Iran, Get Ready for the Battle Rial

Iran’s economy is in crisis. Inflation is skyrocketing, banks are in turmoil, and Iranians protest daily against the regime’s ineptitude, corruption and foreign adventurism. The currency is collapsing. In 1979, just before the Islamic revolution, Iran’s official exchange rate was 70 rial to the dollar. Today’s official rate, 42,000 to 1, is only available to those with regime connections. Most Iranians have to accept less favorable terms on the black market.

The rial experienced several waves of devaluation, including during the last ramp-up in U.S. sanctions. The black-market rate per dollar went from around 11,000 in early 2011 to close to 37,000 in 2013, immediately before the June election of President Hassan Rouhani. The latest deterioration signals a worse crisis. It was triggered by Mr. Trump’s decision in October to decertify the Joint Comprehensive Plan of Action, or JCPOA, indicating his intention to reimpose sanctions. The black-market rate has settled at 63,500, a nearly 40% loss of value since October. It dipped to 70,000 in the 24 hours after Mr. Trump announced on May 8 America’s official withdrawal from the nuclear deal. The regime is so desperate to avoid further collapse, it is taking extreme measures like criminalizing private currency trading and severely restricting the amount of currency Iranian travelers can take out of the country.

With the impending reimposition of sanctions, the pressure on Tehran is growing every day. Any bank that lets Iran draw on its foreign-held reserves will face total cutoff from the U.S. financial system. Trade and investment in major Iranian economic sectors will grind to a halt. Insurers will walk away from Iran-related projects. Importers of Iranian oil will reduce their purchases. Providing Iran with precious metals, which the regime might use in place of cash, will be off-limits, too. Already major European energy, insurance and shipping companies have signaled their intention to cut ties with the Islamic Republic unless their governments can negotiate sanctions waivers.

Mr. Pompeo made clear Monday that’s unlikely—and also that the administration will tighten the screws further, targeting every aspect of the regime’s finances.

What are the options? The Treasury Department has the authority to target companies owned or controlled by the Islamic Revolutionary Guard Corps and Iran’s defense industry. These represent around 20% of total market capitalization of the Tehran Stock Exchange. The Treasury could impose sanctions on Supreme Leader Ayatollah Ali Khamenei’s $200 billion corporate conglomerate, including the charitable trusts, or bonyads, where regime officials stash their money. Mr. Trump could use his executive powers to target companies of which the IRGC owns a minority share, vastly expanding Treasury’s list. He could broaden sanctions to cover Iran’s mining, construction and engineering industries, and any other sector of strategic importance.

Another top target will be Hezbollah, Iran’s largest terrorist proxy. The administration should cut off Hezbollah’s companies and bankers, especially in Lebanon, from the international financial system, while cracking down on the group’s fundraising, recruitment, narcotics trafficking and other transnational criminal activities.

America’s new strategy also presents European leaders with a choice: Either help curb all of Iran’s malign activities in exchange for major American economic and diplomatic concessions, or cast their lots with the repressive theocracy responsible for a 2012 terror attack in Bulgaria, and for the bloodshed in Syria that created a refugee crisis in Europe.

The Europeans have several important roles to play in a maximum-pressure strategy. The Swift financial-messaging service, based in Brussels, would disconnect the Central Bank of Iran, as well as other designated Iranian banks. The European Central Bank would stop clearing euro-based Iranian transactions through its Target2 settlement system, whose bylaws explicitly forbid activity with banks engaged in illicit financing schemes. Central banks in European countries would stop trying to evade U.S. oil sanctions by making direct payments to Iran’s central bank. Europe would designate the IRGC and Hezbollah in their entirety as terror groups.

That sort of showdown may seem appealing to some Europeans. But the democratic ties that bind America with Europe are far stronger than any commercial relationship between Europe and the Islamic Republic.

Just last week, German Chancellor Angela Merkel and French President Emmanuel Macron ruled out any trade war with the U.S. over Iran. Other European leaders should follow their lead. Mr. Pompeo has opened the door for renewed trans-Atlantic dialogue. Brussels may be slow to warm up to America’s new, no-holds-barred financial war on the Iranian regime. But European banks and businesses ought to keep one thing in mind: In a Battle rial, anything goes.