Iran Snap Analysis: Ahmadinejad and The Economy's "Worthless Pieces of Paper"

Five years ago, as he called on OPEC members to convert their cash reserves into a currency other than the US dollar, President Ahmadinejad said of Americans, "They get our oil and give us a worthless piece of paper."

Today, Ahmadinejad awakes to an Iranian Rial which has lost almost half its value in the last nine days despite --- or possibly because of --- a Central Bank intervention which was meant to prop it up. Having traded at just over 10000:1 vs. the "worthless" US dollar a year ago, the Rial is posted on currency websites at 35500:1 to 35800:1. At one point on Tuesday, it reportedly touched 40000:1 in some exchanges before settling --- according to some accounts, assisted by arrests of currency traders.

The President took centre stage in the afternoon with a press conference. However, far from taking on the issues underpinning the dramatic fall of the currency, he adopted the tactics of denial ("It's not the Government's fault"), dismissal ("Dear people, just wait a bit. Don't bother, if you cannot buy foreign spoons and forks for now"), and blame of the "enemy" for sanctions and "psychological warfare".

None of this touched the problems of economic structures and the Government's policies, concisely set out by an EA reader yesterday:

Since draconian sanctions and oil embargoes have drastically cut Iran's oil exports, Iran is suddenly faced with a lack of dollar liquidity. As a result, the main support mechanism for the rial has all but disappeared - much like pulling the rug from under your feet. This is why the rial can no longer be controlled, in spite of massive efforts by the Central Bank to control the sale of dollars.

The main side effect is inflation (which was already prevalent due to economic mismanagement). The Rial is becoming more and more worthless, making products more and more expensive. It is also a double-edged sword: a worthless Rial makes imports far too expensive, yet domestic industries cannot fill the gap because they are themselves decimated by inflation. The only advantage of inflation...is that the budget deficit suddenly becomes very cheap....

All in all, what we are witnessing is an ugly correction of the Iranian economy. This is how our economy looks like without oil. Now the question is: why? Why did 8 years of record oil revenues under Ahmadinejad not lead to a more productive and competitive economy? Why did Iran become so addicted to oil sales, when this outcome was all but inevitable, whether through embargoes or a depletion of reserves?

Why? Because the regime is completely incompetent, and has squandered Iran's riches in every possible way other than actually benefiting the Iranian people.

Maybe Ahmadinejad recognises this, however. Perhaps, seeing the collapse of his economic plans and promises, he knows there is no way back, at least not in the nine months left in his Presidency. Indeed, this may be why he set out an "escape clause" of leaving his office now: "I was somewhere and said, 'If you want me to, I'm ready to write a sentence, and we go away.'"

That "somewhere" is likely to be the Supreme Leader's office. Which raises the question: what exactly is Ayatollah Khamenei doing about the "worthless pieces of paper" with the picture of his predecessor, Ayatollah Khomeini?