Iran's mullahs have frustrated every U.S. president since Jimmy Carter. To undermine the Islamic government, America has tried isolation, support for the regime's opponents and incursions into Iran. But our weapon of choice has been economic sanctions. Until recently, however, our own economic measures-and even the UN's-have had a limited impact on Iran's export earnings and import needs. American pressure had little impact because the sanctions were blunt and economic conditions in Iran were not ripe for change.

But in the past year, Iran's economy has faltered and America has retooled its sanctions package, making it much more damaging to Tehran. Could more thoughtful and effective sanctions coupled with Iran's rapidly deteriorating economic outlook be the tsunami that softens Iran for negotiations or even topples the Islamic Republic?

 

Recent Developments

Iran's economic failures after the 1979 Islamic Revolution have been dramatic. Iran's average real per capita income is lower, income distribution is more unequal, oil production has dropped by 30 percent, financial reserves are lower, dependence on oil revenues is higher, and unemployment and inflation are both higher and are at more than 25 percent. Tehran has not created wealth, but has only distributed oil revenues to make a few very rich while keeping the lid on domestic dissension. It would only be slight exaggeration to conclude that over the last four years all of Iran's oil revenues have been used to either buy domestic support or fund capital flight in favor of the wealthy.

Ironically, economic failure and social injustice has only accelerated during a period of high oil prices. President Ahmadinejad's government has spent windfall profits like a drunken sailor, with financial reserves declining to four months of imports. Fearful of domestic backlash, the regime has eliminated subsidies in favor of giving poor families-with the level of need determined by an ill-conceived survey-a maximum cash payment of about eighty dollars per family to make ends meet.

Further, Tehran has yet to feel the full burden of the collapsing oil market, with prices down from one hundred forty-seven dollars per barrel to forty three dollars per barrel in a matter of weeks, and with lower prices to come. Under prevailing financial conditions in Iran, lower oil prices will squeeze the regime more than ever before and test its ability to survive. The choice for the government will be stark: tax the rich or starve the poor!

Compounding Iran's economic maladies, the new American sanctions are isolating Tehran's banks and financial institutions. This has increased the cost of letters of credit and trade for Iran by about 15 percent. Iran's access to international finance has been cut off when its government may be in desperate need of external credit to survive.

 

How to Bring Tehran to Heel

All of these developments afford the United States an unprecedented opportunity to affect regime change in Iran or to at least negotiate with Iran from a position of overwhelming strength. Here are a few steps President-elect Obama might consider. With more thought and deeper insight into the Iranian economy, the United States could develop even more effective sanctions. Such measures should have one goal in mind-to initiate a run on the Iranian rial. There are a number of actions that could achieve this goal within six to twelve months. Additionally, the United States should make a concerted effort to cut off financial cooperation between Iran and the UAE and Malaysia.

To further compound Iran's economic stress, the American government should do nothing to prevent the downward spiral of oil prices. Before negotiating, however, the new administration needs to wait to let this combined package of enhanced sanctions, lower oil prices and the financial crisis do their work in undermining the Iranian economy.

After six to twelve months, we can begin to contemplate negotiations with Iran. But our administration must be firm and accept overtures only from Iran's supreme leader-we shouldn't respond to the many other voices in the country. Our strategy should be to negotiate, concede nothing and play for time. Time may worry those who think Iran might soon have a nuclear weapon, but Iran's economic implosion will give the United States an opportunity it has never had and may not get again in a generation. We need to plan ahead, and the administration should start to develop a comprehensive plan for dealing with Iran before events unfold.

Even if regime change does not occur in Tehran, the regime will be so threatened from economic pressure that it will be willing to compromise as never before. Under duress, Iran is much less fanatical than rhetoric would have it seem. During the Iran-Iraq War, Tehran had dealings with its purported mortal enemy-Israel. In 2003, the regime was so frightened with America's initial success in Afghanistan and Iraq that it approached the United States as a supplicant. Recent events might hint at a similar approach-President Ahmadinejad just wrote a conciliatory letter to President-elect Obama. The Islamic regime even has close relations with elements of the Shah's former government, who do the cleric's bidding for financial rewards. Iran's meddling in the broader region and its uranium-enrichment program should be viewed as attempts to gain leverage for survival. While Ayatollah Khomeini may have been immovable, his entourage is nothing but practical. Appearances have blurred realities.

 

Hossein Askari is the Iran Professor of Business and International Affairs at the George Washington University.