Why Iran's economy hasn't collapsed amid war and sanctions

Tehran, Iran – Millions of Iranians are struggling to survive, yet five months into the war with the United States, the country's economy has not collapsed.

Iran, a resource-rich nation of more than 92 million people, has built a relatively diversified domestic economy for a major oil exporter. For decades, its authorities have relied on self-sufficiency to cope with severe economic embargoes and confrontations with Washington, Israel, and the West.

Water-intensive agriculture, manufacturing, and services have reduced the country's reliance on oil. Meanwhile, shadowy oil transfers, cross-border trade, maritime networks, and a vast informal labor market have helped the economy retain its resilience.

Still, ordinary citizens are paying a heavy price, absorbing most of the shock. More than a decade of comprehensive sanctions, two wars since last June, nationwide protests that left thousands dead, and multiple internet shutdowns over the past year have severely hurt people's ability to earn a living and plan for the future.

'An expensive way to survive'

Welfare economist Hadi Kahalzadeh defines collapse as massive famine and the state's inability to pay salaries or deliver basic services. By that standard, he says, Iran's economy has not collapsed.

“Combined, war, blockade, and sanctions — no matter how painful — are unlikely to bring us to that point any time soon,” said Kahalzadeh, a nonresident fellow at the Quincy Institute and a researcher at Brandeis University’s Center for Global Development and Sustainability in Massachusetts, told Al Jazeera.

Their combination has driven inflation to about 90%, with food inflation among the highest in the world. The prices of staples such as meat, eggs, and cooking oil have tripled over the past year, while wages have lagged behind.

Imported goods grow ever more expensive as the national currency slides against the U.S. dollar. The closure of the Strait of Hormuz after the U.S.-led war began in late February further cut off fresh supplies.

Kahalzadeh explained that economic shocks are typically absorbed through inflation and currency devaluation, which maintain import and production momentum so goods stay on shelves — but they become increasingly unaffordable. “That mechanism keeps the system running but shifts the cost directly onto households. The government tries to ease the burden with cash and subsidies. It is an expensive way to survive, but it avoids collapse.”

The monthly minimum wage is below $100, and the government provides cash handouts and electronic coupons for essential goods worth a few dollars.

Government spokesperson Fatemeh Mohajerani said Tuesday that the government has paid shops participating in the coupon program, but stores have not received the money because several major banks remain disrupted more than a month after authorities reported a serious cyberattack.

She also highlighted infrastructure damage caused by the latest U.S. bombing this month, with 12 bridges and two tunnels hit and part of Iran's gas and electricity production capacity lost. Mohajerani called it a “precious achievement” demonstrating the government’s determination, adding that industrial sectors face only two days of power cuts per week instead of the previously planned three.

Billions of dollars unreturned

A 2025 report by the Saba Pension Strategy Institute, a research body under Iran's state pension fund, said more than 30% of Iranians lived below the poverty line five years ago. That share is expected to have reached 45% this year and continues to rise.

Mohammad Reza Farzanegan, a professor of Middle East economics at Philipps-Universität Marburg in Germany, said that “rampant corruption” is the most serious internal threat to Iran’s economy. It reduces productivity, weakens institutions, and prioritizes political connections over efficiency.

Oil income helps the government mask some shortfalls and delay consequences, but it also encourages rent-seeking and excessive reliance on the state, weakening the private sector and reducing incentives for innovation and long-term investment.

“Households cut consumption, businesses delay investment, and skilled workers think about emigration. The economy still runs, but at the cost of a shrinking middle class, lower capital accumulation, weaker public services, and diminished confidence in the future,” Farzanegan said.

Zabihollah Khodaeian, head of Iran’s General Inspection Organization, told state television Sunday that some “trustees” appointed by top authorities — including the Supreme National Security Council — to bring home money from oil and other product sales under sanctions have “betrayed” and taken the money for themselves.

Khodaeian said those trustees are currently holding at least $11 billion, of which $1.6 billion has been “misappropriated.”

Some are under arrest in Iran; others have escaped, including one person who stole more than $200 million. The official did not name the perpetrators or say whether any legal action has been taken against those who appointed them.

He also said that more than 20,000 exporters were obliged by law to repatriate 94 billion euros (nearly $107 billion) in foreign exchange earnings but failed to do so. Among them are 225 unidentified individuals each responsible for more than 50 million euros (nearly $57 million) in foreign currency.

Iranians growing poorer

Kahalzadeh said that prolonged sanctions have completely reshaped Iran’s socioeconomic pyramid.

“In 2011, the middle class was the majority of the population. Today, it is a minority. At the same time, those who were once a minority — the poor and those vulnerable to poverty — now make up about 70% of the population,” he said, predicting that the trend will continue.

In Tehran and across the country, that means meat and dairy have vanished from family meals, medical treatments are postponed, rent payments are delayed, and many wages do not stretch beyond a few days, let alone weeks.

“Even if inflation later drops or growth returns, the damage will not disappear quickly. Once a family loses its savings, assets, health, educational opportunities, and middle-class sense of security, rebuilding takes years,” Kahalzadeh said.

Iran and the United States continue to exchange messages through intermediaries and have largely halted military action, but the conflict has spread to the Red Sea and the Caspian Sea, while tensions remain high in the Strait of Hormuz.

Professor Farzanegan of Philipps-Universität Marburg argued that as long as sanctions and the risk of conflict persist, domestic economic reforms cannot produce a sustainable recovery. “Even if the political system survives, the economy may remain chronically sick. Economic relations with China, Russia, and neighboring countries can provide temporary breathing space, but they cannot fully replace international connections. So, the most important economic policy is to reduce geopolitical risk through diplomacy. Without a stable environment, the Iranian economy may continue to exist, but it will have little chance of a real recovery.”