Report

U.S. Turns up Heat on Iran’s Economy, Adding Fuel to Massive Protests

Experts question whether the resumption of sanctions will help topple the regime or strengthen it.

Iranians take to the streets protesting the country's economic woes and the government in Tehran on June 25. (Atta Kenare/AFP/Getty Images)
Iranians take to the streets protesting the country's economic woes and the government in Tehran on June 25. (Atta Kenare/AFP/Getty Images)

As the first wave of renewed U.S. sanctions against Iran goes into effect Tuesday amid rising street protests over the country’s disastrous economy, analysts are divided about whether popular anger over runaway inflation and unemployment will be directed at the government in Tehran—or at the United States.

The sanctions, imposed as part of Washington’s withdrawal from a nuclear agreement with Iran in May, include limits on dollar transactions and trade in many industrial goods. They are the first part of a steadily increasing campaign of U.S. measures against the Islamist regime set in motion after President Donald Trump decided to pull out of the nuclear deal with Iran in May.

Even before the sanctions went into effect, large and in some ways unprecedented protests spread from Tehran to many other big cities across Iran, with demonstrators chanting against the ruling clerics and their decades-long grip on the country.

“We see a significant uptick in protests. There was the first wave in December and January, and then another peak over the last few weeks related to the nosedive that the currency has taken over the past month or so,” said Naysan Rafati, an Iran analyst at the International Crisis Group.

Iran hawks in the West, who have long advocated regime change, see the unrest as a sign that popular support for the ruling clerics is seriously eroding. The National Council of Resistance of Iran, a Paris-based exile group that has for decades opposed the clerical leadership in Tehran, said chants like “down with the mullahs” reflect a growing public rejection of Iran’s political policies and economic mismanagement.

The protests seem to be more broad-based than in previous years. Unlike the middle-class Green Movement protests that shook Iran in 2009, the current wave appears to have swept up the blue-collar workers who were the government’s traditional base of political support. Women are increasingly emboldened, in many cases tearing off their hijabs at the protests.

“What started out as economic protests have transformed into a broad, social and political challenge to the regime,” said Mark Dubowitz, the chief executive of the Foundation for Defense of Democracies, a Washington think tank that has helped push a tougher U.S. line against Iran.

“You’re hearing, ‘Death to Khamenei,’ ‘Death to Rouhani,’ ‘Death to the regime.’ We haven’t seen this kind of direct challenge to the regime since 1979 and the Islamic Revolution,” he said.

But others believe the renewed U.S. economic offensive could actually undermine the cause of protesters and reinforce the kind of bad behavior Washington is trying to curtail.

“Sanctions tend to entrench whatever the target regime is, and that’s what is going to happen in Iran,” said Steve Hanke, an economist at Johns Hopkins University. To evade sanctions and keep their hold on the country, the government and the Islamic Revolutionary Guard Corps will just redouble the kind of illicit activity they’ve used in the past.

“Realistically, it will just spawn nefarious activity and more criminality,” he said.

Popular anger at the Iranian government’s dismal economic performance—including corruption, unemployment, and high inflation—is in itself nothing new. A poll taken after the January protests found that nearly two-thirds of Iranians blame domestic mismanagement more than foreign sanctions for the negative state of the economy. But in the same poll, more than three-quarters said they either “somewhat disagree” or “strongly disagree” that Iran needs systemic political change, while about two-thirds said they would oppose concessions to the United States.

“There is a fine line between politics and economics in a country where the government plays such a major role in the economy,” said Rafati, of the International Crisis Group. “But you can’t say that every economic protest is a pre-revolutionary protest.”

Unlike the Green Movement, which had a more cohesive set of political demands, the current wave “is not yet really coalescing into a systematic, explicitly political movement against the government,” he said.

Still, observers say these protests seem different from previous ones, in which people sought to get the government to address economic grievances. Now, participants appear to be fed up with the system itself.

