Will Iran retaliate if attacked? Israeli intelligence officials and neo-conservative pundits in the United States argue that Iran is bluffing – that it wouldn’t dare.

But on Tuesday, U.S. Director of National Intelligence James R. Clapper Jr. powerfully rebutted this view. Clapper argued not only that Iran would retaliate, but that some Iranian officials are now even willing to carry out attacks on U.S. soil.

In his unclassified statement submitted to the U.S. Senate’s Select Committee on Intelligence, Clapper said: “Iran’s willingness to sponsor future attacks in the United States or against our interests abroad probably will be shaped by Tehran’s evaluation of the costs it bears for the plot…as well as Iranian leader’s perception of U.S. threats against the regime.”

The issue of survival is not taken lightly by the Iranian military and political establishments. According to an article published by the Guardian, an Iranian idiom is quite popular among military officials, “If we drown, we’ll drown everyone with us.” The Iranian regime is prepared to fight until the end.

Many foreign leaders, such as France’s Nicholas Sarkozy are also very worried about the implications of a potential military conflict with Iran. As reported by the German publication Spiegel, during his New Year’s address to diplomats in Paris, Sarkozy stated, “A military intervention [in Iran] would not solve the problem [of Iran's nuclear program], but would trigger war and chaos in the Middle East and maybe the world.

Such conclusions are far more realistic than that of a retired Israeli official who told the New York Times: “I am not saying Iran will not react. But it will be nothing like London during World War II.”

In the eyes of the Iranian regime, this is a fight for survival far more threatening than the domestic challenge presented by the protest movement of millions of Iranian demonstrators in 2009.

The recent pronouncements from Supreme Leader Ali Khamenei and other Iranian officials should be taken seriously. In November, Khamenei said: “Iran is not a nation to sit still and just observe threats from fragile materialist powers which are being eaten by worms from inside.

“Anyone who harbors any thought of invading the Islamic Republic of Iran – or even if the thought crosses their mind – should be prepared to receive strong blows and the steel fists of the military, the Islamic Revolution Guards Corps, and the Basij, backed by the entire Iranian nation,” he said.

Is he bluffing? There is no way to know for sure, but are Israel and the United States willing to accept the potential risks?

There are a number of political, economic, and military retaliatory moves Iran is perfectly capable of and willing to carry out in the short and long-term.

- According to Clapper’s Worldwide Threat Assessment, “Iran already has the largest inventory of ballistic missiles in the Middle East, and it is expanding the scale, reach, and sophistication of its ballistic missile forces.” Iran can use its missile abilities to strike Israel.

- Some might make the argument that Iran’s military capabilities are not on par with Israel or the United States. It does not matter. Even if Israel succeeds in short-term air strikes, Iran is willing and able to cause and promote instability in the region. This is in direct contradiction with the United States’ broad interest in the Middle East, which is stability.

- Iran may not be able to keep the Strait of Hormuz closed indefinitely, but even threats and potential attempts will cause volatility in the Persian Gulf.

Some point to recent history and argue that Iran has never launched a large-scale retaliatory attack. But times have changed, and Iran’s position has shifted. Iran is now preparing for an attack on its soil, and part of this strategy includes an effective second strike.

Iran’s Oil Minister, Rostam Ghasemi, announced that Iran is working on a plan to stop exporting oil to “some countries,” and the European Union’s ban of the country’s oil imports has no impact on Iran’s crude production.

According to many Iranian media sources, as reported by BBC Persian Service on January 30, Ghasemi reacted to the news of the European Union’s decision to embargo Iran’s oil by stating, “Based on the future plans of the Oil Ministry, [Iran] will soon stop its oil exports to some countries.”

Ghasemi indicated that Iran will always find a market for its oil and it is the European countries that should worry about finding an alternative source of petroleum. Ghasemi completely dismissed any concern about the European Union’s embargo, which will be implemented by July 1, adding, “Iran has a market for its oil exports even with cuts [in sales] to Europe and will face no problem in this regard.”

According to IRNA, addressing reporters on Tuesday, Iran’ Oil Minister stated, “Iran’s oil cannot be omitted [removed] from the international market…European countries have imposed the oil sanctions against Iran themselves and the impacts of these sanctions will definitely turn back to themselves.”

Ghasemi also reiterated that his ministry is awaiting a decision from the Iranian parliament that is working on a proposal to halt oil exports to Europe. IRNA quoted Ghasemi as saying, “This motion is being examined in the parliament, but it hasn’t been finalized yet and we are waiting for its final results.”

