Emirates Halt Trade in Iranian Rial

Move adds to Tehran's financial troubles after SWIFT ban takes effect.

Iran's economy suffered yet another blow after banks and currency exchange houses in the United Arab Emirates announced they would cease trading in the Iranian rial. This measure was not part of the trade sanctions the United States is demanding the U.A.E. impose on Tehran. Rather, it was the direct result of the impact of international economic sanctions on the value of the Iranian currency, which lost more than half its value in the past two weeks.

The result of this decision is that Iranian merchants and citizens can no longer use the Iranian currency in the U.A.E. They cannot exchange their rials for another currency. The move slams shut an important trading window for the Iranian regime, through which it had been able to bypass international sanctions.

The Iranian rial

Meanwhile, the Iranian leadership has publicly rejected the possibility of an Israeli strike against its nuclear facilities. Parliament Speaker Ali Larijani said "a barking dog will not dare attack Iran," while the deputy chief of staff said in an interview to Iran's Al-Alam network that Israel's threats are void of substance and reflect the weakness of the "Jewish entity."

Iran's Revolutionary Guards had used Iranian rials deposited in banks in Dubai to fund military and economic activities. The guards control about a third of the Iranian economy, including oil and petrochemical terminals and refineries.

On Friday a corporation controlled by the Revolutionary Guards won the tender to build a subway in Tabriz, estimated to cost $12 billion.

A significant portion of the income from the Revolutionary Guards' various business endeavors are deposited in banks outside Iran, mostly in the Gulf states.

Due to the drop in the value of the rial the government has imposed limits on the transfer of foreign currency outside Iran, sparking a profitable industry of cash-running. Until recently Iranians used to carry suitcases full of local currency abroad, depositing them mainly in Dubai-based banks in exchange for foreign currency.

The immediate result of the decision of banks in the U.A.E., whose trade with Iran is nearly $12 billion a year, will be a 50-percent drop in trading volume. But it will also affect the availability of Western goods in Iran. Most of these are procured through the U.A.E., where some 400,000 Iranian citizens reside, operating thousands of companies.

Government-backed media outlets have yet to address the decision to remove Iranian banks from SWIFT, the system which is used by banks internationally for financial transfers.

Iranian opposition figures say the regime is looking for alternative mechanisms for international trade. One of the possibilities is to operate through Iranian firms based in Russia, Turkey, India and Pakistan, countries which have to date imposed only the United Nations sanctions and have not joined the much more severe sanctions regime of the European Union and the United States.

During the past year the Iranian government opened a number of bank accounts in countries in Asia, while in Turkey, which imports about a third of its oil from Iran, banking for the regime is done through the government controlled Halk Bankasi. Private banks in Turkey have ceased doing business with Iranian businesses. Through the Turkish bank, payments are made by Indian companies for oil they buy from Iran.

In the past year more than 300 new Iranian companies were registered in Turkey, 170 of them in February alone. Tehran and Ankara have announced that they intend to expand their volume of trade during 2012 to $16 billion.

Another way Iran is trying to contain the damage caused by the inability to use SWIFT, is to build a network of barter trade. That would allow countries buying Iranian oil to pay for it with their own goods or ones they would buy for Iran. However, this is a very expensive and inefficient way to trade and is likely to cause a further rise in the prices of consumer goods. Since the start of 2012 the prices of consumer goods in Iran rose by 30 percent to 70 percent.

It is still difficult to gauge the impact of the sanctions on Iranian public opinion, especially on the nuclear issue. A December-January poll by Gallup reported that 40 percent of respondents said they supported Iran's development of military nuclear capability, while 57 percent supported the development of nuclear technology for civilian use.