LONDON: Even before the outbreak of the latest war, Iran was in deep economic trouble.
In the immediate aftermath of the 12-Day War in June and July last year, during which the US and Israel struck Iranian nuclear facilities, an analysis by independent nonprofit Iran Focus laid bare the reality of what it called “the crippled economy of Iran.”
Over recent years, it reported, Iran’s economy has faced a series of “complex crises, any one of which could destabilize an entire economic system.
“From energy imbalances and international sanctions to unstable domestic policies and stagflation, all these challenges have severely disrupted (Iran’s) supply chain, production, and foreign trade.”
The knock-on effects have been considerable. Shortages of gas and electricity, for example, have impacted energy-intensive industries such as steel, cement, and petrochemicals.
Even before the 2025 war, the economy had been dealt a series of blows by the years-long international sanctions regime.
A destroyed vehicle amid rubble at the site of a strike on a residential building in Tehran, Iran, March 16, 2026.(WANA/Reuters)
Analysis of customs reports showed that in the spring of 2025 alone, the value of non-oil exports had fallen by 14.4 percent, while the volume of petrochemical exports fell by almost 30 percent.
Imports were also down, while Iran’s forced focus on Asian trade partners “and a $1.374 billion non-oil trade deficit have increased pressure on foreign currency reserves and fuelled inflation.”
Under the current regime, Iran Focus concluded: “Iran’s economy is trapped in a vortex of domestic and international crises. Energy imbalances, sanctions, unstable policies, and stagflation have paralyzed supply chains and trade.
“The decline in exports, reduced competitiveness, and trade deficits are clear signs of a bleak future, unless the regime is replaced with a government that serves the people’s interests.”
The latest outbreak of war, which began on Feb. 28 when the US and Israel mounted fresh strikes on Iran, has made matters far worse.
Iran effectively closed the Strait of Hormuz, through which some 20 percent of the world’s energy passes, hoping to leverage the resulting global economic pain to force a halt to US-Israeli attacks.
After ceasefire talks in Pakistan collapsed, President Donald Trump announced that the US Navy would blockade vessels entering or leaving the strait, saying the move was meant to force Tehran to reopen the waterway.
The economic viability of Iran’s resistance is facing an unprecedented existential threat due to the US naval blockade of the strait, which accounts for over 90 percent of Iran’s $109.7 billion in annual trade.
In an April 12 thread posted on X, Miad Maleki, a senior fellow at the Foundation for Defense of Democracies, said he expected the blockade to inflict $435 million in combined daily economic damage, totaling roughly $13 billion per month.
A shopkeeper works in his shop in Tehran Bazaar. (WANA/Reuters)
With oil and gas representing 80 percent of government export earnings, the neutralization of key hubs like Kharg Island — which handles 92 percent of crude exports — effectively zeroes out $139 million in daily revenue overnight.
This is compounded by the loss of nearly $54 million a day in petrochemical exports and $79 million in non-oil goods, for which no viable overland alternatives exist.
Beyond immediate revenue loss, the blockade creates a catastrophic “storage clock” for Iran’s energy infrastructure. With only about 20 million barrels of spare onshore storage capacity and a surplus production of 1.5 million barrels per day, the nation’s tanks would fill in just 13 days.
Once storage tanks fill up, Iran would have no choice but to stop pumping oil from some of its older fields. That might sound temporary, but it can cause lasting damage underground. When production stops, water that naturally sits below the oil can push upward into the well — a problem known as “water coning.”
Once this happens, the oil becomes much harder, sometimes impossible, to extract because it gets trapped in the tiny pores of the rock. The result is not just a short-term disruption but a permanent loss of output. In Iran’s case, this could wipe out as much as 500,000 barrels per day of future production capacity — equivalent to roughly $15 billion in lost revenue each year that cannot be recovered.
On the domestic front, the blockade is pushing an already fragile economy toward terminal hyperinflation.
With the rial having cratered to 1.3 million per dollar and food inflation hitting 105 percent as of February 2026, the total loss of foreign exchange earnings leaves the regime with few levers to pull.
Infrastructure outside the strait, such as the Jask bypass and the Caspian ports, can replace less than 10 percent of the Gulf’s throughput. As the regime issues 10-million-rial banknotes worth only $7, long-term economic endurance appears increasingly impossible.
The state bank building burned during Iran's protests, on a street in Tehran, Iran, January 19, 2026. (WANA/Reuters/File)
“The blockade makes continued resistance economically impossible,” Maleki said.
Sensing Iran will be unable to hold up for long, influential Iranians are calling for compromise.
Continuing to fight the US and Israel “might be psychologically satisfying,” former Vice President Mohammad Javad Zarif wrote in Foreign Affairs on April 3, “but it will lead only to the further destruction of civilian lives and infrastructure,” including “vital pharmaceutical, energy, and industrial sites.”
To prevent further degeneration, Zarif argued it was time for Tehran to “offer to place limits on its nuclear program and to reopen the Strait of Hormuz in exchange for an end to all sanctions.”
