The news coming out of Iran these days tells the story of a country in crisis. The economy is sliding towards collapse, even before the first round of US sanctions were reinstated on August 6. Nationwide protests are calling for regime change—a dirty word in Tehran up until recently. The Iranian government and its military leaders speak openly about looming conflicts. Ironically, only a few months ago, there were talks of Iran as a rising regional power in an otherwise volatile Middle East.
So what are the major factors working against the Iranian government?
At the heart of Iran’s economic problems is systemic corruption, which has now reached unprecedented heights not seen before. In April, after the Iranian rial lost nearly 20 percent of its value against the US dollar, the government set a single foreign exchange rate at 42,000 rials per dollar to rescue the currency. Operators with connections to the Central Bank of Iran (CBI) received significant amounts of dollars at the subsidized official rate ostensibly to import essential goods. Instead, they sold their currencies in the open market at prices more than double the official rate.
The current economic crisis goes beyond corruption, though. The Iranian government also struggles with regulating the country’s foreign exchange market. In the government’s latest move, essential imports will be paid in a subsidized official rate set by the CBI in dollars obtained from oil exports. For everything else, a secondary open market will distribute hard currency gained through the export of petrochemicals and others goods. The dual system again could be the basis of corrupt practices in forex markets, although it’s still unclear how efficient the secondary market could operate, and if it could obtain enough currency to meet the demands. The country is also facing a severe economic downturn, with a full-fledged recession looming, high unemployment, and rapidly rising inflation.
The first wave of US sanctions went into effect on August 6. These sanctions cover buying and acquiring US dollars by Iran; the sales of commercial airplanes and their parts; Iran’s auto industry; trading in gold and other precious metals, such as aluminum, steel, and graphite (used as moderator in nuclear reactors); and a host of other sanctions. The greater sanctions will be effective as of November 4. They will include sanctions on oil and petrochemical products; transactions with CBI and other Iranian financial institutions; shipping and insurance; and financial messaging service to Iran’s CBI and other banks.
Needless to say, if uncontested effectively by the European Union, the return of unilateral sanctions could push the ailing Iranian economy over the edge and toward collapse.
Since December 2017, a wave of protests against the regime has entrenched Iran. The latest round of protests, which began on August 2, seems to be more organized than before, as many protesters in cities like Esfahan, Mashhad, Shiraz, Tehran, and Karaj used the same slogans simultaneously. These chants include: “Our enemy is right here. They’re lying when they say it’s America,” “Death to dictator,” and “This month is the month of blood, Seyed Ali [Khamenei] will be overthrown.”
Although the presence of thousands of members of the lower-middle classes on the streets is an indication of a rapidly worsening economic situation, the nature of the slogans is a manifestation that the demands of the protesters go beyond economic issues. The radical overtones show that years of resistance and anger against the regime is boiling over, and will likely result in a nationwide uprising in the not-so-distant future.
The economic and political discontent gripping Iran is the most severe of its kind in the four decades of the Islamic Republic. It wouldn’t be surprising that the opposition, including elements from within the regime such as the Islamic Revolutionary Guard Corps, might soon put forth alternatives to the rule of the clerics in the country. Forty years of incompetency, corruption, and dictatorship have taken their toll on the Islamist movement in Iran.
At a time of growing tensions between Iran and the United States, the attacks on two Saudi oil tankers on July 24 by Iran-backed Houthi rebels—likely with anti-ship missiles provided by Tehran—underscored the precarious situation facing the country after years of military involvement in the region.
Since the 2011 Arab Uprisings, Iran has been at war in Syria, Iraq, and Yemen. Tehran has used proxies to establish an arc of Shia influence across the Middle East. Now its regional foes are no longer turning a blind eye to Iran’s activities and are challenging the country’s attempt at dominance in the region. In places like Yemen, the situation could easily get out of hand. If a Houthi missile attack inflicts major casualties on US or Arab fleets, a major regional conflict could pursue.
Threats by Iran to close the all-important oil tanker choking points, the Strait of Hormuz in the Persian Gulf or Bab el-Mandeb strait in the Red Sea, is also a reminder of how quickly Iran could get pulled into a major regional conflict with its neighbors with superior military capabilities. President Hassan Rouhani’s reference to the “mother of all wars” highlighted the risks involved. Continuous discussions of a potential war by senior Iranian officials could in fact worsen Iran’s own political and economic challenges.
The Way Ahead
The worsening economic and political situation in Iran could serve as impetus for the regime to limit its activities in the region and be prepared to negotiate its regional role as part of a comprehensive agreement with the West, replacing the Joint Comprehensive Plan of Action (JCPOA). Absence of such a compromise, punitive sanctions added to an already worsening economic situation, could cause economic collapse and significantly raise the risk of a popular uprising in Iran.
The contour of a future agreement is already in place with the JCPOA. Looking at it as a model, it can be used to negotiate over Iran’s ballistic missile program and its regional activities. The alternative, the “mother of all wars,” is neither in the interests of the Islamic Republic, the Arab states, nor the West.
Nader Uskowi is a nonresident senior fellow with the Middle East Security Initiative in the Scowcroft Center for Strategy and Security. Nader is also the president of Sagewood Consulting LLC, a consulting firm specializing on Iran, Middle East, and Central Asia. His book, Temperature Rising: Iran Revolutionary Guards and Wars in the Middle East, will be published by Rowman & Littlefield in November. Follow him on Twitter: @nuskowi.