Last week the Foreign Ministers of 27 countries in the European Union sanctioned Iran’s oil in order to force the country to abide by the United Nation’s Security Council resolutions demanding Iran to stop its nuclear activities.

Many western foreign policy experts claim the international sanctions are designed to pressure the Iranian regime and not the people. However, with the recent announcement of the inability of grain shipments to reach the country, this argument becomes harder to make.

According to Reuters, European Union sanctions have halted food import deals to Iran leaving about 400,000 tons of grain held up on at least 10 ships outside Iranian ports.

IAEA Inspections and Iran’s Seemingly Cooperative Reaction

Ali Akbar Salehi, Iran’s foreign minister, announced that the IAEA inspection team is allowed to extend its trip, if they wish.

According to IRNA, Salehi announced on Monday that Iran is “very optimistic about the mission and the outcome” of the IAEA’s inspection trip to Tehran. He added, “The trip was planned for three days, but if the IAEA wishes, the trip can be extended.”

Iran’s Foreign Minister seemed to be trying to diffuse the already tense situation exacerbated due to the recent military threats by Israel and western governments. He urged the United States and the European Union to “replace the sanctions with a policy of engagement.”

The three-day inspection tour by the International Atomic Energy Agency (IAEA) team began on Sunday.

I was the chief editor of the Sokhangooyeh Do’alat, the official website for the Iranian government in 2003-2004. I was also a reporter who extensively wrote for various Iranian publications about military and security matters. During my career, I have had many meetings and interviews with military commanders from various ranks and even was awarded a prize for my work by the Foundation for Preservation of the Holy Defense Values, which is a state organization in charge of preserving and promoting the revolutionary values of the Iran-Iraq war.

For more than ten years–during many formal and informal meetings– as a journalist in Iran, I have always been curious about the strategies the Iranian military is planning for a potential confrontation with the United States.
I recall a famous Iranian idiom that was quite popular among the military officials: “If we drown, we’ll drown everyone with us.” They were pretty clear about their intention. If attacked by a Western power, the war would not be contained within the Iranian boarders. The entire world would become Iran’s battleground – at least this was their thinking.

Serious of tactics and strategies were continually discussed in public and private gatherings, including the following:

A Manual for Causing Damage to the United States and Asymmetrical Warfare

On September 23, 2007, the Etemad Meli newspaper published my interview with General Ezatollah Ghafourzadeh, the chief of the Iranian Army’s Strategic Research Center. I believe he felt comfortable talking to me because I knew him well and we were from the same city.

In this interview, Ghafourzadeh announced the news of the publication of a classified book entitled, “Methods for Causing Damage to Trans-Regional Enemies” by Iran’s Army. He was, of course, referring to the United States. According to the statements by the Iranian General, various strategies for causing damage to the United States in different areas has been studied and spelled out in this manual. He also talked about the formation of a group called, the Council of Future Studies, which meets every three months and updates the manual and a defensive plan for a potential war.

This council also studies and plans for a potential “disproportionate war” with the United States. They have conducted other studies under various titles such as “Armored Unites,” “Applications for Mortar Units,” “Psychological Operations,” and the “Application of Artillery Units in Asymmetrical Warfare.”

The findings of the aforementioned studies has been that by dividing the army into many independently operating units, in an event of a military conflict with the United States, each post would be able to autonomously make decisions without communicating with the headquarters.

A Global War with the United States

During our conversation, Ghafourizadeh stated: “We will force the enemy to fight us [on our terms], when we want to and where we want to…by observing and studying America’s war in Iraq, and the Kosovo War, the Lebanon War, and the tactics used by Hamas, we have developed a native style of warfare. We have incorporated the [aforementioned lessons] with our own abilities and understanding and created a new native combat style.”

Simply put, the new styles of warfare the Iranian commanders speak about are newer and wider subversive operations. These are similar to strategies used by Hezbollah in Lebanon or even groups like Al-Qaeda. Iranians have learned from such tactics, have added their own knowledge and expertise, and will potentially implement them in a geographically wider and more devastating manner. Such a war might even be launched against the United States and European countries.

After my interview with Ghafourzadeh, I attempted to verify his statements, so I searched for his remarks published in other news media. In another interview with Mehr News, a semi-official news agency, on October 20, 2007, Ghafourzadeh stated: “At any time and in any place, we are able to engage the enemy in unorganized and tactical warfare. In the past, Iran’s military was only able to combat the enemy in an organized fashion. However today, our troops have the ability to engage the enemy with any type of clothing; in any style of warfare.”

