October 5, 2012 | Quote

West Seizes On Iran’s Currency Woes


The U.S. and Europe are working on new coordinated measures intended to accelerate the recent plunge of Iran's currency and drain its foreign-exchange reserves, according to officials from the Obama administration, U.S. Congress and European Union.

The first salvos in this stepped-up sanctions campaign are expected at a meeting of EU foreign ministers on Oct. 15, including a ban on Iranian natural-gas exports and tighter restrictions on transactions with Tehran's central bank, European officials said.

A number of additional banks are also expected to be targeted, in the continuing effort to press Supreme Leader Ayatollah Ali Khamenei to curb his country's nuclear program.

The U.S. and EU are also considering imposing a de facto trade embargo early next year by moving to block all export and import transactions through Iran's banking system—which could further choke off Tehran's access to foreign currency, U.S. and European officials said.


To that end, U.S. lawmakers are drafting legislation that would require the White House to block all international dealings with Iran's central bank, while also seeking to enforce a ban on all outside insuring of Iranian companies. There is also a legislative push to block investment in Iran's energy sector by closing off loopholes in existing sanctions.

The EU could follow up on implementing these U.S. measures, just as it backed the White House's moves to impede Iran's oil trade this year, officials said.

“You could see a move for a total embargo,” said a senior European official involved in the sanctions debate. “This could fall in line with what Congress is thinking.”

A nearly 40% drop in the Iranian rial's value against the dollar since Sept. 24 has increased confidence in Washington and Brussels that Western sanctions are starting to significantly erode Tehran's finances, senior U.S. and European officials said.

The rial's fall, which traders blame in part on mismanagement by Iranian authorities, is also seen to be fueling splits among Tehran's political elites. President Mahmoud Ahmadinejad has publicly feuded with Iranian lawmakers and bureaucrats over who is to blame, and on Tuesday attributed the crisis to illegal currency traders as well as U.S. and EU sanctions.


On Wednesday, the Iranian government moved to shut down black-market foreign-exchange houses in a bid to restore financial calm, and antigovernment protests broke out in central Tehran.

It is unclear if the financial panic will force Tehran to make concessions on its nuclear program—the ultimate aim of the West's sanctions campaign. But the rial's plunge is undercutting views held by some in the U.S. and Europe that Tehran's oil wealth could make it immune from financial pressure, U.S. and European officials working on Iran said.

“There has been the perception that Iran is unmovable because of its oil resources,” said a European official. “This perception is quickly shifting.”

Iranian oil exports have fallen by more than 50% this year, according to Iranian officials and independent shipping trackers. U.S. and European officials said their moves to cut off those exports have been aided by ramped-up production in the U.S., Saudi Arabia, Iraq, Libya and other countries, which has helped keep global energy prices stable.

U.S. officials and analysts see Washington and its allies now in a race with Tehran to see what is achieved first—a balance-of-payments crisis in Iran or its acquisition of a nuclear-weapons capability. Tehran says its nuclear program is for peaceful purposes.

“The currency is dropping like a stone, there are riots, and Obama has harangued [Israeli leader Benjamin] Netanyahu not to bomb because there is time to economically cripple Iran,” said Mark Dubowitz of the Foundation for Defense of Democracies, a conservative think tank that advises U.S. lawmakers on sanctions policy. “So if the economic cripple-date occurs before the nuclear red line, then great, economic warfare may work.”

U.S. and European officials believe Western sanctions and the EU's oil embargo, instituted in July, are costing Tehran $15 billion in lost energy revenue every quarter. This, in turn, is helping to force down the government's foreign-exchange reserves, which were estimated to be between $90 billion and $110 billion at the start of the year.

U.S. officials also believe that the widening financial penalties on Iran are making it harder for Iran's central bank to gain access to as much as 30% of its reserves, which are invested overseas. Outside economists now estimate inflation is running as high as 70% annually.

These developments, said U.S. and European officials, explain why Iranian financial officials appear reluctant to try to prop up the value of the Iranian rial by selling dollars into the local currency market. Mr. Ahmadinejad has publicly criticized Tehran's financial planners for not taking these steps.

Some member states still have concerns about taking steps that could disproportionately harm the Iranian population. There have been reports of food and medicine shortages in Iran in recent days, fueled by the weakening of the rial and dwindling imports.

Secretary of State Hillary Clinton on Wednesday sought to deflect charges that sanctions are harming the Iranian people, saying Tehran's decisions were responsible for any economic hardships. “They have made their own government decisions—having nothing to do with the sanctions—that have had an impact on the economic conditions inside of the country,'' Mrs. Clinton said. “Of course, the sanctions have had an impact as well, but those could be remedied in short order if the Iranian government were willing to work with…the international community in a sincere manner.”

In Brussels, the U.K., France and Germany have been pushing for broad new sanctions. Ministers from the three countries wrote to their counterparts last month, urging them to consider sanctions on energy, finance, trade and transportation, according to the letter, seen by The Wall Street Journal.

“The urgency of the matter requires that the EU demonstrates resolve and unity through quick and decisive action,” they said in the letter, calling on the measures to be in place by Oct. 15.

Among the proposals being discussed in Europe is a widening of items on the prohibited-trade list, which would mainly affect energy-related products and services, according to several EU diplomats.

On Thursday, the 27-nation bloc was close to agreement on banning imports of Iranian natural gas and prohibiting exports of graphite to the country because of its possible use in the country's nuclear program, officials said.

The Europeans are also discussing broadening sanctions on a number of Iranian financial firms and imposing a full asset freeze on Iran's central bank. The Oct. 15 measures would likely fall short of a complete ban, an official said Thursday.

Other ideas under discussion include banning the export of marine equipment and the construction of Iranian oil tankers.

There is also a proposal to ban euro transactions with Iran through third parties, two diplomats said, although the details of how this could work are still being hammered out.

Last week, the five permanent members of the United Nations Security Council, plus Germany, said they were eager to resume direct negotiations with Tehran over its nuclear program, which have stalled since June.

Israeli leader Mr. Netanyahu, meanwhile, told the U.N. that the international community needed to be prepared to take military action against Iran by next summer to guard against it acquiring the fissile materials needed to assemble an atomic weapon.

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