Analysis | Iran’s Economy at the Center of Geopolitical Risk if Nuclear Deal Advances

If an agreement with Iran is indeed signed, economic issues and their implications will carry significant weight.

Iran’s revenues depend on various factors, such as oil exports, fees collected for passage through the Strait of Hormuz, and the rebuilding of industry, among others.

Much will depend on US policy toward Iran, including the scale of military deployment near Iran to ensure compliance with any agreement, and the extent of concessions granted, such as the unfreezing of Iranian assets, sanctions relief, and more.

A contraction in the regime’s revenues in Iran could both intensify internal power struggles over control of remaining resources and worsen the economic situation of the population, especially if there is a clear prioritization of military buildup. In both cases, and certainly in combination, this poses a challenge to the regime’s stability.

The Iranian regime’s ability to recover economically, financially, and therefore also militarily, depends on factors both within and outside its control.

The Iranian economy was already in a severe downturn before the war due to currency collapse, capital and brain drain, rising cost of living, lack of investment, deteriorating infrastructure, corruption, and more. Given the cost of the war and its consequences, there is considerable doubt whether there will be any improvement in these areas, such as unemployment following the war, food and electricity shortages, and declining foreign currency reserves). In fact, the economic situation is expected to deteriorate further.

Given the weakened state of Iran’s economy, its dependence on oil exports will increase, with all the constraints this entails, including the condition of oil infrastructure and the effectiveness of US sanctions.

If there is a security de-escalation, oil prices are likely to fall, which would benefit the United States and others but not Iran, in terms of oil revenue.

Iran may therefore seek some level of escalation or at least instability and tension, in order to raise oil prices. However, in other respects, Iran itself could be harmed by this, for example, through negative effects on its currency.

In any case, mutual accusations between Iran and the United States regarding violations of any agreement are likely to continue, including in the economic sphere.

Iran seeks at least partial control over the Strait of Hormuz and the ability to collect fees there. But as long as American military power remains in the region, Iran will need to act cautiously.

In the future, the United States may reduce its military presence in the region around Iran, including withdrawing one or even both of its aircraft carriers, along with other warships (due to other missions, maintenance, rotation, and similar reasons).

Under such conditions, Iran may again strengthen its grip on the Strait of Hormuz and disrupt maritime traffic, which would raise oil prices.

The likelihood of Iranian aggression in the Strait of Hormuz will increase once Iran regains at least a significant portion of its frozen assets held in foreign banks (estimated at around $24 billion).

However, an aggressive Iranian policy in the Gulf, including regarding oil, may ultimately backfire and harm its main source of income—oil exports. Already, efforts are underway to develop alternatives to the Strait of Hormuz, such as pipeline routes, although these are also vulnerable to attack. This situation further highlights global concerns about reliance on oil and gas, potentially increasing efforts worldwide—such as in Europe—to shift toward alternative energy sources like nuclear and renewables.

Iran may receive economic incentives, including funds, in exchange for agreeing to limits on its nuclear program, but later reverse course. Therefore, any economic benefits should be conditioned on strict monitoring and irreversible steps, such as the removal of all uranium, especially highly enriched material.

Iran also requires external investment to rebuild damage to its infrastructure, which is already in poor condition. However, given instability and uncertainty regarding Iran, it is questionable how willing countries, including China, will be to make large investments there, at least in the near future.

Iran’s economy will continue to suffer from mismanagement due to corruption, self-interest, and patronage networks. This trend will burden the economy but is embedded in the current regime, partly due to the need to secure loyalty from supporters and maintain their role in suppressing dissent. Declining revenues will further strain this system and intensify internal power struggles over shrinking resources, potentially weakening the regime.

The regime, for ideological and strategic reasons, may allocate a significant share of its revenues to military buildup at the expense of public welfare. This could continue even if revenues decline, further reducing support for the population. While not necessarily a short-term effect, long-term neglect of public needs could ultimately come at a political cost to the regime despite its repression efforts.

In conclusion, Iran’s economic situation—and how the regime manages it—will have a major and potentially decisive impact on Iran itself and on its relations with other countries.