Iran’s economy stands at a critical juncture, with external pressures and internal dysfunction pushing it further from recovery. Although the country has demonstrated resilience in the face of sanctions, its economic challenges have deepened, exacerbating inflation, unemployment, and poverty. While Tehran continues to project an image of defiance, deeper structural problems suggest the nation is facing a protracted period of stagnation.
Sanctions Impact and Resistance
Sanctions imposed on Iran by the US have focused on its nuclear capabilities, energy and defense industries, as well as government officials, banks, and various sectors of the Iranian economy. Washington’s sanctions on Iran block nearly all US trade, freeze the country’s assets, and ban American foreign aid and arms sales.
Under the Trump administration’s “maximum pressure” sanctions campaign (2018-2021), over 90% of Iran’s $120 billion in reserves became inaccessible. Secondary sanctions reimposed in 2018 devalued Iran’s currency by 60%, triggering a balance of payments crisis and driving up import costs. The data regarding the impact of sanctions on Iranian society is striking. The economy experienced sharp contraction, per capita income declined, poverty levels rose, and living standards worsened.
While Trump’s “maximum pressure” campaign dealt a heavy blow to Iran’s economy, it did not produce a new nuclear deal before his departure. Under Biden, enforcement has been less stringent, though all sanctions remain in place. Iran has neither collapsed nor agreed to the nuclear deal reportedly on the table in 2022. With the US entrenched in its sanctions policy, Iran’s economy has continued to stagnate.
During the second and final televised Iranian presidential debate, candidate Masoud Pezeshkian highlighted soaring inflation and remarked, “We live in a society where many are begging on the streets.” He added, “No government in history has thrived within a cage,” referring to the economic impact of sanctions on Iran.
During his September address to the UN General Assembly (UNGA) and newly sworn-in as President, Pezeshkian declared Iran “ready to engage” with the 2015 nuclear deal participants, marking a departure from his predecessor’s approach. Tellingly, Pezeshkian emphasized economic concerns, stating: “The appropriate response to Iran is not more sanctions … It’s the fulfillment of previous commitments to lift sanctions, improve the economic conditions of the Iranian people, and pave the way for further agreements.”
The chances of ramping up sanctions are slim, as it would require substantial global cooperation — a challenge given other pressing priorities, multiple sanctions regimes, and the burdens these already entail. At the same time, the chances that the US will grant sanctions relief any time soon seem remote given Iran’s recent missile shipments to Russia and rising tensions with Israel.
Inflation, Exchange Rates, and the Burden on the Public
Under sanctions, Iran has been compelled to adapt, often contrary to Western goals, while inflicting deep, enduring harm to the country. Iran’s inflation remains stubbornly high. Basic goods, such as bread, have become prohibitively expensive for many. The government’s recent decision to increase raw milk prices by 20% only adds to the growing strain on households, which are already dealing with rising costs in other essential sectors, including livestock and dairy.
Adding to these economic woes, Iran remains on the blacklist of the Financial Action Task Force (FATF) for its failure to address concerns over terrorism financing and money laundering. This further isolates Iran from international financial systems and impedes any meaningful economic recovery. Lack of foreign currency, high inflation, the depreciating rial, and the chilling effect of US sanctions — despite the humanitarian exemption for food and drug imports — have produced a life-threatening crisis of medicine shortages. In April, the Majles’s health committee reported that Iran was facing shortages of over 200 medications, though some estimates suggest the number could be closer to 300.
Sanctions and Iran’s “Shadow Economy”
Western sanctions have crippled Iran’s economy, and while they have not led to total collapse, they have transformed the economic landscape. One result has been the growth of a smuggling-based economy.
China plays a key role in Iran’s smuggling operations. Around 90% of Iran’s oil flows to China, evading US sanctions in the process. Methods used to mask Iranian exports complicate tracking trade flows, and many of the Chinese buyers are small, semi-independent refineries known as “teapots,” which are difficult to trace and operate outside the reach of the US financial system. Traders involved in this sector reportedly employ various tactics, such as rebranding Iranian oil and using false tanker route data to obscure its origins.
Russia’s conflict in Ukraine has also opened economic and strategic avenues for Tehran. By selling drones to Russia and constructing a production facility on Russian soil, Iran generates significant income. Iran is providing Venezuela with weapons, technical support for its energy sector, and other sanctioned goods. In return, Caracas reportedly has supplied Iran with gold from its extensive Orinoco reserves, a commodity that is challenging to trace.
According to an October 2020 report from the Global Initiative Against Transnational Organized Crime, unelected and unaccountable entities have transformed external sanctions and economic pressures into profitable ventures. These groups exploit currency manipulation, fuel smuggling, and control over public infrastructure projects to generate revenue. Their survival now hinges on entrenched corruption and involvement in illicit economies and large-scale smuggling operations.
As a major player within Iran’s economy, the Islamic Revolutionary Guard Corps (IRGC) has extensive stakes in sectors such as arms trafficking, money laundering, and oil smuggling. In fact, the IRGC has profited disproportionately from Iran’s dark economy. The organization is also allocated one-third of the country’s total annual military budget.
The IRGC’s economic influence cannot be understated. Sanctions have driven Iran’s economy to depend increasingly on black-market trade, allowing the IRGC to solidify its dominance over essential goods distribution. By controlling vital supplies like fuel, food, and medicine, the group exploits shortages, manipulating prices and benefiting from the population’s hardships. Additionally, as businesses have crumbled under the pressure of sanctions, the IRGC has acquired distressed companies and assets at discounted prices, further expanding its financial grip.
As reflected in frequent announcements from the US Treasury’s Office of Foreign Assets Control regarding sanctions breaches and new targets, Iran’s Ministry of Defense and Armed Forces Logistics (MODAFL) and the Islamic Revolutionary Guard Corps (IRGC) continue their sanctions-evasion efforts through an extensive shadow banking network.
