With the announcement on Saturday night that Iran and the P5+1 group reached a tentative deal over the Iranian nuclear program, the Iranian rial appreciated 3.45% against the dollar on the black market. The rial jumped from 30,000 IRR/USD on November 23 to 29,000 IRR/USD on November 24.

A daily appreciation of this magnitude is rare. In fact, it has occurred fewer than ten times since the beginning of 2013. Indeed, this indicates that the diplomatic breakthrough is having a positive effect on Iranian expectations.

Over a year ago, I uncovered the fact that  (in early October 2012), when its monthly inflation rate peaked at 62%. Since then, I have been actively monitoring and reporting on the IRR/USD black market exchange rates and calculating implied inflation rates for the country.

Since Hassan Rouhani took office, on August 3, Iranian expectations about the economy have turned less negative. Thus far, it appears Rouhani has been successful in ending the long period of economic volatility that has plagued Iran, since the US imposed sanctions in 2010. This has been reflected in the black market IRR/USD exchange rate, which has held steady around 30,000 in recent weeks (see the accompanying chart).

There are three main factors at work here. The first is a concerted effort by the Rouhani administration and the central bank to curb Iran’s inflation. This stands in stark contrast to the previous regime, whose strategy was to simply deny that inflation was a problem.

The second is that that  – meaning that the country has ultimately adapted to the sanctions regime and has found ways to keep its economy afloat in spite of them.

The third factor in the rial’s recent stability is an improvement in Iranian economic expectations. This is where the P5+1 talks come into play. Iranians recognized that easing of the sanctions regime would be a bargaining chip in any nuclear negotiations. In consequence, their economic expectations improved as the talks progressed. Indeed, Saturday’s announcement gave these expectations a shot in the arm.

In light of the rial’s recent stability, I have delisted the rial from my list of “Troubled Currencies,” as tracked by the . For starters, the rial no longer appears to be in trouble. And, on a technical note, implied inflation calculations are less reliable during sustained periods of exchange rate stability.

That said, we must continue to pay the most careful and anxious attention to the black market IRR/USD exchange rate in the coming months. Like the P5+1 agreement, Rouhani’s economic progress in Iran is tentative and likely quite fragile. Since the black market IRR/USD is one of the only objective prices in the Iranian economy – and perhaps the most important one of all – it will continue to serve as an important weather vane, as the diplomatic process continues, and as Iran’s economy gradually moves into a post-sanctions era. 

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In light of Senator Chuck Hagel’s appointment as US Secretary of Defense, the issue of Iran — and the economic sanctions, in particular — promises to stay in play. Hagel has been lambasted by the neo-conservatives and some hard-line supporters of Israel for daring to question (in the past) that sanctions are the best way to confront Iran’s nuclear ambitions. Well, as it turns out, the sanctions have failed to force Tehran to abandon its nuclear program. Indeed, sanctions have a long history of failure.

That said, it is true that sanctions have altered the modus operandi of finance and commerce in Iran and have also contributed to the country’s inflation woes. Ever since hyperinflation briefly reared its head, back in October, the Iranian government has tried to prop up its faltering currency and stop its economy’s death spiral through force and deception. In a sense, and to a minor degree, these oppressive tactics seem to have “worked,” as Iran’s inflation rate has fallen somewhat since it peaked in October 2012. Still, using objective, market-based data and a well established methodology, I estimate that Iran experienced an annual inflation rate of 110% during 2012 — a rate that is almost four times higher than the official rate of 27.4%.

While Iran’s annual inflation rate remains very high, its spiral into hyperinflation has subsided — for the time being, at least. Beyond the government’s establishment of a convoluted multiple-exchange-rate regime and its suppression of currency trading, Iranians have also become increasingly effective at evading Western sanctions.

The most glaring example of this can be seen in the influx of gold into Iran in recent months. With inflation eroding consumer wealth and purchasing power, and Iranian companies effectively unable to access the global financial system, Iranians have turned to gold as a stable, non-traceable store of value and a reliable medium of exchange. Much of this gold has come from Turkey, which is heavily dependent on Iranian natural gas. While Turkey — under pressure from its Western allies — has suspended gold exports to Iran via the Turkish banking system, this has not stopped private couriers from facilitating the Turkish-Iranian gold-for-natural-gas trade, primarily via the UAE.

Conventional wisdom holds that the sanctions will “work” by imposing such severe economic hardship that the Iranian regime will be forced to abandon its nuclear program. Even if we assume, for the sake of argument, that this is possible, how long will it take? Consider Cuba, where the Castro government has retained power, despite US sanctions, for over 50 years. Well, one might argue that Cuba has not faced the same inflation problems that now confront Iran. Fine. But Zimbabwe has. Indeed, sanctions and severe hyperinflation (the world’s second worst case) have failed to dislodge Robert Mugabe after 33 years in power.

In light of this, it seems highly unlikely that sanctions will succeed in forcing Iran to abandon its nuclear program before it is able to develop a nuclear weapon. Even conservative estimates give Iran two years, at most, before it has enough fissile nuclear material to construct a nuclear weapon. Regardless of the rhetoric coming out of Washington and Brussels, the West is clearly beginning to recognize that reality. The International Atomic Energy Agency (IAEA) has taken note and initiated talks with Iranian officials. The US and EU have also quietly begun to lay the groundwork for a diplomatic solution.

While the collective punishment delivered by the sanctions has been devastating, it has ultimately failed to deter the Iranian regime from developing nuclear capacity. Instead, it has generated a great deal of resentment. Given the rotting situation in Iran, and the time horizon for Iran to develop nuclear capabilities, it seems that the interests of all concerned are converging on a diplomatic solution. Indeed, it is the only viable option left.

*[A version of this article was published on .]

The views expressed in this article are the author's own and do not necessarily reflect 51勛圖’s editorial policy.

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