Iran: Converging Internal Unrest and External Escalation Risks

While demonstrations and strikes are likely to persist over the coming days and potentially weeks, the collapse of the Iranian government remains unlikely in the near term. Protests that began on Dec. 28 following the rapid depreciation of the rial have continued to expand geographically and socioeconomically all while Israel and the US continue to explore possible military options against the Iranian government. Rarely has the Iranian government faced such a convergence of internal and external pressures since the establishment of the Islamic Republic in 1979, a dangerous combination that Tehran has long sought to avoid.

Although the government has offered limited concessions, these measures have failed to placate protesters. What initially emerged as economically driven unrest has evolved into broader demands for political accountability and reform. While the protest movement remains fragmented and lacks centralized leadership, its persistence suggests a deepening crisis of confidence in the state even if the power of the streets is likely too little to affect regime change absent a further deteriorating economy.

For foreign businesses and investors, this environment significantly elevates political and operational risk, with increased potential for disruptions to commercial activity and currency volatility. Travelers and expatriates face heightened risks stemming from civil unrest, sporadic violence, transportation disruptions, and the potential for sudden security restrictions or border closures, particularly if internal instability coincides with regional military escalation. 

Iran has a long history of large-scale demonstrations, and authorities have typically responded swiftly with force to disperse them. However, given the country’s current constellation of challenges, including economic deterioration, sanctions, and the potential for Israeli or US kinetic actions, authorities have so far exercised relative restraint in their use of force. Nonetheless, dozens of protesters have been killed. Additional violence, including looting, destruction of public property, and attacks on security institutions and police stations, is likely to continue. Protester grievances remain overwhelmingly focused on the government and its security apparatus. 

Despite its economic paralysis, the Iranian state’s coercive apparatus remains intact. The government will almost certainly resort to harsher measures against what it labels “rioters” should unrest intensify or threaten critical state institutions. Tehran has already accused Israel and other foreign governments of fomenting instability. State-affiliated media has amplified this narrative, with the Tehran Times running headlines such as: “Mossad hunting for blood in Iran's protests.”

This framing serves both to justify potential crackdowns and to prepare domestic audiences for external confrontation. It also raises the likelihood that internal unrest could be militarized more rapidly if the leadership perceives an existential threat. 

As protests persist and amid escalating rhetoric from US President Donald Trump, Iran’s armed forces have reportedly drawn up contingency plans for pre-emptive or retaliatory strikes against Israel and US military installations in the region. Armed Forces Chief of Chief of Staff Maj. Gen. Amir Hatami has warned that Iran will not tolerate continued threats without response, emphasizing that Iran’s readiness surpasses previous wartime levels, a claim his forces can likely substantiate but one that would invite severe retaliation from the US and Israel. His assertion that Iran will “cut off the hand of any aggressor” demonstrates Tehran’s defiant posture abroad, even as it strikes a conciliatory tone domestically. 

During the June 12-Day conflict, Iran experienced a temporary rally-around-the-flag effect. It remains unclear whether renewed possible Israeli strikes would similarly suppress domestic dissent or instead exacerbate public frustration. Regardless, protesters increasingly view political change as something they must impose themselves, rather than await from within the system, and may ultimately not be deterred by foreign pressures. 

Prolonged civil unrest raises the likelihood of localized uprisings by ethnic separatist groups. While such movements would likely be suppressed quickly, any diversion of security forces would further embolden broader societal challenges to the state. Elite fragmentation represents a more dangerous indicator of instability. A mass resignation by reformist officials from government posts or the bureaucracy would significantly weaken state cohesion.

The Iranian Army (Artesh), distinct from the Islamic Revolutionary Guard Corps (IRGC), may also see resignations among senior officers. Such developments would constitute severe blows to regime resilience, particularly if they signal widening fissures within the security establishment. 

Ultimately, the economy will determine the trajectory of the unrest. If economic conditions continue to deteriorate, the government’s remaining options will narrow almost exclusively to repression. At that stage, violence may suppress demonstrations temporarily but will deepen long-term instability and resentment.  

For businesses, this could translate into sudden supply chain interruptions, forced closures of offices or factories, difficulty accessing banking and currency markets, and heightened exposure to property damage or civil liability. Clients and investors may face delays in contracts, payments, and legal enforcement, while foreign travelers could encounter sudden transportation disruptions, curfews, restricted movement, or temporary closures of airports, ports, and hotels, particularly in urban centers where unrest is concentrated. 

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