapon, citing the developments in its uranium enrichment program, and has called for "red lines" to be imposed by the international community.

Iranian officials have steadfastly insisted the program is for domestic energy use.

Global sanctions on Iranian oil as a result of the program have been in place since July 1, banning the sale, transport and financing of all crude products. The European Union approved its own ban on Iranian crude imports, as well as the insurance of shipping Iranian oil, in late January.

Iran is the world's third-largest oil producer, according to the US Energy Information Administration, or EIA, with the fourth-largest deposit of proven reserves on the planet.

Bloomberg News reported in August that crude shipments have slumped by half -- around 1.2 million barrels per day -- as a result of U.S.-led sanctions, potentially costing the regime as much as $48 billion each year in oil revenues, an amount equal to about 10 percent of the economy. The EIA says oil underpins around half of government revenues.

In Asia, Iran's biggest market, sales have fallen sharply since the EU ban. China's January-July purchases of Iranian crude are down by around 22 percent, according to official figures, with similar declines reported in South Korea. Japan's crude orders are down nearly 40 percent.

U.S. lawmakers inked an expanded package of sanctions that will further restrict Iran's crude exports in August under the Iran Threat Reduction and Human Rights Act.

Economic embargoes first began in 1979 after students infamously stormed the U.S. Embassy in Tehran at the peak of the Islamic Revolution. Extensions were added under the Bill Clinton administration in 1995 and again under George W. Bush in 2007 and given even greater depth last year when Obama signed into law a bill that would freeze the U.S. assets of financial firms anywhere in the world that were found to be dealing with Iran's central bank.

The weakening rial could have an even deeper impact on the rate of inflation in Iran, which is currently running at around 23.5 percent. Unofficial estimates of cost-of-living increases suggest an even higher figure. Iran's unemployment rate is estimated at 14 percent.

The International Monetary Fund expects GDP to slow to 0.4 percent this year, after expanding around 2 percent in 2011.

Iran's central bank set up an exchange center last week to curb what it calls excessive speculation in the market for rials. Essential businesses in the Iranian economy can use the center to buy U.S. dollars at a fixed rate of 12,260.

Comment: Ellen Brown explains what's really going on in Web of Debt:

International Pirates Prowling in a Sea of Floating Currencies, p.218

Countries around the world have been caught in the same trap that captured Mexico. Henry C. K. Liu calls it the "Tequila Trap." He also calls it "a suicidal policy masked by the giddy expansion typical of the early phase of a Ponzi scheme." The lure in the trap is the promise of massive dollar investment. At first, returns are spectacular; but as with every Ponzi scheme, the returns eventually collapse, leaving the people massively in debt to foreign bankers who will become their new economic masters. The former Soviet states, the Tiger economies of Southeast Asia, and the Latin American banana republics all succumbed to these rapacious tactics. Local ineptitude and corrupt politicians are blamed, when the real culprits are international banking speculators armed with tsunami-sized walls of "credit" created on computer screens.

Targeted countries are advised that to attract foreign investment, they must make their currencies freely convertible into dollars at prevailing or "floating" exchange rates, and they must keep adequate dollars in reserve for anyone who wants to change from one currency to another. After the trap is set, the speculators move in. Speculation has been known to bring down currencies and national economics in a single day. Michel Chossudovsky, Professor of Economics at the University of Ottawa, writes:

The media tends to identify these currency crises as being the product of some internal mechanism, internal political weaknesses or corruption. The linkages to international finance are downplayed. The fact of the matter is that currency speculation, using speculative instruments, was ultimately the means whereby these central bank reserves were literally confiscated by private speculators.

While economists debate the fiscal pros and cons of "floating" exchange rates, from a legal standpoint they represent a blatant fraud on the people who depend on a stable medium of exchange. They are as much a fraud as a grocer's scales with a rock on it. If a farmer's peso was worth thirty cents yesterday and is worth only five cents today, his dozen eggs have suddenly shrunk to two eggs, his dozen apples to two apples. The very notion that a country has to "defend" its currency shows that there is something wrong with the system. Inches don't have to defend themselves against millimeters but peacefully co-exist with them side by side on the same yardstick. A sovereign government has both the right and the duty to calibrate its medium of exchange so that it is a stable measure of purchasing power for its people.