Internal divisions are also surfacing. Reports emerged in February of fractures within the country’s parliament over the withering economy. One member of the Islamic Consultative Assembly reportedly raised concerns that foreign currency revenue was remaining in the hands of “a few hundred major exporters.”
Hossein Samsami, an economist, claimed that between 2018 and February this year, foreign currency worth about $85 billion had not found its way into the state’s treasury.
INNUMBERS
• $435m Economic damage inflicted by US naval blockade per day.
• 1.3m Value of the Iranian rial against the US dollar.
(Source: FDD)
Samsami asked: “Do the country’s executive officials know where the economy and people’s livelihoods are heading now?”
State policies had led to “an increase of 30 percent to 50 percent in nearly all goods, from detergents to hygiene products, various beverages, motor oil, car tires, automobiles, and construction materials.”
Samsami also suggested that exchange rates unfavorable to the Iranian economy were being determined, in effect, by players in foreign markets including Sulaimani (in the Kurdistan region of Iraq) and Herat in Afghanistan.
The country’s exchange rate, he was reported as saying, “is practically determined by a few individuals across the borders, and the entire ruling establishment adapts itself to it.”
Despite the suffering, Sanam Vakil, director of the Middle East and North Africa program at Chatham House, says the regime is unlikely to be moved by economic logic.
“This is not about economic sustainability — it’s about regime survivability,” she said. “Because the regime sees this war as existential, they have no choice but to prolong the conflict in order to achieve their objectives, which are primarily directed to the survival of the Islamic Republic.”
The B1 bridge in Karaj was damaged by a strikes. (WANA/Reuters)
Vakil notes that any short-term “windfall” from higher oil prices or tolls “is not enough to lead to growth or some kind of massive turnaround in the Iranian economy.”
Besides, “the economic cost of the war is huge, when you consider the reconstruction effort that will need to be pursued. Without a doubt, there is going to be a huge bill and a contraction of Iran’s GDP.”
And no matter how long the war drags on, Iranians are unlikely to “forgive and forget” the actions of a regime which in January responded to nationwide protests sparked by economic grievances by killing thousands of people who took to the streets.
“It is really way too early to know what the protest impact will be,” said Vakil, on how the war might have shaped public attitudes to the regime.
“But I don’t think that because Iranians might be angry at how the US has executed this war that that’s going to erase their grievances with the Islamic Republic. Those grievances are still very much there.”
For the regime, she added, “the biggest challenge will come when the war ends, in terms of reconstruction, rehabilitation — if you can even think about that — and the economy.”
In an analysis published last week by the UK’s Royal United Services Institute, senior research fellow Burcu Ozcelik agreed that “the real test for Iran comes after the war.”
Vendors sit at their shops selling jewellery and accessories at Grand Bazaar, in Tehran, Iran, April 13, 2026. (Reuters)
The postwar picture in Iran, she wrote, “is likely to be shaped not only by military losses or retained offensive capabilities, but by something less visible in the short term.
“The scale of damage to economic infrastructure, the burden on industrial recovery, and the future of Iran’s access to the regional financial and commercial environment that has helped it absorb pressure until now.”
She added: “The economic consequences of the war, whether debilitating or, under a negotiated settlement, partly reversible, may prove more consequential than the military phase itself.”
Iran’s attacks on its Gulf neighbors are also likely to have dire long-term consequences for the country’s economy.
Thousands of Iranian traders and businesses are based in the UAE and, said Vakil, “the role of the UAE in particular, in providing a very important re-export market for Iran to survive sanctions, will certainly not be the same.
Emergency personnel work amid rubble in the aftermath of a strike on a building in Tehran, Iran, March 12, 2026. (WANA/Reuters)
“There will be no snap-back to the status quo, I think, for the UAE, and again this speaks to the existential nature of this war for Iran, where they’ve had to really burn bridges.
“I personally think it will be very hard for them to recover from this retaliatory option that they’ve pursued against the Gulf states.”
Ozcelik agrees that “one of Tehran’s most immediate post-war constraints will be the need to repair relations with the Gulf states.”
Of key importance, she added, “is the financial environment — particularly centred in the UAE — that facilitated Iran’s financial lifelines despite sanctions.”
Prior to the war, the UAE was central to Iran’s trade. In April 2024 Reuters reported that in the fiscal year ending March 2024, Iran imported $20.8 billion of goods from the UAE, making it Iran’s top source of imports.
The UAE was also Iran’s third-largest export destination, importing $6.6 billion worth of goods from its neighbor on the far side of the Gulf.
Ironically, the Iranian Business Council in Dubai says on its website that its mission is to “fortify the economic, cultural and commercial connections between Iran and the UAE” and to “enhance Iran’s reputation” across the UAE.
In the wake of the Iranian bombardment unleashed on Dubai and other cities across the Gulf over the past month, that now seems increasingly like a mission impossible.
