The other week’s slide in the rial to a new record low, posted as 56,800 per dollar, according to the Financial Tribune last week, shows just how maniacal the market’s thirst for hard currency has become. But instead of following the herd and asking, “where can I get some dollars to hoard?”, the better questions to ask are instead:

1.    What do Iranians wish to do with all the dollars they are buying?
2.    Is the dollar a sensible financial asset to buy, when evaluated against a rubric of its function as:
a.    Store of value
b.    Medium of exchange
c.    Unit of account
3.    Is the dollar being valued accurately in the Iranian market?
4.    Are there obvious fundamental reasons for the continued decline in the rial, or is it mostly psychological?
In response to the first question, the answer seems to be, “put them under the doshak”, since there’s not much else that can be done with them, at least not according to some authorities.  

Why?
The U.S. dollar is not an accepted currency in the Islamic Republic of Iran and is also subject to a number of international restrictions against use in, or in relation to Iran, owing to the sanctions placed on Iran by the American Office of Foreign Assets Control (or “OFAC”). 

While OFAC has publicly stated that it does not control U.S. dollar bills, it has, in its revised guidance last published in December, 2016, avowed that it shall be considered as prohibited for any person, U.S. or non-U.S., to undertake, facilitate, or otherwise participate in, financial transfers concerning Iran which originate, transit through, or directly or indirectly involve the U.S. financial system.  

That’s a very broad and blanket restriction, once you think about it.  The U.S. financial system, at least as OFAC conceives of it, may not simply be limited to bank and non-bank institutions within the physical confines of the United States; in fact, taken expansively, the “U.S. financial system”, as the term may be understood by sanctions experts, includes the entire U.S. dollar payments system worldwide, which encompasses everything from exchange houses and stock bourses to money transfer platforms and electronic crossing networks which deal in or depend upon U.S. dollar flows.  

Therefore, by the book (albeit the book of American sanctions regulators), dollars that have touched Iran are problematic.  

In any case, even if some of the Iranians exchanging their rials for USD at nearly 60.000 per had intended to take those dollars and invest them outside of Iran, there are other reasons why the mad rush for the currency appears short-sighted:

Official statistics place the number of Iranian born individuals living in America at less than 500.000, with those of Iranian ancestry at 1-2 million.  Even under the conservative assumption that each one of those 1-2 million individuals of Iranian ancestry has five or even 10 interdependent persons in Iran who might routinely visit and hence have a need to obtain dollars for travel purposes, gifts or expenses, the gross amount of dollars on an annual basis pales in comparison to the hard currency earnings of Iran as a whole.

Suppose, for instance, that the average individual of Iranian ancestry living in America receives 10.000 USD on annual basis in transfers from his relatives living in Iran, that would imply a net dollar demand by Iranians living in Iran of a median figure of 15bn USD per year.  

When compared to 2,5mm bbl of oil exported every day, at a price of 60 per bbl, it represents just 100 days of oil-export earnings.  Moreover, in the context of reported quarterly trade-balance figures of around 10bn USD, it is well within the scope of the economy to accommodate.

The dollar-fascination therefore seems to be a blend of investment mania, herd following, and the ever-present fear of missing out, rather than a question of a significant use case, at least in terms of the actual regulations. But if we consider that any currency, insofar as it is intended to function in that capacity, should at least present itself credibly according to a standard rubric as mentioned in our second question, the dollar does not distinguish itself.

Yes, it has been a sound store of value in recent times, as compared to the persistent depreciation in the rial, which has lost roughly half its value over the past few years, from around 30.000 to nearly 60.000 to date.  However, by that metric, gold, which is readily available for purchase and investment, has done even better, as have other alternative currencies to the dollar, such as the Swiss franc or Euro.  

Moreover, the dollar is not a particularly useful medium of exchange, at least in Iran.  In order to convey its value to others, one can, essentially, only hand it over in person.  Owing to the banking restrictions mentioned above, there are no dollar accounts within Iranian banks, and reconverting dollars to rials simply to transfer money would defeat the purpose of having purchased dollars in the first place.  Handling large amounts of physical currency runs the risk of loss, theft, or even basic miscounting, particularly at a time when the fever for dollars runs high.  By comparison, there is a limited possibility to open and maintain euro denominated accounts within Iranian banks, which may allow the transfer of such consideration to others, and on that metric, the euro scores marginally better.

As a unit of account, again, for the Iranian domestic market, the dollar is without place.  Go to buy your daily groceries, purchase a plane ticket, or shop at any emporium across the country, and you may find that there is limited acceptance for dollars, particularly at a time when the exchange rate is so volatile.  Even for those merchants who wish to accept dollars, the actual rate to use when taking a customer’s hard currency is up for debate, and wide spreads between buying and selling hard currency mean that holders of dollars may have different expectations about its value in rials than those being asked to accept them.  The transactional inefficiencies, it seems, loom large.

These mundane facts aside, and not considering people’s psychological preference for a piece of paper which is backed by nothing other than the “full faith and credit” of a hostile foreign nation, we should ask ourselves whether the dollar is being appropriately (and efficiently valued) in comparison to other alternatives.  

When we consider the financial tribune’s posted closing rates for the dollar as of the other week, the euro is posted at 65,750, the dollar at 56,800 and the AED at 15,100 (rial for each).

