Inside a stately boardroom at the Federal Ministry of Finance in Berlin last April, U.S. Treasury Department officials meeting with their German counterparts described an elaborate Iranian operation that the Americans had uncovered. For several years, Iran’s elite Islamic Revolutionary Guard Corps (IRGC) had been using German front companies to buy advanced printing machinery, watermarked paper and specialty inks in violation of European export controls. The IRGC had then printed counterfeit Yemeni bank notes potentially worth hundreds of millions of dollars and used them to help fund its proxy war against the beleaguered pro-U.S. government in the capital of Sana’a. German companies, the Americans said, were being used as a cover by the Iranians to finance the world’s worst humanitarian conflict.
The evidence, uncovered by U.S. illicit-finance investigators, was meant to sway the Germans, but not just in hopes of countering Iran’s moves on the southern tip of the Arabian Peninsula. The larger mission, according to other Treasury documents later used in a presentation and reviewed by TIME, was to convince Berlin that Tehran cannot be trusted and that the Germans should join the Trump Administration in imposing economy-crippling sanctions on Iran. Weeks later, American officials presented their hosts with one last set of documents: detailed blueprints on how the Trump Administration was preparing to unleash financial warfare on the Iranian economy.
For many, U.S.-Iran tensions are defined by President Trump’s occasionally flamboyant outbursts, including a late July 22 all-caps tweet that appeared to threaten Tehran with military attack. But the low-grade confrontation between the two countries has been intensifying almost from the moment they and five major powers signed the landmark 2015 nuclear deal known officially as the Joint Comprehensive Plan of Action (JCPOA). That deal brought Iran’s nuclear program under tight international controls, but freed it from heavy sanctions. Tehran has been causing trouble for the U.S. and its allies ever since.
Iranian leaders used part of the windfall from the lifted sanctions, worth tens of billions of dollars, to expand the country’s reach into the region, and further its role as the world’s leading state sponsor of terrorism, Administration officials say. Tehran is now involved in every single serious conflict in the Middle East, almost always on the side of America’s enemies. Israel and Gulf nations have pressured the White House to address what they see as a growing Shi’ite sphere of influence across the Middle East with the IRGC bolstering its support for allied militant groups in Iraq, Lebanon and Syria. Tehran is also said to have increased funding for Shi’ite insurgents opposing American allies in Bahrain, Saudi Arabia and Yemen. It also has continued to develop ballistic missile technology in defiance of the United Nations.
Even before Trump took office, the U.S. was responding to Iran’s regional expansion with military, intelligence and diplomatic countermeasures. Trump’s decision in May to walk away from the nuclear deal accelerated the confrontation. And Trump’s campaign for “maximum economic and diplomatic pressure”–quietly unveiled by U.S. officials in international capitals across Europe, the Middle East and Asia–is bringing matters to a head as an Aug. 6 deadline for the new sanctions approaches.
The stakes rise with the confrontations. U.S. allies have been warned during road shows like the one last April in Berlin that if they don’t join the new campaign, their countries’ companies are susceptible to Iranian schemes, and after August 6 they could be slapped with U.S. sanctions for doing business with Tehran. Everyone from French energy giants to South Korean petrochemical companies are weighing the cost of rolling back three years of investment in Iran against losing access to the exponentially larger U.S. economy. As a business decision, it’s not a hard one. More than 50 companies in all major industries have already committed to leaving the Iranian market by August, U.S. officials say.
The run for the door has intensified pressure on Iran’s already battered economy. The value of its currency, the rial, collapsed to a record low of 90,000 rials to the U.S. dollar–a nearly 50% drop since Trump left the nuclear deal. In an economy based on petrodollars and heavy importing, most Iranians effectively lost half of their wealth, as prices soared for everything from daily goods to cars. On June 25, after the government banned the import of 1,300 foreign goods to battle inflation, merchants in Tehran’s Grand Bazaar shuttered their businesses. Protests spread from Tehran to other cities.
