Will cash-hungry Iran hit the wall next year?

Iran is facing an increasingly dire financial situation amid a shrinking economy and hard-hitting US sanctions. The regime is desperate for cash to fund its military adventurism in the region, support its militia groups and proxies, and run its institutions inside the country.

The government’s pension fund system, which heavily relies on subsidies, is on the verge of collapse. The system provides funds to various government institutions, including the regime’s armed forces. According to recent National Security Council documents, “the impact (of US sanctions) has been so severe that of the 18 existing retirement funds in Iran, 17 are in the red.”

Iran’s economic situation is not sustainable and its leaders are unlikely to sit idly next year watching their power diminish in the region or their decades of investments in foreign proxies and militia groups go to waste. The theocratic establishment is hoping to gain revenues next year without relying heavily on oil exports.

Announcing a “budget of resistance” recently, Iran’s President Hassan Rouhani said: “This is a budget to resist sanctions with the least possible dependence on oil. This budget announces to the world that despite sanctions we can manage the country.”

But the question is: What methods will the regime most likely employ in order to generate the necessary revenues?

Historically, whenever Iran’s leaders have faced economic challenges and sanctions, they have redirected the financial pressure on to the ordinary people who make up the majority of the population.

The result is that the regime generally increases prices of commodities, collects more taxes, cuts subsidies and social services, and reduces spending on infrastructure.

While underfunding infrastructure projects and social services can deliver some revenue boost to the government, it also has negative repercussions for the ruling mullahs. The welfare of most Iranians — specifically, the middle class and low-income families — will deteriorate significantly as a result of such measures.

In addition, the country’s unemployment rate and inflation will most likely go up. This will ratchet up dissatisfaction, frustration and resistance against the regime, providing a ripe environment for widespread protests threatening the ruling clerics’ hold on power.

Iran’s economic situation is not sustainable and its leaders are unlikely to sit idly next year watching their power diminish in the region.

Dr. Majid Rafizadeh

More fundamentally, any extra revenue from increasing taxes and cutting subsidies will be inadequate, partially because the regime’s institutions and the wealthy individuals connected to the establishment will most likely continue evading taxes with impunity.

Intriguingly, even the Iranian newspaper Donya-e Eqtesad acknowledged last week that “at present, tax revenue consists of about 30 percent of the total government budget. This figure is very low, and the tax is collected relatively unjustly due to many high-income people not paying taxes.”

The second method that Iranian leaders will rely on next year to boost revenues: Skirting sanctions through illicit means. This includes increasing black-market oil exports as well as employing shell companies to carry out the regime’s financial activities.

On the surface, such companies, which are spread across the world, appear to be legitimate independent firms. But in reality, they are run by the regime, the Islamic Revolutionary Guard, or a program called the “Execution of Imam Khomeini’s Order,” which helps the regime evade sanctions and provides revenue.

For example, one such revelation related to a New York skyscraper housing a string of high-profile corporate tenants. Last year, acting US Attorney for the Southern District of New York Joon H. Kim revealed how rent paid by these firms was helping the Iranian regime, saying: “Through all the efforts to sanction and isolate Iran, a state sponsor of terrorism, the owners (of the building) gave the Iranian government a critical foothold in the heart of Manhattan, through which Iran successfully circumvented US economic sanctions.”

Nevertheless, since the US is closely monitoring Iran’s financial activities, and increasing pressure on the regime through economic and political sanctions, this approach will not answer the Iranian regime’s financial needs.

As a result, the regime will most likely ask for loans from other governments. Many of Iran’s allies, such as Syria, also face economic problems. Tehran can probably seek loans from China and Russia. Iranian Energy Minister Reza Ardakanian recently held talks with his Russian counterpart, Alexander Novak, over a $5 billion loan. But this approach will not address the country’s economic crisis.

In a nutshell, the Iranian regime is running out of options to generate adequate revenues next year. Increasing taxes on the population and underfunding infrastructure projects will only increase dissatisfaction with the regime.

• Dr. Majid Rafizadeh is a Harvard-educated Iranian-American political scientist. He is a leading expert on Iran and US foreign policy, a businessman and president of the International American Council. Twitter: @Dr_Rafizadeh