Dubai, United Arab Emirates – Iran faces a time of reckoning, and the stakes couldn’t be higher: potential war with the United States, the reversal of its gains across the Middle East and the future of its revolutionary state.

It would surprise most Americans how little the Arab public and media here – nine time zones from Washington DC – were occupied this week with the Congressional hearings on impeaching President Trump.  They instead were focused on the crisis closer to the door in Iran, just 600 miles away from the UAE as the drone flies.

This defining moment for Tehran – perhaps the most critical since the Iranian Revolution of 1979 – has been prompted by the Trump administration’s “maximum pressure” campaign of sanctions, Iran’s dangerously declining economy, and the cumulative effect of Tehran’s domestic malfeasance and regional overstretch.

Growing protests in Iran, Iraq and Lebanon have charged the atmosphere with urgency.

What’s clear is that the growing scale of the challenge makes it difficult for Iran to pursue its earlier approach toward mounting US pressure: hunkering down and waiting out the Trump administration through the November 2020 election in the hope of Democratic victory.

What’s less clear is whether Tehran, over the short term, will respond to this historic test with more military escalation, diplomatic compromise – or a combination of both. 

Diplomats in the Middle East argue that the United States has put itself in a good position to shape that choice. They argue Washington could take advantage of Iran’s increased difficulties by working more closely with European and Mideast allies to frame an offer that would ease sanctions but put in place a process that would block Iran’s path to a nuclear weapon and end its foreign policy of regional meddling.

However, that sounds like wishful thinking in the world of Washington’s distractions, transatlantic distrust and Iranian outrage. Trump administration officials are sanguine, arguing that at the very least the sanctions have cut deeply into the resources Iran can invest in its proxies. Protests at home and abroad are usefully soaking up regime energies.

The danger is that may risk further military escalation to gain attention and leverage, following its June 20 shooting down of the American drone and its September 14 strike on Saudi oil processing facilities. Or it could take further steps away from its nuclear agreement of 2015, having this month resumed low grade uranium enrichment at its underground Fordow nuclear plant to 60% of fissile purity, not far from the 90% level required for nuclear bomb fuel.

It’s hard to imagine Iran entering the expanded talks the US would want without first getting the sanctions relief the Trump administration has thus far refused. Yet it’s just as difficult for Iran to imagine that the status quo is sustainable of a collapsing economy and rising protests.

The challenges to the Iranian regime have been sharpened by ongoing demonstrations at home since November 15 that have resulted in at least 106 and as many as 200 deaths in 21 cities, according to Amnesty International. Those numbers have been increasingly difficult to verify or update due to the regime’s shutdown of the internet this week. (The US Treasury on Friday added the Iranian Communications Ministry and its minister to the sanctions list for that action.)

At the same time, widespread protests in Iraq and Lebanon are also taking aim at Iran’s influence and proxies. What’s at risk for Iran are decades of investments that have transformed the country into the Mideast military and political power it is today.  U.S. officials reckon Iran has spent some $16 billion on Iraq, Lebanon and Yemen since 2013 – and $10 billion on Syria.  It is estimated to spend $700 million a year on Hezbollah.  That support is increasingly difficult to sustain both financially and politically among Iranians – and there are new reports that Hezbollah, Iran’s proxy in Lebanon, increasingly has been engaged in fund-raising drives.

What’s also changed is that Iranian leaders are conceding that the economic pressures on them are growing – after a long period of insisting they could easily sustain the sanctions. They are taking unprecedented and perhaps counterproductive measures to address the problem. What triggered the current protests was Iran’s midnight announcement on November 15 that it would cut fuel subsidies and increase the price of gasoline by 50%.

“We all know too well that we are not in normal and easy circumstances,” Iranian President Hasan Rouhani said recently, calling it the worst economic situation in four decades. “The conditions are very complicated … Since the beginning of the revolution until today, we have never faced so many difficulties in moving an oil tanker from our ports and harbors to the world.”

Though Iran’s economic numbers can be unreliable, what’s clear is that under the sanctions regime its oil exports have dropped from 2.5 million barrels a day after the lifting of sanctions in 2016 to 400,000 barrels per day and perhaps as little as 200,000.

Rouhani has said that some $25 billion of the state’s annual budget of $39 billion has been covered by oil exports. Beyond that, the export decline has prompted the International Monetary Fund to project that Iran’s economy would shrink by 9.5% while inflation would surpass 35%. Iran’s own inflation projection of 42% is even more pessimistic.

The history is mixed of economic sanctions bringing about political change.

That said, it is difficult to imagine a moment when the West’s leverage could be higher. Thus, Germany, Britain and France should get ready to consider moves to reinstate international sanctions on Iran over breaches of its 2015 nuclear deal, as suggested by German Foreign Minister Heiko Maas, and such deeper sanctions should be at the same time accompanied by more intense diplomacy. 

The problem from the Western side, say leading diplomats, is that it’s hard to know what Iran wants nationally and regionally. It’s been even more difficult to known with whom one can negotiate most effectively, as it is Supreme Leader Ali Khamenei – with whom no one has negotiated – who holds the cards.  

Until those answers are known, the best approach is to continue and expand the maximum pressure and prepare for a range of increasingly unpredictable Iranian responses – focusing as deeply on deterrence as diplomacy.

This article originally appeared on CNBC.com

Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter @FredKempe. 

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Image: A man walks past the ruins of a burnt bank, after protests against increased fuel prices, in Tehran, Iran November 20, 2019. Picture taken November 20, 2019. Nazanin Tabatabaee/WANA (West Asia News Agency) via REUTERS