The collapse of the rial in Iran's foreign currency exchange in early October was a tipping point -- not so much for Iran's economy as for Tehran officials' efforts to deny that sanctions do harm. In a rare moment of agreement, President Mahmoud Ahmadinejad and analysts in Washington blamed the rial's collapse on Western sanctions, even as most of the president's political opponents in Tehran insisted that his handling of the economy -- not sanctions -- was responsible for the economic mess.
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For his part, Supreme Leader Ali Khamenei dismissed the sanctions as "not a new issue" and said that "enemies are making efforts to blow the issue of sanctions out of proportion, and, unfortunately, certain people inside are assisting them."
As a lame-duck president with only six months left in his term, Ahmadinejad is an easy target. But blaming the crisis on domestic policy mistakes is also a way for the more radical politicians in Tehran to continue to deny the sanctions' negative impact and to suggest that the crisis will be brought under control by changes in economic, not foreign, policy.
In reality, both the sanctions and the government's inept response to them have contributed to the country's economic woes. But Western analysts have misjudged the severity of the crisis: Since the rial started to fall, the media has been full of tall tales of hyperinflation, economic collapse, and revolution. Much of this is based on a misunderstanding of how Iran's foreign exchange markets work.
Why didn't Tehran see this coming?
Economic mismanagement in Iran is nothing new. In the past, high oil prices have covered up policy mistakes and prevented economic crises. Oil couldn't save Iran this time, however, because sanctions have taken a large bite out of the country's energy revenues. Oil exports are down about 50 percent this year from their normal level, and they may fall further. Iran has also lost its access to part of its foreign currency reserves, which are frozen in foreign banks.
Iran should have known this could happen. After all, Western governments were not hiding their intentions to tighten the sanctions. The Iranian authorities had ample warning that maintaining the rial as a convertible currency would become infeasible once sanctions began to bite. They could have laid the groundwork for their current multiple-exchange-rate system -- which allows Iran's Central Bank to sell foreign currency at different rates to different users -- long before December 2011, when U.S. President Barack Obama signed the sanctions law that limits Iran's access to the oil market and the international financial system.
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