One of the great mysteries surrounding the U.S. Iran war is why the economic toll from the months-long assault on Tehran has not compelled that country to make peace. Iranian officials estimated in April that U.S. and Israeli strikes had caused 270 billion dollar worth of damage to Iranian infrastructure. Iran had to borrow heavily from the central bank to keep fighting.
Inflation is expected to rise, and it was already at more than 40 percent last year. Ordinary Iranians are undoubtedly suffering. How has the country then not been brought to surrender by now? Part of the reason is that nations are not moved by economics alone.
Nationalism, dignity, pride all play their part. But it is also worth noting that Iran’s economy, as strained as it has been by decades of sanctions and now the war, has nonetheless been surprisingly resilient. For all the perceptions of Iran as an economic basket case, for all the real pain inflicted, it is also true that Iran is one of the region’s more diversified, functioning industrial economies.
Iran borders seven countries and can trade over land. It also has several ports, some of which have been operational even during the war. Iran exports more than just oil.
Protectionist policies and entrepreneurship have fostered booming industries such as steel, petrochemicals, iron, and food products. Iran has adapted to international sanctions by producing more of what it needs at home, including cars, pharmaceuticals, and home appliances. These goods are not always internationally competitive, not by a long stretch, but they do cater to local demand, and that helps the country during wartime as well.
And as for the oil, the Wall Street Journal reports that an increasing number of transactions are taking place, but in Chinese yuan rather than dollars, helping Iran evade sanctions. In 2024, Iran earned an estimated 43 billion dollars in revenue, and the journal found that most of the sales were made in yuan. Iran also uses cryptocurrency to evade sanctions, which is similarly hard to track.
And it’s crucial to understand that Iran’s elite directly benefits from the way the economy works right now, that is, in an opaque system controlled by shadowy interests, including the country’s clerics and its Islamic Revolutionary Guard Corps, the IRGC. As Kehan Valadbeghi writes in Phenomenal World, after the Islamic Revolution, the government seized elite assets and distributed them into two camps. Some, like banks, insurance companies, and heavy industries, were nationalized and run directly by government ministries.
Others, including the Shah’s foundations, were distributed to social organizations known as banyards, which answered to the clerics. The banyards headed reconstruction and relief efforts surrounding the Iran-Iraq War in the 1980s and grew into sprawling conglomerates over time. Many of the nationalized industries were eventually privatized, and many of those companies ended up in the hands of the IRGC, Valadbeghi writes.
Today, the IRGC’s commercial interests span Iran’s shipping, construction, oil, carmaking, and telecom industries. And as Reuters notes, sanctions have reinforced the Revolutionary Guard’s control of the economy because it facilitates clandestine exports and trade through intermediaries and shell companies. In other words, they control the smuggling.
It is now estimated that the IRGC and the banyards control more than 50 percent of Iran’s economy. And as Reuters notes, whenever postwar reconstruction is attempted, the Guard Corps will be a main beneficiary because of its dominance in construction and engineering. Iran’s economy has, of course, operated at the expense of ordinary citizens.
But there are millions of people who benefit from proximity to the regime. As the Journal reports, members of the volunteer paramilitary force, the Basij and the IRGC, can enjoy positions in government-linked companies or access to cheap loans. One of the many problems with Donald Trump’s approach to Tehran is that he acts as though he’s dealing with the straightforward imperatives of a normal market economy.
But Iran’s economy is dominated by a web of perverse incentives. Sanctions and isolation are bad for the country, but they are good for its rulers.
