The Iranian economy has reached a threshold where foreign policy no longer explains the magnitude of the catastrophe. Sanctions, war, strikes on infrastructure, and international isolation have undoubtedly dealt a heavy blow to the country. However, the Islamic Republic's primary problem lies deeper. It is found not only in external pressure but in the structure of the system itself, which for decades has consumed resources, destroyed incentives, subsidized inefficiency, masked corruption with ideology, and turned the state into a mechanism of constant overspending.
Even if one imagines the most favorable scenario for Tehran - a rapid end to the war with the US, de-escalation with Israel, partial or even broad lifting of sanctions, and the unblocking of some foreign assets - it would not return Iran to sustainable growth. This is because the war struck an already diseased organism. Prior to the strikes on domestic targets, Iran was already living under conditions of shortages in water, gas, electricity, foreign currency, investment, trust, and managerial competence.
Preliminary estimates of the damage from the US-Israeli campaign reach 270 billion dollars. This amount is five times higher than the Iranian state budget revenues for the 2024-2025 fiscal year, which were estimated at approximately 50 billion dollars. It is also comparable to the country’s pre-war GDP, which stood at about 475 billion dollars according to the latest available World Bank data.
But the most terrifying reality for Tehran is not just the physical destruction. It is that reconstruction will require the very resources Iran lacks: capital, technology, trust, effective governance, and political predictability.
A Country Where Everything Is Already in Short Supply
Iran's crisis did not begin with the war. The war merely blew the lid off a cauldron that had been boiling for a long time. Even before the strikes on infrastructure, the country faced a systemic crisis of basic resources. Water, electricity, gas, and gasoline - everything that should serve as the foundation of a normal economy - became chronic problems.
In November 2025, President Masoud Pezeshkian effectively admitted that the water crisis had reached the level of a national threat. He stated that if the situation worsened further, it might become necessary to evacuate Tehran. For a country that for decades took pride in its engineering projects, dams, and massive state intervention in natural resource management, this sounded like a death sentence.
For too long, Iran pretended that water could be replaced by slogans and climate risks by administrative decisions. Years of consumption growth, irrational agriculture, inefficient irrigation, and politically motivated dam construction led to a situation where the latest drought turned from a seasonal issue into a systemic collapse.
Parallel to this, the country plunged into energy instability. Residents of major cities regularly faced multi-hour power outages, often without warning. Ahmad Moradi, a representative of the parliamentary energy committee, estimated the power system's capacity deficit at 20,000 megawatts. The reasons were stated directly: a lack of generation, problems at power plants, and the deterioration of transmission lines.
This is no longer a temporary failure. This is infrastructure degradation. When generators begin to be installed en masse in residential buildings so that people do not get stuck in elevators during blackouts, it means the state energy system has ceased to perform its basic function.
A Gas Power Without Enough Gas
The most painful paradox of Iran is that a country with vast reserves of natural gas is unable to provide its own economy with stable supplies. According to the Statistical Review of World Energy 2025, natural gas accounts for about 69% of Iran's energy mix. This is one of the highest figures in the world, with higher dependencies found only in Turkmenistan and Uzbekistan. For comparison, while gas's share in Russia's energy mix is also large, it is lower - at about 54%.
Such a structure makes Iran extremely vulnerable. Gas is needed for electricity generation, industry, heating, and the municipal sector. But in winter, demand rises sharply, and the country lacks sufficient seasonal gas storage infrastructure to compensate for peak loads.
As a result, every winter Iran faces the same scenario: a gas shortage, the shutdown of various industrial enterprises, supply disruptions, reduced wages for workers, and rising social tension.
This is not an accident. It is the price of a multi-year policy of artificially depressed domestic energy prices. Cheap gas stimulated excessive consumption but failed to provide the sector with funds for modernization. Companies did not pay their bills, infrastructure aged, investments were deferred, and the state continued to buy social peace at the expense of the future.
Pezeshkian’s remark that people should dress more warmly when the threat of residential gas shutoffs arose became a symbol of managerial helplessness. The president of a country with gigantic gas resources effectively suggested that the population save themselves with a sweater.
Fuel Oil Instead of Modernization: How the Energy Crisis Poisons the Air
When power plants do not receive enough natural gas, they switch to heavy fuel oil. This decision may temporarily support electricity generation, but it hits cities, public health, and quality of life.
