For Iran and the United States, August 24 was Groundhog Day. “We are launching an economic onslaught against Iran’s financial connections around the globe,” declared U.S. Treasury Secretary Scott Bessent. “Our objective is to sever every economic lifeline that sustains this tyrannical regime.” It was the same promise he made in April, when he said that the United States was “imposing a financial stranglehold on the Iranian regime” under what the White House called Operation Economic Fury. It was also akin to the May 2018 rollout of the first Trump administration’s “maximum pressure” campaign, in which Secretary of State Mike Pompeo announced that Iran would be targeted by the “strongest sanctions in history.” And it sounded like U.S. President Barack Obama’s promise, made in 2012, that the Iranian government was to face “even more crippling sanctions.”
The Iranian economy has certainly felt the effects of all the successive restrictions. Ever since U.S. President Donald Trump’s first term in office, the country has experienced little growth and high inflation. As a result, Iranian firms have built less infrastructure and adopted fewer new technologies compared with peers in other developing economies. Iranian households, once increasingly affluent, are now at risk of falling below the state’s poverty line.
Yet for the better part of a decade, Iran has been able to resist U.S. economic coercion. Until the recent blockade, it used sanctions-evasion techniques to continue oil exports to its key customer, China. Its non-oil industries also adapted to the sanctions, as currency devaluation reduced competition from imports and made Iranian products more competitive in regional markets, boosting exports. Iran thereby avoided the kind of runaway economic collapse seen in other sanctioned countries, such as Syria and Venezuela.
Today, war is testing the resilience of the Iranian economy in ways that sanctions alone could not. Numerous U.S. and Israeli airstrikes have targeted critical industrial facilities, including some of Iran’s most important steel and petrochemical plants. The damage sustained during these attacks has led to major production outages for key industrial goods. The general decline in maritime traffic in the Strait of Hormuz and the specific disruptions caused by the U.S. naval blockade have not only reduced Iran’s exports; they have also throttled imports of much-needed capital and consumer goods. According to a July estimate by the International Monetary Fund, Iran’s GDP is set to contract 5.4 percent this year after shrinking by less than half that over the previous 12 months. Year-on-year inflation climbed from 52.6 percent in December 2025 to 88.6 percent by the start of the summer. The value of the country’s currency has hit a record low of over two million rials to the dollar.
But even as the country’s economic situation is getting worse, Iran’s leadership remains able to resist the coercive effects of sanctions than it might appear. The state of the economy is not yet impinging on Iran’s ability to wage war. Stockpiles of various goods remain deep, thanks to years of sanctions experience. And the Iranian state, with its powerful repressive tools, has figured out how to offload much of the economic pain onto ordinary Iranians while making sure its own needs are met. Trump’s approach, in other words, can certainly immiserate most of the country’s people. But it cannot successfully strangle the Islamic Republic itself.
ANATOMY OF A CRISIS
Iranian officials have acknowledged the country’s economic difficulties. “No matter how strong we are militarily, if the people are hungry and we do not have financial circulation, economic growth and domestic production, we will not endure,” declared Mohammad Bagher Ghalibaf, the speaker of Iran’s parliament and a key power broker, on August 21. (Bessent cited this quote as evidence that U.S. economic warfare was having its intended effect.) During a television interview last week, Iranian President Masoud Pezeshkian expressed frustration that some of his fellow political leaders continue to deny that sanctions are harming the country. “Some say sanctions have no effect at all; I really don’t know what to say to those people,” he remarked.
The statements from Ghalibaf and Pezeshkian reflect genuine concern about Iran’s economic trajectory. The speaker and the president are understandably worried about deteriorating public opinion, given the inherent connections between general economic welfare and political legitimacy. But U.S. officials should be wary of overinterpreting these statements. Contrary to what it might seem, neither leader is suggesting that the country’s economy is on the brink of collapse.
American assessments of the Iranian economy and the success of economic coercion fail to account for the ways in which sanctions have transformed Iran’s political economy, altering the distribution of economic resources in ways that reinforce its existing power structure. The Iranian leaders who are most vocal about the suffering of ordinary people are not worried about the country’s imminent economic collapse; they are dissenting against a political consensus that has long enabled Iranian elites to deliberately push the pressure of sanctions onto ordinary people. In other words, Ghalibaf and Pezeshkian are complaining about the social costs of a policy response that has worked largely as intended.
Perhaps more important, U.S. assessments of the Iranian economy miss important dynamics. Typically, the effects of sanctions are described in terms of macroeconomic indicators, including rates of growth, inflation, and currency depreciation. But these measures mainly capture price levels: the value of goods and services. They provide, in other words, a financial—not a functional—view of the economy. To take a functional view, one must look at the dynamics at the firm and household level; they reveal why deteriorating figures in the headlines have not led to Iran’s capitulation.
Iranian officials pushed the pain of sanctions onto households and firms.
The fundamental dilemma for policymakers in any comprehensively sanctioned country is how to respond to balance-of-payments vulnerabilities, such as when a country runs out of the foreign currency it needs to pay for imports. There are, broadly speaking, two approaches. Policymakers can use expansionary monetary policy to fuel investment, restoring the trade surplus through a combination of higher exports and increased domestic production. Alternatively, policymakers can use monetary tightening and austerity measures to suppress import demand, restoring the trade surplus at similar export levels.
When faced with major sanctions after invading Ukraine, Russian policymakers took the first approach. They increased fiscal stimulus, driving a rapid expansion in industrial activity and manufacturing employment that created a distinct war economy. This spending was necessary to increase military production, but it also had the effect of dramatically tightening the labor market, raising real wages for ordinary Russians. That, in turn, blunted the initial effects of sanctions-related inflation. This approach eventually reached its limits, and inflation is starting to bite, but the economic strategy allowed Russia to persist in its war aims despite U.S. sanctions pressure.
