Distressing U.S. sanctions on Iran’s oil industry will become active on November the 4th, but the Iranian economy is already showing signs of big cracks. Coincidentally, the day the sanction sets in marks the 39th anniversary of the kidnapping of the staff and diplomats at the US embassy in Tehran.
Iran currently has a flourishing black market for the greenback as the rial continues to nosedive. According to the Forex website, Bonbast.com, the Iranian rial recorded a new low of 138,000 against the U.S. dollar yesterday, which monitors the unofficial market.
The US wants to bring down Tehran’s crude exports to “Zero.”
US President Donald Trump tweeted in May that “The Iran sanctions have officially been cast,” announcing his government’s exit from the 2015 Iran nuclear deal. Trump’s decision sounded knell to the Joint Comprehensive Plan of Action (JCPOA), as the agreement is officially called.
Other parties to the agreement – Russia, the European Union countries, and China – were disappointed, but quickly reaffirmed their intention to stick to the arrangement. However, the people of Iran are not willing to believe other countries who might not risk their relationship with the US in favor of the deal.
As a result, Iranians who have already experienced sanctions previously have started shoring up dollars which has turned the currency extremely volatile in the previous few weeks.
The government turned its ire on the central bank and other ministers. In July, the head of the central bank was kicked out, and likewise, in early August, the labor minister was forced to quit, and last weekend, the economy minister was ousted.
The expelling of essential officials indicates that the President, Hassan Rouhani, a moderate, is losing his control to hardliners in the country. Ali Vaez, director of the Iran Project at the International Crisis Group, said: “Rouhani’s failure to respond to the economic crisis with gut and grit has further isolated him. Even his erstwhile allies in the parliament are deserting what they believe is a sinking ship.”
The currency’s fall and economic weakness have sparked nationwide protests leading to 25 deaths in the past six months. Most of the demonstrations were lead by truck drivers, merchants, and farmers.
Even though the government has failed economically, Rouhani’s opponents have projected it as a political failure by pointing to the fact that it was his government that trusted the US and entered into the 2015 nuclear deal. A majority of people now consider opening up and negotiating with the US as a big miscalculation on the part of Tehran.
Following Trump’s announcement, significant clients of Iranian crude are looking for other alternatives. In July, the country’s production fell by 56,000 bps, compares with the previous month. The output has decreased by 150,000 bpd compared to May, and Reuters data indicates that Iran’s crude exports could fall to 2.06 million bpd this month, down from 2.16 million bpd in July.
The worst is yet still to come, however, as the BMI research has forecast a 4% contraction in Iran’s economy. The US officials are determined to suppress Iran’s “nuclear ambitions,” limit its regional influence and dislodge its ballistic missile program. The US admin has repeatedly stated that regime change is not their official policy which raises the question about Washington’s ultimate objective. As of now, the US aims to bring down Iran’s oil exports to “zero.”
The Bank of America’s Merrill Lynch analysts have warned that crude oil price could rally sharply in the first of 2019 when the sanctions begin to impact the overall oil supply. Until then, crude is expected to remain range-bound between $65 and $80 per barrel. The overall scenario indicates that the decline of the Iranian rial has started only just begun.
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