Answer

Introduction

Iran has witnessed its largest nationwide protests since 2022, triggered by the December 2025 budget announcement and a subsequent currency collapse. With inflation soaring above 48% and the rial hitting a record low of 1.45 million per USD, the demonstrations have evolved from economic grievances into a direct challenge to the Islamic Republic’s legitimacy.

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Implications for Internal Stability

• Erosion of Governance Legitimacy: The failure of President Pezeshkian’s “reformist” promises has led to a total loss of trust, with students and bazaar merchants joining forces.
  Eg: Protesters have moved beyond economic slogans to chants like “Death to the Dictator,” indicating a shift from reform to regime change.
• Security Apparatus Attrition: Massive increases in security spending (up 150%) at the cost of public subsidies have strained the social contract between the state and its foot soldiers. 
• Ethnic and Regional Fractures: The unrest has reignited dissent in marginalized periphery regions, complicating the central government’s control. 

Implications for External Engagements

• Nuclear Brinkmanship: Internal chaos has led Tehran to suspend IAEA cooperation, triggering the UN “snapback” mechanism for sanctions.
  Eg: The E3 nations (UK, France, Germany) activated snapback in late 2025, reimposing binding legal constraints on Iran’s energy and finance sectors.
• Stalled Westward Rapprochement: The “shadow war” with Israel and US threats of intervention have killed any immediate prospects for a JCPOA successor. 
• Weakened Proxy Influence: Fiscal strain at home is forcing a reduction in funding for regional proxies, affecting Iran’s “Forward Defense” strategy. 
• Heightened Regional Conflict Risk: To deflect domestic pressure, the regime may attempt external provocations, risking a wider Middle East war. 

Potential Resolutions

• Inclusive National Dialogue: Transitioning from cosmetic gestures to genuine political concessions and an end to the “shadow governance” by the IRGC.
  Eg: President Pezeshkian’s call to listen to “legitimate demands” must be backed by a reversal of the 2026 austerity budget.
• Transparent Economic Reform: Stabilizing the rial through a unified exchange rate and addressing the chronic corruption that drains the state treasury.
  Eg: Re-engaging with the FATF standards could help restore international financial confidence and ease the current liquidity crisis.
• De-escalating Regional Tensions: Pursuing a “Security-First” rapprochement with neighbors to reduce the need for high-cost proxy wars and surveillance spending.
  Eg: Iranian diplomats are reportedly putting out “feelers for dialogue” to the US administration to insulate the system from further strikes.

Conclusion

The 2026 unrest marks a “self-blinding” crisis where the Iranian leadership’s preference for narrative over reality has manufactured the very instability it fears. For Iran to survive this hardest year, it must decouple its regional security posture from its domestic survival strategy. Without a shift toward accountability and away from the “snapback” isolation, the Islamic Republic faces an irreversible erosion of the state’s functional capacity, potentially leading to a permanent structural collapse.

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