A Quick and Decisive War

The tactics Ghafourzadeh and other Iranian commanders refer to as “new methods of fighting,” include a short duration of fighting, immense firepower, and an extensive geographic area. He publically explained part of this strategy in his interview with the Hamshahri newspaper on March 9, 2009:

“In future wars, the enemy will showcase its ground ability via high mobility mechanized offensive units…today the military operations take place around the clock. The enemy will operate night and day. Instead of direct running battles [with the enemy], the modern [Iranian] operations are vast, three dimensional, and multifaceted… It is no longer true that a war would, for example, start at the Iran-Iraq border and end there. An outbreak of a possible war could directly impact all the countries and the region as a whole.”

According to this commander’s statements and based on my other numerous encounters with other Iranian military officials, I believe Iran is planning to respond with a war of attrition and sabotage in the region and across the globe.

Using Propaganda as Deterrence

When I encountered the Iranian official’s public rants and propaganda against the West, I always wondered why, despite the highly classified nature of these strategies, military officials announce them publically.

I found my answer during a conference with Ali Shamkhani, Iran’s former Defense Minister, with government officials. In that meeting, Shamkhani was asked about the reason behind the heightened propaganda about Iran’s military abilities. Shamkhani’s response was illuminating. Iran’s Defense Ministry was implementing the strategy of deterring a foreign attack by publically announcing Iran’s military capabilities. The officials believed by declaring, and perhaps exaggerating the Islamic Republic’s abilities, the United States would be dissuaded from attacking the country.

According to Shamkhani, this policy was reviewed and approved by Iran’s political elites and the Supreme Leader Ali Khamenei. During the same time period an organization by the name of the Central Military Propaganda Office was established in the Defense Ministry. This newly-founded center was tasked with advertising the military capabilities of the Islamic Republic in order to paint a harsh outcome for the United States if it decides to attack Iran.

This strategy would in turn increase the morale of internal forces and the population as well. Shamkhani labeled this tactic as “strengthening psychological operations.” These psychological operations are still taking place and they are aimed at strengthening the moral of the Iranian troops against the enemy’s damage.

Mandatory Readiness Training

The Iranian commanders talk about modern means of warfare, but their reliance on unconventional warfare requires a great deal of manpower. According to my discussion with various military officials, which were censored by the Army’s Intelligence Office and never published, another strategy, which is being discussed but has yet to be executed, is the implementation of a mandatory readiness training service. Each individual who has already completed his military service will be asked to annually report to various military bases and renew his military training.

Planning for a confrontation after the United States invasion of Iraq

However, despite their official statements dismissing the possibility of a military attack by the United States, the Iranian officials are taking the threats very seriously. Since the day the United States invaded Iraq, the Iranian officials began their planning for a potential confrontation. The Ministers of Commerce and Agriculture were tasked with planning and preparing for a potential war with the West and finding ways to provide the country with the necessary food supplies. These trends continue to this day and all officials are required to keep the possibility of a potential war in mind as they are planning for future.

Ehsan Mehrabi is a distinguished Iranian journalist who has written about the Islamic Republic’s military, parliamentary politics, and various other socio-political issues for more than a decade. He has worked as the parliamentary reporter for the reformist newspapers Etemad Meli and Tose’eh, and as a reporter and political editor for Hambastegi newspaper. During his career he has interviewed many Iranian military commanders and officials. He left Iran a few months ago.

Yahya Rahim Safavi, former Chief Commander of the Revolutionary Guard Corps (IRGC) and the current military advisor to the Supreme Leader, highlighted Iran’s ability to guarantee security of global energy supplies in the Persian Gulf, the Strait of Hormuz and the Gulf of Oman, but at the same time warned about Iran’s ability to defend its interests by taking actions in the Strait of Hormuz.

According to Fars News, a semi-official news agency close to the IRGC, Rahim Safavi made a reference to the letter sent by the United States and noted, “Iran is the most powerful country in the region and since its coastal lines stretch from the Al-Faw Peninsula to the Gulf of Oman, Iran ensures the global energy security, which is shared security…however if Iran faces any dangers it will use all political and non-political tools at its disposal to defend its interests.”

Last Friday, the New York Times, citing unnamed US officials, reported that Washington had used a secret channel to warn Iran’s Supreme Leader Ali Khamenei that closing the narrow strategic waterway would cross a “red line” and provoke a response.

According to IRNA, on Sunday January 15, Ramin Mehmanparast, the Iranian Foreign Ministry’s Spokesman, confirmed the news by announcing, “The US ambassador to the UN, Susan Rice, sent a letter to Mohammad Khazaie, Iran’s UN representative, which was conveyed by the Swiss ambassador, and finally Iraqi President Jalal Talabani delivered its contents to officials” in Iran.

