In the last week, the Financial Times has run several stories suggesting that even with a booming seller’s market for oil production, Iran may be on the brink of a currency crisis. Last week, FT reported (subscription only) that the Iranian rial has become dangerously unstable as the country runs out of hard currency reserves:
“The central bank is short of hard currency because of sanctions which have disrupted withdrawal of money from overseas banks,” says a reform-minded economist connected to Iran’s financial organisations.
Economic sanctions are generally a blunt instrument, but one big exception is the set of financial sanctions developed by the Department of the Treasury to deal with North Korea during the Bush administration. The most effective of those sanctions are those which apply specifically to U.S. banks — and their authority to do business with foreign banks that do business with the targeted country. A single Treasury action against a small bank in Macau in 2005 had the effect of cutting North Korea off from the global financial system. U.S. banks are the central hub of the global financial system, and banks around the world will bend over backwards to avoid losing their access to U.S. banks. Highly technical regulations affecting U.S. banks can therefore have vast secondary and tertiary consequences for banks around the world — and their customers, such as Iran.
The FT reported yesterday (“China and Iran Plan Oil Barter”) that China has been unable to pay some $30 billion it owes Iran for oil and other commodities, because of the difficulty of getting around U.S. financial sanctions. The two governments are apparently discussing some far-fetched barter scheme to replace cash transactions:
Some Iranian officials are growing increasingly angry about the inability of the country’s largest oil customers to pay cash, a problem that has contributed to a shortage of hard currency and has hindered the central bank from defending the Iranian rial, which has been sharply devalued over the past month.
Iran’s current difficulties appear to have arisen largely because of Treasury sanctions adopted days after the 2008 elections (see “Financial Dealing with Iran” in this document). They prohibit U.S. banks from processing transactions that involve payments to Iran regardless what bank is the point of origin or terminus. As most wire transfers have to go through U.S. banks, this basically makes it impossible for any country to use normal banking methods to pay Iran for any transaction — even an otherwise legal transaction such as oil.