Since President Donald Trump launched the US-Israel assault on Iran in late February 2026, the Trump administration has offered several objectives for the war. They include eliminating Tehran’s ability to project power, obliterating its military capacity and missile program, destroying its nuclear program, ending its ability to threaten Americans, and even supporting the Iranian people. But beneath these shifting justifications lies a deeper economic strategy: to break the economic resilience architecture that has allowed Iran to withstand external pressure. Once its capacity to adapt and absorb collapses, the Trump administration seems to believe, the Islamic Republic will submit to US demands. That assumption is likely wrong. Instead of capitulation, the war, blockade, and sanctions may produce a deeper humanitarian crisis and a region pushed closer to prolonged instability.
The war has been the hardest blow yet to Iran’s post-revolution economy. However, the conflict’s economic significance does not lie in the reported $270 billion in damage that Iran has suffered. The war targeted the infrastructure that keeps Iran’s economy and society functioning. Thousands of public civilian facilities have been damaged, weakening basic service delivery. More than 125,000 civilian units have been damaged, nearly matching the scale of devastation during the Iran-Iraq War and displacing thousands of families. The destruction of 24,450 commercial and industrial sites—along with damage to energy and aviation facilities, ports, transportation networks, and trade routes—has disrupted supply chains, labor mobility, and the movement of essential goods and exports. The result is a cascading national crisis: a projected economic contraction of at least 6 percent, up to 4 million potential layoffs, and as many as 4.1 million Iranians pushed below the poverty line.
Perhaps the war’s most consequential impact, however, is its calculated attack on the architecture of Iran’s economic resilience. Over years of sanctions, Tehran built a costly survival model based on economic diversification, self-reliance (where possible), trade rerouting, and sanctions evasion. The war has struck this model at its core by disrupting supply chains, by weakening domestic production networks, and by narrowing the alternative trade and transport routes that helped Iran manage pressure. Uncertainty over when and how the conflict will end has created a state of limbo, making adaptation itself harder.
Despite significant damage to Iran’s resilience architecture, though, the war is unlikely to force the Islamic Republic into capitulation or collapse. Iran can still draw on its geographical depth, sanctions evasion networks, social policy tools, and capacity for repression. The more likely outcome is more troubling: a poorer, more damaged, and more unequal Iran. Ordinary Iranians, private businesses, and the middle class will bear the highest costs, while state-connected and security-linked networks may become even more central to economic survival.
Iran’s Pre-War Model of Costly Adaptation
Since the 1979 revolution, Iran’s economy has endured repeated macroeconomic shocks, from the Iran-Iraq War and US sanctions to the pandemic. The pressure intensified after 2011, when Washington tightened sanctions on Iran’s energy and banking sectors, sharply reducing oil revenues, restricting access to the international financial system, and narrowing the country’s trade partnerships. Tehran responded by building a sanctions-survival model. It shifted trade eastward, expanded non-oil exports to neighboring countries, used intermediaries to maintain exports and imports, and supported domestic production in sectors it considered essential. This costly adaptation model was not economically efficient, nor did it eliminate the costs of sanctions. Its purpose was survival under pressure.
As sanctions reduced Iran’s oil revenue, the country was forced to diversify its economy to lessen its reliance on oil. While Tehran’s oil revenue fell from $115 billion in 2011 to just $8 billion in 2020, the share of non-oil exports in total trade rose from 27 percent in 2011 to 78 percent in 2020. By adopting a strategy of self-reliance, Tehran increased domestic production to mitigate the effects of import restrictions. Gasoline production, for example, increased from about 54 million liters per day in early 2011 to roughly 120 million liters per day in early 2025.
Under sanctions, the logic of trade shifted from efficiency to survivability. As mentioned, Tehran restructured its trade partnerships toward the East and its neighbors. The number of Iran’s trade partners fell from 157 in 2010 to 142 in 2023, while China replaced the European Union as its main partner. Currency devaluation made Iranian goods more affordable internationally, boosting the profitability of non-oil manufacturing and encouraging domestic production as a substitute for imports. Non-oil exports to neighboring countries expanded, and the composition of Iran’s exports shifted.
More than 3,500 US sanctions narrowed Iran’s trade partnerships and raised transaction costs, but they did not lead to a collapse.
