David Frum

10.04.12

Why is Iran's Currency Collapsing Now?

Daniel Cloud is a founding partner of two hedge funds who manages also to find time to teach philosophy at Princeton. He is a shrewd observer of international markets. I asked him why he thought the Iranian currency was collapsing now. His answer is surprising - but highly convincing.

For many years, the sanctions on Iran weren’t effective. They weren’t very serious sanctions, because the outside world was willing to do everything except… actually interrupt the flow of oil, the only thing that would have made a difference. The two sides disliked each other, but were dependent on each other, so they attacked each other in relatively minor ways, while continuing to do business.

This latest round of sanctions, however, which included cutting Iran off from the global payments system, really has been serious, so serious that Turkey has been forced to pay for Iranian oil with gold. But why? What is it that suddenly caused the West to change its behavior? New worries about Iranian nuclear progress? The problem with that explanation is that hawks have been saying a bomb was imminent for decades. Some renewed enthusiasm for an actual war with Iran, on the part of people like Hilary Clinton? Hard to believe. The real reason the West intensified sanctions was that they could, because the potential political costs of removing Iranian oil from the market have fallen dramatically with the recent increase of production in Iraq.

Iraqi production has gone from a low of less than two million barrels of oil a day at the height of the war, to almost 3.4 million barrels a day this September. The Iraqis have a target of 4 million barrels a day by 2014, which – given the way things have gone in the last year – they are quite likely to meet and perhaps exceed. The increase of 1.5 m barrels/day that has already occurred neatly matches the decline of about 1.5 m barrels/a day that has occurred in Iranian exports over the last year. Since the West could always quietly abandon sanctions if things went badly wrong in Iraq, serious sanctions on Iran have gone from being impossible, to being almost costless, as a result of the success of the Iraqi reconstruction program. While the public narrative in American politics casts Iraq as South Vietnam and Iran as North Vietnam, making the Iranians the main beneficiaries of the war, in fact that scary old story has nothing at all to do with Iraq or Iran, and the actual outcome of the war, for the Iranians, has been disaster.