Time for an Economic Blockade on Iran
The recent demonstrations and protests in Iran over the increasingly perilous state of its economy are the latest and most powerful sign that the economic war is having a tangible impact. There is no doubt that punitive financial and economic sanctions have contributed greatly to the collapse of Iran's currency, the rial. Iran now suffers from hyperinflation and the rial has fallen by 80 percent in the past year. As history has shown, durable hyperinflation such as this can result in public unrest and, occasionally, regime change.
The conventional wisdom of the past was that sanctions against Iran would have little impact because of Iran's vast oil wealth. That was, in retrospect, flawed thinking. In the past year, Iran's acceleration of its nuclear program and defiance of the IAEA, its sponsorship of terrorism and its destabilizing behavior in countries like Syria finally prompted the international community to act. The loss of Iranian oil has had little effect on the market so far, as countries like Saudi Arabia, Iraq and Libya have made up for the loss.
The sanctions now in place are beginning to have a dramatic impact, as Iran's currency is collapsing. As a result of hyperinflation, we have seen Iran's currency exchange market become paralyzed. Licensed exchange bureaus refused in recent days to do business at the officially imposed rate of 28,500 rials to the dollar, while black market dealers were offering the dollar at a rate of 35,500 rials, sparking protests and a violent crackdown. Significantly, the ire of the protesters was primarily directed at the regime for its mismanagement, and for actions that led to sanctions in the first place.
If history is any guide, the leaders of Iran have reason to worry, as there is a correlation between hyperinflation and regime change. In Indonesia, hyperinflation and the collapse of the rupiah from 2,700 to the dollar to nearly 16,000 over the course of a year was one of the principal sources of discontent, which brought people out to the streets to overthrow the Suharto regime. In the case of Yugoslavia, hyperinflation was the motivating force that led Slobodan Milosevic to start a war to divert attention from the monetary crisis facing the country -- a war that led to his ultimate defeat.
Regardless of the precipitating event, hyperinflation can signal the death knell of a regime. We often forget that a "Persian Spring" preceded the Arab Spring, and that Iran has not only restive minorities, but a restive middle class frustrated with a corrupt theocratic regime, culminating in protests over the 2009 election. If the regime faces increased and durable hyperinflation, Iran's demographics suggest that the mullahs' brutal hold on power could face serious challenges.
At this critical stage, it is time for U.S. and EU policymakers to do all they can to build upon and ensure the durability of Iran's hyperinflation. The best way to do so is by implementing a total economic blockade that would pit the vast purchasing power of the world's two largest economies against that of Iran. Such an economic blockade would bar any business, firm or entity that does work in Iran from receiving U.S. and EU government contracts, accessing U.S. and EU capital markets, entering into commercial partnerships in the U.S. and EU or otherwise doing business in the U.S. and EU. The result would be an immense economic barrier to entry into Iran's marketplace, and would place unprecedented pressure on the rial.
Other steps to pressure the rial could be taken as well. As the rial devalues, Iranians seek the safe haven of dollars and gold in the currency markets of Afghanistan and Iraq and the gold markets in Turkey. Stemming the ease of accessibility to dollars and gold would further pressure the rial. Other creative ideas include impeding the flow of sophisticated currency printing technology and other products that have been previously provided to Iran's central bank by European vendors. In fact, recently the German currency printer Koenig & Bauer AG announced the cessation of its provision of bank note printing equipment and services in Iran under pressure from United Against Nuclear Iran, seriously impeding Iran's ability to manipulate its money supply and maintain the integrity of the rial.
It is time to present the mullahs in Iran with a clear choice -- they can forego a nuclear weapon or they can have a functioning economy. To be sure, there is no guarantee that even a total economic blockade will prevent Iran from changing its strategic calculus to develop a nuclear weapons capability. But as the prospects of war over the next months increase, does the international community not owe it to itself to say it has exhausted all other options? It surely makes sense to try, particularly since we have seen the impact current sanctions are having on the regime. And the human cost of hyperinflation, though at times great, is far less than those of a nuclear-armed Iran or a preemptive military conflict.