Iran's economy is facing severe challenges due to war damages, inflation, and oil revenue loss, raising concerns about its negotiating strength with the US. Estimates suggest that 4.1 million more Iranians could fall into poverty as a result.
Key points
Iran's economy is severely impacted by war damages and inflation.
The US naval blockade is affecting Iran's oil export revenues.
4.1 million more Iranians may fall into poverty.
Economic difficulties could weaken Iran's negotiating position with the US.
Iran may not be choking like a stuffed pig as Donald Trump predicted, but its economy is in serious difficulty as a combination of a massive war-damages bill, inflation, currency devaluation, unemployment and a contraction in oil revenues combine to leave the political elite worrying how hardline they can afford to be with their US negotiators. One estimate circulating in Iran’s media suggests the damage to the economy from the US-Israeli attacks is nine times the value of the Iranian budget last year.
The UN Development Programme has estimated that 4.1 million more Iranians could fall into poverty.
Trump made his prediction that Iran would choke on the basis that the country would soon run out of oil storage space because of the US naval blockade. On 26 April, he predicted that Iranian wells would “explode” in a “very powerful” destructive process starting in three days.
Behind this prediction was a belief that the US naval blockade launched on 13 April would prevent Tehran’s tankers from reaching the strait of Hormuz, depriving the Iranian regime of at least $175m (£129m) a day in oil export revenue. Once the oil was stuck inside the country, Iran would soon run out of storage, forcing it to close the taps. Such a closure would irreparably damage the wells.
A view of oil facilities on the Kharg Island
A view of oil facilities on the Kharg Island, Iran’s primary oil export hub. Photograph: NurPhoto SRL/Alamy
“When it explodes, you can never, regardless, you can never rebuild it the way it was,” Trump told Fox News in an interview, adding that capacity would be reduced to about 50% of what it was “right now”. The US Treasury secretary, Scott Bessent, last week likened the Iranian leadership to “rats in a sewer pipe” who found it hard to understand what was going on. Kharg Island, Iran’s primary oil export hub, was “soon nearing capacity”, he said. For good measure Trump put a further squeeze on exports to China by imposing US sanctions on companies linked to Chinese refineries, a step that has led the Chinese ministry of commerce on Saturday to issue a counter-injunction.
Although it is true Iran is now producing more oil than it can export, it appears for the moment enough tankers are making it through the US naval blockade, while remedial steps such as flaring means storage space has not run out. Independent estimates, including from the Center on Global Energy Policy at Columbia University, suggest that Iran has up to three weeks of free useable storage capacity.
Q&A
What are the main factors contributing to Iran's economic crisis?
Iran's economic crisis is driven by war damages, high inflation, currency devaluation, rising unemployment, and reduced oil revenues.
How could Iran's economic situation affect its negotiations with the US?
The economic difficulties may force Iran's political elite to reconsider their hardline stance in negotiations with the US due to financial pressures.
What is the estimated impact of US-Israeli attacks on Iran's economy?
Reports suggest that the damage from US-Israeli attacks could be nine times the value of Iran's budget from the previous year.
How many Iranians are projected to fall into poverty due to the economic crisis?
The UN Development Programme estimates that an additional 4.1 million Iranians could fall into poverty as a result of the ongoing economic crisis.
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Yet something is putting renewed pressure on the Iranian currency. The value of the toman, the primary unit of currency used in commerce and daily life in Iran, has fallen almost 22% on the open market, to 190,000 to the dollar on Sunday.
Overall inflation is put at 73.5%, while food and beverage prices have surged 115%. The Iranian government on Sunday said it was considering doubling the value of the voucher it already gives citizens, an inflationary step in itself. The monthly minimum wage in Iran is less than 170m rials ($92), and that is after the government raised it by about 60% in March. Imported cars or iPhones are available only at incredibly high prices.
A currency dealer in Tehran holds $100 bills as the value of the Iranian rial fell last week.
A currency dealer in Tehran holds $100 bills as the value of the Iranian rial fell last week. Photograph: Majid Asgaripour/Reuters
More than 23,000 factories and firms have been hit by US-Israeli airstrikes, resulting in a million jobs lost, according to Iran’s deputy work and social security minister, Gholamhossein Mohammadi. Unemployment, already high, has increased by an estimated 1 million people, with those reliant on digital trade worst affected. A digital-based economy cannot be shut in perpetuity, and at some point the needs of the economy may have to be put before those of security.
The Iranian communications minister, Seyed Sattar Hashemi, has repeatedly promised that the country’s digital lockdown is temporary, but he has no means of forcing the true decision-makers in the intelligence services to lift the restrictions.
Reza Olfatnasab, the head of the Union of Virtual Businesses, said in a statement: “The largest decrease in sales occurred in March. Unfortunately, businesses lost the key end-of-year market, and the issue of ‘non-profitability’ was very prominent and tangible during this period.”
According to him, even now some large businesses are facing a 40% to 50% drop in sales. This is despite the fact that these companies have 50 million to 60 million users and their apps are installed on most people’s phones in Iran.
“When large platforms with such dimensions and infrastructure suffer this level of sales decline, one can predict what a disaster and deep damage has occurred for small and micro businesses,” Olfatnasab said.
Ahmad Zeidabadi, a reformist journalist and political analyst critical of the government, said: “The internet and the economic conditions of the people are no joke. The reality is without the internet normal life and social stability are impossible.”
“If a fundamental solution is not quickly devised, exactly the event that opponents of internet connection fear will happen,” he added, in a reference to the renewal of January’s nationwide protests.
Satellite image shows Latyan Dam outside of Tehran in November.
Latyan Dam outside of Tehran in November. Tehran and Alborz regions have now entered their sixth consecutive year of drought. Photograph: Planet Labs PBC/AP
Nor has the rainy season delivered what was needed. A spokesperson for the country’s water industry said: “Despite a positive national index, 10 provinces remain below normal precipitation levels, mostly located in the downstream and upstream regions of the Alborz mountain range. These provinces include Tehran, Qom, Yazd, Isfahan, Qazvin, Alborz, Gilan, Mazandaran and Semnan.”
The spokesperson said the Tehran and Alborz regions had now entered their sixth consecutive year of drought.
Open debate about the best course for the Iranian negotiating team is circumscribed by state newspaper censorship, the effective closure of parliament, and of course by the continued internet shutdown that allows only certain licensed voices to be heard.
Despite reports of splits in the Iran negotiating team, in practice it seems only a small minority of parliamentarians have openly opposed talks, and this is the group that has always opposed reaching deals with the US. But that does not mean Iran is immune from pressure.
