Trump Shouldn’t Forget Iran’s Big Achilles’ Heel: Its Economy

(Washington Post) – The debate over the Iranian nuclear deal has so far largely neglected a factor that potentially gives the United States leverage: the deteriorating economic and political situation in Iran. The Trump administration should integrate this factor into its strategy.

Iran’s currency, the rial, has lost 25 percent of its value against the dollar in the past several weeks. Two weeks ago, Tehran decided to set up an official exchange rate of 42,000 rials to the dollar, but that move is unlikely to succeed, given that the market prices the rial at 60,000 to the dollar, some 43 percent less. Inflation is also very high.

Iranians are also struggling to contend with a severe credit crisis; several financial institutions have gone bankrupt, depriving depositors of their savings. Iranian expatriates brought a considerable amount of capital back into the country after the nuclear deal’s signing, but that sense of initial optimism has long since dissipated (along with those funds). The current economic situation, combined with uncertainty about the future, are leading to capital flight, a decline in investment and high unemployment. The International Monetary Fundexpects joblessness to remain above 11 percent.

Two problems are driving economic decline. First, mismanagement and corruption are widespread. Iran’s Revolutionary Guard Corps dominates key industries and businesses, and it is notoriously inefficient. Of the billions that Iran received from the easing of sanctions following the nuclear agreement, substantial amounts were pocketed by the Revolutionary Guard or siphoned off to its bank accounts abroad.

Second, the economy must also contend with the opportunity costs of Iranian money squandered by the regime in exporting its revolution and supporting proxies such as Syria’s Bashar Assad. The Trump administration’s new sanctions and the threat to scuttle the nuclear deal have also contributed to economic woes. Mr. Trump’s skepticism about the deal is discouraging foreign investment from Iran and fueling uncertainty.

Our European partners are unlikely to support reinstatement of the full suite of economic sanctions imposed on Iran before the deal. Nevertheless, even unilateral sanctions by the United States would have crippling effects on the Iranian economy, which could descend into a state of stagflation.

The current poor economic outlook is producing political instability. Reformers outside of government are losing hope in evolutionary change. Moderates in government have failed to offer meaningful reform. The Iranian people have largely lost confidence in Tehran’s ability to address economic problems. This is feeding widespread hostility to the religious authorities, to the extent that people are unafraid to insult them on the street.

Disillusioned with President Hassan Rouhani, some moderates are calling for radical action, including regime change. Even many of those who want the Islamic republic to continue want to eliminate the supreme-leader position, an unelected and unaccountable figure.

Even though the chance of instability is high, the regime is resilient. It has not lost the will to use force against its people. Supreme Leader Ayatollah Ali Khamenei has repeatedly demonstrated that he is willing to employ whatever force necessary to stay in control. As Iran’s economic crisis deepens, support for the regime among its core supporters in the Basij paramilitary group, particularly those from the Iran-Iraq war generation, may erode. Such a scenario could impact the regime’s ability to suppress dissent through violence. Discontent within the regime has not reached a tipping point — but the possibility that it will is real.

The Trump administration could, of course, opt to maintain the nuclear deal. But that would forfeit the chance to capitalize on Iran’s crisis by threatening draconian new U.S. sanctions.

A second option — extending uncertainty about the future of the agreement and the possibility of intensifying sanctions beyond the May deadline — could further exacerbate Iran’s internal problems and generate additional leverage. The Trump administration has already used the weapon of uncertainty to devastating effect.

A third option — withdrawal from the nuclear deal — would give the United States the greatest opportunity to impose costs on Iran and exploit its economic and political difficulties. To have the greatest impact, withdrawal would have to be part of a comprehensive strategy to contain and roll back Iran. The strategy must include harsh financial sanctions, including restricting the use of the SWIFT system for transactions. It should include helping establish and maintain a balance of power between Tehran and its Arab rivals, effective ideological pressure that builds on the regime’s unpopularity, and political support for the regime’s opponents. Regionally, the strategy must include support for groups resisting Iranian hegemony and pushing back against Iran in both Iraq and Syria. And the United States must maintain the posture that force will be used if Iran takes new steps toward acquiring nuclear weapons.

By applying such pressure, Washington might be able to force Iran to negotiate a better agreement. This is likely to happen when the regime perceives that mounting domestic pressure threatens its hold on power.

Rouhani has said Iran was merely weeks away from being unable to pay the salaries of government employees before the deal. A better nuclear agreement was possible in 2015, if the Obama administration had appreciated the leverage it had and used it. One can hope the United States will not make the same mistake again.

Khalilzad was the U.S. ambassador to the United Nations from 2007 to 2009.