The Iranian government has introduced new restrictions on the use of the U.S. dollar by blocking imports priced in the currency, in what appears to be a fresh attempt to halt a slide in the value of its own currency, the rial. According to local media reports, as of February 28, any purchase orders or other import documentation based on U.S. dollars will not be processed by customs officials.
The move comes as a result of a directive from the Ministry of Industry, Mines and Trade to the Central Bank of Iran. Mehdi Kasraeipour, the central bank’s director of foreign exchange rules and policies affairs, was quoted by local news agencies as saying the new rules should not cause too much disruption, given the limited share of the dollar in Iranian trade.
U.S. banks are still banned from dealing with Iran as part of an old U.S. trade embargo that still remains in place. Accordingly, this is believed to have already effectively blocked any transactions with Iran which is based on U.S. dollars because they would ultimately have to be cleared in the U.S.
“Considering that the use of the dollar is banned for Iran and traders are literally using alternative currencies in their transactions, there is no longer any reason to proceed with invoices that use the dollar as the base rate,” Kasraeipour was quoted as saying.
The official further emphasized that Iranian merchants would need to inform their suppliers to change the base currency from the dollar to other currencies so that the related import documentations can be proceeded at Iran’s entry points. He said the merchants also needed to specify whether they would proceed with their payments through banks or currency exchange shops. Kasraeipour said when an invoice is issued in dollars, a demand naturally develops in the network of exchange shops for dollars. He further suggested that this could eventually lead to a rise in the rates of the hard currency.
As of Wednesday, a new electronic system of the CBI for purchasing foreign currencies became operational on a wider scale. The system offers all currencies to importers and exchangers, except for a handful that includes Japan’s yen, South Korea’s won and Thailand’s baht.
Although Kasraipour has mentioned the sanctions as the underlying cause of Iran’s new decision, this could be part of the Iranian government’s initiatives to control the black market for foreign currency and to prevent the rising price of U.S. dollar against the Iranian currency tuman, which has been fast losing its value over the past nine months.
It is still not known whether the ban on dollar-based purchase orders would make any difference in controlling the devaluation of the Iranian currency if merchants begin to pay for imports in Euros, the most likely alternative to dollars. The CBI decision appears to be oblivious to the fact that the Iranian currency has been losing its value against all major currencies, not just against the U.S. dollar.
The price of U.S. dollar in the Iranian market recently jumped to 5,000 tumans with a 30 percent rise in comparison to the price in September. Following a clamp down on the black market and officially authorized moneychangers during the past two weeks, every U.S. dollar is being traded for 4,500 tumans, which is still 16 percent higher than September.
Kasraipour said that “U.S. dollar has a small share of Iran’s trade basket and the ban on the registration of dollar-based purchase orders is not going to cause major problems for Iranian businesses.”
Based on figures released by the Iranian Trade Development Organization, Iran has imported almost $43 billion worth of goods during the past ten months. The figures show a 22 percent rise in imports compared to the same period in the previous year.
Iran receives its oil revenue in Euros although the price of oil is determined in U.S. dollars. Replacing dollars with Euros may not create any problem in Iran’s trade with Europe. But during the past ten months, only 10 percent of Iran’s imports have come from Europe. Iran’s major trade partners are in East Asia and usually trade in dollars and their national currencies are not popular in the world markets.
Tehran has long sought to switch to non-dollar based trade. It has already signed agreements with several countries and is in talks with Russia on using national currencies in settlements.
While meeting with Russian President Vladimir Putin in November, Iranian Supreme Leader Ali Khamenei said that the best way to beat U.S. sanctions against the two countries was joint efforts to dump the American currency in bilateral trade. He told President Putin that by using methods such as eliminating the U.S. dollar and replacing it with national currencies in transactions between two or more parties, the sides could “isolate the Americans.”
There are some obvious workarounds for Iranian traders, given that many regional currencies are pegged to the dollar, including the Omani rial, the Qatari riyal, and the UAE dirham. Alternatively, they may opt to use the euro, given the relatively strong relationship Tehran has with many European countries. However, the extra layer of currency swapping involved may add to the cost of imports into Iran which could then feed into higher inflation.
Wider market forces may also help the Iranian authorities. In a review of recent economic developments issued on February 28, Shervin Shahriari, chief investment officer of Tehran-based Turquoise Partners, said the rial was now much closer to its ‘fair value’ against the dollar and added, “we would not be surprised to see a short-term reversal of the recent rial weakness.”
The latest move comes a year after another attempt by the Iranian government to limit the use of the U.S. dollar. In January 2017, Central Bank of Iran governor Valiollah Seif announced the government would stop using the U.S. dollar in its official statements. Despite that, the central bank continues to use the dollar when discussing international trade flows and other topics.