The US is considering economic warfare with Iran

Oil Price | Nick Cunningham: Iran’s currency recently hit an all-time low, and economic uncertainty looks likely to test the country’s political establishment.

Iranian President Hassan Rouhani has already been dealing with a restless population, after years of disappointing economic performance following incredibly high expectations of rewards from the 2015 nuclear deal. The sudden loss of value to the rial threatens to undermine him even further.

Iran’s currency, the rial, traded at 40,000 to the dollar last year, but this week plunged to 60,000 rials per dollar, sparking panic buying. Just a few days ago, the government announced a plan to implement a currency peg at 42,000 rials, although that surprise move caused confusion. The central bank is trying to limit the amount that people can sell in exchange for foreign currency in an effort to halt the pressure.

The currency crisis comes just a few months after protests erupted across a wide swathe of the country, although, notably, less so in Tehran. The fragile nature of the rial could add to economic grievances and foment even more unrest.

“Enemies outside of our borders, in various different guises, are fueling this issue and are going to some effort to make conditions tougher for the people,” Iranian central bank governor Valiollah Seif said on Tuesday. Some Iranian officials blame Saudi Arabia and the UAE for limiting Iran’s access to dollars. Plus, the U.S. still has some sanctions on Iran that continue to curb bank financing. Iran earns plenty of hard currency from oil sales but is having trouble bringing the proceeds home.

The problem for Iran is that the U.S. government is likely going to start taking on a more belligerent posture any day now. Moreover, some hawkish groups in Washington are calling for open economic warfare against Iran.

National Security Adviser and infamous war-hawk John Bolton just started work this week. Mike Pompeo, another person eager to start a war with Iran, is hoping to soon be confirmed as Secretary of State.

The Trump administration has to make a decision on what it is going to do with Iran sanctions by May 12. Few expect the U.S. to remain in the nuclear accord. In fact, U.S. Secretary of State Steven Mnuchin tipped Washington’s hand on Wednesday, when he said that “very strong” sanctions on Iran were possible, including both “primary and secondary sanctions.”

“If the president doesn’t sign the certification, the sanctions snap back into place,” Mnuchin told reporters. “I do think the primary and secondary sanctions would have an important impact on the Iranian economy, and that’s something he’s thinking about and balancing as he makes his decision.” When asked about sanctions separate from the nuclear deal, Mnuchin responded by saying “you can assume we continue to work on that.”

Obviously, that would dramatically step up the economic pressure on Iran and could spell even more trouble for the country’s currency.

The question for the oil market is how much Iran’s oil production will be affected by U.S. sanctions. The U.S. is likely burning bridges with its allies, who want to stay in the deal. That could undermine the effectiveness of the sanctions. Nevertheless, the U.S. could knock some 400,000 to 500,000 bpd of Iranian oil offline, according to a recent study from Columbia University’s Center on Global Energy Policy.

Meanwhile, the flare up of conflict in the Middle East is already driving up oil prices. “Oil markets are very much linked to geopolitical tensions, especially if they’re in the Middle East, the heart of global oil exports,” IEA executive director Fatih Birol said.

He noted the tensions surrounding Saudi Arabia shooting down missiles from Yemen, which could exacerbate the brewing conflict between Riyadh and Iran. Also, the U.S. is considering military action in Syria, which pushed up prices on Wednesday. “If tensions continue, they will continue to have an impact on the oil market and prices,” said Birol. “Definitely, this will be a reason to push the prices up.”