The foreign exchange policies that have emerged in Iran in the aftermath of the sudden devaluation of the national currency have not only worsened the sense of instability in Iran’s economy, but also paved the way for an increase in smuggling. Incidentally, smuggling is taking place in both directions, into and out of the country, damaging the overall trade and payment balances and economic performance as well as intensifying corrupt practices.

In a healthy economy, the devaluation of the national currency — though inflationary — could theoretically lead to a growth in exports and a reduction in imports. Such an outcome could benefit domestic industry, which would become more competitive in export markets and also against imported goods. However, the existence of economic distortions such as subsidies or multitiered exchange rates can lead to scenarios in which a currency devaluation can undermine overall economic performance. What Iran is experiencing today is a reminder of how mismanagement of economic affairs can hurt a resourceful economy. 

Smuggling has always been part of the economic picture in Iran. In many cases, smuggling has been used to import products that cannot be brought in legally, but smuggling due to economic disparities and price differences has also taken place extensively. Most significantly, in the past few decades the smuggling of subsidized goods, especially fuel, to neighboring countries has damaged the Iranian economy extensively. In the past, Iranian authorities tried to contain fuel smuggling through rationing and stricter controls in border regions; however, the most effective instrument was the pricing of fuels. In 2011, when the first phase of the subsidy reforms started, fuel smuggling was reduced considerably.

However, the recent devaluation of the national currency has made fuel smuggling lucrative again as subsidized fuel is much cheaper in Iran than in all neighboring countries. According to the latest estimates, between 20 million and 40 million liters (5.3 million to 10.6 million gallons) of fuel is smuggled out of the country on a daily basis, imposing an economic damage of 365 trillion rials (close to $4 billion at the median of the three existing exchange rates) per year. The sad reality is that the proceeds of such smuggling go into the pockets of corrupt networks that have the means to organize the movement of these huge volumes across the borders. In fact, a provincial official in Sistan-Baluchistan stated recently that the operations relating to fuel smuggling were not just limited to border provinces, meaning that a large nationwide network is engaged in such lucrative smuggling. In the meantime, while the government is considering approaches such as rationing, past experience has shown that fuel prices are the only instrument that will contain smuggling effectively.