Basic triangular parity yields that these prices imply that the EUR/USD exchange rate, on the street in Iran at mid market, is 1,1575, some seven CENTS below the global market price of the euro, which, according to Bloomberg, is 1,2275!!!  In other words, Iranians are willing to pay an additional six percent of their capital simply for the pleasure of holding U.S. dollar bills, as opposed to euros.  

By extension, if we compute the implicit USD/AED rate from these figures, by dividing the USD/IRR rate by the AED/IRR rate, we arrive at 3,7615!   When compared to the fixed and official exchange rate of the AED against the dollar of approximately 3,66, we find that Iranians are paying a premium 10 cents (of dirham) for the privilege of those sweet-smelling dollars.  In other words, nearly three percent of their money is being cast aside because they would rather have a bill marked “United States of America” rather than “United Arab Emirates”.  This case is all the more vexing since the exchange rate between the dirham and dollar is fixed and firm and dollars can be traded for dirhams with little or no transaction cost.  Moreover, the proximity of Iran to the UAE where millions of Iranians travel frequently for business and pleasure suggests that, all else equal, the practical functional use for dirhams, as compared to dollars, should be much greater.

The same should be said of euros.  The state of the world these days means that, in spite of many Iranians’ ill-founded dreams of moving to America or even visiting family there, American visas are now issued essentially only in cases of exceptional hardship, and only Iranians who are permanent residents of the U.S. (or hold U.S. passports) can easily travel there and use the dollars they buy.  By contrast, Europe has, particularly since the JCPOA, warmly embrace Iran and Iranians, and Schengen visas are routinely applied for (and obtained) by ordinary Iranians at any number of European consulates across the country.  In that sense, it would be rational for Iranians to want to squirrel away some euros for their upcoming vacations, or business trips, or to purchase goods and services from European venders.  Moreover, in contrast to the preposterous regulations imposed on Iranians and Iran by OFAC, Europe’s regulations don’t presume to tell Iran that the currency of the European union is contraband.

It is, therefore, somewhat shocking to see that, at a time when hard currency affordability is already at all-time lows, Iranians are essentially throwing money away!  While it is beyond the scope of this article to explain full-scale currency arbitrage, consider, for instance, the following scenario:

A clever Iranian fisherman, plying the waters between the UAE and Bandar Abbas in the Persian Gulf, sees an opportunity to enhance his profits in the currency market, owing the fascination of his fellow Iranians with U.S. dollars (and U.S. dollars only, as opposed to euros, pounds or dirhams).

Therefore, every day, the fisherman, who sells 10 million rial worth of fish in the Bandar Abbas bazaar, makes the short trip by ferry to the north tip of the UAE, whereby, at the posted rate of 15.000, he exchanges his rials for dirhams, leaving him with 666,66 dirhams.  He then takes those dirhams to a money changer nearby who buys dirhams and sells dollars at a rate of 3,666, leaving the fisherman with $182,15.  The fisherman then returns to Bandar Abbas, where he exchanges his dollars for rials at the posted rate of 56,800, receiving 10.346.084 rial.  Without taking any risk, the fisherman has earned an additional 3.46% on his daily income!

The example becomes more pronounced when we consider the case of euros and large sums of money, whereby an enterprising businessman could potentially walk away with an extra 70.000 dollars of profit for every 1.000.000 euros of products he trades.  Imagine, for instance, the following:

A petrochemical exporter sells 1000 tons of product at 1000 euros per ton for gross proceeds of 1.000.000 euros, which the exporter receives in his bank account in Europe.  Knowing the demand for dollars in Iran, the exporter converts those euros to dollars at an exchange rate of 1,225, receiving 1,225,000 USD, which he then exchanges for rials at 56,000, receiving 68.600.000.000 rial.  Owing to the size of his amount, his purchase of euros is expense – 66.500 rial per euro, leaving him with proceeds of 1.031.579 EUR, a profit of 31.579 EUR.

The arguments here can be expanded to show that local market participants in Iran are not valuing the dollar efficiently.  They are placing it at a material premium to more useful, and compliant, alternatives, with little place to spend it, or even save it, other than keeping it at home in their own safes.

Iranian tourist arrivals to the United States on visas will likely be among the lowest on record, owing to stringent, and unfair, American policies, and actual commerce between nations in dollars is essentially non existent.  

Individuals wishing to consider a liquid alternative to the dollar would do well to remember that, technically speaking, Iran just might be the cheapest place in the world to buy euros, in terms of the relative implied exchange rate with dollars based on rial prices.  Moreover, the macroeconomic backdrop does not seem, in any obvious way, to suggest that Iran has a difficulty in generating hard currency.  

While individual participants in the market for foreign exchange are certainly free to do as they wish, the sobering reality is that the people who are most at-risk in the run-up in the dollar, are those actually buying.  It seems that the sway of the American mirage, even when it comes to slips of paper, is just too hard for the average person to ignore, even at their own peril.   While not speculating on the trajectory of the rial, it is apparent that, from the above analysis, on practical, regulatory, and comparative analytic metrics, there is no justification whatsoever for the choice of the dollar.  Good luck to those who choose it over substantially more sensible options.

Numbers and calculations may not reflect current FX market exactly.

he article was originally written on April 9, 2018.

Mehrnoosh Aryanpour is the manager partner of the Tehran office of Gide Loyrette Nouel, the first and only branch of a foreign law firm in Iran.