Iran On the Edge

Iran is at a tipping point, and President Obama’s policies in the next few months could define the Iran that emerges from the current turmoil. In considering the next step in its engagement with Iran, the Obama administration must take a hard look at the country’s increasingly unstable domestic situation.

Given the an increasingly serious political and economic crisis, the "Islamic" in the Islamic Republic of Iran is no longer applicable — nor is the word "republic." After the recent elections and the brutal treatment of protestors and anyone opposed to the regime, the mullahs are no longer seen as legitimate by the Iranian people. The Revolutionary Guard Corps has carried out a bloodless coup with the blessings of a puppet supreme leader and president. Today Iran is, for all intents and purposes, a secular military dictatorship.

The country’s economy is also in dire straits. The regime has put off reforms for three decades, blaming sanctions for its self-inflicted failures. Inflation is running at an annual rate of 20-25 percent. Unemployment is around 20 percent and on the rise. Iran’s foreign exchange reserves have declined rapidly, to an estimated $40 billion. Tehran can no longer pay the bills, keep the regime’s corrupt sycophants satisfied, and deliver a minimum level of subsidies to poor Iranians to keep the lid on political dissent.

Faced with these economic realities, the regime has decided to cut energy and food subsidies, gradually increasing the price of basic goods such as oil, electricity, and bread to international market rates over a period of about five years. While many senior members of government have long appreciated that this was necessary in order to achieve an economic turnaround, they were loathe to take this step for fear of a domestic backlash. Now that subsidies are being slashed, the people are beginning to stir. Electricity bills have increased by 300 percent, with payments due within 45 days and late payments subject to a 20 percent interest penalty. The expected price increases associated with the elimination of subsidies should send inflation soaring above the 30-40 percent rate, making the lot of poor Iranians unbearable.

Both the regime and average Iranians hope that a rapprochement with the West can alleviate these economic pressures. They assume that the removal of sanctions and Iran’s re-integration into the global financial system will quickly reinvigorate economic growth. But they are wrong. Iran’s economic wounds are largely self-inflicted; they are the result of failed institutions, ill-conceived economic plans, and pervasive corruption. The removal of all sanctions will enable corrupt business and political leaders to amass even larger fortunes as they scramble to represent U.S. firms in Iran, but average Iranians will see very little benefit so long as the present regime stays in power. For economic conditions to improve, Iran needs a dramatic change in policies and practices, not just the removal of sanctions.

The continuing turmoil in Tehran has also afforded Iran’s ethnic minorities — principally the Arabs in the Southwest, the Baluchis in the Southeast, and the Kurds and Azeris in the Northwest (but also Lurs and Turkmens) — an opening to challenge the regime with their list of growing grievances. There is fear among Iranians that their nation may be in serious danger of dismemberment if additional political and economic pressures are brought to bear on the already strained government.

The Iranian regime, fearing these developments, has exhibited an unprecedented willingness to negotiate with the United States in order to regain its legitimacy. The United States should seize this opportunity — not only by tackling the issue of nuclear enrichment, but also by raising governance issues with the Islamic Republic. Embracing the regime in Tehran and lending it unconditional support, as the United States has done with other dictatorships in the region, will only backfire. Washington is fooling itself if it thinks it can prop up this regime. The mullahs have lost all credibility, and the Iranian people are unwilling to pretend otherwise. It is in America’s interest not to alienate the Iranian people and the rest of the Muslim world.

In order to affect domestic change in Iran, the Obama administration is faced with two possible policy stances. Both have their merits. The first would continue the negotiations begun in Geneva and Vienna, attempting to achieve a complete halt to Iran’s enrichment program in exchange for a lifting of sanctions and further guarantees of Iran’s security.

The argument in favor of this course is that Iran’s economy and internal conditions are so fragile that further economic pressures would impose unbearable pain on average Iranians. Rapprochement and openness are the best antidote to the dictatorial regime in Tehran, and would rob the regime of its ability to use the United States as a boogeyman for its economic failures. The people of Iran, who are better informed than ever before, would see the regime’s failure for what it is and might feel sufficiently secure to affect regime change themselves.

Alternatively, the Obama administration could react to the stalled nuclear negotiations by strictly enforcing existing laws against investing in Iran, and by pressuring its allies in the Persian Gulf and Europe to sever all financial ties with the country. The end result would be a run on the Iranian rial, which would ultimately result in the collapse of the Iranian economy.

This option would attempt to exploit the fragility of the Iranian economy, and the country’s large capital outflows. Iran does not have sufficient foreign exchange reserves to support the rial and would have to impose exchange controls in the face of these pressures. Many Iranians living abroad, and even those who live in the country, fearing a decline in the value of the rial, would panic and take their money out of Iran. The ensuing black market exchange rate and inflation would cause such widespread dissatisfaction that the Islamic Republic would be overthrown.

Whatever option Obama chooses, it is vital that the United States appreciate the precarious nature of Iran’s domestic political scene, and orient its policy toward a long-term improvement of its relationship with Iranian citizens. Happily, the interests of the Iranian people coincide with the interests of the United States, offering the possibilities of good long-term relations between the two countries. The current regime in Tehran does not serve the interests of the Iranian people or afford the United States with a reliable negotiating partner. Regime change from within is desirable for both Americans and Iranians, and it is a goal that Obama must pursue as he formulates the next step of his policy towards the Islamic Republic.