Each year the editors of the Iran Times review the news of the outgoing year and name the chief Newsmakers of that year. This is 
This year there was no question that the rial dominated the news within Iran—both directly, in terms of its value, and indirectly, in terms of inflation fears and soaring prices.
Within the expatriate community, the dominant News-maker was Arbabsiar, an Iranian-American from Texas. Arbabsiar has never been interviewed and has only been heard to utter two words in his courtroom appearances. But, despite that, he was the dominant presence felt from the expatriate community because of the impact he has had on souring relations between Iran and the rest of the world.
Perhaps the most startling point of the government’s new policy is that it has locked the value of the rial to the dollar, a currency President Ahmadi-nejad has condemned for years as sliding into well-deserved obscurity. The official exchange rate has been 12,260 rials to the dollar since January 28; it has not shifted one rial.
In the latest sign of the rial’s decline, the reformist daily Mardom Salari reported last week that more and more wholesalers in the Tehran Grand Bazaar are asking their customers to pay in dollars and forget rials. All around the world, that is a common sign of currency disaster. When wholesalers who engage in the largest cash transactions decide to abandon their own currency, that commonly leads retailers to give a preference to a foreign currency and then the wealthy members of the public make the same shift.
One merchant told Mardom Salari he preferred dollars in part because he had no way of knowing what exchange rate was reasonable when the price was shifting sometimes hourly as the government tried to stop the public from discerning an open market value. In other words, the government’s own efforts to repress the free market may be driving more people to the dollar.
Confidence in the rial was effectively lost right after the revolution, but that distrust accelerated this past year, partly as a result of growing sanctions and the political pressures the Islamic Republic faces. Iranians have been increasingly buying gold and foreign currencies as a hedge against the collapse of the rial.
Much of the rial’s decline, however, stems from the government’s own policies. President Ahmadi-nejad ordered bank interest rates pushed down below the rate of inflation last April. That meant the public did not want to put their savings in a bank in rials because the deposit was guaranteed to have less purchasing power when withdrawn. That policy sharpened the move to other currencies and to gold.
On top of that, the government is said to be scrounging for funds anywhere it can find them to keep up the monthly welfare payments to every citizen. The government has reportedly dunned the banks for cash to make the payments.
The regime has also restricted cash withdrawals and allows banks to sell no more than $2,000 in American currency each year to each citizen traveling abroad. That drove travelers to the moneychangers in the street and depressed the rial yet further on the free market. People in the street were asking why those limits were imposed if the government really did have “huge reserves” of foreign currency as it claims repeatedly.
Agence France Presse (AFP) quoted an unnamed source as saying the Central Bank was not getting many dollars any more. The source said that, because of US financial restrictions, Iran’s main buyers of crude—China, Japan and South Korea—no longer paid dollars to Iran but instead paid in local currency into local bank accounts in those countries from which Iranian buyers now draw funds for imports. That reduces the resources available to the Central Bank.
In November, Yahya ale-Eshagh, the chairman of the Tehran Chamber of Commerce, told the Mehr news agency, “Any family that seeks to save is going toward the dollar.”
The Central Bank perpetually resists devaluing the rial to reflect the open market rate, in part because the open market rate is often suspect as subject to manipulation. The open market rate has surged and slumped with great suddenness this past year, always a suspicious sign.
Ali As-Saffar, an analyst at the Economist Intelligence Unit in London, told the Bloomberg news agency that Iranians are seeking a less “volatile” currency than the rial and generally feel safer with the dollar, even though President Ahmadi-nejad has been saying the dollar is a dead currency.
In December, US Treasury Undersecretary David Cohen said the gap between the official and open market rates provided an arbitrage opportunity exploited by officials and businesses affiliated with the government and Pasdaran. They are among regime elements able to obtain foreign currency at the favorable official exchange rate, he told the Senate Foreign Relations Committee in written testimony.
