For Iran, 2013 could be one of the most challenging years-both at home and in relations with the outside world-since the 1979 revolution. The Islamic Republic faces the potential of stronger economic sanctions and even an Israeli and/or U.S. military strike because of its intransigence in complying with U.N. resolutions on its nuclear program. The world's only modern theocracy also must deal with twin domestic challenges-- deepening malaise among the young and increasing tensions among the political elite. Home-grown problems could outweigh the regime's foreign policy woes.
Iran and the world's major powers have all indicated an interest in a new round of diplomatic talks to end the long standoff over Tehran's controversial nuclear program. The gap is still enormous, however, after three rounds in Istanbul, Baghdad and Moscow in 2012.
Khamenei is not easily swayed by pressure. He views Iran's uranium enrichment program not only as a natural and legal right, but also a measure of Tehran's success against the United States. Tehran also spins the so-called Arab Spring as an "Islamic awakening" modeled on its own Islamic revolution. However, Khamenei is also savvy enough to know that the same political changes represent new challenges for his regime as well. And other regional powers, most notably Turkey, are increasingly questioning Iran's geopolitical aspirations.
Iran begins 2013 with growing economic woes. The economy is now the Islamic Republic's Achilles Heel. Iran has been successful in educating millions of Iranians and rebuilding its infrastructure after the Iran-Iraq War. But it has not reached the potential of a country with one of the world's largest reserves of oil and natural gas and a well-educated and resourceful population. Khamenei needs tens of billions of dollars in oil revenues to maintain a vast and often loyal network that has maintained his rule for the past 23 years. But the world's toughest sanctions, soaring inflation, and the plummeting value of Iran's currency produced the perfect economic storm in 2012. And Tehran's economic crisis will not end any time soon.
Iran's oil exports declined by as much as one-half in 2012. But chronic mismanagement is the chief cause of Iran's economic problems. Corruption across the regime has contributed to the economic crisis. The Revolutionary Guards, which control large parts of the economy, are also reportedly corrupt. The most powerful military organization in Iran has charitable foundations (bonyads) that are tax-exempt and largely free of government scrutiny. The Guards have also been linked to illicit smuggling and narcotics trafficking. Some veteran officers have reportedly amassed significant wealth.
The Islamic Republic begins 2013 with anxiety among both the public and the government over the impending presidential election. The 2009 election produced the deepest political schism since the revolution, with millions turning out in massive popular protests across the country to challenge the official outcome. It gave birth to the opposition Green Movement and created an enduring crisis of legitimacy for the Supreme Leader. The 2013 election may be more tightly scripted than any earlier presidential race to prevent serious debates or competition. Candidates are technically vetted by the Guardian Council, but they must also have the Supreme Leader's unspoken approval. As the regime becomes increasingly militarized, candidates may also need to either have ties to the Revolutionary Guards or be amenable to its interests. The spectrum of rivals reflects the unprecedented divisions. All were among the early revolutionaries who ousted the shah and hung together for more than a decade. Ahmadinejad, a hardliner who had Khamenei's full endorsement just four years ago, is now perceived as a threat to the Supreme Leader's hold on power.
But the most important challenge to the regime may still come from the Green Movement. Its symbolic leaders, Mir Hossein Mousavi and Mehdi Karroubi, are under house arrest but they remain a potent threat to Khamenei's rule, perhaps even more than an Israeli military strike or U.S. sanctions. 
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