Editorial Board

Turning Iran’s Currency Crisis Into a Revolution

Amid the usual hyperbolic conspiracy theories, Iranian President Mahmoud Ahmadinejad said something incisive in a televised address last week: that the West is waging against Iran.

He’s right, and the Iranian rial’s death spiral is the first clear sign that we’re on a path to victory. The 40 percent drop by the rial against the dollar since late September is a symptom of larger woes: oil exports are at 1 million barrels a day, down from 2.2 million last year; quarterly oil revenue is down by about $15 billion a quarter; inflation, officially at 25 percent, is probably closer to 70 percent per month; unemployment is probably three times higher than the official 12 percent; and the country has been hemorrhaging foreign-currency reserves, which were estimated at about $110 billion at the end of 2011.

Critics of sanctions will point out that this economic pain hasn’t softened up the Tehran leadership’s hard line on its nuclear program. Iranian officials said Oct. 2 that if current negotiations falter, they plan to enrich some of its current 20 percent-pure uranium to 60 percent purity as fuel for a (nonexistent) nuclear submarine fleet, bringing it closer to the 90 percent level necessary for a weapon.

Ignore such bluster: The real test of sanctions’ impact can be seen in the riots outside Tehran’s main bazaar and elsewhere in recent days. These weren’t the first signs of public discontent over the government’s handling of the economy. A wave of strikes happened this summer; a trade-union group complained to the government that despite staggering price increases, “worker’s wages … have gone up by only 13 percent.” (The regime responded by imprisoning labor activists and sentencing them to lashings.) There’s been political fallout as well. Parliament Speaker Ali Larijani said last week that the Ahmadinejad government was responsible for “80 percent” of the economic woes.

The idea behind tightening the screws is not that we expect the regime to see the error of its atomic ambitions. Rather, it is to stress the economy to the point that Supreme Leader Ayatollah Ali Khamenei realizes he can no longer afford to see his people punished for such nuclear dreams.

In that quest, the West might have tapped out the oil barrel. Perhaps the U.S. could expend diplomatic and political capital to get greater cooperation from a few of the countries it says are making “significant” reductions on Iranian oil imports, such as India, Japan, South Korea and perhaps China. But pushing Iranian oil sales much below their current monthly level will be tough.

Instead, it’s time to broaden the war to other fronts: targeting the entire Iranian energy sector, making it even harder for companies to sell any nonhumanitarian commercial goods to Iran, and seeking to deplete or freeze the regime’s remaining foreign-currency reserves.

Iran’s skyrocketing inflation stems partly from a drop in imports, which has made meat a luxury and forced the government to stockpile wheat from eastern Europe and India. This is the real-world effect of U.S.-led efforts making it more difficult for companies to do business with Iran’s central bank. How to turn up that pressure?

First, the U.S. and European Union should expand sanctions to all Iranian financial institutions. When European leaders meet in mid-October to discuss Iran, they should agree to end exceptions that allow Iran’s central bank to use reserves it holds in European banks for some commercial trade. It should also ban the so-called U-turn transactions that landed Standard Chartered Plc in hot water with New York state authorities.

Further, while banning companies from exporting food and consumer products to Iran would leave the U.S. open to criticism that it is starving the Iranian people (and probably fracture relations with EU nations who have so far supported the sanctions), there are more subtle techniques for tightening the circle. One is for the EU to prohibit European insurers from providing any sort of maritime or commercial policies for exports of goods other than food or medicine to Iran.

On a different tack, the U.S. could push for a global ban on trade with any entity related to Iranian energy production, a sector controlled by the regime and its Islamic Revolutionary Guard Corps (which the U.S. government has blacklisted). This would be far better than targeting individual companies, as the Iranians have been creating new fronts and reflagging ships far faster than the sanctions regime can be expanded. A 2010 United Nations resolution backed by China and Russia would seem to allow such global action.

High inflation and a dwindling number of goods in Iran’s marketplaces may increase popular anger with the regime, but would somewhat set back the effort to deplete its hard-currency reserves, which by some estimates could last two more years. To move that date forward, Mark Dubowitz of the Foundation for the Defense of Democracies suggests creating a haven program to help average Iranians move their savings into U.S. bank accounts. The mullahs would probably fight back with capital controls and other oppressive measures, but that would put them in the position of harming the economic interests of their people while the U.S. was offering to safeguard them.

Sanctions are a long game, and the objective isn’t to starve the increasingly restive Iranian people but to convince them that their leaders no longer have their best interests at heart. Khamenei will only change his ways when he is forced to choose between his weapons program and the downfall of his regime. Either of those outcomes would be fine with us.

( (Corrects Iran monthly inflation rate in second paragraph of editorial published Oct. 8.) )

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

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