What can Iraqi merchants tell us about the impact of sanctions on Iran?

Will Israel attack Iran? Will the US give Israel the “green light” to conduct such an attack? Might the US even join Israel in attacking Iran? The rhetoric surrounding Iran’s development of a nuclear energy program has increased dramatically during the past month, particularly after Defense Secretary, Leon Panetta, suggested that an Israeli might attack Iran might as soon as this coming May or June.

Clearly, Iran’s nuclear program is not limited to increasing its energy production. The International Atomic Energy Agency (IAEA) has stated that the program is not limited to energy, but intended instead to lay the basis for developing nuclear weapons. Israel is concerned that if it waits, Iran will have time to bury its nuclear program in underground bunkers after which it will immune to air attacks.

The behavior of Iraqi merchants may suggest reasons why Israel and the US should think twice about mounting an attack on Iran. Merchants in the Shiite shrine cities of al-Najaf, Karbala’, and the Baghdad quarter of al-Kadhimiya, site of the splendid al-Kadhimayn Mosque which celebrates Twelver Shiism's 7th Imam, Musa al-Kadhim (a mosque I once had the great fortune to visit), and elsewhere in Iraq, are increasingly refusing to accept the Iranian toman (rial).

Iraqi merchants who serve the thousands of Iranian pilgrims who travel to Iraq to visit Shiite holy sites, and who trade with Iran, state that, if the toman continues to lose its value, they will no longer accept Iranian currency. While many merchants express sympathy for Iranian pilgrims who, they point out, are often of very modest means, they cannot afford to continue to lose money. As one money changer noted, a month and a half ago he exchanged $10,000 daily in tomans while now that figure has dropped to only a $1000 per day.

Hotel owners in al-Najaf and elsewhere likewise complain about the decline in value of the toman. An owner of a large hotel in al-Najaf, Khalid Abu al-Jeej, notes that many hotel owners have been experiencing a sharp drop in profits. As a result, many are only accepting payments from Iranian guests in US dollars. Of course, as the Iranian toman buys less Iraqi dinars, fewer pilgrims are visiting Iraq, further cutting into the profits of both Iraqi and Iranian businessmen.

The drop in the value of Iran's currency is not only significant because it is hurting Iranian pilgrims and Iraqi and Iranian merchants. The economic narrative is much broader and more complex than that. The Iranian middle classes are scrambling to convert their tomans into dollars. Many Iraqis have been hired by Iranians to convert tomans into US dollars at Iraqi banks. This behavior has led the Iraqi Central Bank to begin to impose restrictions on who can change tomans into dollars, putting further pressure on the Iranian currency. Iranians hire Iraqis to convert tomans into dollars as a hedge against further losses as the toman continues to lose value.

What do these developments have to do with the current Iranian nuclear weapons crisis? The rapid loss of value of the Iranian toman suggests that the international sanctions imposed on Iran are having serious negative consequences for its economy. President Obama has shown excellent leadership skills in refusing to succumb to the rhetoric of a nuclear armed Iran, which is being used to mobilize an attack on Iran. Instead, President Obama has chosen to pursue a steady ratcheting up of the international sanctions regime which is now having a serious impact on Iran.

Already there are signs that the Iranian regime is very nervous at the international opposition to its nuclear program. It realizes that its position domestically is not particularly strong. On the one hand, there is intense infighting currently underway within the political elite that sets the supporters of President Mahmoud Ahmadinejad against those of Iran’s Supreme Leader, Ayatollah Ali Khamanei. On the other hand, the regime faces declining popularity among the populace at large. Both of these considerations mean that challenging the US, Israel, the European Union, and other major powers such as India is not necessarily the most sensible policy to be pursuing at the present time.

In an earlier post, I discussed the possible consequences of an attack on Iran and argued that it would be a lose-lose situation for all parties concerned. If Israel attacks Iran, international sympathy will swing towards the Islamic Republic and further isolate Israel in the Middle East and the larger international community. For Iran, such an attack could set in motion processes that lead to the collapse of the regime. For the US and the West, an attack on Iran would result in huge increases in the price of oil, dealing a serious blow to the global economy and sending many countries into an even deeper recession.

For Iraq, the continued economic travails faced by Iran - problems that will only increase in the short term - are having a negative impact on its own economy. These problems are raising questions inside Iraq about the Maliki government’s close ties to the current Iranian regime. Questions include: why should Iraq be so closely allied with a regime that is becoming an international pariah?

Steady as she goes - to invoke a tried and true saying - is the best antidote for Iran’s effort to become a nuclear power. Tightening the existing sanctions regime and persuading Iran’s trading partners not to purchase its oil will bring Iran to the bargaining table. This can be accomplished in time to prevent Iran from achieving an end that no one, aside from its few allies, wants to become a reality, namely the development of nuclear weapons which would further destabilize the Middle East, an outcome that the region can ill afford.

(For more information on Iraqi responses to Iran's economic woes, see al-Hayat, February. 6, 2012)