Based on reports by the Iranian media, Mostafa Ahmadi Roshan was killed due the explosion of a bomb near Seyed Khandan, a neighborhood in northern Tehran. According to Fars News, a semiofficial news agency close to the IRGC, Roshan was the Commerce Deputy Director of the Natanz enrichment facility and a professor at the Sharif University, Iran’s leading university in technology, engineering and physical sciences.

According to Fars News, a magnetic bomb was planted under the car of Ahmadi Roshan by an unknown motorcyclist. Iranian officials are blaming Israel and Mojahedin khalq Organization (MKO) for the attack. Mohammd Reza Rahimi, Iran’s first vice-president labeled the event as “state terrorism.”

According to Fars News, a few hours ago Reza Qashqayee, the driver of the assassinated professor who was severely injured in the blast died from his wounds in the hospital. The third victim of the explosion is a wounded pedestrian who has been transferred to a hospital.

Iranian officials seem persistent to continue their nuclear ambitions despite the most recent assassination of their leading nuclear scientists. According to Fars News, addressing a parliament session on Wednesday, vice-speaker of the parliament, Seyed Shahabeddin Sadr, mentioned that terrorist attacks on the lives of Iranian scientists are aimed at stopping Iran’s progress.

“The enemy assumes that it can hinder the Islamic Republic’s move towards progress and growth through such actions, but the experience gained as a result of the enemy’s blind assassination attempts over the last 30 years shows that these assassinations will not influence our nations,” he said. Sadr also warned that such terrorist attacks may backfire because they result in the Iranian nation’s stronger solidarity and determination.

The blast took place on the second anniversary of the assassination of university professor and nuclear scientist, Massoud Ali Mohammadi, who was killed in a similar fashion in January 2010.

If there were any doubt that Iran has sentenced a young Iranian-American to death purely for political reasons, Amir Hekmati’s family has now provided convincing evidence of Iran’s true motives.

In an interview with the BBC Persian Service, the family said Hekmati, fearful he would find himself exactly in the situation he is in now, visited the Iranian Interests Section in Washington, D.C.,  before  his trip.  He provided detailed information about his background as a former U.S. marine and sought advice from officials at the Interests Section. He asked if they thought this would cause problems for him in Tehran, and they assured him it was safe to make the trip.

Not only did the Iranian officials in Washington mislead Hekmati, but it seems that they alerted the authorities in Tehran, transforming the young man into the latest political pawn in the running conflict between Iran and the United States.

This new information sheds light on both the depth of Iran’s fear of Western intervention and the lengths to which it is resolved to counter mounting pressure from the United States. It should also serve as a warning to many of the Republican Presidential hopefuls that, while it is easy to raise the rhetorical temperature for domestic political gains, taking on the regime in Tehran will be no simple matter.

Whether it is an isolated strike on its nuclear facilities or a larger attack, Iran would retaliate with all its might as would its proxies in the Middle East. Such a development would make the costly, bloody conflict now winding down in Iraq look like a training exercise.

The death sentence for an Iranian-American on charges of “collaborating with a hostile government [the United States], membership in the United States’ intelligence organizations, and attempting to accuse Iran of terrorism” is highly unusual, even for Iran. While Americans have been taken hostage, Iranian-Americans held for long periods in prison, no American in recent memory has received the death sentence.

Despite the evidence to the contrary, Iran maintains that its judiciary is independent from politics. But in fact, the Iranian judicial branch is politicized and the majority of the political cases tried in the Islamic courts are predetermined rulings handed down to the judge by higher officials.

The decisions behind sensitive political cases are often made within the upper echelons of the intelligence and security organizations. Trials and the events surrounding political cases are also used for propaganda purposes, which is true in the case of Hekamti.  His confessions were broadcast on December 18 on Iran’s state-run television on a program entitled “confessions of an American Spy.”

According to a subsequent report published by Fars News, a semi-official news agency close to the Islamic Revolutionary Guards Corp, the accused admitted to staying in the Bagram U.S. military air base in Afghanistan for two months prior to his trip to Iran. According to this report, Hekmati confessed to receiving intelligence training during his stay at the base. Now, it is known that this information, according to BBC Persian’s interview with his family, was provided to the Iranian government through their Interests Section in Washington DC.

Judge Abolghasem Salavati, the judge presiding over Hekamti’s trial, is infamous for handing out heavy prison terms and execution sentences to the majority of the accused in his court. He has presided over many sensitive political cases, such as the trials of the three American hikers, the prominent Iranian blogger, Hossein Derakhshan,  Zahra Bahrami, a  Dutch-Iranian citizen who was executed for “drug trafficking,” and the Iranian politician and diplomat Ebrahim Yazdi. He was also the judge who presided over the numerous show trials following the disputed 2009 presidential election, handing out heavy prison sentences to hundreds of Iranian reformists and dissidents.

