war on the rocks

Iran’s Summer of Discontent: A Warning for Washington

July 23, 2018

Iran is facing its most intense combination of domestic and international challenges in at least a decade, which is fueling speculation about the long-term viability of President Hassan Rouhani’s government — and even that of the regime itself. How the government responds to these challenges in the coming months will shape Iran’s domestic landscape, the near-term direction of U.S-Iran relations, and the broader outlook for regional stability.

Economic Woes

In the aftermath of the White House’s decision to abandon the Iran nuclear deal and reinstate punishing sanctions, Iran’s economic stability is increasingly at risk. Earlier this month, Treasury Secretary Steven Mnuchin publicly expressed the administration’s desire to reduce foreign purchases of Iranian oil to zero by the end of 2018. To put that number in perspective, Iran’s oil exports in May reached approximately 2.7 million barrels per day, the highest since Iran signed the nuclear agreement in 2015. Even though Mnuchin subsequently signaled the White House’s willingness to grant some sanctions waivers to allies that are dependent on Iranian crude purchases, many oil industry experts still expect Iran’s oil sales to plummet by nearly one million barrels per day once U.S. sanctions go into full effect in November. That’s obviously of great concern in Tehran given that oil and gas sales account for more than 80 percent of the country’s export revenues.

Meanwhile, the Iranian public’s growing anxiety over renewed sanctions has contributed to a series of recent public protests and a flight from the Iranian rial, which has lost about half its value against foreign currencies since late last year. To stem pressure on the currency, Tehran in April decided to combine the official and free-market exchange rates and to prohibit other trading in the currency, but indications are that the public’s confidence in the rial is deeply shaken. If, as appears likely, the public’s confidence in the currency continues to erode, look for the speculation market to boom, the demand for U.S. dollars to increase, and a sharp uptick in inflation.

This turmoil is exacerbating the public’s underlying frustration with Iran’s structural economic problems, including endemic government corruption, a difficult investment climate, distorted supply chains, and a lack of jobs. Iran’s official unemployment rate is 12 percent (unofficial estimates put it much higher), but the youth unemployment rate is a more pressing concern. According to recent Iranian government statistics, 42 percent of the country’s unemployed hold university degrees, with many young people trying to depart the country in search of meaningful employment.

And if that’s not enough bad economic news, all of this is occurring against the backdrop of the most intense drought Iran has experienced in half a century. Iran’s Energy Minister said recently that 334 cities with 35 million people are struggling with water stress, with half of those affected experiencing a “red alert situation.” One Iranian parliamentarian recently labeled the situation in Sistan and Baluchestan province as “a danger threatening national security.” Power shortages and blackouts are now common in many cities, including in Tehran, which is obviously a particular problem during the hot summer months.

Most international experts blame Iran’s water crisis on a combination of factors, including climate change, the overplanting of certain water hungry crops, a history of higher than normal energy transmission and distribution losses, and the government’s overall poor water management practices. But regardless of who is to blame, the situation is quickly going from bad to worse, and is reminiscent of the water shortage crises that have, in recent years, sparked instability in Afghanistan, Syria, and Somalia.

For their part, Iran’s leaders recognize the gravity of the current political-economic dynamic and are scrambling to formulate creative solutions. These steps include cozying up to Russia and agreeing to multi-billion-dollar Russian investment deals in Iran’s energy sector, working aggressively to identify workarounds to U.S. oil sanctions, reducing the working hours of government agencies, banks, and municipalities to conserve energy, and talking to the International Monetary Fund about ways to overhaul the country’s struggling banking system. Much of Rouhani’s popularity has hinged on his outreach to the West and the promise of an improving economy, and both of those key pillars of support are increasingly shaky.

Foreign Policy: Trouble On Many Fronts

That’s the economic story. But is Iran’s foreign policy agenda faring any better? In short, the answer is no. As a starting point, it’s crystal clear 18 months into the Trump administration that the president is determined, in close coordination with Saudi Arabia and other Gulf partners, to explore every opportunity to tighten pressure on Iran and to push back on its regional meddling. It’s unclear whether the White House’s long-term objective is to force Tehran back to the nuclear negotiating table or to bring about regime change, but the Trump administration clearly aims to significantly scale back Iran’s regional clout.

At the same time, most of Iran’s other high-profile foreign policy endeavors are producing mixed results at best. Consider the situation in Syria, for example. On the one hand, Iran’s support for Bashar al-Assad in recent years, which has included the provision of significant military and economic assistance, has cemented Iran’s relationship with a key ally, undercut Sunni extremist efforts to expand their physical foothold in Syria, enabled Iran to deepen its military presence throughout the country, and increased Iran’s long-term ability to support Hizballah logistically and to threaten Israel’s security.

