By Abbas Sarhan.
The Iranian banking system was seen as an attractive alternative to Iraq’s shaky financial institutions. But a recent, drastic devaluation in the Iranian rial means Iraqi money is stuck over the border.
Depositing money in Iranian banks has been popular in Iraq since around 2012, and even more so since 2014, and the security crisis caused by the extremist group known as the Islamic State.
In the southern city of Karbala, it was a popular move for people who had sold property, especially after the decline of prices in the Iraqi real estate market since June 2014 and the beginning of the security crisis.
But in fact, small and mid-sized Iraqi investors have been putting money into Iranian banks since 2012, when the Iranian authorities significantly increased the interest rate on savings in a bid to get more currency flowing into their sanctioned nation.
Iraqi investors were encouraged to deposit cash in Iran. Iraqis could change their money into Iranian rials, then deposit them with bank officers based in Karbala or Najaf, without ever having to leave home.
Tens of thousands of Iraqis took up the offer, says Mohammed Abbas, one of the locals who also did so: He put US$500,000 in Iranian banks.
“It was too tempting for anyone with a small or medium sized deposit,” he explains. “Iraqis were afraid to invest their money in Iraq and there are really not many other opportunities for investment.” Abbas says that in the first three years he made good money off his deposits and he used the rials on his frequent trips to Iran.
However the situation has since deteriorated badly. The Iranian rial has recently lost a lot of value and even those Iraqis who had done well with the interest rates on their money, saw that extra cash wiped out. Now, Abbas says, Iraqi money is trapped in Iran. Depositors cannot withdraw their deposits for fear of wiping out half the value so they leave it there in the hope that the Iranian authorities may be able to revalue their own currency.
However the Iranian authorities appear to only have been able to take limited steps. In April this year, Iranians arrested as many as 90 foreign exchange traders, accusing them of raising the price of foreign currencies against the rial, and suspended activities in ten foreign exchange bureaus. They also tried to set the exchange rate more favourably.
However these measures have not worked and thousands of Iraqis who deposited savings over the border remain frustrated. Anybody who does want to withdraw their cash needs to change the rial for dollars first. Iraqis must change their money on the black market.
Iranian banks only exchange dollars in specific situations and then only to Iranians. Even though the Iranian authorities have tried to set the exchange rate against the US dollar there, the black market exchange rate puts the dollar at significantly higher rates. Which still leaves Iraqi depositors in a bad way.
Iraqi economist Abdul-Hussein al-Rumi says there’s not much anyone can really do. That is the risk that Iraqi investors were taking and Iran’s economy and currency is unlikely to be able to withstand the new round of US sanctions.
Instead of taking their money out of Iran, al-Rumi suggests withdrawing the deposits, buying Iranian goods over the border and then selling them on the Iraqi market to try and reduce their losses and to get out of the Iranian banking system.