Iranian metropolises are already paying a heavy price for this. Air pollution in winter months reached such levels that schools had to be closed for weeks. In some cases, there were forced breaks of more than 50 days.
It looks like a vicious cycle. The state keeps energy prices low to avoid protests. Cheap energy fuels overconsumption. Overconsumption destroys the system's balance. The system lacks the funds for modernization. In times of shortage, fuel oil must be burned. Fuel oil pollutes the air. Pollution paralyzes cities, schools, and economic activity.
And all of this is happening in a country that claims the status of a regional power.
The Gasoline Trap: Why Cheap Fuel Became an Expensive Disaster
Iran’s problems are not limited to gas and electricity. Even in an oil-rich country, gasoline has become a heavy budgetary burden.
Each year, Iran spends about 6 billion dollars on gasoline imports. There are two reasons: excessive domestic consumption and smuggling. Meanwhile, authorities continue to maintain extremely low fuel prices within the country, fearing a repeat of the 2019 protests, when a rise in gasoline prices became the trigger for mass discontent.
Politically, this is understandable. Economically, it is destructive.
Cheap gasoline turns into a hidden form of bribing society. The state buys short-term stability but pays for it with budget degradation, rising deficits, and the loss of resources for energy, water supply, transport, and industry.
The president proposed raising prices, but even the level under discussion was less than 5% of the prices in neighboring countries. With such a difference, smuggling becomes not an anomaly, but almost a built-in element of the economy. If a product inside the country costs several times less than abroad, it will inevitably begin to leak through shadow channels.
The Iranian Navy and the IRGC regularly intercept vessels carrying illegal gasoline. But intercepting individual ships does not change the core issue: the pricing system itself creates the incentive for smuggling.
GDP in Decline: War Has Only Accelerated What Had Already Begun
Until recently, Iran was still able to demonstrate moderate economic growth. According to the International Monetary Fund, between 2020 and 2024, the country’s GDP increased by an average of 4.4% per year. On paper, this looked better than the performance of the US and Europe during the same period.
However, this growth proved fragile. It was not accompanied by quality infrastructure modernization, the strengthening of institutions, an influx of investment, or improved management efficiency. It was growth driven by adaptation to sanctions, the expansion of shadow export schemes, internal subsidies, and the gradual depletion of legacy capital.
In 2025, Iran’s GDP contracted by 1.5%, according to IMF estimates. For 2026, even before the start of the US-Israeli campaign, an additional decline of 6.1% was projected. Following strikes on industrial, transport, petrochemical, and metallurgical infrastructure, the downturn could exceed 10%.
Iranian authorities estimate the damage from US and Israeli strikes at 270 billion dollars, excluding the destruction of military sites. Industrial facilities, logistical hubs, bridges, and elements of the transportation system have been damaged. This means the economy is losing not only current output but also the ability to quickly restore production chains.
History does provide examples of countries that recovered faster than expected after wars. But such nations typically possessed either strong institutions, access to foreign capital, international support, or a clear reform strategy. Iran possesses none of these.
One Million Jobs Already Lost: The Situation May Worsen
In recent years, Iran managed to reduce unemployment from a peak of 14% in 2010 to approximately 8% in 2025. Yet, behind these figures lay a demographic quirk: a sharp decline in the birth rate during the 1990s resulted in fewer young people entering the labor market.
Now, the war is changing the landscape. Estimates suggest that at least 1 million jobs have already been lost directly due to combat and destruction. The government is discussing small business grants and bank loans for large enterprises to maintain employment. However, such measures can only bridge cash flow gaps for a few months; they cannot replace destroyed demand, disrupted logistics, or the collapse of business confidence.
Iranian economist Hadi Kahalzadeh warned that 10 to 12 million jobs - nearly half of the country’s workforce - could be at risk. If this scenario begins to unfold, it will no longer be just a recession. It will be a social crisis of national proportions.
Migration factors create additional pressure. Over the past year, at least 1.5 million Afghans have left Iran, yet approximately 2.5 million likely remain and provide a significant portion of the low-wage labor force. Amidst the crisis, demands to deport Afghans will intensify. However, a mass expulsion of this workforce would hit construction, agriculture, services, and the grassroots sector of the economy.
Another structural weakness is the extremely low participation of women in the workforce. It is estimated at about 10-12%, roughly three times lower than in Saudi Arabia. For an economy in need of human capital, this is a massive untapped resource. Yet, the regime’s political and social model prevents it from becoming a source of growth.
