The various sanctions the U.S. has imposed on Iran have exacted an economic toll far more onerous than what the Iranians and other observers anticipated. Unlike those imposed in the past by the U.S., the EU and the UN, these were done to cause real harm and pain to Iran’s economy. And they have, despite brave protestations to the contrary by Iranian President Hassan Rouhani and Foreign Minister Mohammad Javad Zarif.

An Economy in Steep Decline

After contracting more than four percent in 2018, Iran’s economy is expected to decline another six percent in 2019, according to the IMF. This follows a massive 12 percent expansion in 2016 after the signing of the nuclear accord and lifting of prior sanctions. The reason is clear: Iran, which sits atop the world’s fourth-largest oil reserves, has seen its oil exports decline from more than 2.5 million barrels per day (mbpd) of crude just before Trump withdrew from the JCPOA to about 400,000 – 500,000 mbpd one year later.

No Western business or banking institution will get close to Iran and risk imposition of secondary U.S. sanctions. The EU’s stillborn INSTEX system to skirt U.S. sanctions has provided little relief. Even if the mechanism were effective, the risk to any international business caught by the U.S. using it would remain too high. The long arm of American sanctions has proven unavoidable.

The pain extends throughout Iran’s hobbled economy: the rial has fallen by 60 percent, inflation approaches 40 percent and costs of food and medicine are up 40-60 percent. Unemployment has risen above 12 percent, with the nation’s under-25 youth, who account for more than 40 percent of the 80 million population, experiencing over 30 percent unemployment. Iran’s own parliament has reported that unless the economy maintains a five percent growth rate, unemployment could reach to over one-quarter of the working-age population, i.e., a depression. Anecdotal reports indicate small businesses are shutting down throughout the country and Iranians are complaining about the difficulty of meeting rent payments, paying every day bills and even affording essential food items.

Of perhaps more immediate concern to the Islamic Republic, per the government’s “Sixth Economic Development Plan” and a recent study by the Atlantic Council, is its need to export at least 1.5 million mbpd in order to meet budget requirements for assuring adequate import of basic products, especially food and medicine. Otherwise, it must tap into foreign exchange reserves. Those once ample reserves have been depleted by 20 percent already in the past year.

What’s Next?

So, the U.S. administration’s harsh “extreme measures” approach has caused considerable economic hardship for Iran and its people, with no respite in sight. But the purpose of the U.S. approach cannot be simply to inflict pain on a people who have little-to-no say on their government’s policies, especially security and foreign policy. The oft touted objective of some within the U.S. administration to advance regime change has little chance of success. Iran’s Islamic Revolutionary Guard Corps (IRGC) and its brown-shirts paramilitary appendage, the Basij Resistance Force, have seen to that, whether through imprisonment of opponents, threats and intimidation, or emasculation of any potential opposition political group.

The Iranian response to the U.S. actions shows more desperation than calculated strategy. Its quasi-extortionist efforts to coerce a European effort to circumvent sanctions through increasing the amount and levels of enriched uranium have fallen flat. European countries won’t and can’t afford to be bullied by such tactics. They may provide grist for diplomatic interactions but will produce neither jobs nor foreign exchange earnings nor food on the table for ordinary Iranians.

Similarly, seizures of and attacks on oil tankers transiting the Strait of Hormuz are equally fruitless countermeasures. They and the mutual drone downings only escalate the potential for more serious confrontation between Iran and the US or one of its regional or other allies. For average Iranians, such actions are useless and put them no closer to a job or the basic needs of daily life.

Short of all-out conflict, which neither Mr. Trump nor Supreme Leader Khamenei seem to want, what are the options for a US administration whose vision doesn’t seem to extend beyond the next round of sanctions and more economic pain for the Islamic Republic and for an Iranian leadership left to flailing acts of desperation?

Could It Be diplomacy?

Might now be the time for the U.S. to take the initiative, though indirectly? A direct approach – Donald Trump’s preferred approach as he did with North Korea – is unlikely to make much head way. In fact, the indirect way – sometimes referred to as a “back channel” – as was done in the initial efforts that led to the JCPOA, would make a reasonable, low-risk, low-cost, face-saving approach for both sides. It might begin with the Omanis, who maintain close ties with both antagonists, or with some of the European signatories of the JCPOA quietly reaching out to the Iranians to signal the Americans’ interest in talking.

