The U.S. and Iran Are Already Locked in Economic War

Bombs may not be falling, but sanctions and markets are the new, hard-hitting tools of this escalating conflict

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Iranian Navy commander Habibollah Sayyari points while standing on a naval ship on the Sea of Oman near the Strait of Hormuz in southern Iran / Reuters

Hard-hitting U.S. sanctions on Iran's central bank and new Iranian threats to attack U.S. vessels in a vital oil-shipping route underscore a little-noticed aspect of the growing tensions between Washington and Tehran: Armed conflict may not break out anytime soon, but Iran and the U.S. are already fighting a low-level economic war that seems likely to escalate in the months ahead.

Iran's apparent progress toward building both nuclear weapons and the long-range missiles capable of carrying them to targets in both Israel and Europe has prompted mounting speculation that Washington or Jerusalem will soon carry out full-scale military strikes against Iran, attacks likely to trigger a major regional conflict.

For now, that talk seems overblown. But the economic sparring between the U.S. and Iran is continuing to intensify, a sign that the two countries have ways of fighting each other that don't require the use of armed force. In the last month alone, Congress voted to directly target Iran's oil sector by isolating the country's central bank from the world financial system, and Iran threatened to close the Straits of Hormuz, the passageway for more than a fifth of the world's oil.

Tensions between Washington and Tehran flared even higher on Tuesday, with Iran warning that it would take unspecified actions if a U.S. warship returned to the Straits of Hormuz. "I recommend and emphasize to the American carrier not to return," said Ataollah Salehi, chief of staff of the Iranian Army. "We are not in the habit of warning more than once."

The comments were widely interpreted in the region as a direct threat to the U.S., and the Pentagon said on Tuesday that the "deployment of U.S. military assets in the Persian Gulf region will continue as it has for decades." The Straits of Hormuz are considered to be international waters, which means Iran has no legal basis for threatening to close them off.

Suzanne Maloney, an expert on the Iranian economy at the Brookings Institution, said the two countries are already looking for ways of hurting each other that stop short of full military conflict.

"It's not an overstatement to say that the sanctions we've put on Iran in recent weeks constitute a full-fledged attack on the Iranian economy," she said in an interview. "This is now a regime that sees itself locked with an existential conflict with the U.S., and they're going to use every lever at their disposal--economic, irregular warfare, public diplomacy--to fight back."

Oil is emerging as the first battleground between the two countries. World energy prices have been steadily rising because of Iran's threats to close the Straits of Hormuz, and Tehran's new warnings about attacking U.S. vessels there sent them spiraling still higher. By midday Tuesday, crude futures were up $4 a barrel, pushing prices above $111 a barrel, according to Reuters.

The U.S. and its allies, meanwhile, are ratcheting up their pressure on Iran's oil sector, the most important part of the country's overall economy. President Obama signed legislation on New Year's Eve that blocks financial institutions that deal with Iran's central bank from doing any business with American financial institutions, effectively isolating Iran economically. The European Union is expected to impose similar measures later this month.

U.S. economic sanctions are already hitting Iran hard. Iran's currency, the rial, fell to a historic low against the dollar on Tuesday and is down nearly 40 percent since December. In an ironic twist, press reports from Iran said that businessmen, oil traders, and ordinary citizens were frantically trying to buy dollars out of fears the rial will soon slump even further.

Iran seems likely to respond to the new sanctions, though it's not clear how or when. Speaking to a gathering of military officials in November, Ayatalloh Ali Khamenei, the country's supreme leader, said "we respond to threats with threats." With the two countries locked in a spiraling financial and political conflict, the economic war between the two countries will continue to rage--and intensify--into the foreseeable future.