A prolonged conflict with Israel and the US will leave the already-fragile Iranian economy unlikely to “cope”, with years needed to recover, analysts say.
Iran’s economy was already struggling under the weight of sanctions. The country, which has been attacking Gulf states since Saturday in retaliation for the US and Israeli strikes, said it is ready for a prolonged conflict.
“While Iran has prepared militarily, its economic foundation is fragile,” said Mohammad Farzanegan, professor of Middle East economics at Philipps-Universität Marburg, the Centre for Near and Middle Eastern Studies in Germany.
“My research shows that over a decade of 'maximum pressure' sanctions has already hollowed out the state’s reserves and significantly reduced the middle class, the traditional stabiliser of the economy,” he said.
International sanctions reduced the size of Iran’s middle class by an average of 17 percentage points per year between 2012 and 2019, with the cumulative loss reaching 28 percentage points by 2019, according to research from Mr Farzanegan and Nader Habibi from Brandeis University.
“Iran’s fiscal ‘lungs’ appear limited for a protracted conflict, yet adaptive strategies and institutional resilience may allow it to sustain confrontation longer than headline budget figures would suggest," he said.
Iran's economy has suffered for years under the extraneous sanctions reimposed by Washington in 2018, after US President Donald Trump in his previous term withdrew the US from the Joint Comprehensive Plan of Action nuclear deal. Those sanctions are yet to be lifted.
The economy was given a jolt when so-called snapback sanctions were imposed by Britain, France and Germany at the UN General Assembly last September.
Protests in the country of 90 million, which erupted late last year triggered by the plummeting rial and the soaring cost of living, have also added to its economic woes.
The Iranian rial has declined steadily in recent months and was trading at more than 1.53 million to the US dollar on the parallel market on Thursday, according to Bonbast.com, which monitors unofficial exchange rates. It had dropped to 1.75 million to the dollar four days ago, when the country was first attacked.
Iran’s economy is “unlikely to cope in any traditional sense” amid the current war, Mr Farzanegan said.
“The impact will be catastrophic and non-linear. We will see hyper-inflation as the rial loses all utility, and more 'brain drain' as the remaining professional class flees.
“We are entering this war with a society that is already economically exhausted. Rather than a brief adjustment, we should expect a transition to a primitive war economy that could take years to reverse.”
As of January, the International Monetary Fund had predicted that the country’s real gross domestic product would grow by 1.1 per cent in 2026, following a 0.6 per cent expansion in 2025. Inflation in the country stood at 42.4 per cent annually last year.
Energy disruption
Iran, which produces about 3.3 million barrels of oil per day and is Opec’s fourth-largest producer, is also heavily dependent on oil export revenue to sustain its economy.
Sanctions have restricted Iran's ability to export freely forcing much of its oil trade to move through discounted or indirect channels according to the International Energy Agency.
The Strait of Hormuz, through which about 20 per cent of the world’s oil transits each day, has become the focal point of global energy markets, as it remains unofficially blocked. No ships passed through the strait on Tuesday, down from more than 50 on Thursday, February 26, according to Bloomberg data.
A closure of the strait would hit the country hard.
Iran's revolutionary guards said on Thursday in the statement carried by state media that, in times of war, passage through the strait will be under the control of the Islamic Republic.
Regime change
At the start of the attacks, Mr Trump said the objective was regime change in Iran. On the first day of strikes, Iran’s supreme leader Ayatollah Ali Khamenei was killed, leading to mixed reactions from people on the ground.
“The internal trajectory – whether the public mobilises against the regime or whether fractures appear within the state – will hinge in part on whether the United States and Israel have a coherent endgame,” said Alex Vatanka, director of the Iran programme at the Middle East Institute.
“Without a wider, intelligence-driven plan for political transition, air strikes alone are unlikely to generate sustained internal momentum against the IRGC leadership, particularly in the absence of an organised opposition ready to act.”
While military strikes can certainly weaken central authority, regime change does not automatically translate into institutional reconstruction, added Mr Farzanegan.
“Look at Iraq and Libya: external intervention led to persistent declines in stability that never returned to prewar levels. In Iran, given its size and ethnic diversity, a collapse of the central government without a co-ordinated internal alternative is more likely to lead to state fragmentation and rival militias than a stable new democracy.”
While the conflict is still raging and it is too early to know where it is headed, there are discussions around whether a potential regime change could lead to the removal of sanctions by the US.
But even if that scenario played out, the expected value of such an escalation would remain deeply negative, Mr Farzanegan said.
“Sanctions removal, while economically meaningful, cannot by itself rebuild a hollowed-out middle class, restore physical capital, or reconstruct credible governance. The destruction of state capacity reduces the marginal effectiveness of any subsequent policy reform,” he said.
What is more likely is a “prolonged equilibrium of volatility, weakened institutions, and chronic fragility”, he explained.
“In expected-value terms, the downside risks of violent regime rupture substantially outweigh the uncertain gains from hypothetical post-conflict normalisation.”
