What should the next administration do about Iran? During the 2008 presidential campaign, Sen. Barack Obama advocated the need for direct negotiations as a way of addressing the Iranian regime's persistent nuclear ambitions. And since his electoral victory, the president-elect has given every indication that he intends to initiate a diplomatic dialogue with Tehran after he assumes office on Jan. 20.
Obama's approach has found favor with a growing number of policy experts and analysts, who have come out publicly in favor of some sort of engagement with the Islamic Republic. But in reality, the most effective approach to Iran lies not in dialogue but in economic warfare. This is because, while the global financial crisis may have hit the United States and its allies hard, the Islamic Republic is weathering the world economic meltdown far worse.
The reason has to do with Iran's intrinsic economic vulnerabilities. Saddled with costly subsidies (which account for some 20% of Iran's total annual GDP), and deeply dependent on costly supplies of foreign refined petroleum, Iran is a poster-child for comprehensive economic pressure.
The numbers tell the story. For years, the Iranian regime has expended enormous sums of money to keep domestic energy prices at artificial rock-bottom rates as a gesture of goodwill toward its people. This system worked well when world energy prices were sky-high, but the global economic slowdown--and the attendant drop in the cost of oil--has crippled Iran's economic construct.
Exactly how much is readily apparent. Mohsin Khan, the International Monetary Fund's director for the Middle East and Central Asia, told the Dow Jones news wires in September that "if prices dip below $90 a barrel, then [Iran's leaders] would have to tighten their public expenditure policy, and probably cut subsidies, which would be an issue for the government there--the public would not be content."
If anything, Khan's assessment is an understatement. With the Iranian economy dependent on oil revenue for some 80% of its foreign exchange earnings, the plummeting world price of oil (now dipping below $55 a barrel) has been nothing short of ruinous for Iran's ayatollahs. And in response, the Iranian regime has begun to devour itself from within, progressively depleting its estimated $82 billion of hard currency reserves in order to stay solvent.
For the United States, the economic crisis now engulfing Iran represents a signal opportunity. If it chooses to do so, Washington is now in a position to leverage Iran's economic disorder to compel a change in Iranian behavior.
Working with allies abroad, it can exploit Iran's massive dependency on foreign refined petroleum, squeezing the small number of firms that sell gas to Iran as a way of progressively starving the Islamic Republic of fuel.
Likewise, it can continue to marginalize Iran in the global marketplace, expanding the sanctions against Iranian banks and financial entities that have been applied by the U.S. Treasury Department over the past several years--and compounding them with a clear message to the host of foreign firms now trading with Iran: You can do business with Tehran or with Washington, but not with both. It can also target Iran's "oligarchs," the small group of individuals and organizations that, much like their counterparts in Russia, today exert sweeping control over the Iranian economy, inducing them to substantially change Iran's strategic direction.
At the extreme end of the spectrum, it can magnify the economic mismanagement that has taken root in Iran under the leadership of president Mahmoud Ahmadinejad by enacting policies that further raise the rate of inflation, create commodity shortages and destabilize key economic sectors.
The Obama administration will take office at a critical moment. Iran has never been more of a threat to international peace and security, or more vulnerable to serious, concerted pressure from the world community.
The current global economic crisis has provided the United States and its allies with unprecedented leverage over Iranian behavior. The incoming administration will need to choose whether to use it to build better bilateral ties with Tehran, or to force Iran's ayatollahs to rethink their dangerous foreign policy direction. Only one of these approaches has a prayer of preventing the Iranian regime from going nuclear.