More proof of the judiciary’s lack of independence is the direct involvement of the Supreme Leader in choosing the head of the judicial branch. Sadegh Larijani, the head of the judicial branch, was handpicked by Supreme Leader Ali Khamenei in 2009. He is the brother of Ali Larijani, the speaker of the Iranian parliament, with close ties to the military and intelligence agencies.

Given the political nature of the judiciary, and what appears to be a shift in how Iran is dealing with sanctions and other aggressive acts by the United States, it would not be surprising if Hekmati becomes another victim among those who have gotten caught in the crossfire of Tehran and Washington’s perennial cold war.

Iranian-American Citizen Sentenced to Death

On Monday the Iranian Revolutionary Court sentenced an Iranian-American citizen and former U.S. Marine to death. The 28-year-old Amir Mirzaei Hekmati was accused of spying for the Central Intelligence Agency. According to various Iranian media, Hekmati was given the death sentence for “his collaboration with a hostile government [the United States], membership in the United States’ intelligence organizations, and attempting to accuse Iran of terrorism.”

It is not clear what the Iranian government is trying to achieve by arresting Amir Hekmati, but according to BBC Persian, on December 23, Ahmad Jannati, the Head of the Guardian Council, announced during his Friday prayer sermon, “The American spy is good bait. He has a lot of information, which should be extracted from him during interrogation.”

He was also accused of being a Mohareb, enemy of God, which is considered to be the highest crime in Islamic law. According to the Iranian media, Hekmati responded to the questions of the judge by “defending himself and confessing to the accusations of his involvement with the CIA and attempting to infiltrate Iran’s intelligence apparatus.” Hekmati admitted in the court that “he had been deceived by the United States’ Central Intelligence Agency.”

“I entered Iran with the mission to infiltrate the Islamic Republic’s intelligence apparatus. I was supposed to become a source of information for the CIA, but I personally did not want to harm Iran. I wanted to stay in Iran and not return to the United States,” Hekmati mentioned in court.

On December 18, Iran’s state television broadcasted a program entitled “confessions of an American Spy” in which Hekmati “confessed” to his collaboration with the CIA. According to a following report published by Fars News, a semiofficial news agency close to the IRGC, the accused admitted to staying in the Bagram U.S. military air base in Afghanistan for two months prior to his trip to Iran. According to this report, Hekmati confessed to receiving intelligence training during his stay at this base.

According to the Iranian Students’ News Agency, the spokesman for the judiciary has announced that “the sentence was submitted to [Hekmati’s] attorney and the ruling can be objected in the Supreme Court.” Typically, Iran’s Supreme Court has to approve of such sentences before they are carried out.

Hekmati’s family told U.S. media outlets that their son traveled to Iran to visit his grandmothers and he had even received permission from the Iranian Interest section in Washington D.C.

Extending Nuclear Enrichment

On Saturday the head of Iran’s Atomic Energy Organization, Fereydoon Abbasi-Davani announced that new nuclear enrichment facilities will soon be open at the Fordow underground site. Abbasi-Davani announced that the site will soon be operational and it will be “capable of producing enriched uranium with concentrations of 3.5%, 4%, and 20%.”

Months ago Iran announced that it is relocating its enrichment facility from the “less secure Natanz location” to the fortified underground site at Fordow near the city of Qom. The IRGC claims the new location is protected by air defense batteries and it could withstand a potential air strike by Israel or the United States. According to the Iranian media, toward the end of September, Abbasi-Davani announced the main reason behind the relocation of the enrichment facilities has been the military threats by the United States and its allies.

Also, a few days before the start of the new round of negotiations between Iran and the 5+1 group (the United States, Britain, France, Russia, China, and Germany) Iran’s Atomic Energy Organization announced it has succeeded in building and testing the “first sample of a nuclear fuel rod containing uranium.”

Iran continues to claim its nuclear program is for civilian purposes, while the United States and the European Union highly doubt the Islamic Republic’s intensions. The U.S. and Israel believe all options remain open if Iran continues its enrichment program.

New Naval Exercises in the Persian Gulf

Iran’s IRGC naval commander, Real Admiral Ali Fadavi, announced that the IRGC navy will continue its naval maneuvers in the Persian Gulf and the strategic Strait of Hormuz during the month of February.

According to Fars News, Fadavi announced “the Islamic Republic has complete control over this region and it controls all the movements within it.” This announcement came two days after Iran’s navy concluded its set of naval exercises east of the Strait of Hormuz.