To be sure, it would have to be made clear that there would be no pre-conditions. And the U.S. would have to be patient. The Iranians will predictably read the attempt as a weakening of the American position. But that exercise in self-deception cannot last long for the cooler heads in Tehran. The nation’s economic spiral will worsen and a head-to-head conflict with the U.S. would still be suicidal. Just as his predecessor Ayatollah Ruhollah Khomeini was obliged to acknowledge after eight years of the stalemated and costly 1980-1988 Iran-Iraq War, Supreme Leader Khamenei must drink from a new “cup of poison.” Now, as then, diplomacy is its only option.

First, following the end of that war, Khamenei was able to stabilize Islamic rule in Iran. That wasn’t the case at the war’s outset. He became revered by many Iranians not only for ending the war but then setting the country on a course of post-shah, post-war development, despite continuing and oppressive sanctions. Khamenei could set the nation on course for real prosperity by merely forsaking what it doesn’t even have, nuclear weapons, and reintegrating itself in the international community, which Iranians want.

Second, there may be distinct advantages to negotiating with this administration. Unlike previous presidents and despite the views of his hawkish Secretary of State and National Security Adviser, Donald Trump is unburdened by ideology. For him, it’s doing the deal with – and not doing in – the demagogues in Tehran. So, mullahs or moderates, they’re welcome to stay as far as he’s concerned; just give him what he wants.

That is meaningful because the ostensible justification for a nuclear weapons program is preservation of the Islamic revolution and the existent leadership apparatus. Trump, though not in so many words, has effectively conceded that. So, the rest ought to be transactional, which is Mr. Trump’s defining modus operandi and Khamenei’s via media from an otherwise increasingly confining economic dilemma. For genuine sanctions relief, forever eschew nuclear weapons and limit the range of ballistic missiles – all subject to verifiable inspections – and agree to start talking about withdrawing support for terrorist organizations.

Nuclear weapons and ballistic missiles are not really existential for Tehran. Dropping support for Hezbollah et al would be an enormous lift, however, in light of the ideological and revolutionary fervor of many within the political leadership and the IRGC. At the very least, it would probably require the U.S. to make some formal commitment not to seek regime change. Trump might be inclined to accept that.

Iran’s Opportunity, Too

There are two other important factors for Tehran. First, any deal that’s measurably stronger than the JCPOA is more likely to win Senate approval, which Mr. Trump’s predecessor, Barak Obama, was unable to come close to achieving. So, a negotiated deal with the U.S. under Trump that enjoys Senate approval will be the closest thing to a virtual lock for Iran and, therefore, face little chance of reversal or subsequent U.S. pullout.

Second, and perhaps more important, is Donald Trump’s history as a businessman doing deals. When he perceived the people with whom he was negotiating as weaker than himself – as he does the Iranians today – he presses harder and even bullies. For Tehran, that means that continued obstinacy will be met with more sanctions and more economic pain. The downside of that approach to Trump and to the U.S. side is very limited. But for Tehran, it may put the very revolution at risk.

A Change After US 2020 Elections… Not Likely

Banking on a new U.S. administration in 2021? That’s a fool’s errand. No smart Democratic administration will resume membership in the JCPOA, as is. (And Mr. Trump might win another term.) While the Democrats might make more willing negotiators, they will understandably seek – and would be politically wise to insist on – a measurably strengthened JCPOA, perhaps with newly negotiated addenda, before stepping into the political bear trap of negotiating another accord with Tehran. But without a Democrat-controlled Senate – far from assured at this point – even a bulked-up JCPOA would produce the same sort of partisan heartburn experienced by Mr. Obama’s administration.

The biggest hurdle for the Iranian leadership might actually be internal. Compromise will likely be seen by some within the IRGC as a sellout and possible dilution of their power and influence. But the short-lived benefits from the JCPOA in 2016 ought to have shown them that they stand to gain significantly from the lifting of sanctions.

With open conflict between the U.S. and Iran unthinkable and the tightening vice of economic sanctions on Iran inescapable, both nations have ample justification to pursue the only real option available to them, diplomacy. For Washington and Mr. Trump, it could be a great foreign policy achievement. For Tehran, the new poison might prove to be the economic elixir that has eluded them since 1979.

Read more from former Ambassador Gary Grappo in The Cipher Brief.