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Iran’s Crippled Currency

MONTREAL Escalating economic woes, aggravated by increasingly stringent international sanctions that prohibit transactions with Iran’s central bank and oil companies, are fueling unrest in Iran, as the value of the country’s currency, the rial, plummets. In just 18 months, the rial’s exchange rate against the dollar has fallen by two-thirds.

Reluctant to engage militarily with Iran, and facing increasing pressure from Israel, the United States will most likely continue to push for and apply tough economic sanctions, with two major objectives in its sights. First, the US hopes to force Iran to cooperate fully with the International Atomic Energy Agency (IAEA), the United Nations’ nuclear watchdog, by bringing its nuclear program into compliance with the international community’s demands. Second, economic hardship and the threat of further isolation could compel Iran’s leaders to modify fundamentally their domestic and international policies.

While Iran’s leaders have often downplayed the sanctions’ impact, President Mahmoud Ahmadinejad has recently cited them as the primary culprit behind Iran’s economic turmoil. But Iran has faced similar economic difficulties before – in the 1980’s, oil exports fell significantly amid the country’s eight-year war with Iraq, and in 1986-2000 global oil prices were extremely low – and handled them relatively well. Four factors have made the oil embargo particularly unbearable today.

First, prohibiting oil exports is more painful when world oil prices are rising. Ahmadinejad has benefited from a massive increase in the price of oil, resulting in unprecedented earnings. Oil revenue reached a record high of more than $81 billion in 2010, more than three times its historical average. And more than 50% of Iran’s total oil revenues during the preceding century were earned during Ahmadinejad’s eight years in office.