Iran also pursued de-dollarization—moving from reliance on the US dollar to other currencies— and alternative financial channels. Tehran increasingly shifted oil payments from US dollars to Chinese renminbi. It also used local-currency arrangements with Russia, sought euro payments in some oil deals, and explored digital or blockchain-based mechanisms to bypass dollar-based banking restrictions and the SWIFT system. Iran has also used shadow banking networks, exchange houses, front companies, offshore arrangements, and financial intermediaries, particularly through the United Arab Emirates. These channels were costly and imperfect, but they helped Tehran keep trade moving outside the reach of US-dominated financial networks.
More than 3,500 US sanctions narrowed Iran’s trade partnerships and raised transaction costs, but they did not lead to a collapse. Iran’s economy became less efficient, more distorted, more dependent on opaque networks, and more reliant on a small number of trade partners. Yet it continued to move oil, import essential goods, and sustain enough production to keep the state functioning.
How the War Disrupted Iran’s Resilience and Adaptation
The war’s most significant economic impact has been a deliberate strike at the heart of Iran’s resistance economy that had allowed the Islamic Republic to endure decades of sanctions. Iran’s sanctions-survival model rested on three pillars: diversification, domestic production, and evasion. The war struck each of them by disrupting supply chains, weakening domestic production networks, and constraining trade and financial routes that had helped Iran absorb external pressure.
The war has damaged all four sectors of Iran’s economy: agriculture, industry, services, and oil. But its most consequential impact was on the connective tissue linking production, trade, and everyday economic life. The damage to industry, especially petrochemical plants and steel facilities, carries outsized economic consequences because these sectors sit at the center of Iran’s productive capacity and export base.
Among the damaged industrial assets, Iran’s steel sector is especially significant. Steel is a core input for about 42 percent of the country’s industrial supply chain, supporting construction, automotive production, home appliances, pipe manufacturing, and parts of the oil, gas, and petrochemical sectors. One of the largest war-damaged steel plants, Isfahan’s Mobarakeh, alone accounts for around 1 percent of Iran’s GDP. This plant is one of the largest steel producers in the Middle East and North Africa and supplies raw materials to over 2,800 factories and workshops.
Petrochemicals are one of Iran’s main sources of non-oil export revenue and a critical link among energy production, manufacturing, and daily economic life. Based on the author’s estimation of Iran’s trade data, the sector accounts for about 43 percent of total non-oil exports and supplies inputs for plastics, packaging, textiles, agriculture, pharmaceuticals, construction materials, auto parts, refining, and energy production. The war struck utility plants at Bandar Imam Petrochemical Complex, near Mahshahr, that provided the electricity, steam, oxygen, and other services that producers need to operate. Attacks on South Pars disrupted gas refineries supplying some 80 percent of Iran’s domestic natural gas needs to refineries, power plants, and petrochemical plants. The strikes also disrupted gas condensate supply by about 35 percent and natural gas supply by about 20 percent, further straining petrochemical and refining companies. The result was a chain reaction: less gas and condensate has meant lower petrochemical and refinery output; deeper gas, fuel, and electricity shortages; higher input costs for downstream industries; and greater pressure on everyday life.
The war has weakened Iran’s external channels of economic adaptation.
The war has also weakened another pillar of Iran’s survival model: its external channels of economic adaptation. The United Arab Emirates (UAE) has long been Iran’s second-largest trading partner, accounting for roughly 20 to 25 percent of the Islamic Republic’s total trade. The UAE has also served as a logistical and financial gateway through which Iran has accessed wider markets and suppliers. Especially during sanctions, the UAE has served Iran as a trade hub, re-exporting and re-importing, and a critical hub for exchange houses, front companies, and financial intermediaries that underpin Iran’s sanctions-adaptation strategy.
The importance of the UAE lies not only in the volume of trade, but also in its composition. Roughly 30 percent of Iran’s imports come from the UAE, and much of this trade consists of capital and intermediate goods, machinery, industrial equipment, and production inputs that are critical to keeping Iran’s domestic economy running. The UAE also accounted for an estimated 12 percent of Iran’s non-oil exports in 2024. Iranian exports to the UAE, meanwhile, show that Iran is still mainly a supplier of basic inputs, not a producer of finished goods. This suggests that the UAE’s role is not merely as a key trade partner, but also as a regional commercial and logistical intermediary. Straining this channel damages both Iran’s import capacity and its sanctions-evasion infrastructure.
Why the Economy Has Not Yet Collapsed
The war has damaged Iran’s adaptive capacity but not eliminated it. The country still retains enough geographic, logistical, financial, and coercive capacity to avoid outright economic collapse.