Unrest is just what the Trump Administration is hoping for. The White House believes new sanctions will drive middle-and lower-class Iranians to pressure the central government to redirect wealth from foreign adventures to domestic spending. “After our sanctions come in force,” Secretary of State Mike Pompeo said in May at the Heritage Foundation, a right-leaning Washington think tank, “Iran will be forced to make a choice: either fight to keep its economy off life support at home or squander precious wealth on fights abroad. It will not have the resources to do both.”
But the U.S. faces risks too. Russia and China are opposing the U.S. sanctions push, and most other countries still support the 2015 deal and are looking for ways around the Trump Administration crackdown. If they find them, and the U.S. looks ineffectual, it could weaken American diplomatic and economic clout around the world.
Even success could prove costly. National Security Adviser John Bolton has long advocated toppling the Iranian leaders, and while the Administration no longer espouses that policy openly, many suspect regime change is the ultimate goal of the sanctions. Few who lived through the bloody aftermath of America’s 2003 invasion of Iraq have forgotten how costly messy leadership changes in the Middle East can become.
On July 24, 2015, 10 days after the Iran nuclear deal was signed, an airliner carrying Major General Qassem Soleimani touched down in Moscow. As commander of the IRGC’s Quds Force, a designated terrorist organization, Soleimani wasn’t supposed to be allowed to fly commercially–U.N. Security Council resolutions barred him from leaving Iran. Yet there he was, according to former and current U.S. officials, meeting with senior Russian military leaders to pitch an audacious plan: together Moscow and Tehran could team up to save the forces of Syrian President Bashar Assad, which were nearing defeat at the hands of rebel groups.
Soleimani, who reports directly to Iran’s supreme theocratic ruler, Ayatullah Khamenei, had already organized, funded and deployed Shi’ite militias–many from Afghanistan, Pakistan and Lebanon–to help Assad. What he needed was air power. He got it. By that October, Russian warplanes were striking rebel positions daily from above while Iranian special forces were leading operations on the ground. The military moves triggered by Solemani’s Moscow visit, the officials say, fundamentally changed the trajectory of the Syrian war in Assad’s favor.
And Iran was only getting started. For the previous five years, it had labored under a U.S.-led crackdown on its banking and financial sectors designed to coerce it to abandon its nuclear program. But six months after the July 2015 deal, the sanctions came off and money began flowing again, including billions in cash assets previously frozen by the U.S. Firms from Europe and the U.S. began to invest–albeit cautiously. Iran’s oil exports started a steady climb to their current 2.7 million barrels per day. All told, Iran profited by tens of billions of dollars from the deal–and $16 billion went to regional proxies, according to a senior State Department official.
National pride, including memories of Persian empires, also figures in Iran’s regional ambitions. But there is little doubt, says Nathan Sales, counterterrorism coordinator at the State Department, that “you’re seeing an intensification of Iranian support for terrorism and other malign activity.” U.S. State Department officials estimate that in Syria alone, Tehran floated Assad more than $4 billion in credit to purchase oil and other goods from Iran, munificence that would not have been possible without JCPOA sanctions relief on Iran’s economy.
The result has been expanded influence inside Syria, where the IRGC is regarded by some analysts as being in control of Assad’s ground forces. That in turn has raised fears of pervasive Iranian influence that Sunni rulers warned would come into being after the U.S. invaded Iraq. Already, Tehran had used the U.S. ouster of Iraq’s despot, Saddam Hussein, to establish militia networks there. Now its overland supply route runs from Tehran, across Iraq and Syria, to Lebanon, a route replacing air cargo flights as a supply corridor.
Of all the Shi’ite militias in the region, Hizballah in Lebanon has gained the most from Iran’s post-JCPOA ascendancy. A U.S. State Department official estimated Iran’s support at $700 million a year. Hizballah has received weapons, training facilities in Iran and direct financial support since the early 1980s, when Iran helped establish it. It posts photos of Iran’s leaders in territory it controls, and flies a flag inspired by the IRGC emblem. The group is both deeply rooted in Lebanon’s Shi’ite population, and a clear proxy for Iran on the Mediterranean.