Corruption and Economic Mismanagement
A significant factor compounding Iran’s economic decline is corruption. Transparency International ranks Iran 149th out of 180 countries on its Corruption Perception Index, underscoring the extent to which state resources are misallocated. Smuggling and mismanagement have also severely impacted critical sectors, including healthcare.
Drug shortages, for example, have become widespread, with hundreds of essential medicines in short supply. Iran’s healthcare system, already battered by sanctions, is further compromised by smuggling networks and a lack of transparency in the procurement of medical supplies. The resulting inefficiencies make life increasingly difficult for the average Iranian, as living standards continue to erode.
Over the past decade, Iran’s economy has defied predictions of collapse by adapting to sanctions. Iranian manufacturers found new suppliers for critical parts, often sourcing European goods through third countries, notably the United Arab Emirates (UAE), while also turning to China for technology and machinery.
Although finding new markets was a challenge, Iran succeeded in increasing non-oil exports to neighboring countries like Iraq, the UAE, and Afghanistan, helped by sharp currency devaluations that made its goods more attractive in the region. Yet, while Iranian exports increased, ongoing banking restrictions and ineffective customs systems remained significant obstacles to further growth for businesses in Iran.
Despite regional trade being a rare bright spot, Iran’s manufacturing sector faces significant challenges. Sanctions have reduced investment and hampered the transfer of necessary technological advancements, leaving Iranian manufacturers at a disadvantage. While the sector remains productive, the goods produced are often outdated, inefficient, and priced higher than they should be, reflecting the country’s lack of competitiveness.
Moreover, Iran’s industrial capacity, particularly in mining and steel, has grown due to domestic demand driven by sanctions. However, these industries remain vulnerable to global economic shifts, especially as China’s overcapacity introduces new competition into the market. While Iran has managed to grow its local industries in response to sanctions, the long-term outlook suggests stagnation due to the lack of investment and technology transfers.
Geopolitical and Trade Realignments
Iran has been working to break its economic isolation by pursuing new partnerships with non-Western powers. In 2023, it joined the Shanghai Cooperation Organization (SCO) and in August announced it had accepted an official invitation to become a member of the BRICS group of emerging economies. These alliances signal Tehran’s desire to reorient its economy toward the East, particularly as relations with Western nations remain strained.
Tehran has also attempted to de-escalate tensions with regional rivals, such as Saudi Arabia. In March 2023, Iran and Saudi Arabia agreed to a Beijing-brokered rapprochement, signaling the beginning of a détente process. Iran has also benefitted from a “non-agreement” with the US, which has allowed it to repatriate funds and export more oil. However, the long-term benefits of these geopolitical maneuvers remain uncertain, especially as expected investments from these diplomatic breakthroughs have yet to materialize.
During his inaugural press conference as president, Pezeshkian remarked pointedly, “Those guys sanctioned us,” he said, referring to the West. “These guys helped us,” referring to Russia and China.
Yet, Iran has grown frustrated with China’s unfulfilled investment promises, particularly in energy and agriculture. Sinopec quietly terminated its contract to develop the second phase of the Yadavaran oil field, citing low returns. While China buys most of Iran’s oil, it pays about 10% less than for Russian crude, and 30% below global market prices. Payments are made in nonconvertible yuan, forcing Iran to purchase Chinese goods. And Iranian consumers face limited options and higher prices, with some Chinese products, like cars, costing three times more in Iran than elsewhere in the Gulf, despite lower purchasing power.
Despite growing economic cooperation between Iran and Russia, their partnership faces significant challenges. Both nations, as major oil and gas exporters, inevitably compete for market share. Russia’s steep discounts on crude oil following the Ukraine war have undermined Iran’s position, particularly in Asia. Competition has also spilled over into the steel industry, where Russia has eroded Iran’s market share in key buyers like Thailand and South Korea.
Conclusion: A Path with No Clear Exit
Iran’s economy is, in many ways, past the point of no return. It has managed to survive the immense pressure from sanctions, but survival alone has not addressed the deeper structural problems. Inflation, corruption, and economic mismanagement, combined with the geopolitical isolation imposed by the West, continue to limit Iran’s economic prospects. Although the country has pivoted toward Russia, China, and other non-Western blocs, this strategy has yet to yield significant investment or growth.
In its July report, the World Bank noted that Iran’s economy is expanding for a fourth consecutive year, supported by the recovery in the oil sector despite continued economic sanctions. However, the reliance on oil revenue for this recovery indicates that Iran’s economic resurgence may be short-lived. Beneath these headline numbers lies an economy grappling with deeper issues and an unsustainable dependence on external factors.
As the US and EU considered fresh sanctions this past April, Iran emphasized its resilience to Western pressure. Oil Minister Javad Owji announced that oil exports in 2023 had surpassed all levels in the past six years, earning more than $35 billion. He told the Financial Times that, although adversaries aimed to block Iran’s oil trade, “we are now able to export oil to any destination, with minimal discounts.” Yet, as Iran’s government touts its resilience, the reality on the ground tells a different story —one of an economy that is stagnating, unable to provide for its people, and increasingly dependent on a narrow set of international partners.
On November 6, 2024, Iran’s currency, the rial, fell to a historic low after Donald Trump was re-elected US president, signaling new challenges for Tehran as its already struggling economy is expected to face further punitive measures. However, as this analysis demonstrates, the roots of Iran’s economic troubles go far beyond the suffocating effects of American sanctions. Without meaningful reforms, Iran’s economic path will remain fraught with uncertainty and hardship, exacerbating the social tensions already bubbling beneath the surface.