Iran’s Access to Hard Currency Reserves Drops Precipitously

In its latest assessment of Iran’s economy, released last week, the International Monetary Fund (IMF) estimated that Iran’s “readily available and controlled” gross official reserves will fall to $8.8 billion by the end of 2020, a downward revision of almost 90 percent compared to the IMF’s April estimate of $85 billion. If accurate, the new estimate indicates Iran may be closer to a balance-of-payments crisis than previously thought.

While one should treat the IMF’s new finding cautiously, its figure is very close to a previously publicized U.S. government estimate that only 10 percent of reserves remained accessible in December 2019. Still, information on where Tehran’s reserves were parked in 2018, when U.S. financial sanctions were first reimposed, is not publicly available, which makes it difficult to vet the IMF estimates. However, most of the money the IMF now considers less than fully accessible is likely held in sanctions-mandated escrow accounts by Iran’s major oil customers, such as China, Japan, South Korea, India, Turkey, and Italy.

In 2019, Washington also designated the Central Bank of Iran (CBI) for financing terrorism, which further restricted Tehran’s access to its funds held abroad. This month, the U.S. government also designated 18 major Iranian banks. These designations put immense pressure on Iran’s access to the international financial system.

However, all U.S. sanctions imposed so far have a humanitarian trade exemption, which allows Tehran to buy non-sanctioned goods such as food and medicine. The United States and Switzerland set up a special financial channel for such purchases; the Treasury Department also issued a general license allowing the CBI to conduct humanitarian trade despite its role in financing terrorism.

This exemption affects calculations regarding when Tehran may face a balance-of-payments crisis, as Tehran can use money held in foreign oil escrow accounts to fund humanitarian imports. Accordingly, the IMF estimated that Tehran’s “readily available and controlled” reserves will increase from $8.8 billion at the end of 2020 to $10.5 billion in 2021.

Iran has been actively lobbying to release its blocked funds. For example, in 2018, Tehran secured the release of $700 million held by the United Arab Emirates. Abdolnasser Hemmati, the head of the CBI, said this month that his negotiations with Iraq to release Tehran’s blocked money produced a favorable agreement.

The future of Iran’s reserves will likely depend on the outcome of the U.S. presidential election in November. If former Vice President Joe Biden wins, he will likely lift key sanctions on Iran if Tehran complies with the 2015 nuclear deal, which would enable Iran to access its blocked funds. This development would significantly increase Iran’s gross official reserves.

If President Donald Trump wins, however, a continuation of the maximum pressure campaign, combined with the further expansion and enforcement of sanctions, can further reduce Iran’s access to its foreign reserves, making the IMF’s estimate for 2021 too optimistic. In fact, with increased sanctions and better enforcement, Washington can push Tehran’s fully accessible reserves close to zero within the next two to three years.

Tehran is not yet facing a balance-of-payments crisis, but a lack of reserves is only one of the economic woes Tehran faces. The Iranian economy is also suffering from three years of recession, double-digit inflation, and depreciation of its national currency. The regime faced two waves of widespread protests in 2017 and 2019 and is preparing for another round. Tehran’s clients across the Arab world are also facing increasing challenges to their legitimacy.

If Washington continues maximum pressure, by the end of the next presidential term, the Islamic Republic will likely face a stark choice between collapse and capitulation to U.S. demands.

Saeed Ghasseminejad is a senior Iran and financial economics advisor at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP) and Iran Program. For more analysis from Saeed, CEFP, and the Iran Program, please subscribe HERE. Follow Saeed on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_CEFP and @FDD_Iran. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.