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Iran Economy Buckles Under US War Pressure But Avoids Collapse — AI-generated representative image: A woman shops at a Tehran grocery store as inflation nears 90 percent and food prices triple under US war pressure and sancti

Editorial Team

Inflation nears 90 percent and the middle class shrinks, yet diversified domestic production and informal trade networks prevent systemic breakdown

Five months of war with the United States have pushed Iran's economy to the brink, but the country of more than 92 million people has so far avoided outright collapse, according to economists and government officials. Inflation has soared to approximately 90 percent, food prices have more than tripled for staples such as meat, eggs and cooking oil, and the national currency continues to sink to new lows against the US dollar. Yet a combination of diversified domestic production, informal trade networks and state subsidies has prevented the kind of systemic breakdown that would constitute economic collapse.

The resilience of Iran's economy comes at an enormous human cost. Roughly 70 percent of the population now falls into the category of poor or vulnerable to poverty, a dramatic reversal from 2011 when the middle class formed the majority. The strain is being absorbed directly by households through inflation and currency depreciation rather than through a wholesale failure of the state to deliver basic services.

How the Economy Is Holding Together

Welfare economist Hadi Kahalzadeh, a non-resident fellow at the Quincy Institute, defines collapse as famine combined with the state losing its ability to pay employees and deliver basic services. By that measure, Iran has not reached collapse, and he does not believe the combination of war, blockade and sanctions will push it there soon.

The economy absorbs shocks primarily through inflation and currency depreciation, which preserves incentives to import and produce. Goods remain on shelves but become increasingly unaffordable. The government attempts to soften the impact through monthly cash subsidies and electronic coupons for essential goods, though the monthly minimum wage remains below $100.

Government spokeswoman Fatemeh Mohajerani confirmed on Tuesday that the government has belatedly paid designated shops under the coupon scheme, but stores have not received funds because several major banks remain disrupted following cyberattacks reported more than a month ago. She also detailed infrastructure losses from the latest US bombing this month: 12 bridges, two tunnels, and damage to natural gas production and electricity generation capacity.

Decades of Sanctions Forged a Survival Economy

Iran's current economic endurance is rooted in decades of adaptation to harsh international sanctions and confrontation with the US, Israel and the West. Authorities have systematically pursued self-sufficiency, developing water-intensive agriculture, manufacturing and services that have reduced total reliance on oil exports. Shadowy oil transfers, cross-border trade, maritime networks and a large informal labour market have further bolstered resilience.

The population, however, has borne the brunt of this adaptation. More than a decade of all-encompassing sanctions, two wars since June of last year, nationwide protests in which thousands were killed, and several state-imposed internet shutdowns have steadily eroded living standards and future prospects. The Strait of Hormuz has been closed since the US-Israel war escalated in late February, blocking fresh supplies of imported goods.

Corruption and Unreturned Billions

Zabihollah Khodaeian, head of the General Inspection Organisation of Iran, disclosed on state television that trustees appointed by top authorities, including the Supreme National Security Council, to repatriate proceeds from crude oil and other product sales under sanctions have "betrayed" the country. These trustees currently hold at least $11 billion, of which $1.6 billion has been misused. Some individuals are under arrest in Iran while others have fled, including one person who stole more than $200 million.

Khodaeian further revealed that more than 20,000 exporters have failed to repatriate 94 billion euros (nearly $107 billion) in export yields as required by law. Among them are 225 unnamed individuals each holding more than 50 million euros (nearly $57 million) in foreign currency commitments.

Mohammad Reza Farzanegan, professor of Economics of the Middle East at Germany's Philipps-Universitat Marburg, identified "endemic corruption" as the most serious internal threat to the Iranian economy, noting that oil incomes have encouraged rent-seeking and overdependence on the state, weakening the private sector and reducing incentives for innovation and long-term investment.

Diplomatic Path Forward

Iran and the US continue to exchange messages through mediators and have largely suspended military action, though the conflict has spread to the Red Sea and the Caspian Sea while tensions persist in the Strait of Hormuz. Farzanegan cautioned that without a reduction in geopolitical risk through diplomacy, domestic economic reforms alone cannot generate sustained recovery. He noted that economic relations with China, Russia and neighboring countries may offer temporary relief but cannot fully replace broader international ties. "Even if the political system survives, the economy may remain chronically sick," he said.

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