Some Iranian military and political officials have threatened to close the Strait of Hormuz if the West attacks the county or sanctions its oil exports. Since the initial threats many Iranian officials have backed down. According to BBC Persian, Ahmad Vahidi, the Iranian Defense Minister, announced on Monday, “We did not say we will close the Strait of Hormuz.”

Vahidi added, “The Islamic Republic of Iran is the most important provider of security in the Strait of Hormuz…if anyone decides to endanger the stability of the Persian Gulf, concurrently it will endanger the security of the Strait of Hormuz.”

Q: Obama recently signed the defense authorization bill that sanctions Iran’s central bank. What is the main impact on Iran’s economy and what part of the economy is affected the most?

A: When you impose sanctions, in this case sanctioning the central bank of Iran, its effectiveness depends on the follow through. How will the United States take action against anyone who deals with the central bank? This is an open question. Will the US in fact fine and sanction an entity that deals with the central bank of Iran? The answer depends on the country that defies this particular bill. If it is China, the US would be much more reluctant, but if it is a small country like Greece, yes, the US would be more likely to take action and thus make the sanction bite.

The main impact of these sanctions on Iran’s economy is the following: Basically what these sanctions do is make it very difficult for banks and other entities to deal with the Iranian central bank. The US is saying if you deal with the central bank of Iran we are going to impose fines on you, we are not going to let you come into the US market, and, of course, for most countries the US market is much more important than the Iranian market. So as a result most countries would be much more reluctant to deal with Iran. However, if they still decide to deal with Iran, they will have to hide it from the United States or they will tell Iran we will deal with you but on more preferable terms for us because of the attendant risk of a US fine.

So what this means practically is that when Iran receives monies for its oil and when it needs to issue letters of credit for its imports, these transactions will be more costly. If a country cannot pay Iran for its oil, it will say we can keep this money and do a barter deal and this will increase the cost of Iran’s imports (or reduce the value of its oil exports) and require more foreign exchange. The main impact is it will put more pressure on Iran’s foreign exchange both on the side of revenues and the side of expenditures and so it will squeeze Iran’s foreign exchange reserves. That will be the major effect.

Q: According to reports inside Iran, Iran’s currency has dropped 10 percent in a span of a day or two. What is the reason behind the sudden depreciation of the rial?

A: Let me back up a bit. If you look back over last two years, the rial has depreciated almost 100 percent. Iran is its own worst enemy. The main reason Iran is in this dire economic situation is Iran’s economic policies, which I should list. Iranian economic mismanagement is very sad. Iran does not have good economic institutions, such as the rule of law, to give people confidence to invest in Iran.

The Iranian government controls the markets, so that markets are not free, such as the labor market, financial markets and some of the goods markets. And also much of Iran’s GDP is controlled by the government and semi-government entities; for example, one of the major economic entities in Iran are the foundations, which basically undo some of the government’s economic policies. Corruption is pervasive throughout the economy. Also macroeconomic polices are inconsistent and inappropriate. The president wakes up in the morning and declares what the interest rate should be. You just cannot dictate interest rates because many things affect interest rates. Those things cannot be changed over night.

However, it is undeniable that sanctions have had an impact. These sanctions much more recently – the financial sanctions –have had an impact. I think the depreciation is worse than 10 percent. People are losing faith in the Iranian economy and in Iran’s ability to redeem rials for dollars. They want to take money out because of bad policies and sanctions. They realize that the rial could plunge much more and that they might not be able to get much for their rials. So it is the beginning of a financial panic, and when a financial panic starts the sky is the limit. I do not know where the Iranian rial will end up. No one can answer that question. What we have seen could be a blip in what may follow and the rial could go into a free fall.

Q: What is the reason for the government’s inaction in dealing with the currency depreciation? Is there a segment of the population, which benefits from the economic turmoil?

A: The classic way a government would try to stop the outflow of financial resources is to increase interest rates. But this has been tried in European countries and what you have to do is increase overnight interest rates dramatically to 40 or 50 percent and adopt other harsh policies to restore financial order. Iran cannot do that because this will increase all prices, especially of imports, overnight and people will panic more and it might in fact backfire both financially and politically.

Another point is that Iran is of course an Islamic country and it would look bad if interest rates were jacked up to 50 percent just to stop the outflow of funds. But as I said earlier, this could backfire for the government because the price of goods are going up, increasing inflation, fueling inflationary expectation and encouraging hoarding even more. I do not know if the government is capable of managing what may follow.

