FT Alphaville " Gresham's law takes Iran What's happening in the Iranian currency markets at the moment is getting pretty fascinating. Via Reuters on Wednesday: So, the back story is that sanctions have for a long while been causing a huge squeeze on the black market's currency of choice - the dollar. Supply of which Iran obviously cannot freely regulate. As a consequence, it's become ever harder for the central bank to pass off any semblance of an official rate. And Iran has been put at the mercy of oil-related dollar inflows. It's important to note, of course, that the reason the depreciation and associated inflation has been so intensive is almost entirely connected to the scarcity of goods associated with sanctions. As Bank of New York Mellon's Neil Mellor noted on Wednesday: Indeed, the collapse in the Iranian Rial is indicative of the intensifying impact of global sanctions on the country and the accompanying pressure on its government: President Ahmadinejad yesterday denounced the West's economic "war" whilst industry minister Ghazanfari today promised to "root out" speculators. But here's where it gets interesting. In a bid to defend the rial - and keep it even remotely in line with the official "reference" rate of 12,260 rials to the dollar - the government took to what could only be described as Diocletian maximum price edict tactics earlier this month. As Reuters reported on September 24: DUBAI, Sept 24 (Reuters) - Iran launched a fresh bid on Monday to stabilise its falling currency, opening a foreign exchange centre that provides government-subsidised U.S. dollars to import some goods as the country struggles with Western economic sanctions. The rial's street value has tumbled by more than half in the last year because of U.S. and European sanctions against Iran's oil and banking sectors, which have cast doubt on the central bank's ability to defend its currency. Iranians have rushed to informal money changers to convert their savings into hard currencies, driving down the rial's open-market value. This has raised the price of imported goods, contributing to double-digit inflation. The new foreign exchange centre allows importers of goods including truck tyres, construction equipment and synthetic fibres to buy dollars at a rate 2 percent cheaper than the street rate at any given time. The government plans to use revenues from petrochemical sales and 14.5 percent of its oil revenues to provide dollars for the centre, central bank governor Mahmoud Bahmani said on Sunday, according to the newspaper Aftab. Yet even the act of subsidising the "street value" of the dollar (as opposed to the official exchange rate) is proving problematic - presumably because oil-related dollars are not flowing into the country quickly enough to support the exchange. At this point, Iran is running out of options. Indeed, historically speaking, the only options left on the table may be brute force or taking control of the remaining dollar supply (and/or competing currencies) to the rial. It's no surprise then that the internet - which opens the door to barter and other alternative parallel currency systems - is seen as a problematic threat here too. All in all, exactly how Gresham's law goes into effect. And also how food riots begin. Related links: A fistful of ______ - FT Alphaville Iran launches forex centre to support sagging rial - Reuters This entry was posted by Izabella Kaminska on Wednesday, October 3rd, 2012 at 16:29 and is filed under Uncategorised. Tagged with iran, rial, sanctions.