According to the public relations department of Agah Investment Group, Amirali Raeisi, an economic expert, wrote in a note referring to the turbulent conditions of the foreign exchange market in recent weeks:
The rise in the exchange rate in recent weeks has caused concern among businesses and various segments of society, to the extent that the Minister of Economy was impeached in parliament due to the depreciation of the national currency. The increase in the exchange rate has multiple causes, each contributing to this instability in its own way. However, the root cause of currency price fluctuations in Iran may be attributed to the economy’s dependence on political developments.
Economic indicators are determined based on market rules and formulas. Specifically, the pricing of goods or services is driven by supply and demand—the higher the demand while supply remains insufficient, the higher the prices will rise. However, in the realm of politics, actions are shaped by prevailing circumstances, making predictions nearly impossible. Meanwhile, the most crucial characteristic of any successful economy is its predictability. Given the notion that Iran’s economy is heavily influenced by political developments, its indicators tend to be unpredictable and fluctuate based on news and events.
The most significant drawback of this dependency is the rise in ‘inflation expectations.’ Inflation expectations refer to the rate at which people—consumers, businesses, and investors—anticipate prices will increase in the future. This rate is crucial because actual inflation is, to some extent, influenced by public expectations.
In addition to the mentioned reasons, the demand for the U.S. dollar typically rises in December and January due to the New Year celebrations and the Chinese New Year. Businesses also require foreign currency to import essential goods for the holiday season, further driving up demand.
Another factor contributing to exchange rate instability is the imbalance in non-oil trade, with imports exceeding exports.
The rising demand in both official and unofficial markets forces the country’s foreign exchange resources to rely on oil revenues. In the unofficial market, there are certain legitimate demands that must be met; otherwise, shortages can lead to crises—just as we have occasionally seen shortages and price hikes in essential goods like medicine.
It is also worth noting that there are unauthorized and illicit demands for foreign currency, including smuggling, speculation, and capital flight, which are met through the unofficial market. The significant reliance on the unofficial market for foreign exchange weakens the official market, pushing it to the sidelines instead of allowing it to serve as the primary reference.
The policy of unifying the exchange rate, which has been implemented by the government in recent weeks, is not yet assessable. It is inaccurate to claim that this policy has caused the rise in the dollar’s price, as it seems that this market has not yet developed enough.
The Central Bank is trying to achieve certain goals through the establishment of a negotiated currency market. One of these goals is to regulate and clarify the foreign currencies that are offered outside of the NIMA system. The lack of control over the unofficial currency market allows this market to set the exchange rate, preventing the goal of the negotiated currency market from being realized, which is to discover a reliable and optimal rate.
One of the questions raised about preserving the value of the national currency is the comparison between the Iranian and Russian economies. The question is why the value of the ruble was maintained despite economic sanctions and war, while the value of the Iranian rial decreases due to the political positions of the U.S. President.
After the sanctions imposed on Russia due to its military invasion of Ukraine, the Russians temporarily used interest rate tools to maintain the value of their national currency and reduce inflation. Meanwhile, in Iran, the interest rate tool has somewhat lost its effectiveness, and if implemented, it could lead to a worsening of banking imbalances, problems in the capital market, and economic stagnation.
Russian economic policymakers, in line with fundamental reforms in foreign exchange policies and to prevent recurring currency fluctuations and make the economy more predictable, began stabilizing the entry of oil revenues into the foreign exchange market at a minimal level since 2017. This was done to prevent tying the nominal exchange rate to oil revenues. In other words, despite the increase in oil export value, they decided not to use the increase in foreign exchange reserves for reducing the real exchange rate or making imports (both official and unofficial) more attractive. Instead, they chose to allocate it towards increasing foreign exchange and gold reserves. This approach contrasts with the currency intervention policies of our government.
In Russia, the government has strongly protected foreign exchange resources, and many non-essential items have been banned since the beginning of the sanctions. Policies like the preferential exchange rate are not observed in the country. Additionally, Russia has strictly enforced the obligation to return export earnings, and companies and exporters have no excuse for failing to repatriate their foreign exchange revenues.
Finally, it seems that one of the reasons for the success of Russia’s Central Bank in controlling the exchange rate is the country’s relatively intact official foreign payment structure. In contrast, Iran’s structure has collapsed, which is why the Russians can easily close capital accounts and sever the link between export currency and capital outflows.
These policies have shown that it is possible to preserve the value of the national currency even in crisis conditions, as long as scientific methods are used and individuals without the necessary expertise are not put in charge.
