Opinion

If America Wants to Hit Iran Hard, Go for Its Flaccid Economy

The rial’s freefall shows how vulnerable the Islamic Republic’s economy is, but does Trump have patience for economic warfare?

A man darns a Persian carpet in the rug bazaar in Tehran, Iran, on Monday, Jan. 15, 2018. The U.S. president plans on sticking with an agreement that suspends American sanctions on Iran in return for limiting its nuclear research, according to two administration officials familiar with the matter. Photographer: Ali Mohammedi/Bloomberg
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If the fight against Iranian irredentism were being fought solely over Syria, the situation would be pretty grim. Despite Israel’s alleged air raids on Syrian territory and the U.S. missile attack over the weekend, the fact is that Bashar Assad is gradually regaining his grip on the country and the Iranians are entrenching themselves.

The Trump administration can’t seem to make up its mind what it wants to do about this, while the Russians seem to be indifferent to Tehran’s aspirations. Israel alone can’t really do anything to reverse the process.

But there’s another front where Tehran is clearly in retreat, the very front that may dictate if it can ever emerge as the dominant power in the Middle East is decided.

The economy has always been the Islamic Republic’s biggest obstacle to the great power status it aspires.

Its 80 million people and vast oil resources buy it some influence in the region. The Islamic Revolution gave it a degree of soft power among the world’s Shiites. Iran’s nuclear program was about showing the world it IS a technology power, almost as much as it was about military prowess.

A briefcase filled with Iranian rial banknotes sits on display at a currency exchange market on Ferdowsi street in Tehran, Iran, on Saturday, Jan. 6, 2018. A wave of bad loans from unregulated lenders has rocked the banking sector and oil prices have averaged less than $60 a barrel for the past three years, draining Iran of a key source of revenue. Photographer: Ali Mohammadi/Bloomberg
Bloomberg

But aspiring to be even a regional power (much less a superpower) in the 21st century means having economic resources to pay for a military; buy and develop weaponry; and deploy it far from your borders when the need arises. Iran’s oil can’t make up for the fundamental weakness of the rest of the economy – the bit that actually produces products and services, creates jobs and generates broad-based wealth.

Death to scapegoats?

The outside world got some sense of the Islamic Republic’s deep economic problems when spontaneous protests broke out in December and January, prompted by economic distress and provoking a deadly government response.

It surfaced again last week when the rial exchange rate collapsed, forcing the government to impose currency controls and arrest a few forex dealers to show it means business. One cleric suggested black market dealers be executed.

After falling to a record low of 60,000 rials to the dollar, Teheran has committed itself to defending a flat exchange rate of 42,000. Iran has sufficient foreign currency reserves to prop up the rial for the foreseeable future, but its move just only papers over the serious problems facing the economy.

Iranian leaders prefer to blame the economy’s woes on its enemies, in particular Western sanctions. “The recent volatility in the foreign exchange market is a plot by enemies and we should not worry about it,” the Iranian central bank chief, Valiollah Seif, told parliament at the peak of the currency crisis.

That’s sort of true, although the conspiratorial tone of Seif’s remarks is silly. Most of the sanctions that existed prior to the 2015 nuclear accord are still in place, and the Trump administration has discouraged companies that can do business with Iran by repeatedly threatening to tear up the accord.

But an equal share of the blame can be laid at Tehran itself, which has mismanaged the economy.

Corruption is endemic, the Iran Revolutionary Guard Corps and religious foundations have monopolized much of the economy, the banking system is in deep trouble  (no fewer than 20 institutions have gone under in recent months).

The economy grew at a double-digit rate after the nuclear accords cleared the way for oil exports, but that was a one-time bonus. Since then, the economy has had to run on its own steam, and the pace of expansion has slowed sharply. Unemployment and inflation are in the double-digits and while devaluation may give a lift to non-oil exports, it will also feed into inflation and economic distress for ordinary Iranians.

File photo: A currency trader counts Iranian rial banknotes at a money exchange market on Ferdowsi street in Tehran, Iran.
Bloomberg

The rial is a good barometer for how well Iran’s Islamist leaders have run the economy. When they overthrew the Shah in 1979, it was worth 70 to the dollar; by 2013, when the reformist president Hassan Rouhani took over it was at 36,000. The 60,000 rate the currency briefly touched is more indicative of what Iranians really think of the country’s prospects, rather than the government’s staged-managed rate of 42,000.

Better than tossing the 2015 nuclear accord into a diplomatic wastebasket or confronting Iran militarily in Syria or Yemen, Trump would do better ratcheting up the economic pressure on Iran, for instance by re-imposing sanctions.

It would be naïve to think that Tehran will be forced withdraw from Syria because it can no longer afford to. Politics in the Islamic Republic aren’t transparent, so the government can choose more freely how it spends its money than a truly democratic one can. But stepped-up sanctions can give the U.S. a strong bargaining chip playing against an Iranian leadership fearful of street protests and regime change from below.

Reportedly there are officials in the Trump administration pushing that very strategy.

The idea looks tempting because Iran is so vulnerable and the military options so risky. But with hyper-hawks like John Bolton and Mike Pompeo in key positions and a president who is neither a patient nor consistent policy maker, economic warfare might not be given a chance.