Is Iran Trying to Inflate Yemen’s Currency as a Tool of Warfare?

On Nov. 20, the Treasury Department’s Office of Foreign Assets Control, which enforces sanctions, identified and designated individuals and entities connected to an operation by the Quds force, the special forces division of Iran’s Revolutionary Guard Corps (IRGC) to print counterfeit Yemeni money worth hundreds of millions of U.S. dollars using European equipment. Treasury only released limited information about the plot, but the sanctions are likely to spur policymakers to analyze carefully Iran’s next moves.

Two developments are important to watch. First, the U.S. should be paying close attention to whether, and how, Iran might use economic warfare to destabilize an adversary’s economy. Second, the Quds force managed to draw Europe into its actions, tempting a European Union response; if Europe fails to respond adequately, it may embolden the IRGC.

The revelation that the Quds force was printing the Yemeni rial invites the question: Why did the Iran choose to counterfeit Yemeni currency in particular?

Yemen has been in the midst of a civil war since 2015, meaning that it has a weak government without the resources to stop a massive counterfeiting scheme. However, policymakers should also consider whether Iran is being more than opportunistic in choosing to counterfeit Yemeni currency. Perhaps—and this remains conjectural—Iran may be trying to circulate fake currency in order to destabilize the Yemeni economy through inflation. The World Bank estimates that Yemen’s economy contracted by about 37.5 percent since 2015 with a concurrent spike in inflation. Iran is currently supporting the Houthi rebellion against the Yemeni government, sending increasingly lethal weapons into the region, and therefore has an interest in weakening the government and the country’s economy.

It would not be the first time Tehran has used counterfeiting as a tool of economic warfare: Iran was tied to a counterfeiting scheme targeting the Iraqi economy in 1992. It flooded the economy with counterfeit money in order to increase inflation and destabilize the economy. This month’s recent counterfeiting revelation could be signaling that they’re implementing a similar scheme to increase inflation in Yemen.

The Treasury designation revealed that in addition to printing hundreds of millions of Yemeni rial, the Iranians boldly used European equipment to pursue their scheme. The Quds forces used front companies in Germany to circumvent European export controls and obtain equipment to print Yemeni rial.

Exposing that the Quds force used German front-companies to obtain the counterfeiting equipment has to give Europeans pause in their reintegration efforts with Iran, after the Iran nuclear deal. The EU’s diplomatic service chief, Helga Schmid, explained that there was a 94 percent increase in Iranian-European trade in the first half of 2017 compared to the same period the previous year. Those billions of dollars in new trade will certainly incentivize European companies to pressure their governments to avoid applying additional sanctions against Iran. However, since Iran uses cash to pursue destabilizing activities such as its well-documented support of terrorism and even cyberattacks against the U.S. financial system, the use of German companies will likely increase the weight of Secretary of State Rex Tillerson’s calls on European governments to sanction the IRGC.

The U.S. should watch Iran’s response to these sanctions carefully. The failure of Europe to act may embolden the IRGC, which likely knows that Europe wants to avoid hurting trade with Iran again and losing out on the resultant revenue. The U.S. should especially be on the lookout for any efforts to evade sanctions.

Ultimately, any discussion of economic sanctions against the Iranian counterfeit ring should serve a purpose greater than simply stopping and punishing an organization that’s long been committed to illicit actions; it should push the U.S. and its allies to think both about how to limit Iran’s bad behavior now and contemplate how Iran may be strategizing to achieve its future geopolitical objectives.