Persian Files ISSN 2975-0598 Volume 30 Issue 3
Author: Silvia Boltuc

Executive Summary

This report examines Iran’s ongoing efforts to stabilise its economy in the face of severe currency fluctuations, inflation, and external economic pressures

The Iranian government has attempted to replicate elements of Russia’s financial response to sanctions and currency devaluation. However, the structural differences between the two economies have limited the effectiveness of this approach.

The report also assesses the broader geopolitical landscape, considering Iran’s regional position and its evolving economic policies. While Iran continues to navigate financial instability, its reliance on restrictive monetary policies and state intervention remains a key constraint, affecting both its domestic economy and international standing.

Information Context

In recent months, the Central Bank of Iran has implemented various measures to stabilise the currency market and control inflation. One of the most significant changes has been the introduction of a ‘بازار توافقی – Negotiated Currency Market’ (in the Iranian case, a ‘negotiated market’ refers to a state-controlled foreign exchange system where currency transactions occur at rates agreed upon between buyers and sellers, but within a regulatory framework set by the central bank), replacing the Nima system, which had long been used to regulate foreign exchange transactions. Unlike a free-market exchange, this new system aims to allow businesses to trade currency at rates determined through government-supervised negotiations rather than purely supply and demand.

The Nima system had been criticised for penalising exporters, fostering rent-seeking behaviour among importers, and failing to ensure that currency subsidies effectively reached consumers. This inefficiency, for example, affected mineral exporters, who faced restrictive policies on repatriating foreign exchange revenues. In practice, Iran attempted to regulate exchange rates by requiring businesses to sell foreign currency at a government-controlled rate rather than allowing the market to determine its value. However, these controls failed to curb speculative activity, and the rial continued to depreciate in unofficial markets due to persistent capital flight, inflationary pressures, and a lack of investors’ confidence. The failure of the Nima system is therefore part of a broader trend in Iran’s economic mismanagement, rather than the sole driver of currency instability.

With the removal of the Nima system and a transition to a more flexible market, exporters are expected to benefit from a less restrictive currency exchange system. The shift is intended to stimulate exports, attract foreign investment, and encourage industrial growth. However, businesses remain concerned about continued government intervention in foreign exchange markets. The long-standing requirement for exporters to repatriate earnings at rates below the free-market value has been seen as an obstacle to efficiency, limiting businesses’ ability to respond to real market conditions.

Iran’s recent measures bear some similarities to Russia’s response to its currency crisis in the wake of the Ukrainian conflict. Moscow imposed strict capital controls, restricted foreign transfers, and sharply increased interest rates, leading to a rapid recovery of the ruble. Iran has also sought to tighten foreign exchange regulations and increase state control over currency markets, but key differences exist. Russia, despite sanctions, had the advantage of large foreign reserves, a stronger industrial base, and a globally integrated financial network. Iran, by contrast, faces severe structural weaknesses, long-standing economic mismanagement, and deeper isolation from international markets.

Moreover, Iran’s geopolitical constraints have made economic recovery more difficult. While Russia was able to leverage its vast energy exports to negotiate alternative payment systems with countries like China and India, Iran has struggled to ensure the reliable repatriation of export revenues. Tehran has attempted to enforce repatriation rules for foreign exchange earnings, but these efforts have been only partially effective due to weak enforcement mechanisms and systemic loopholes. Without a more comprehensive strategy that includes broader economic and financial reforms, Tehran’s efforts to stabilise its currency market will likely remain limited in effectiveness.

(The repatriation of export revenues refers to the obligation of exporters to return the foreign currency earned from their exports to the country. The CBI regulates this process to ensure that foreign exchange earnings are utilised within the national economy, thereby stabilising the currency and supporting economic growth.).

Geopolitical Scenario

Iran’s economic difficulties are unfolding in a complex geopolitical environment where both regional and international factors play a significant role. Domestically, the government faces mounting pressure to control inflation and stabilise the currency without triggering further economic contraction.

The Central Bank’s monetary policies, including interest rate adjustments, have had limited impact because of a lack of market confidence and persistent capital outflows. Meanwhile, economic decision-making remains heavily influenced by political considerations, with factions within the government divided over whether to pursue stricter financial controls or explore potential diplomatic solutions to ease economic pressures.

Regionally, Iran’s economic challenges are occurring alongside broader geopolitical shifts. While Tehran has made efforts to normalise relations with Gulf states, such as Saudi Arabia and the United Arab Emirates (UAE), economic cooperation remains limited. The reluctance of these states to engage in deeper financial partnerships with Iran stems from sanctions and reflects ongoing concerns about geopolitical tensions and Iran’s economic stability.

Despite its oil and gas resources, Tehran faces greater obstacles in securing international buyers because of US enforcement of secondary sanctions and competition from other energy suppliers.

In parallel with these currency market reforms, Iranian authorities have also tightened control over cryptocurrency transactions, shutting down exchange payment gateways to curb capital flight and speculation in the Tether market. This move aligns with broader efforts to regulate financial flows and prevent further pressure on the rial.

On a global scale, Tehran’s economic strategy remains constrained by its diplomatic isolation. The country’s alignment with Russia and China has provided some opportunities for trade and financial cooperation, but these relationships do not offer the level of economic support Tehran requires.

China, while a major buyer of Iranian oil, has been cautious in its financial dealings, avoiding direct confrontation with US sanctions enforcement. Russia, despite its geopolitical alignment with the Islamic republic, has prioritised its own economic recovery and has not extended substantial financial aid to Tehran. These dynamics have limited Iran’s ability to implement a comprehensive economic stabilisation strategy, forcing it to rely on internal mechanisms that have so far proven ineffective.

Conclusions

In conclusion, Iran’s current economic strategy is heavily influenced by the need to manage social unrest caused by economic instability, with currency devaluation being a primary source of public dissatisfaction. The government’s ability to stabilise its currency is hindered by the limitations of its foreign reserves and a fragmented decision-making process, where power is divided among various political and military actors.

Unlike Russia, which had $600 billion in reserves pre-Ukraine war, Iran lacks the same cushion. Its Central Bank cannot intervene as aggressively in currency markets, making long-term stabilisation difficult. The Iranian system involves multiple power centres (Supreme Leader, President, IRGC, and the Central Bank). Unlike Moscow’s top-down economic response, Tehran lacks a unified decision-making structure, complicating policy execution. Any attempt to tighten monetary policy (e.g., raising interest rates) could deepen the recession and fuel domestic discontent.

Despite attempts to stabilise the economy through restrictive monetary policies and capital controls, these measures have produced limited results, exacerbating inflation and leading to further depreciation of the rial. The imposition of currency controls, particularly in terms of export revenue repatriation at below-market rates, has disrupted private sector growth and created additional uncertainty. These rules have stifled businesses and contributed to an environment where the economy remains stagnant, with little prospect of substantial recovery.

Geopolitically, Iran faces immense challenges. While strategic partnerships with China, Russia, and regional allies offer some relief, Tehran needs to strengthen economic ties with non-Western powers to fully counter the impact of Western sanctions. Engaging with regional organisations such as the Eurasian Economic Union, BRICS, and the Shanghai Cooperation Organisation can provide Tehran with much-needed economic relief.

Similarly, expanding its Special Economic Zones (SEZs), leveraging its role in international transport corridors like the International North South Transport Corridor (INSTC), and positioning its ports as vital regional hubs—especially for landlocked areas like Central Asia—could strengthen its economic resilience. Creating new economic opportunities for younger generations will also help shield the revolutionary political class from social unrest, which is precisely the outcome sanctions aim to provoke in an effort to weaken the country from within.

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