Iran bans foreign exchange and gold futures trading

On June 16, Iran’s Economic Security Police announced that a ban on currency, gold and other precious metal futures had come into force in Iran.

Deputy Police Chief Brigadier General Sohrab Bahrami said officers had arrested 31 “profiteers” who were running illegal futures concessions. Now, he said, all such activities were considered gambling and therefore illegal, and participants would be accused of “disrupting the national economic system”.

The price of the US dollar had hit an all-time high on Sunday June 11 and has been on a downward trajectory ever since, attributed by analysts to emergency measures taken by the Central Bank. It was the Central Bank that gave the go-ahead to ban trading futures contracts on the open market, also warning that any violators could expect “severe penalties”.

Futures trading in Iran: a perpetual gray area

Iran currency and gold futures basically involve bets placed between traders made at the end of the trading day on the next day’s prices, or some other specific future date. Usually, in such transactions, no money or gold changes hands; differences are sent or received in Iranian Rials.

Recent announcements have formally criminalized the practice, but in fact it never had the approval of Iranian authorities to begin with. The Economic Security Police have sought to root out and make examples of futures traders under various guises for years.

In the absence of an official regulator, the futures market for currencies, gold, silver and precious metals has only ever been “regulated” by the level of confidence in the traders themselves – and, of course, by the guarantees of the main players.

Until recently, the Central Bank had always considered the futures market to be “unofficial” and not part of its remit. But according to Ahmad Araghchi, the Central Bank’s former deputy governor for monetary affairs, after the “shock” of rising currency prices in late 2017 and early 2018, the Supreme National Security Council authorized the Central Bank to intervene.

The initial intervention lasted only 16 days. Meanwhile, the bank has pumped around US$150 million into this “grey market” in an effort to at least partially stabilize it.

This initiative ended badly for Ahmad Araghchi and Valiollah Seif, then Governor of the Central Bank. During a period of unprecedented and highly publicized “corruption trials” during Ebrahim Raisi’s tenure as Chief Justice, both were arrested in the summer of 2018 and later sentenced to 10 years in prison for “illegal practices” of foreign currency management.

Like many others imprisoned during this period, both had their sentences overturned by the Supreme Court in December 2021. The court found that they had simply followed government policies at the time and therefore could not be guilty of ‘No violation.

The extent to which the Central Bank is authorized to intervene in the market has therefore never been concretely established. Its ability to enforce any new bans is also in doubt, given the relative ease and anonymity with which potential investors can organize themselves online and on social media. Nevertheless, for the time being at least, the ban appears to have halted the dizzying rise in the price of the dollar, which had exceeded 33,000 tomans on June 11.

A multi-pronged intervention

The main question for analysts of the Iranian foreign exchange market now is how long the Central Bank and the economic security police can maintain the ban on speculative transactions. But the bank has also deployed other strategies, including injecting more foreign currency into the market again.

This time, the governor and officials did so with the approval of the heads of the three branches of government – ​​the Iranian president, the speaker of parliament and the chief justice – who gave the bank carte blanche to intervene” unlimited” via the High Council for Economic Coordination. Any fear of suffering the same fate as Araghchi and Seif in 2018 is therefore banished, for now at least.

In a bid to encourage the same, Iran’s National Tax Authority has also announced that regardless of the amount, no tax will be levied on foreign currency that Iranians bring into the country from abroad.

The Central Bank has taken several other measures, including allowing licensed exchange offices to resume the buying and selling of foreign currencies. This allows more dollars to enter the market to hopefully continue to stabilize the exchange rate.

The other action taken by the Central Bank was to start holding regular meetings with key stakeholders, including companies exporting petrochemicals and other raw materials made in Iran, as well as active businessmen. in the currency, gold and metals markets.

The success of these new policies will largely depend on the trust of currency holders in the government and the Central Bank. If there is a deficit of optimism, many may prefer to continue doing what they have been doing so far, rather than joining a more regulated system.

Besides, the government is also taking steps to better supervise and control the demand side of the market. This includes cracking down on futures traders and those accused of artificially inflating demand to drive up prices, and limiting the ability of third-party websites to advertise what those prices are.

What does the future hold?

Fluctuations in the open currency, gold and precious metals markets are one manifestation of an ongoing battle between two opposing forces: the fear and anticipation of inflation, and the multitude of concerns about Iran’s economic future, versus the Central Bank’s ability to intervene.

The most important variable, aside from confidence, is the size of Iran’s foreign currency earnings and how much of it can be brought into the country in the months and years to come. Without clear answers to these questions, currency market stability will remain elusive and the cycle seen throughout the past decade will continue to repeat itself.