“This year we’ve seen many little crises explode against the backdrop of one huge economic crisis, which the regime clearly has no answers for,” said Matthew Reed, the vice president of the energy consultancy Foreign Reports. “All this adds up to a crisis of legitimacy—but it’s not an existential one yet.”

Iran’s current economic malaise is a combination of long-term, internal weaknesses and the “snapback” of U.S. sanctions, which threaten to shut the country out of the global financial system and choke off most of its oil exports. Since the 1979 Islamic Revolution, the Iranian currency has lost more than 99 percent of its value, noted Hanke, while inflation has generally been in the double digits.

Most of the economy is run by the government or related bodies like the Revolutionary Guard Corps. Corruption is endemic. Popular anger over the dire economy dogged Iranian President Hassan Rouhani in his election bids in 2013 and 2017.

Now, after a hiatus lasting almost two years while the nuclear deal was in effect, external pressure is again dialing up. In withdrawing from the nuclear accord this spring, the Trump administration promised the “harshest” economic sanctions on the country.

For the Trump administration, that economic pain is by design: The thinking is that maximum pressure on the regime’s weak points will force it back to the table to negotiate a new, more expansive pact that could rein in both Iran’s nuclear weapons program, its missile program, and its involvement in conflicts around the Middle East.

“The Trump administration senses that the economy is the Achilles’ heel of Rouhani and the Iranian system as a whole,” said ICG’s Rafati. “They’re willing to rake their studs down the side of the leg to make that more acute.”

A U.S. administration official said on Monday that the Iranian government bears responsibility for the protests that have rocked the country. “As Iran expends enormous resources on its foreign adventurism, its people are becoming increasingly frustrated, and we are seeing this frustration expressed in protests across the country,” the official said, dismissing concerns that U.S. sanctions could channel discontent toward America.

Just the specter of renewed U.S. sanctions on Iranian oil exports, which will kick in beginning in November, have hammered Iran’s currency. Most buyers of Iranian oil have indicated that they will scale back purchases of Iranian crude to avoid reprisals from Washington (though not its biggest customer, China). That fuels concern that Iranian government revenues will soon shrink, which means greater budget deficits.

Iran, locked out of global capital markets and unable to turn to local banks, pays for budget deficits by essentially printing money, which creates runaway inflation. While official figures suggest an annualized inflation rate of about 10 percent, outside experts figure the real figure is much higher, on par with the darkest days of the Mahmoud Ahmadinejad presidency.

“They are basically turning on the printing presses,” and driving inflation, said Hanke, who estimates that real Iranian inflation is running about 186 percent year on year.

Experts expect that the return of U.S. sanctions will intensify public unrest.

“As sanctions snap back, I think you’re going to see more demonstrations,” said Alireza Nader, an independent Iran analyst. “But it’s not just about the economy—the vast majority of people hate the Islamic Republic.” He noted that the 1979 revolution was sparked by mass protests and strikes, and said he sees a similar dynamic at work today.

The Trump administration says its goal is not regime change, but behavior change. Secretary of State Mike Pompeo on Sunday said Washington would need to see “enormous change” from Tehran to ease sanctions, adding that Trump’s goal is to get Iran to “behave like a normal country.”

But forcing Iran’s hand might be harder than during the period from 2012 to 2015, when the Obama administration laid the groundwork for the nuclear deal. Rouhani’s political freedom to again offer concessions to the United States and other major powers is limited, after the difficulty he had overcoming hard-line resistance to the 2015 deal.

“Rouhani went through a lot of political capital to do the deal once, and to come back in a position of perceived weakness, that would be not just a major political gamble, but much more than that,” said Rafati.

He said the protests could instead push the regime to finally tackle the economic ills that have long plagued the country, such as corruption, unemployment, or the moribund banking sector, he said.

But Dubowitz scoffed at the idea that Iranians who have risked life and limb in recent days to challenge the regime will turn their support to the clerics just because of outside economic pressure.

“The only ‘rally-around-the-flag’ that is occurring and likely to occur is around the pre-revolutionary flag,” Dubowitz said.

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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