“Ordinary Iranians are urgently seeking out foreign currency such as dollars or euros for safety, yet they are having trouble accessing hard currency, and, when they can, they have to pay the unofficial [free] market rate,” said Cohen, the Treasury undersecretary for terrorism and financial intelligence.
“At the same time, senior government officials and preferred businesses, including [Pasdar]-owned and controlled operations, are able to access foreign exchange at the official [Central Bank] rate, essentially engaging in profitable arbitrage on the back of the average Iranian,” Cohen wrote.
The Alef news website linked to Deputy Ahmad Tavakkoli, an economist who runs the Majlis research center, cited him as saying the gap between the rates “will lead to massive undue incomes at the expense of the nation’s assets.”
That will result in the “emergence of a new class of people who will have achieved greater wealth through the economy’s muddy waters and the blessings of the Central Bank,” said Tavakkoli, who has frequently criticized President Ahmadi-nejad’s economic policies.
One unanswered question is whether the Central Bank is complicit in the game, happily making dollars available for the elite’s profit mongering, or just bumbling and stumbling, unable to figure out what to do stop the scheme.
Cohen told Congress that for a decade, until September 2010, Iran successfully supported a single, official exchange rate using hard currency earned from oil sales. He credited United Nations sanctions imposed in June, 2010, with making it hard for the Central Bank to access foreign currency to defend the rial. The plunging currency is now “fueling serious inflation, high unemployment and domestic discontent,” he said.
A separate issue this past year has been lopping zeroes off the rial. The cabinet finally decided a few weeks ago to lop off four zeroes so that 10,000 rials will become 1 rial. A dollar would go from 12,260 rials to 1.23 rials overnight. This a purely cosmetic change and has nothing to do with value. But it has been tying the Central Bank in knots. The bank is now saying the change won’t come until February 2015.
The rial was introduced in 1798 by the then-new Qajar Dynasty. In 1825, the Qajars changed the name to gheran. In 1932, the Pahlavi Dynasty switched from the gheran back to the rial, with the rial worth about 10 US cents of the day and divided into 100 dinars.
The Pahlavi rial slipped in value from about 10 to the dollar in 1932 to 70 to the dollar by the late 1950s. It then remained very stable—one of the world’s most stable currencies for two decades—until the 1979 revolution when it went into a sharp plunge from which it has yet to emerge.
Within the expatriate community, the Iran Times named Arbabsiar as the Newsmaker of the year. He was charged last October 11 with trying to arrange the assassination of the Saudi ambassador to Washington.
Prosecutors say Arbabsiar was tasked by the Qods Force of the Pasdaran to contact a drug cartel in Mexico to arrange the murder of the ambassador. Arbabsiar talked to friends in Texas and was given a name. Unfortunately, that contact was actually a US Drug Enforecment Administration spy who had penetrated a Mexican drug cartel.
Arbabsiar has only been heard to speak two words in public. Asked in court in October how he pleaded, he said, “Not guilty.”
The case involving Arbab-siar appears to be a watershed in international attitudes against the Islamic Republic, coupled with strongly worded criticism of Iran’s human rights compliance by the UN rapporteur on Iran and a report from the IAEA saying there are many indicators Iran has a nuclear weapons program. All three emerged in a four-week period last October and November.
Only weeks after Arbab-siar’s arrest, the European Union decided to impose massive and punitive sanctions on Iran, something the EU had never previously given a serious thought to. And the UN General Assembly voted to condemn Iran for the Arbabsiar plot with a mere eight nations out of 193 UN members backing the Islamic Republic—the least support the regime has ever received at the UN
US prosecutors have said Arbabsiar told them all about the plot after his arrest and freely provided numerous details. But his lawyer said he would plead innocent. That is the normal procedure. By pleading innocent, Arbabsiar and his lawyer, Sabrina Shroff, have some maneuvering room to try to minimize the charges. Prosecutors said Arbabsiar could face life in prison if convicted on all the charges, including terrorism.
The judge said in October the trial would likely start in January and last three to four weeks. But in January, the date of October 22 was set for the trial’s start despite the defense pleading for even more time.