Iran faces its most critical moment since the 1979 Revolution

Iran's President Hassan Rouhani addresses parliament in the capital Tehran on September 3, 2019.

ATTA KENARE | AFP | Getty Images

DUBAI – Iran faces a time of reckoning, and the stakes couldn't be higher: potential war with the United States, the reversal of its gains across the Middle East and the future of its revolutionary state.

It would surprise most Americans how little the Arab public and media here – nine time zones from Washington, D.C. – were occupied this week with the congressional hearings on impeaching President Donald Trump. They instead were focused on the crisis in Iran, just 600 miles away from the UAE as the drone flies.

This defining moment for Tehran – perhaps the most critical since the Iranian Revolution of 1979 -- has been prompted by the Trump administration's "maximum pressure" campaign of sanctions, Iran's dangerously declining economy, and the cumulative effect of Tehran's domestic malfeasance and regional overstretch.

Growing protests in Iran, Iraq and Lebanon have charged the atmosphere with urgency.

What's clear is that the growing scale of the challenge makes it difficult for Iran to pursue its earlier approach toward mounting U.S. pressure: hunkering down and waiting out the Trump administration through the November 2020 election in the hope of Democratic victory.

What's less clear is whether Tehran over the short term will respond to this historic test with more military escalation, diplomatic compromise – or a combination of both.

Diplomats in the Middle East argue that the United States has put itself in a good position to shape that choice. They argue Washington could take advantage of Iran's increased difficulties by working more closely with European and Mideast allies to frame an offer that would ease sanctions but put in place a process that would block Iran's path to a nuclear weapon and end its foreign policy of regional meddling.

However, that sounds like wishful thinking in the world of Washington's distractions, transatlantic distrust and Iranian outrage. Trump administration officials are sanguine, arguing that at the very least the sanctions have cut deeply into the resources Iran can invest in its proxies. Protests at home and abroad are usefully soaking up regime energies.

The danger is that may risk further military escalation to gain attention and leverage, following its June 20 shooting down of the American drone and its Sept. 14 strike on Saudi oil processing facilities. Or it could take further steps away from its nuclear agreement of 2015, having this month resumed low grade uranium enrichment at its underground Fordow nuclear plant to 60% of fissile purity, not far from the 90% level required for nuclear bomb fuel.

It's hard to imagine Iran entering the expanded talks the U.S. would want without first getting the sanctions relief Trump has thus far refused. Yet it's just as difficult for Iran to imagine that the status quo is sustainable, amid a collapsing economy and rising protests.

It's hard to imagine Iran entering the expanded talks the U.S. would want without first getting the sanctions relief Trump has thus far refused. Yet it's just as difficult for Iran to imagine that the status quo is sustainable.

The challenges to the Iranian regime have been sharpened by ongoing demonstrations at home since Nov. 15 that have resulted in at least 106 and as many as 200 deaths in 21 cities, according to Amnesty International. Those numbers have been increasingly difficult to verify or update due to the regime's shutdown of the internet this week. (The U.S. Treasury on Friday added the Iranian Communications Ministry and its minister to the sanctions list for that action.)

At the same time, widespread protests in Iraq and Lebanon are also taking aim at Iran's influence and proxies. What's at risk for Iran are decades of investments that have transformed the country into the Mideast military and political power it is today. U.S. officials reckon Iran has spent some $16 billion on Iraq, Lebanon and Yemen since 2013 – and $10 billion on Syria. It is estimated to spend $700 million a year on Hezbollah. That support is increasingly difficult to sustain both financially and politically among Iranians – and there are new reports that Hezbollah, Iran's proxy in Lebanon, increasingly has been engaged in fund-raising drives.

What's also changed is that Iranian leaders are conceding that the economic pressures on them are growing – after a long period of insisting they could easily sustain the sanctions. They are taking unprecedented and perhaps counterproductive measures to address the problem. What triggered the current protests was Iran's midnight announcement on Nov. 15 that it would cut fuel subsidies and increase the price of gasoline by 50%.

"We all know too well that we are not in normal and easy circumstances," Iranian President Hassan Rouhani said recently, calling it the worst economic situation in four decades. "The conditions are very complicated. … Since the beginning of the revolution until today, we have never faced so many difficulties in moving an oil tanker from our ports and harbors to the world."

Though Iran's economic numbers can be unreliable, what's clear is that under the sanctions regime it's oil exports have dropped from 2.5 million barrels a day after the lifting of sanctions in 2016 to 400,000 barrels per day and perhaps as little as 200,000.

Rouhani has said that some $25 billion of the state's annual budget of $39 billion has been covered by oil exports. Beyond that, the export decline has prompted the International Monetary Fund to project that Iran's economy would shrink by 9.5% while inflation would surpass 35%. Iran's own inflation projection of 42% is even more pessimistic.

Economic sanctions have a mixed history when it comes to bringing about political change.

That said, it is difficult to imagine a moment when the West's leverage could be higher. Thus, Germany, Britain and France should get ready to consider moves to reinstate international sanctions on Iran over breaches of its 2015 nuclear deal, as suggested by German Foreign Minister Heiko Mass, and such deeper sanctions should be at the same time accompanied by more intense diplomacy.

The problem from the Western side, say leading diplomats, is that it's hard to know what Iran wants nationally and regionally. It's been even more difficult to know with whom in Iran one can negotiate most effectively. Supreme Leader Ali Khamenei – with whom no one has negotiated – holds the cards.

Until those answers are known, the best approach is to continue and expand the maximum pressure and prepare for a range of increasingly unpredictable Iranian responses – focusing as deeply on deterrence as diplomacy.

Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States' most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper's European edition. His latest book – "Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth" – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week's top stories and trends.

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