Iran On the Edge

• Iran is at a tipping point, and President Obama's policies in the next few months could define the Iran that emerges from the current turmoil. In considering the next step in its engagement with Iran, the Obama administration must take a hard look at the country's increasingly unstable domestic situation.

Given the an increasingly serious political and economic crisis, the "Islamic" in the Islamic Republic of Iran is no longer applicable -- nor is the word "republic." After the recent elections and the brutal treatment of protestors and anyone opposed to the regime, the mullahs are no longer seen as legitimate by the Iranian people. The Revolutionary Guard Corps has carried out a bloodless coup with the blessings of a puppet supreme leader and president. Today Iran is, for all intents and purposes, a secular military dictatorship.

The country's economy is also in dire straits. The regime has put off reforms for three decades, blaming sanctions for its self-inflicted failures. Inflation is running at an annual rate of 20-25 percent. Unemployment is around 20 percent and on the rise. Iran's foreign exchange reserves have declined rapidly, to an estimated $40 billion. Tehran can no longer pay the bills, keep the regime's corrupt sycophants satisfied, and deliver a minimum level of subsidies to poor Iranians to keep the lid on political dissent.

Faced with these economic realities, the regime has decided to cut energy and food subsidies, gradually increasing the price of basic goods such as oil, electricity, and bread to international market rates over a period of about five years. While many senior members of government have long appreciated that this was necessary in order to achieve an economic turnaround, they were loathe to take this step for fear of a domestic backlash. Now that subsidies are being slashed, the people are beginning to stir.

Electricity bills have increased by 300 percent, with payments due within 45 days and late payments subject to a 20 percent interest penalty. The expected price increases associated with the elimination of subsidies should send inflation soaring above the 30-40 percent rate, making the lot of poor Iranians unbearable.
Both the regime and average Iranians hope that a rapprochement with the West can alleviate these economic pressures. They assume that the removal of sanctions and Iran's re-integration into the global financial system will quickly reinvigorate economic growth. But they are wrong. Iran's economic wounds are largely self-inflicted; they are the result of failed institutions, ill-conceived economic plans, and pervasive corruption. The removal of all sanctions will enable corrupt business and political leaders to amass even larger fortunes as they scramble to represent U.S. firms in Iran, but average Iranians will see very little benefit so long as the present regime stays in power. For economic conditions to improve, Iran needs a dramatic change in policies and practices, not just the removal of sanctions.

The continuing turmoil in Tehran has also afforded Iran's ethnic minorities -- principally the Arabs in the Southwest, the Baluchis in the Southeast, and the Kurds and Azeris in the Northwest (but also Lurs and Turkmens) -- an opening to challenge the regime with their list of growing grievances. There is fear among Iranians that their nation may be in serious danger of dismemberment if additional political and economic pressures are brought to bear on the already strained government.

The Iranian regime, fearing these developments, has exhibited an unprecedented willingness to negotiate with the United States in order to regain its legitimacy. The United States should seize this opportunity -- not only by tackling the issue of nuclear enrichment, but also by raising governance issues with the Islamic Republic. Embracing the regime in Tehran and lending it unconditional support, as the United States has done with other dictatorships in the region, will only backfire. Washington is fooling itself if it thinks it can prop up this regime. The mullahs have lost all credibility, and the Iranian people are unwilling to pretend otherwise. It is in America's interest not to alienate the Iranian people and the rest of the Muslim world.