Oil Will Not Save the Day: Even Rising Prices Cannot Fill the Hole
At first glance, it might seem that rising oil prices should help Iran. The country continues to export about 1.5 million barrels per day, including stocks in floating storage off Asian coasts. But even additional oil revenues are incapable of covering hundreds of billions of dollars in damage.
Simple arithmetic is ruthless. If the destruction is valued at 270 billion dollars, then a few extra tens of billions from oil do not change the strategic picture. They may delay a financial collapse, support specific budget items, or cover part of import needs, but they will not rebuild infrastructure, renew the energy sector, or restore investor confidence.
The idea of using the Strait of Hormuz as economic leverage is also overestimated. Even if one imagines that Iran could charge 2 dollars for every barrel of oil passing through the strait, at a volume of 12 million barrels per day, this would yield less than 9 billion dollars a year. For an economy with 270 billion dollars in war damage, this is not a life raft, but an accounting illusion. Furthermore, Saudi Arabia and the UAE have pipeline routes that allow them to partially bypass the maritime path.
Oil Revenues Are Being Misdirected
Another problem for Iran is the lack of transparency in the oil sector. Formally, production is controlled by the state, primarily through the National Iranian Oil Company. However, exports are conducted through a network of intermediaries created to bypass sanctions. This network generates immense opportunities for corruption, embezzlement, and off-budget revenue distribution.
Part of the oil flows through structures linked to the IRGC and its allies. In such cases, revenue may not enter the state budget but go directly to the disposal of the Corps. This means that oil income does not always work for the country's economy; it works for the political and security architecture of the regime.
Officially, authorities claim that oil revenues are secondary to tax revenues, with each source contributing about 40-45% of the budget alongside the role of privatization proceeds. But the real picture is more complex because a significant portion of oil money moves through closed channels.
Iran today is indeed less dependent on oil than in the 1980s. In 1983-1984, oil accounted for 98% of the country's exports. In 2022-2023, non-oil exports, according to the Iranian Customs Administration, reached 53 billion dollars. This is higher than oil revenues.
But there is a caveat: non-oil exports include several billion dollars' worth of condensates, which are essentially petroleum products. Even after adjustment, the figure remains significant, nearly comparable to the 60 billion dollars in imports. However, this is insufficient for reconstructing the country after such destruction.
Lifting Sanctions Does Not Mean the Return of Investors
For years, Tehran has argued that it needs sanctions relief to restore its economy. There is some truth to this. Sanctions restrict access to capital, technology, banking settlements, and markets. But that is only part of the problem.
Even if Washington agreed to a massive easing of the sanctions regime, foreign investors would not rush into Iran. The reason is obvious: the business environment remains corrupt, opaque, politically risky, and associated with high compliance threats.
An investor looks at more than just the formal removal of restrictions. They look at the courts, property rights, currency risks, the ability to repatriate profits, the influence of security forces, third-party sanctions risks, the status of the banking system, and reputational threats. In the case of Iran, the list of risks is too long.
About 100 billion dollars in Iranian assets remain restricted due to US pressure and banking caution. Even if a portion of these funds were unblocked as part of an agreement regarding the Strait of Hormuz or the nuclear program, utilizing them would not be easy. Financial institutions avoid working with Iran due to risks of money laundering and terrorism financing highlighted by the FATF.
This means that Iran might gain a political concession but fail to secure a normal financial channel. Money may exist on paper but fail to transform into investment, equipment, and reconstruction.
Inflation as a Verdict on the Management Model
Iranian inflation is not solely a product of sanctions or war. Its root lies in monetary policy and chronic state overspending.
The Central Bank allows for rapid growth of the money supply. Banks lend to state projects. Authorities finance infrastructure initiatives, security force expenditures, gasoline subsidies, and other politically motivated programs through the banking system. In other words, the regime spends more than it earns, shifting the difference onto the population through inflation and devaluation.
Inflation is reaching approximately 40% per year. The free-market exchange rate shows the scale of the collapse in confidence in the national currency. Ten years ago, a dollar cost about 32,000 rials. At the end of February 2026, it was 930,000. Now, it is approximately 1.53 million rials. An average annual devaluation of 47% destroys savings, wages, investment plans, and social stability.
For the average person, this means one simple thing: they are becoming poor faster than the state can explain the reasons why.