So, I believe Iran is at the beginning of a very difficult financial and economic cycle. Iran cannot say the sanctions are hurting and this is why they have turned it into another issue, which is the Strait of Hormuz. By its military rhetoric, the Ahmadinejad government is trying to divert attention from its economic failures and the effect of sanctions.

Q: What are the immediate economic challenges for the government in the next six months?

A: I think first and foremost inflation is going to pick up. Interest rates will go up whether the government likes it or not and there will be much more hoarding of imported goods that will be a hedge against further rial depreciation.

All these things are going to put further pressure on Iran’s foreign exchange reserves. Iran has to persuade Iranians living inside and abroad that the government has enough foreign exchange to redeem rials for dollars and they are going to keep the exchange rate within a certain rate. I am not sure if they are in a position to do that. Once the market loses faith in Iran’s central bank ability to be able to redeem rails for dollars, I have no idea where the exchange rate will go. I think the danger for Iran is that a truly financial panic will set in. Such panic may cause the exchange rate to change really dramatically every day. Exchange instability and depreciation of the rial will become Iran’s financial problem and this will in turn affect the real economy, adversely affecting economic activity for some years to come.

Q: Can Iran survive the sanctions?

A: Iran’s economic policies have been a mess for many years and you cannot achieve an economic turnaround overnight; it will take time. Iran needs fundamental economic reforms. The only way I see that it will get relief is if the sanctions are rescinded by the United States and if something occurs such as a country like China helps Iran out of its mess. In other words, a miracle! So I do not see any way Iran can avoid this short-run economic turmoil. There needs to be rational, fundamental reforms that they will stick to, which will in turn give the market confidence. It will take political courage and change economic policies. There is no quick fix.

Q: Do you think the overall policy of the United States sanctioning Iran has so far been successful?

A: From the Iranian perspective, and in fact from a humanitarian perspective, what happened during the Iran-Iraq war was wrong. It was a mistake for the United States and a number of European countries to support Iraq, especially with outlawed chemical weapons. Understandably, Iranians do not want to be so vulnerable again. This is why the Iranian people support the government’s policies to develop Iran’s nuclear capabilities. For sanctions to have a better chance of success, you want the broad citizenry to favor a change in the policy targeted by sanctions. The United States has made a mistake. It picked the wrong policy (to be changed by the regime in Tehran).

The nuclear issue is a popular policy. What the United States should say is we are going to impose sanctions until you hold free elections, respect human rights….This would have much force within Iran and with a change in regime, then the nuclear issue could be better resolved. The issue the US has picked (the nuclear issue) will not rally the people against the regime. Sanctions are aimed at hurting the government and forcing the regime to change its policies, or squeezing the average citizen to turn against the regime. It hurts the average person. This is sad, but inevitable, fallout of sanctions that cannot be helped.

As Iran issued another threat on Tuesday, this time to take action if the U.S. Navy returns an aircraft carrier to the Persian Gulf, it might seem that the government in Tehran is begging for a military attack.

Why else would the Iranian regime test fire a cruise missile during exercises in the Persian Gulf on Monday? Why would it threaten to close the Strait of Hormuz two weeks ago while also conducting 10 days of military exercises to show off Iran’s military might? In addition, Iran’s nuclear agency said its scientists had produced their first nuclear rod, despite tough sanctions from the United States, the United Nations and the European Union.

But Iran is not begging for a military confrontation. It’s recent aggression is due, in fact, to its fear of a pending military attack. My sources inside the country say the circle of regime insiders around Supreme Leader Ali Khamenei truly believes an attack is inevitable, perhaps even before the U.S. presidential election. Therefore, to save face at home and in the region, Iran’s saber-rattling has reached a fever pitch.

In order not to appear weak in light of the pressure coming from the United States, Iran is determined to show it maintains the upper hand, which it tries to demonstrate through its military exercises, threats and hostile rhetoric. But such behavior, which Iran believes demonstrates its strength and some in the United States view as aggression, should not be misunderstood as Iran provoking the United States to launch a military attack.

The more candidates running for election in the United States publicly endorse a military attack, and the more the Obama administration is forced to appear hawkish, the more the Iranian regime works to prepare for what insiders believe will be a hit on the country’s nuclear facilities if not the population.

Despite the fact that the legitimacy of the Islamic Republic has depended upon an ideologically-driven foreign policy for more than thirty years – no normalized relationship with the United States and no recognition of the state of Israel – this in no way means Iran wants a military conflict. There is a difference in finding virtue in the distance between Iran and Western powers, as the regime has done since the Islamic revolution, and risking self-destruction.

As much as American pundits and politicians highlight the hostile statements coming from Tehran, a closer examination reveals Iran’s backpedalling in recent days.

