Iran erupts as oil embargo sends currency plunging

Mobs brand Ahmadinejad a 'traitor' as rial loses 40 per cent of its value in just seven days

Hundreds of protesters have clashed with police in Tehran after the government attempted to stop the Iranian currency plummeting in value by cracking down on speculators, beginning with the city's black-market money changers.

The sprawling Grand Bazaar, whose merchants were instrumental in the overthrow of the Shah in 1979, was closed as traders shut their shops in solidarity with the currency traders, and called for government action to head off an economic collapse.

The riots were a sign that Western sanctions aimed at halting Iran's nuclear programme are taking their toll on the economy, and signal the most serious civil unrest in over a year.

In the past week alone, the rial, which has steadily devalued over the year, has fallen by 40 per cent, hitting a record low of 37,500 to the dollar on the free market. It was trading at around 24,600 last Monday, and early last year, was trading closer to 10,000. Trading in the currency was halted yesterday.

"Everyone wants to buy dollars and it's clear there's a bit of a bank run," a Western diplomat in Tehran told Reuters. "[Iranian President Mahmoud] Ahmadinejad's announcement of using police against exchangers and speculators didn't help at all. Now people are even more worried."

Police used tear gas and batons to disperse protesters, who branded Mr Ahmadinejad a "traitor" for fuelling the crisis with poor economic decisions. Witnesses described motorcycle chases in the area around Manoucheri Street, where most of the money changers are based. The area has been thronged with people desperate to swap rials for dollars in the past week.

Police also threatened traders on strike at the Grand Bazaar, Tehran's traditional business centre. While many reportedly closed their shops in protest, others said that they did not know what price at which to sell their goods amid the currency's volatility. Police denied claims of a protest, saying the bazaar had been shut down for "security reasons".

Many Iranians, who have seen prices for daily goods and services, such as taxi rides and food, rise daily, have blamed Mr Ahmadinejad's government for mishandling the economic crisis and fuelling the rial's plunge with inflationary measures.

In a press conference, the embattled President, who will step down in June, defended himself against accusations of economic mismanagement, and blamed the rial's fall on "psychological pressures" from the West and currency speculators. He stopped short of putting the blame on Western sanctions, saying only that oil exports had dropped "a bit".

He urged Iranians not to exchange their rials for foreign currency, and warned that a group of "22 people" could face arrest for manipulating exchange rates.

But as he sought to deflect criticism, he drew attention to the internal differences over the handling of the crisis, attacking the parliamentary Speaker, Ali Larijani, who said that only a small part of Iran's economic woes derived from sanctions.

The President potentially faces more domestic censure, with some politicians calling for him to appear before parliament to explain the rial's devaluation.

Iran's enemies, meanwhile, are determined to take some credit, with the Israeli Finance Minister Yuval Steinitz claiming this week that sanctions had brought Iran's economy to the "verge of collapse".

A US State Department spokeswoman, Victoria Nuland, said the falling value of the rial comes as "firms all over the world are refusing to do business with Iranian companies".

Iran's oil exports have more than halved since a ban on oil exports to the West came into effect, costing the regime some $5bn (£3bn) a month. "Our goal isn't to affect their GDP growth, it's to affect their political calculus," US Treasury Undersecretary David Cohen said last month.

Q&A: The cash crisis explained

Q. Why has the rial slumped so sharply this week?

A. Although it has been declining steadily in recent months – weighed down by a combination of Western sanctions on Iranian oil sales, soaring inflation and the threat of a conflict with Israel – the sudden slump appears to have been inadvertently triggered by the country's central bank. Seeking to limit fluctuations in the value of the rial, it decided to offer preferential exchange rates to importers of essential goods like grain and medicine. This appears to have been read as a sign that the country was running out of foreign exchange, and sparked panic.

Q. Will it affect Iran's support for Bashar al-Assad and Hezbollah?

A. Potentially. There is little doubt that Tehran's resources are coming under severe pressure – and that is likely to chip away at its regional clout. The crisis has put Mr Ahmadinejad under pressure at home, which could force him to focus on the economy at the expense of his foreign policy ambitions.