SANCTIONS and economic chaos are beginning to hit the Ahmadinejad regime in Tehran. The riyal is plunging – by leaps and bounds – having lost almost one third of its value in less than a week. Frenzied traders are on the streets of Tehran and Isfahan - protesting against economic mismanagement. The currency has lost about a third of its value since the government launched an “exchange center" that was designed to stabilize the rial by supplying dollars to importers of some basic goods at a special rate slightly cheaper than the market. This but appears to have backfired. Instead of allaying fears about the availability of dollars, the center seems to have intensified the race for hard currency by linking the special rate to the market rate, meaning that even privileged importers will face sharply higher costs. Iranians have responded by scrambling to change their rial savings into hard currency, fueling the slide - even further. Washington led sanctions against Tehran have slashed its oil exports and mostly excluded it from the global banking system. The currency free fall last week suggests sanctions are undermining its ability to earn foreign exchange and that its reserves of hard currency may be running low. But the blame for Tehran's deteriorating economy is being resoundingly placed on the Iranian government too, for failing to cushion the country against the impact of sanctions, that many viewed as inevitable. Much of the criticism is based on the fact that the government seems to have done little to prepare for a situation it must have seen coming. Washington sanctions foreign firms that purchase Iranian oil and penalizes banks engaging in financial transactions with the Islamic Republic. It first implemented financial sanctions on Iran in 2006, and four rounds of sanctions by the United Nations Security Council followed. Tehran's banking system became increasingly squeezed after 2007, as Washington boosted efforts to get US allies and other foreign governments and private entities to implement unilateral financial sanctions imposed by the US Treasury. Critics of the government strongly feel that this government has been the richest in the history of the Islamic Republic, and while it should have reserved billions of dollars for a future day like today, it did not. Between 2005 and 2011, Tehran earned an estimated $465 billion from oil exports alone, according to data from the Organization of Petroleum Exporting Countries. Critics of Iranian President Mahmoud Ahmadinejad say his administration's extravagant spending during this period – on infrastructure and housing projects, subsidized loans, and cash handouts to lower-income and working-class Iranians – boosted inflation and diminished Iran's currency reserves. “The country has mismanaged countering the sanctions...and today, we are faced with a situation where oil sales are down, the country has less foreign currency, and the government can't even transfer (most of) the money for oil it does sell back into the country," a Tehran-based analyst says. For the past two years, as US allies in western Europe and Asia deepened their implementation of US Treasury sanctions against the Islamic Republic – essentially isolating Iran from much of the global financial system – the Central Bank's access to foreign exchange reserves held in accounts overseas has become severely constrained. In the meantime, the country's oil exports, which fluctuate between 900,000 to 1.1 million barrels a day, are 55 percent lower than what they were at this time last year. All this left Iran vulnerable to currency speculators too, as unlike other oil producers in the Gulf, it didn't built up its foreign assets or laid aside enough oil earnings to be able to support its currency. Sanctions alone thus can't be held responsible for the dire straits Tehran finds itself in today. To be fair, sanctions have not been that effective. Tehran has been finding and exploiting holes in the overall sanctions regime – to the detriment of Washington. In a recent story, “Vitol Admits Iran Fuel Oil Cargo Deal," Financial Times exposed Iran bypassing the sanctions – rather conveniently. Vitol is the world's largest oil trader with an office in Houston and affiliates throughout the world. Conveniently, as per the story, its Bahraini subsidiary availed itself and the Vitol organization of the opportunity to buy the spot cargo of Iranian oil product from a non-Iranian counterparty and then resell it, presumably not at a loss. The transaction raises the troubling question of how much Iranian oil and oil product cargoes are being traded outside the parameters of the embargo restrictions set in place to constrain the purchase and sale of Iranian oil. The episode has raised suggestions in Washington that henceforward all imports of foreign crude oil/products into the United States should require an import license designating the country of production origin, not simply the port of shipment. But despite all the chaos and confusion in Tehran, there is no clear sign- yet - that the economic pain in Iran has reached levels that would prompt Ahmadinejad government to compromise on its nuclear program. The point has not arrived – yet. Last week, Israeli Finance Minister Yuval Steinitz said Iran's economy “was not collapsing, but it is on the verge of collapse. The loss of income from oil there is approaching $45 billion to $50 billion by the year's end." And thus despite the visible impact of western sanctions, being felt in Tehran, Ahmadinejad regime could well ride off the current phase too, most feel. The calls for Ahmadinejad regime's imminent demise thus seem premature – as yet. And markets are taking the cue. Despite the Goldman Sachs projection that rising tensions between Israel and Iran could drive oil prices over $130 a barrel next year, the consensus price forecast among the pundits today hovers around $80-90 a barrel. Slowing global economic growth, the cooling Chinese appetite and ongoing euro crisis – all seem to be adversely impacting the crude demand growth. And even Goldman Sachs bullish tone is driven by a one-off, not rising demand, but a tightening embargo on Iran that will take more and more oil out of the market," insists Clemens Grafe, Goldman Sachs' managing director of new market economics. Despite all the efforts, the sanctions are yet to produce the desired magical wand. Tehran is yet to receive ‘the' fatal blow. Is someone in Washington taking the cue?
