Despite the barrage of geopolitical headlines involving Iran, and as of today, the US and Israel, especially as pertains to wargame exercises in the Straits of Hormuz, a different, and potentially much more important story is to be found in the country's capital markets, and specifically its currency, which has continued to tumble ever since Obama signed the Iran financial boycott on New Year's Day as reported here. And, as we predicted, it is the aftershocks of the boycott which may have the most adverse impact on geopolitics. Because if the Iran regime finds itself in a lose-lose situation with its economy imploding and its currency crashing, the opportunity cost of doing something very irrational, from a military standpoint or otherwise, gets lower and lower. Then again, something tells us the US administration has been well aware of this sequence of events all along. Here is Art Cashing explaining it all.
From UBS Financial Services
Show Me The Money - Iran continues to make headlines (and roil the crude market) with its threats to blockade the Strait of Hormuz. Observers feel the threat is primarily a reaction to the trade sanctions which are beginning to pinch, and pinch tightly. While the people are not exactly in the streets yet, the business community appears to be in an all out scramble. That shows up in the recent frantic trading in the currency black market. Here’s a bit of what the sharp-eyed Bob Hardy wrote on the topic on his nifty GeoStrat blog:
Despite all of the tough talk and threats coming out of Teheran as it wrapped up its ten day naval maneuvers, one only has to look at the dramatic fall in the black market value of the Iranian Rial versus the U.S. Dollar, to know that the country is under a tremendous amount of pressure. The leaders of this military dictatorship cloaked in a theocracy, may threaten to close the Strait of Hormuz if its oil is sanctioned or if it is attacked militarily. They may test fire new missiles and warn the U.S. to keep its aircraft carriers out of the Persian Gulf, but the people understand the risks, and they are voting with their money.
The locals are dumping their Rials for Dollars at such as dizzying rate that the banks are no longer cashing letters of credit at the official rate, which leaves businessmen in the lurch and continues to weaken support for the regime. Multiple media sites are reporting that moneychangers are no longer even advertising rates on their white boards, as they cannot keep up with the fall in the Rial's value.
The currency has fallen out of bed ever since President Obama signed a defense bill on Saturday, December 31st, which included a provision to sanction companies that used the Iranian Central Bank to buy that country's oil. By Monday, January 2nd, the Rial was widely reported to be trading down 12% in the black market from Saturday's rate, and Mehr news service reported that housing prices had tumbled 20% during the last few weeks. As a point in fact, we understand that many hard assets that are not absolutely necessary, are being sold so that people can invest in the U.S. Dollar and other foreign currencies.
This drop was on top of the 10% hit the currency took after Teheran announced that it was cancelling all trading with the UAE several weeks ago, but it soon rescinded that decision. The Rial was trading at 17,800 Rials to the Dollar on Tuesday, January 3rd, which represents a fall of about 17% from the street rate on Saturday before the sanctions announcement. Compare that rate with the official rate displayed on the Central Bank's website of 11,100 Rials to the Dollar, and one can see why the Central Bank has been holding daily emergency meetings. On Wednesday the decline continued in spite absurd comments from the Iranian government that the decline in the Currency had nothing to do with the new U.S. sanctions, because they have not yet taken effect.
This is just beginning. Stay tuned.