Iranian officials, by contrast, chose the second course of action. When major financial and energy sanctions imposed by the Obama administration first pushed Iran into a recession in 2012, Supreme Leader Ali Khamenei called for Iran to adopt a “resistance economy,” focusing on domestic capacities to counteract the sanctions pressure. But Iranian economic policymakers never managed to implement a new industrial policy or set up a new welfare system. Instead, they tolerated inflation, effectively pushing the pain of the sanctions away from the government and onto households and firms. They ran austerity budgets and refused to rationalize production or consumption through direct administration, such as by instituting quotas or price controls. The worsening economic crisis led to weakness in the labor market, allowing employers to engage in wage repression and leading to further pressure on household incomes.
At first, this may seem like a policy failure. But in reality, Iranian authorities appear perfectly content to see economic activity slow. Doing so, they believe, will give them staying power in their confrontation with the United States.
GOOD TIMES, BAD TIMES
Microeconomic data reveal the effects of U.S. pressure on economic activity at the firm and household level. A review of Purchasing Managers’ Index data compiled by Iran’s Chamber of Commerce makes clear how the country’s economic crisis has intensified. Between 2019 and 2023, Iran’s overall economy was in contraction for two-thirds of the period thanks to Trump’s initial maximum pressure sanctions, the COVID-19 pandemic, and disruptions related to the “Women, Life, Freedom” protests. But throughout this period, Iranian non-oil industries experienced modest growth. At the start of 2023, Iran even began to exit its long recession as the overall economy and the industrial sector grew in tandem. By March 2024, living standards were beginning to rise again, buoyed by a roughly 15 percent increase in real incomes.
This recovery was derailed by the April 2024 Israeli airstrikes on Iran. Since then, the economic uncertainty associated with recurring military conflict has triggered a prolonged decline in industrial activity, pushing Iran into an even deeper recession. Industrial firms have reported deteriorating conditions for eight consecutive months. But that does not mean these firms are insolvent. Over the last two decades, Iranian companies have developed a practice of maintaining large inventories. This practice allows firms to mitigate the effects of sanctions on supply chains and helps shore balance sheets in a high-inflation environment in which cash loses its value but goods do not. According to filings made by companies listed on the Tehran Stock Exchange, the average “days inventory outstanding” level among Iranian industries is around three months. In sensitive sectors such as electrical machinery, which has been heavily targeted by U.S. restrictions, firms maintain inventories as high as 200 days.
These large inventories have been a source of significant economic resilience during the war. Iranian supply chains came under strain as ship traffic through the Strait of Hormuz dwindled. A shift toward overland trade could not compensate for the loss of container traffic through Iran’s southern ports. But with an ample inventory of raw materials, semifinished goods, and finished products, Iranian producers could keep customers supplied—or at least customers with the means to pay.
Tehran has accepted inflation as a necessary evil to maintain its own spending.
Firms kept raising prices to protect their margins, passing higher input costs onto consumers. And as the war continued, these higher prices led to demand destruction. Iranian households, embattled by years of persistent inflation, began to consume less. When they did buy, they increasingly relied on consumer credit, including new buy-now-pay-later schemes and informal loans. Even in special categories such as food, Iranian retailers reported diminished sales volume.
The sharp drop in household consumption is clear evidence that economic welfare in Iran is declining. It is why Iranian officials have been forced to acknowledge the pain felt by ordinary people. But even so, the government has thus far failed to intervene to control rising prices. Not only have officials failed to introduce price controls—a move that successfully blunted the economic pain associated with the Iran-Iraq War 40 years ago—they have also discussed the elimination of cash transfers and energy subsidies for large portions of the population. In this respect, demand destruction has acted as a form of rationing, providing a structured way for Iranian political and economic elites to push the costs of the war and sanctions onto ordinary people. Although the government continues to face significant fiscal pressure, it has accepted inflation as a necessary evil to maintain its own spending. With a monthly inflation rate of under ten percent, Iran is still a long way from the kind of hyperinflation—typified by monthly inflation of over 50 percent—that will make the government’s strategy untenable.
Meanwhile, reduced economic activity has provided buffers for the real economy. In financial terms, the Iranian economy is in a worse position than at the outset of the war, but in functional terms, inventory levels are unchanged from December 2025, and supply and demand may find a new balance at a lower level of overall economic activity. Iran’s foremost vulnerability to sanctions and the blockade remains its persistent need for imports, which totaled $17 billion in the first five months of this Iranian calendar year beginning in March. That means imports will likely total around $40 billion by the end of the year, down significantly from $58 billion in the previous year and $72 billion in the year before that. The fall in import demand, driven by inflation and currency devaluation, is evidence of a deeper economic crisis. But in the near term, it will help Iranian policymakers forestall a wider economic collapse, possibly for several years.
LOW POWER MODE
When Bessent evoked the imagery of an “economic D-Day” in his August press conference, he failed to consider who is standing on the other side of his planned invasion. Although it may not seem like it, the success of Iranian authorities in transferring the costs of both sanctions and the war onto ordinary people represents a form of wartime mobilization. Ordinary Iranians may not wish to be mobilized in this way, but they do not have a choice.
In a recent social media post, Trump asked, “When are the Iranian people going to rise up and fight?” But even if ordinary Iranians were to take to the streets again to protest the financial repression they are enduring, they would once again face the brutal violence of the Islamic Republic. With multiple repressive tools at their disposal, many Iranian leaders believe that the country’s population can be made to tolerate more pain, especially if it is necessary to defeat the United States militarily. To prevail in its economic war, the Trump administration will thus need to asphyxiate 25 million households and more than one million firms. But as breathing slows in parts of Iran’s economy, ample oxygen will remain for the country’s elite.
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