A street money exchanger in Tehran puts U.S. dollars into a plastic bag in… (Vahid Salemi / Associated…)
Reporting from Washington and Tehran — The West's campaign to punish Iran for its suspected nuclear weapons program has begun to inflict far more damage on Tehran's economy in recent weeks, spurring a new phase of a dispute that carries acute risks as well as opportunities for the United States and its allies.
Fear of potentially crippling new economic sanctions have helped send the Iranian currency into a tailspin, drive basic commodity and import prices sharply higher, and spark runs on Iranian banks.
As the United States and European Union prepare steps designed to cut the oil revenue that is the Islamic Republic's chief source of income, Iran has responded with threats of military retaliation, including warnings that it might close the Strait of Hormuz, a lifeline for oil and gas shipments from the Persian Gulf. Though Iran would suffer in a blockade of the strait, it appears to be gambling that the West has more to lose.
In the latest sign of mounting tensions, Iran's Revolutionary Guard announced Monday that it had sentenced Amir Mirzaei Hekmati, a former U.S. Marine of Iranian descent, to death for allegedly spying for the CIA. The White House denied that Hekmati was a spy and demanded his release.
Vali Nasr, a former State Department official, described the string of developments as "the start of a more dangerous phase in the West's attempt to curtail Iran's nuclear program."
Iran has decided "it wants to push back on the pressure, to show there's a price to pay for pressuring Iran," agreed Michael Singh, a former national security advisor in the George W. Bush administration. "This could lead to inadvertent conflict."
But Iranian officials also floated the possibility that they will accede to the West's top goal: resuming negotiations over their nuclear program. Talks broke down a year ago, and Western officials believe Tehran isn't yet serious about returning to the table, but rather is holding out the prospect of talks in an effort to stave off tougher sanctions or a potential military attack.
For now, the West would like to see Iranian oil continue to flow in order to maintain stability in world supplies, but to limit sales to fewer and fewer buyers who could demand discounts that would further starve the Iranian treasury.
Analysts nonetheless worry that stopping Iran from selling oil to its traditional customers in Europe and Asia isn't a surefire scheme and could easily set off a dangerous spike in prices. That could cripple already fragile economies around the globe, alienate key allies who depend on Iranian oil, or even lead to an unintended military confrontation with Iran.
World oil markets remain tight and traders are extremely sensitive to talk about reductions or delays in supply. The price of oil, now about $100 a barrel, could jump $50 a barrel if actions by either Iran or the West suggested a possible interruption or delay in gulf traffic, analysts say.
"The markets would react extremely quickly if there were a hint of a closure, or even a delay," said Jamie Webster of the PFC Energy consulting group in Washington.
A senior European diplomat said that although Western allies "are feeling some new confidence" in the sanctions strategy, "there is also a wide appreciation that this is balanced very delicately."
Iran insists its nuclear development program is only for generating electricity, but Western powers worry that the country intends to build a bomb. At this point, United Nations nuclear inspectors have not found evidence suggesting Iran is capable of building an atomic bomb, or has enriched uranium to sufficient purity to fuel one.
The West has been imposing arms, trade and economic embargoes on Iran since Muslim clerics and students overthrew the country's U.S.-backed government in 1979 and created the Islamic Republic. The U.N. has approved four rounds of sanctions specifically aimed at Iran's nuclear program.
Over the years, the efforts have had limited impact, in part because many countries ignored them.
But Washington and its allies imposed or threatened far harsher punishments recently amid rising concerns that Iran is dangerously close to gaining the know-how to build a nuclear bomb. Defense Secretary Leon E. Panetta said last month that Iranian scientists might attain the knowledge in a year or less.
The European Union, which buys almost 20% of Iran's exported oil, reached an agreement in principle last week for an embargo on Iranian oil. The member governments are expected to approve the deal at the end of January.
President Obama signed legislation on New Year's Eve that could cut off from the U.S. economy any foreign companies that buy oil through the Iranian central bank. If implemented on schedule in June, that would make it much more difficult for Iran to sell its oil.