Washington DC, April 24, 2018 --  

A collapse in the value of Iran's currency heightens the risk of regional war.

When Israeli missiles struck an Iranian base in Syria on April 9¹, it might have been the first shot in a looming regional war. Tensions between Israel and Iran have been growing for years owing to Iran's military presence in Syria. It was Iran's alleged use of an armed drone to probe Israeli airspace in February that triggered Israel's air strike earlier this month. An eerie calm has taken hold as Iran has thus far not retaliated. Should cool heads not prevail, a regional war between Iran and Israel could drag in the United States and Russia.

While Americans are blissfully unconcerned about the threat of war, Iranians are hoarding cash. Since last fall, the Iranian rial has lost nearly half its value, as Iranians protecting their savings have hoarded foreign currency. The rial went into free fall this month. The Iranian government outlawed trading the currency at anything other than the official rate of 42,000 rials to the dollar, despite a black market trading the currency at 60,000 to the dollar.² Access to foreign currency has predictably dried up.

The Iranian government, never quick to take the blame, pointed its finger at foreign enemies. And as paranoid as this sounds, there is an element of truth to it. Panic is in part related to President Donald Trump's threat to pull America out of the Iranian nuclear deal by a May 12 deadline to certify compliance. If Trump follows through, American economic sanctions on Iran could be reimposed by Congress, exacerbating Iranians' economic misery.

Despite Trump's threats, this outcome is not certain. He has threatened the same twice before, most recently in January, only to back down at the last minute. But since the last time, Trump has fired his Secretary of State and National Security Advisor in favor of hard-liner replacements who support scrapping the Iranian agreement.

The economic consequences of an American withdrawal would be relatively mild. Even after the agreement came into force, the United States imposed new sanctions on Iran in response to its ballistic missile program, so the direct impact of any relief is modest. For this reason, Iran's wisest economic move would be to keep abiding by its end of the bargain -- as long as European countries stay on board with the agreement, Iran will retain its economic links to the rest of the world.

But that might not be how Iran responds. Iran has hardliners of its own who also don't like the deal, and for whom the Unites States is, as always, the Great Satan. Iran's foreign minister warned Monday that it would restart nuclear activities in the event of a U.S. withdrawal,³ and Iran's Secretary of the Supreme National Security Council said today that the nation might even withdraw from the Nuclear Non-Proliferation Treaty.⁴

This may all be bluster. But if Iran actually follows through with these threats and restarts its uranium refinement, that might give Israel the excuse it long been itching for to strike Iran's nuclear sites. And once that happens, the whole region goes up in flames.

Would Iran really be so foolish? Perhaps, because it might make sense from the perspective of Iran's leadership. While Iran's military involvement in the civil wars in Syria and Yemen are unpopular with its people, the country's nuclear program has always enjoyed great popularity. It generates pride even with liberal-minded Iranians who yearn for one of the world's oldest powers to regain its proper place in the world. Back in 2015, before the centrifuges stopped spinning in Iran, 83 percent of Iranians said the program was very important.⁵

In contrast, the nuclear deal that stopped the centrifuges is unpopular. By the end of 2016, support for the agreement in Iran had dropped to 21 percent, with 72 percent of people saying living standards had not improved with sanctions relief.⁶ This is a huge problem for the government. Much like in Cuba, foreign sanctions on Iran have become an excuse the government needs to deflect blame for its failure to deliver prosperity. Indeed, large anti-government protests gripped Iran just three months ago. Videos were captured with people denouncing the Islamic Republic and chanting "death to the dictator."⁷

Today's currency crisis shows the people engaging in a vote of no confidence in the government with their pocketbooks. They are hoarding dollars and euros because they no longer believe the government can manage the economy, with or without sanctions. This is a dangerous situation for a government that has long relied on the threat of foreign enemies to justify its rule. What better way to shore up flagging public support than by goading the Israeli enemy to launch an attack? For teetering authoritarian regimes, using the specter of war to rally the people is the oldest trick in the book.

Related Web Columns:

Getting Us Nuked, June 6, 2017

Great Satan No More, June 3, 2014

Fire the Memory Sticks, September 28, 2010

Deal With It
The Inevitibility of a Nuclear Iran, July 20, 2010

Unstoppable Disaster
The Coming Conflict with Iran, December 11, 2007

Notes:

1. Times of Israel, Satellite Photos Indicate Precision of Raid on Iranian Military Base in Syria, April 22, 2018

2. Radio Free Europe / Radio Liberty, Iranians Hit By 'Perfect Currency Storm', April 22, 2018

3. Washington Post, Iran's Foreign Minister Warns Nation Will Restart 'Nuclear Activities' if U.S. Withdraws From Accord, April 22, 2018

4. The Guardian, Iran Threatens to Withdraw from Nuclear Weapons Treaty, April 24, 2018

5. Center for International and Security Studies at Maryland, Iranian Public Opinion on the Nuclear Negotiations, June 2015

6. OZY, Iran's Nuclear Deal: Less Popular There Than Here? May 5, 2017

7. The Wall Street Journal, Iranian Antigovernment Protesters Demand End to Regime, Khamenei's Rule, December 31, 2017