Iran’s ascendance presents an immediate problem for Israel, America’s closest ally in the region and Tehran’s mortal enemy. Iran’s forces in Lebanon and Syria, which border Israel, have been attacked by Israeli jets, enforcing Israel’s pledge to protect its borders “until the last millimeter.” Israel has launched airstrikes for several months that target groups arrayed to the north and northwest of the border. Israel even attacked a convoy of Iranian-backed Iraqi Shi’ite militiamen crossing into Syria near Deir ez-Zor–some 500 miles away from the Israeli border.
Israel isn’t the only U.S. ally in the region to confront resurgent Iranian proxies. In Bahrain, which was once a part of Iran and now hosts the U.S. Navy’s Fifth Fleet, the IRGC has found proxies in Shi’ite groups like al-Ashtar Brigades. In Yemen, the war escalated by Saudi Arabia and the United Arab Emirates in 2015 has boosted Iran’s relationship with the rebels known as Houthis. They have received long-range missiles which were then fired into Saudi Arabia, and the U.S. Navy and allies have intercepted weapons shipments from Iran headed to the Houthis.
The U.S. military has thus far avoided direct confrontation with Iranian forces–even when small Iranian boats and drones routinely pestered American naval ships at sea. (The U.S. military said that behavior abruptly–and inexplicably–stopped this year.) Instead, the U.S. is working to expose Iran’s activities and help America’s allies. “We do consider Iran to be the most destabilizing actor across the region,” General Joseph Votel, commander of all U.S. forces across the Middle East, told reporters July 19. “And our efforts across the region have been on exposing their activities and then working with partners to stop or disrupt them.”
In addition to naval interdictions off the coast of Yemen, the Trump Administration has provided intelligence, munitions and midair refueling to Saudi warplanes operating against the Houthis. In Syria, the U.S. maintains a remote Special Operations base at Al Tanf, in the country’s southeast, at a strategic intersection where the borders of Syria, Iraq and Jordan meet that serves as a physical obstruction against Iranian expansion. And at every turn, Trump has backed Israel’s efforts to attack Iran.
The greater U.S. push has come on the economic battlefield. Under the reimposed American sanctions, companies that invested in Iran have a brief window to wind down business ties before incurring penalties. The first group of sanctions on Iran’s automotive sector, gold trade and other industries will “snap back” beginning on Aug. 4.
The real economic pain will begin Nov. 6 when a more rigorous set of sanctions on oil and transactions with the central bank of Iran come into effect. Iran currently exports around 1 million barrels of oil per day to Europe, and nearly 2 million to Asian countries like China, India, South Korea and Japan. Importers of Iranian oil have already reduced their purchases about 8% in the past two months amid Trump Administration efforts.
No one expects a full return to the level of international sanctions that were in place prior to the nuclear deal–a prodigious, nearly global and ultimately successful effort aimed at forcing Iran to the negotiating table. But the U.S. wields great power even alone. French energy giant Total is preparing to walk away from a $47 million investment in Iran’s South Pars gas field under the threat of U.S. sanctions. It’s happening despite the French government’s belief, along with all other signatories, that Iran is fully complying with the terms of the 2015 nuclear deal. “There’s a difference of opinion about the JCPOA itself, but I wouldn’t infer that there’s a difference of opinion in countering Iran’s malign activities,” said Sigal Mandelker, Treasury’s Under Secretary for Terrorism and Financial Intelligence, who has been traveling to European and Middle Eastern capitals on the Trump Administration’s road shows. “For us, we have conversations with our European counterparts about the aggressiveness with which we’re going to enforce our authorities.”