Iran’s vice president appeared definitive when he threatened to close the Strait of Hormuz if further sanctions are imposed on Tehran. “If we cannot export oil, not a drop will be allowed to be exported by anyone else,” said Muhammad Reza Rahimi, Iran’s first assistant president.

But since then, commanders in the Islamic Revolutionary Guards Corps have retreated somewhat by explaining that passage through the Strait is a weapon Iran would use only if necessary. “We will respond to any threat by intensified threat and this fact has no time or geographical limitations,” said Brigadier General Hossein Salami, Lieutenant Commander of the IRGC. He added, “Our response to threats is threats.”

Another IRGC commander also backed away from threats to close the Strait. Masoud Jazayeri, a powerful general, tried to retreat from the brink by saying such talk is five years old and Iran has other options to defend itself “when the time comes.”

American policy makers and pundits should use their imagination to see the view from Tehran. Influential Americans sound the daily call for action to be taken against Iran, even though most fail to explicitly spell out the details. Compound this with a long-standing belief of Supreme Leader Khamenei that the United States’ objective has always been regime change in Iran. The small circle around Ahmadinejad and the Supreme Leader himself believe they are engaged in a new cold war, which has been hotter than that between the U.S. and the former Soviet Union, characterized by covert operations inside their country including the assassinations of nuclear scientists, a computer virus and attacks on Islamic Revolutionary Guards posts.

These Iranians belief that this “soft war” is a prelude to real war on the horizon. Despite the failures of President Obama’s engagement policy with Iran during the early period of his administration, there was one important success, which is often forgotten: Obama managed to convince at least part of the Iranian people that the United States was not in conflict with them, but their government. This message found particular resonance with at least some young Iranians who want to become part of the globalized world. However, with the approval of the most recent sanctions on Iran’s central bank, it is likely Iran’s business class will blame Obama. They have witnessed a depreciation of 10 percent in their currency just in the last week.

Now, Khamenei and his hard-line loyalists have just received the evidence to undo this delicate and newfound trust between Americans and Iranians. Both Khamenei and President Mahmoud Ahmadinejad in recent months have used the bellicose rhetoric from Washington to argue at home that the United States is at war with the Iranian people. This serves many useful purposes for the regime, including justifying repression against those who are accused of being “spies” for the United States who in reality are working toward positive change in Iran.

But in the end, Iran wants to move away from the brink. Cooler heads in Washington should do their part to end the escalation of hostility before the regime’s perception becomes reality.

According to Fars News, a semi-official news agency, Iranian Speaker of Parliament Ali Larijani, responded to the announcement of the new wave of sanctions by stating, “The Iranian Parliament will respond to the new set of sanctions sanctions imposed by Britain and other Western countries. They should wait for our reaction.”

The United States, Britain and Canada announced new measures against Iran’s energy and financial sectors on Monday and France proposed “unprecedented” new sanctions, including freezing the assets of its central bank and suspending purchases of Iran’s oil.

During a news conference on November 22, Larijani dismissed the effectiveness of the sanctions. In response to the European Union’s announcement of the possibility of sanctioning Iran’s Central Bank, Larijani stated, “These actions are derived from a type of [diplomatic] backwardness.”

Larijani dismissed the findings of the recent IAEA report, saying it was a pretext for the new sanctions. “There were no new developments in our nuclear program, so the reason behind these sanctions stems somewhere else. We look around ourselves and see that the reason is the new regional developments. The dictators that they [the United States and Britain] put in place are being toppled,” Larijani said.

The latest sanctions were prompted by a U.N. nuclear agency report that suggested Iran has mastered the critical steps needed to build a nuclear weapon. Tehran maintains its work is entirely peaceful and said the report was based on false Western intelligence.

In his weekly press conference, Iranian Foreign Ministry Spokesman Ramin Mehmanparast said: “These new efforts from some western countries and especially the United Sates are the continuation of their policy of being enemies to the people of our nation. These efforts have been experienced before and are all in vain. Unfortunately, Britain is blindly following the United States’ policies, which is a sign of weakness in their foreign policy.”

According to the Iranian Foreign Ministry’s official website, Mehmanparast also added, “It is interesting that the countries that put forward such plans are on the verge of political and economic bankruptcy themselves. These governments have very low popularity among their own people.”

Mehmanparast emphasized that Iran is determined to follow its current path and will remain strong in the face of challenges posed by the West. “If our people feel that the enemies want to deprive them of their rights by threatening, bullying, and adopting illegal and irrational methods, they will pursue the path that they have taken, more united and more determined than ever,” Mehmanparast said.