Snapback is Not the Main Blow: The System Itself is the Primary Strike
Iran laments the restoration of UN sanctions following the activation of the "snapback" mechanism by European powers under the 2015 nuclear deal. Formally, this mechanism provided for the automatic return of restrictions if a participant declared that Iran had failed to meet its obligations.
However, the actual impact of these sanctions is limited. Iran already conducts very little trade with industrially developed nations. Prior to the snapback activation, Iranian imports to the EU totaled approximately 2 billion dollars annually, while EU exports to Iran were around 5 billion dollars. These are not the volumes that dictate the destiny of the Iranian economy.
Even trade with Russia, which Tehran labels a strategic partner, remains modest. Russian imports from Iran in 2023 amounted to about 700 million dollars, while exports to Iran were roughly 1.5 billion dollars.
This highlights a critical point: Iran's foreign policy rhetoric is far more expansive than its actual economic integration. The country speaks the language of a geopolitical power, but its trade figures demonstrate isolation, limitation, and structural fragility.
The IRGC, Subsidies, and Corruption: The Three Pillars of the Iranian Crisis
The Iranian economy rests upon three hazardous foundations:
First: The massive role of security structures, primarily the IRGC, in the economy. This creates a parallel resource distribution system where political loyalty outweighs efficiency, and closed channels take precedence over a transparent budget.
Second: Subsidies, particularly for energy. These allow for the temporary suppression of discontent, but simultaneously destroy incentives for conservation, provoke smuggling, and deprive the state of resources for modernization.
Third: Corruption and opacity. In a country where export schemes are forcibly hidden due to sanctions, corruption finds an ideal environment. Intermediaries, semi-state entities, paramilitary economic groups, and well-connected businesses turn the bypassing of sanctions into a source of enrichment.
This is precisely why even the removal of sanctions does not eliminate the problem. It may open a door, but behind that door, an investor will see not a reformed economy, but a system where rules shift, property is vulnerable, security forces are influential, and the state chronically spends more than it receives.
Why Peace Will Not Be a Salvation
Peace with the United States, if at all possible, would reduce military pressure. It could diminish the risk of new strikes, partially stabilize oil exports, and open space for negotiations regarding assets and sanctions.
But peace will not repair power plants. It will not rebuild bridges. It will not create gas storage facilities. It will not modernize the water system. It will not change the behavior of banks. It will not make investors forget about the FATF, the IRGC, and corruption. It will not lower inflation if the state continues to finance expenditures through bank credit. It will not stop devaluation if the people do not trust the national currency.
The fundamental error of the Iranian authorities is the belief that a foreign policy deal can replace internal reform. It cannot.
Iran requires more than just negotiations; it needs a complete reassembly of its economic model. It needs real energy prices, investment protection, an independent monetary policy, a reduction in off-budget spending, a limitation of the economic role of security forces, and the modernization of energy, water management, transport, and industry.
However, all of this requires political will, which the regime - judging by its actions - does not possess. Because genuine economic reform in Iran would inevitably strike the interests of those who have profited from the current chaos for decades.
A Country Losing Not Only a War, but Its Governance
The Iranian crisis cannot be reduced to a simple formula: "sanctions destroyed the economy." Sanctions dealt a heavy blow, but they do not explain everything. They do not explain why a gas power cannot manage a gas deficit. Why an oil country imports billions of dollars in gasoline. Why the capital could face evacuation due to water shortages. Why the power grid cannot withstand the load. Why inflation reaches 40% while the currency has been falling for decades. Why oil revenues partially disappear into closed security channels rather than national development.
The answer is unpleasant for Tehran: Iran is suffering not only from external pressure. It is suffering from its own design.
The US-Israeli campaign has caused immense damage. But the regime itself spent years preparing the ground for this vulnerability. It built an economy where political survival is more important than efficiency, subsidies more important than investment, security forces more important than the market, and ideology more important than competence.
Therefore, even immediate peace with the US would not be a salvation. It would merely halt one source of destruction. The primary source remains within the system itself.
Iran has entered a mode of self-destruction not because it lacks resources. It possesses oil, gas, an industrial base, an educated population, a strategic geographic position, and export potential. But all of this is devalued when the state cannot convert resources into development.
That is why today’s Iranian catastrophe is not just a story of war and sanctions. It is the story of a leadership that too long confused control with governance, mobilization with economics, and the survival of the regime with the survival of the country.