In the Eye of the Cyclone, p.302

Iran announced that it would be opening an oil market (or "bourse") in Euros in March 2006, sidestepping the 1974 agreement with OPEC to trade oil only in U.S. dollars. An article in the Arab online magazine Al-Jazeerah warned that the Iranian bourse "could lead to a collapse in value for the American currency, potentially putting the U.S. economy in its greatest crisis since the depression era of the 1930s." Rob Kirby wrote:

[I]f countries like Japan and China (and other Asian countries) with their trillions of U.S. dollars no longer need them (or require a great deal less of them) to buy oil . . . [and] begin wholesale liquidation of U.S. debt obligations, there is no doubt in my mind that the Fed will print the dollars necessary to redeem them - this would necessarily imply an absolutely enormous (can you say hyperinflation) bloating of the money supply - which would undoubtedly be captured statistically in M3 or its related reporting. It would appear that we're all going to be "flying blind" as to how much money the Fed is truly going to pump into the system . . . .

Compounding the problem, Iran and other oil producers began moving from dollars to other currencies for their oil trades. If oil no longer has to be traded in dollars, a major incentive for foreign central banks to hold U.S. government bonds disappears. British journalist John Pilger, writing in The New Statesman in 2006, suggested that the real reason for the aggressive saber-rattling with Iran was not Iran's nuclear ambitions but was the effect of the world's fourth largest oil producer and trader breaking the dollar monopoly. He noted that Iraqi President Saddam Hussein had done the same thing before he was attacked. In an April 2005 article in Counter Punch, Mike Whitney warned of the dire consequences that were liable to follow when the "petrodollar" standard was abandoned:

This is much more serious than a simple decline in the value of the dollar. If the major oil producers convert from the dollar to the euro, the American economy will sink almost overnight. If oil is traded in euros then central banks around the world would be compelled to follow and America will be required to pay off its enormous $8 trillion debt. That, of course, would be doomsday for the American economy. . . . If there's a quick fix, I have no idea what it might be.

Interest and Islam, p.406

Instituting a system of government-owned banks may sound radical in the United States, but some countries have already done it; and other countries are ripe for radical reform. Rodney Shakespeare, author of The Modern Universal Paradigm (2007), suggests that significant monetary reform may come first in the Islamic community. Islamic reformers are keenly aware of the limitations of the current Western system and are actively seeking change, and oil-rich Islamic countries may have the clout to pull it off.

As noted earlier, Western lenders got around the religious proscription against "usury" (taking a fee for the use of money) by redefining the term to mean taking "excessive" interest; but Islamic purists still hold to the older interpretation. The Islamic Republic of Iran has a state-owned central bank and has assumed a lead role in adopting the principles of the Koran as state government policy, including interest-free lending. In September 2007, Iran's President advocated returning to an interest-free system and appointed a new central bank governor who would further those objectives. The governor said that banks should generate income by charging fees for their services rather than making a profit by receiving interest on loans.

That might have been one covert factor in the persistent drumbeats for war against Iran, despite a December 2007 National Intelligence Estimate finding that the country was not developing nuclear weapons, the asserted justification for a very aggressive stance against it. A paper titled "Rebuilding America's Defenses," released in September 2000 by a politically influential neoconservative think tank called the Project for the New American Century, linked America's "national defense" to suppressing economic rivals. The policy goals it urged included "ensuring economic domination of the world, while strangling any potential 'rival' or viable alternative to America's vision of a 'free market' economy." We've seen that alternative models threatening the dominance of the prevailing financial establishment have consistently been targeted for takedown, either by speculative attack, economic sanctions or war. Iran has repeatedly been hit with economic sanctions that could strangle it economically.