On the other hand, Iran’s Syria operation has reportedly resulted in more than 2,000 Iranian military deaths, heightened the risk of a direct military clash with Israel, and fueled growing public opposition to Iran’s expenditure of scarce resources in Syria at a time when its own economy is struggling. We should expect this domestic criticism to grow even louder as Iran’s economy weakens further later this year.

A similar story is unfolding in Yemen, where the Iranian-backed Houthi rebels have suffered a series of military setbacks to the Saudi-backed coalition in recent months, and may soon be forced to yield control of the critical port of Hudaydah. Iran is certainly not as invested in Yemen as it is in Syria — viewing it primarily as a way to bog down the Saudis in an expensive and image-damaging conflict — but it has provided significant military, technical, and logistical assistance to the Houthis, and surely does not view recent battlefield developments favorably. Even in neighboring Iraq, where Iran wields considerable influence, there is a growing political backlash against Iran’s perceived meddling, which has been demonstrated clearly in the country’s recent election as well as in a series of ongoing protests in Basra and throughout southern Iraq.

The Challenge for Washington

On both the domestic and foreign policy fronts, then, Iran is facing multiple challenges, none of which can be easily resolved. What are the practical implications of this for U.S. and Western policymakers? Is the Iranian regime teetering on the verge of collapse, as some senior officials have opined? Or, as other officials have suggested, is this simply a slight bump in the road for a regime that has momentum and is on the march throughout the Middle East?

On the first theory, it’s worth recalling that the Iranian government has an internal monopoly on the use of force and has demonstrated its willingness to crack down harshly on dissidents (as it did in 2009 in the aftermath of the presidential election) whenever it feels threatened. Iran also has recent experience in managing a “resistance economy” in the face of Western sanctions, and still has more than $100 billion in reserves to draw on to help prop up the economy, if required. Moreover, countries such as Cuba and Venezuela have repeatedly demonstrated that it’s possible for governments to cling to power — particularly when they control the security services — for much longer than anyone could imagine, even in the face of a disastrous economy. At the moment, therefore, it’s far more likely that Rouhani and his allies could be forced from office than that the regime and its hardline supporters will be toppled.

Alternatively, for those U.S. policymakers worried about Iran’s regional activities, it would be wise, in my view, to keep a particularly close eye on Tehran’s actions as the noose tightens on its exports later this year. I do not believe Iran will sit idly by while its ability to export oil and gas is curtailed, nor as Saudi Arabia absorbs its market share.

While Iran certainly does not want to provoke a direct conflict with the U.S. military, it has a full range of asymmetric and plausibly deniable tools that it will not hesitate to employ if convinced that it’s in the regime’s interest to do so. For example, in 2012, Iran was blamed for a significant cyberattack against Saudi Aramco — an attack that was widely believed to be in retaliation for the Stuxnet virus launched by the West against Iran’s nuclear industry in 2010. We should assume that in the subsequent six years Iran has significantly upped its cyber game, and is now capable of launching even more crippling cyber operations against a range of targets. Indeed, just last week, there were reports citing senior U.S. officials claiming that Iranian hackers have already laid the groundwork to carry out extensive cyberattacks on U.S. and European infrastructure, though there is no indication that Tehran has decided to launch such an attack. Iran could also choose to lash out by increasing its military and technical support to a number of its regional proxies and encourage them, especially the Houthis in Yemen and Iran’s Shiite militia allies in Iraq, to target U.S. and Western interests to signal Iran’s displeasure with how the nuclear agreement has been handled and the renewal of economic sanctions.

Regardless, then, of how one interprets Iran’s current dilemma — and in many ways Iran has become a sort of Rorschach test for American policymakers over the years — it is a good time to keep an open and objective mind when assessing developments there. Given the fluidity of the situation, U.S. policymakers and analysts alike would be well-advised to challenge their underlying assumptions about the regime’s intentions and its stability, to think deeply about (and prepare for) Iran’s conventional and asymmetric response options to new U.S. pressure, and to think through the potential unintended consequences of a full-blown economic and military standoff with Iran. On the latter point, for example, is the United States prepared to weather the economic impact of removing a million barrels a day of Iran’s oil from the market and the possibility of a clash in the Persian Gulf, even if it drives the global price of oil to well over $100 per barrel? And is it prepared for Iran’s economy to deteriorate to the point that it doesn’t topple the regime or force it back to the negotiating table, but instead triggers a wave of Iranian refugees into Iraq and elsewhere in the region? Thinking through these scenarios now won’t ensure a successful policy outcome, but does offer the best hope for ensuring that Iran’s summer of discontent does not also become America’s.

 

Michael P. Dempsey is the national intelligence fellow at the Council on Foreign Relations, a fellowship sponsored by the U.S. government. He served as the former acting director of national intelligence. The opinions expressed are solely those of the author.

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