The U.S. moves already appear to be having an effect. Analysts at BMI Research project that Iran’s economy will grow just 1.8% this year, down from a prior forecast of 4.3% before Trump pulled out of the nuclear deal. Some experts say U.S. economic expect more companies to join Trump’s crackdown. “The fact of the matter is, when foreign firms are forced to choose between business with Iran and access to the U.S. financial system, they are going to choose the latter,” said Daniel Glaser, a former Assistant Treasury Secretary for Terrorist Financing in the Office of Terrorism and Financial Intelligence.
Tehran is doing what they can to push back. Iranian President Hassan Rouhani and Javad Zarif, his Western-educated Foreign Minister, have traveled throughout Europe in search of commitments from leaders there, but have yet to secure them. “We see that under pressure from the U.S., under the psychological atmosphere that the U.S. has tried to create, some European companies have already started to withdraw,” Zarif told to Euronews in a July 19 interview.
The leadership is right to worry. The new round of protests over Iran’s economic woes poses a challenge to Rouhani’s government, which was twice elected on the promise that a nuclear deal would result in integrating the country into the global economy. And there are more signs the Iranian people are growing weary of their government’s foreign military intervention. On June 25, protesters chanted “Death to Palestine,” a noticeable about-face from the chants most often heard in Tehran: “Death to Israel.”
The unrest may predate Trump’s withdrawal from JCPOA, but that doesn’t mean he can’t use it. The U.S. government recently unveiled plans to create an around-the-clock Farsi channel that promotes Western propaganda on television, radio, and social media. “Trump is gambling that this regime is extremely unpopular at home,” said Alex Vatanka, an Iran expert at the Middle East Institute. “A lot of this is psychological. The Administration has made the determination that there are real cracks inside this Iranian society, so why not tap into it?”
All of which helps explain the mounting tensions between Tehran and Washington. Rouhani revived a threat to shut down international oil shipments in the strategic Strait of Hormuz if Washington continued to provoke Tehran, a step that would almost certainly trigger war. Meanwhile, U.S. officials told NBC News in July that Iran has “laid the groundwork” for cyberattacks against electric grids, water plants and tech companies in the U.S. and Europe.
There have been other provocations. An Iranian diplomat based in Vienna was among six people arrested in connection with a foiled bombing attack on a conference of opponents of the Tehran regime that was to be held in a town north of Paris. Israel’s Mossad spy agency claimed it had alerted European authorities of a cell led by the diplomat. A Belgian couple of Iranian origin was arrested with homemade explosive and a detonation device found in their car. Iran said it had nothing to do with the plot, calling it a staged “false flag” operation.
Finally, on July 22, Rouhani spoke out in rare bellicose terms more often heard from Iran’s Supreme Leader. “Mr. Trump, do not play with the lion’s tail, this will only lead to regret,” Rouhani said, according to the state-run news agency IRNA. “America must understand that peace with Iran is the mother of all peace and war with Iran is the mother of all wars.” That triggered Trump’s all-caps tweet the same day: “Never, ever threaten the united states again or you will suffer consequences the likes of which few throughout history have ever suffered before.”
Trump’s tweet also had a domestic context–it changed the subject from fallout from his Russia summit. But critics say the President’s entire approach to Iran runs a steep risk. “There’s so much friction between Iran, the U.S. and their respective allies throughout the region,” said Ali Vaez, the Iran project director at the International Crisis Group. “There’s so many flash points that a single miscalculation could result in a confrontation that could easily spiral out of control.” A wider war with Iran might stoke bloody sectarian violence across a region already reeling through nearly three decades of nonstop conflict. Some experts also fear a smaller, targeted threat against U.S. interests, perhaps an Iranian-backed militia attack against isolated U.S. forces, on a remote base in Syria.
With the August sanctions looming and tougher ones on track in November, the break in tensions seems likely. Especially between governments that, even in the best of times, cast the other as a reliable villain.
– With reporting by KAY ARMIN SERJOIE/TEHRAN
This appears in the August 06, 2018 issue of TIME.