Geography is central to that resilience. Iran is difficult to strangle completely because it does not depend on a single border, port, or maritime corridor. In 2024, around 90 percent of Iran’s 190 million tons of trade moved through ports. Some ports have remained operational during the war, and Iran still has road transport capacity to move an estimated 20 to 23 million tons of essential goods. Wartime survival does not require normal commerce. It requires enough rerouting of machinery, industrial inputs, raw materials, and basic goods to keep the economy from seizing up.
Iran has already begun shifting parts of its trade through land routes to Iraq, Pakistan, and Turkey. Iran could also rely more heavily on overland corridors linking it to Central Asia, China, Russia, and other neighboring markets. The direct rail link with China launched in 2025, while the Rasht-Astara railway, connecting Azerbaijan, Iran, and Russia, is nearing operational status. These routes cannot replace the full volume of Persian Gulf shipping. Their value lies in redundancy: they provide limited but functional alternatives that give Iran time and flexibility under pressure.
Iran’s sanctions-evasion machine has been damaged but not dismantled. Concern about reliance on Dubai had already pushed Tehran to diversify parts of its shadow financial networks beyond the UAE, including through Hong Kong, Iraq, and Turkey. Iran has also expanded financial links with Russia, including interbank messaging and payment card networks outside Western-controlled systems. Iran’s Central Bank has increased gold purchases and reserves, giving Tehran another tool for managing imports and for preserving value outside dollar channels.
If economic relief, welfare support, and patriotic mobilization fail to contain public anger, the state is likely to fall back on repression.
Iran’s privilege-based welfare system gives the state a limited but important source of resilience. Hardship is not distributed evenly. Groups tied to the state or important to state functioning, security forces, public employees, managerial workers, and parts of the pseudo-private sector are more protected than informal workers, private-sector laborers, and the poor. Despite fiscal constraints, Tehran is likely to expand food subsidies, unemployment support, and emergency assistance to soften the immediate social shock. These measures will not eliminate hardship or reduce inflationary pressures, but they can help contain unrest and support a partial rally-around-the-flag effect.
Iran’s resilience is not only economic. Authoritarian survival also rests on coercive capacity, and the Islamic Republic still retains functioning security institutions. If economic relief, welfare support, and patriotic mobilization fail to contain public anger, the state is likely to fall back on repression, especially when it frames war as an existential threat.
Toward a More Unequal Iran
The medium-term consequence is likely to be a more unequal political economy. Sanctions had already weakened the private sector, shrunk the middle class, and expanded the role of state-connected networks. War will likely accelerate these trends. Firms with access to state contracts, protected imports, security institutions, and opaque financial channels will be better positioned to survive. Firms without such access will face higher costs, weaker demand, and greater uncertainty.
This matters for Washington’s theory of pressure. Years of sanctions did not simply weaken Iran; they expanded its capacity for costly adaptation, narrowed the space for diplomacy, weakened elites in favor of engagement with the West, and increased the incentives for resistance. Yet Washington repeatedly overestimated Iran’s economic vulnerability and ordinary Iranians’ hardship as evidence that the state itself was nearing collapse. At the same time, it underestimated Iran’s capacity to adapt, absorb costs, and survive. Backed by Israel and key regional allies pressing for a harder line, this miscalculation locked US policy into escalation rather than resolution and eventually drew the United States into war.
The war may deepen this mistake. By destroying ordinary businesses, weakening the middle class, and disrupting private-sector activity, the war will accelerate economic and social breakdown. But that does not mean that the regime will collapse. State- and security-linked networks are often better positioned to survive under extreme pressure because they control access to contracts, imports, logistics, foreign exchange, and coercive power. The result may not be state collapse, but rather a harsher, more militarized political economy. The Iranian Revolutionary Guard Corps and affiliated networks are likely to play a larger role in reconstruction, logistics, import allocation, infrastructure repair, and wartime production.
The war may weaken Iranian society more than it weakens the state. A poorer society, a damaged private sector, a battered middle class, and rising fiscal pressure will create long-term instability. But the burden will fall unevenly. Ordinary Iranians will face job loss, even lower living standards, and declining social mobility, while the state becomes even more dependent on coercion, patronage, and security-linked economic actors to govern through crisis. For Washington, the lesson is clear: destruction can cause hardship and instability without leading to regime capitulation or collapse.
The views expressed in this publication are the author’s own and do not necessarily reflect the position of Arab Center Washington DC, its staff, or its Board of Directors.
Featured image credit: Fotokon via Shutterstock
