Amid indirect talks over the 2015 nuclear deal, is Iran under pressure because of a shortage of foreign reserves?
With US sanctions trying to cut off Tehran’s access to financial markets and transactions — as well as sharply reducing oil exports — Iran has long faced the question of whether its economy is backed by a sufficient level of foreign currency.
The issue is linked to a sharp decline in Iran’s own currency. The rial sank to more than 300,000:1 v. the US dollar, compared to previous historic lows of 180,000:1 in autumn 2018 and 45,000:1 early that year.
With the prospect of a renewed deal and the lifting of the American sanctions, the rial has recovered to 226,800:1.
But the International Monetary Fund pointed to an Iranian crisis earlier this month, when it estimated Tehran’s foreign reserves at only $4 billion. That is a drop of almost 97% from the 2018 level of $122.5 billion.
Iranian officials protested the numbers, and analysts at Bourse and Bazaar explained the reason for the dramatic plummet. The IMF is basing its 2021 figure — unlike that of 2018 — on reserves that Iran can immediately use. Because of the Trump Administration’s “maximum pressure” campaign, the IMF estimates that 90% of reserves are held and thus “frozen” in other countries.
The IMF then calculated that, of the $12.4 billion in accessible reserves in 2019, another $8.4 billion has been lost with a balance of payments deficit.
After objections from the Central Bank of Iran over its method of calculation, the IMF stated that “total gross reserves” are $115 billion.
But, perhaps more importantly, the Fund did not revise its estimate of $4 billion for “usable reserves”.
That points both to an immediate issue in the nuclear talks in Vienna between the US and Iran, brokered by the European Union and the powers in the 2015 deal (UK, France, China, Russia, and Germany).
Iran is insisting publicly on the full removal of all US sanctions since the deal was agreed. The Biden Administration has positioned itself on a sequenced approach, in which sanctions removal is linked to Tehran’s return to compliance with the agreement.
Practically, that has meant Iran is still unable to access any of the frozen funds abroad. Tehran had focused on returning $7 billion from South Korea, with a visit by Pyongyang’s Prime Minister after the Revolutionary Guards seized a South Korean tanker.
However, none of the funds have moved. The Biden Administration denied a report that it offered the return of $1 billion as a sign of goodwill.
Without any advance on the issue — and without unilateral action by other countries — the US retains an important point of leverage in the talks. Iran has been given some breathing space by the improvement in the position of the rial, but that is based on expectation rather than reality. If the talks are perceived to stall, the currency crisis may be renewed.
This could explain why Iran, despite its public position, appears to have accepted some form of “sequencing” in the negotiations. Rather than demanding the lifting of all US sanctions as a precondition, President Hassan Rouhani now refers to removal of “main sanctions” as part of negotiations.
US “hawks” who oppose return to the nuclear deal continue to proclaim, in mainstream publications, that Iran is at the point of collapse. Some analysts, such as Djavad Salehi-Isfahani, and the activists of Responsible Statecraft push back against the notion of “imminent crisis”.
As so often during the decades of US-Iran tensions, the challenge is to navigate between the polar opposites of political spin to understand that Tehran is not in free fall — but nor is it in a position of strength.