Obama’s options on Iran

Abevy of foreign policy experts are pressing Barack Obama to move quickly on his promise to “engage in aggressive personal diplomacy” with Iran.

He’d be better off first taking a long, deep breath and allowing Iran’s economic crisis to take its toll on the mullahs before getting down to serious business.

The political landscape has shifted dramatically in Iran in the last few months, handing the United States policy options it hasn’t had since the 1979 revolution. President Mahmoud Ahmadinejad’s populist expenditure policies, coupled with the unprecedented collapse of the oil market, have driven Iran into an economic tailspin. The result is that Iran is more vulnerable to focused economic sanctions than it has been in 30 years.

Iran’s record of economic failure since the revolution is astonishing. Average real per-capita income is lower and income distribution is more unequal. Oil production has dropped 30% and yet dependence on oil revenues is higher. The unemployment rate is hovering around 25%, and this year inflation may top 30%.

Preoccupied with day-to-day survival and short-term popularity, the regime in Tehran has foregone policies to achieve sustained economic growth and development. Still, until recently, it had been able to leverage its oil revenues to stay in power: Consumer subsidies kept the lid on domestic dissent, lucrative contracts rewarded cronies and a rapid credit expansion spurred an unbelievable real estate bubble. Meanwhile, an essentially fixed exchange rate helped the rich to take their money out of the country and prevented import prices from going up. But now the regime is out of maneuvering room.

In 2007, the U.S. Treasury began cutting off Iranian financial institutions from the international banking system, increasing Iran’s cost of letters of credit and in turn the price of imported goods by about 15%. On Nov. 6, the Treasury tightened the noose: U.S. banks can no longer make dollar transfers into Iranian banks on behalf of foreign countries or companies when they buy Iranian oil. On Nov. 26, the Treasury went one step further and expanded the definition of “financial institution” to encompass the National Iranian Oil Co. and its subsidiaries, meaning they’re cut off from the U.S. financial market too.

But it’s lower oil prices that are really squeezing Tehran. When oil was at its peak, about $150 a barrel, the government spent the windfall as if there were no tomorrow. Now Iran finds itself in a precarious financial position with oil at about $46. A decline in prices to the $30-$40 range for a year or two will be catastrophic for the regime: Either the poor have to go without basic necessities or cronies will have to be heavily taxed.

If Obama takes stock of these developments, he’ll realize there is no need to rush to engage Iran. Iran is no superpower, after all. Its GDP is less than 2% of that of the U.S. Its military is puny; Iran fought Saddam Hussein for eight years and could not advance even 100 miles into Iraq, so it hardly represents a military threat to the United States or Israel. The large U.S. military presence in the region can easily keep Iran in check. Even if Iran is striving to develop nuclear weapons, it is at least three years away. All Iran can do is fan the flames against U.S. interests through surrogates such as Hezbollah and Hamas.

So the Obama administration has no need to swing into action. A rush to negotiate would only embolden the mullahs, extract unnecessary concessions from the U.S. and subject Iranians to clerical rule for the foreseeable future. If the new U.S. administration wants to negotiate from a position of strength or affect change in Iran, it should act in a slow and deliberate manner, making no threats but quietly taking steps to nudge Iran over the financial brink: Do nothing to prevent the slide in oil prices. Develop other smart sanctions that encourage financial panic and capital outflows from Iran. Use incentives to persuade the United Arab Emirates and Malaysia to end financial cooperation with Iran, leaving it even more isolated.

As long as oil prices stay low, the global financial crisis keeps taking a toll and no one in Tehran figures out how an economy works, Iran will continue to weaken. Meantime, global goodwill toward the new American president should give Obama multilateral support to draw on.

So the new administration would be wise to back-burner serious negotiations with Iran for a while. Let Iran make the first move toward negotiations. If it does, the U.S. should respond positively but show no eagerness. Insist on overtures only from Iran’s supreme leader. Let enhanced sanctions, lower oil prices and the financial crisis continue to do their work. Negotiate a little, concede nothing. Negotiate some more and offer nothing while Iran’s economy crumbles. Then decide on the next step. Remember the song: “Only Fools Rush In.”

Hossein Askari is the Iran professor of international business and international affairs at the George Washington University.