Despite its geopolitical position, rich energy resources, and historical significance, Iran has faced severe economic and energy crises in recent years. These crises stem from international sanctions, structural issues within domestic politics, and strategic choices in foreign policy. As a result, Iran is grappling with significant challenges that negatively impact economic development and social welfare.
International Sanctions and Their Economic Impact
Although Iran’s economy has relied heavily on oil and natural gas exports since the 1979 Revolution, this dependence has become a significant disadvantage due to international sanctions. In 2012, Iran’s gross domestic product (GDP), USD 644 billion, fell to USD 400 billion due to sanctions and domestic governance issues. The economic and financial sanctions imposed by the United States and the European Union, primarily in response to Iran’s nuclear program, have restricted Iran’s energy exports and led to a rapid depletion of its foreign exchange reserves. The US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in 2018 intensified sanctions and further isolated Iran from global markets, exacerbating the economic crisis.
Energy Dependency and Technological Inadequacies
The vulnerabilities within Iran’s energy sector further exacerbate the challenges facing the country’s overall economic structure. Despite possessing some of the largest energy reserves in the world, Iran has struggled to harness this potential effectively. Sanctions have hindered Iran’s ability to attract foreign investment in energy projects and restricted access to essential technologies. As a result, the country has experienced significant losses in energy production and deficiencies in its infrastructure. Iran’s daily natural gas deficit of 350 million cubic meters has profoundly impacted industrial production. The closure of 17 power plants has triggered a crisis, potentially causing a 30% to 50% decline in industrial output.
Revolutionary Guards’ Economic Control
One of the most significant structural issues within the Iranian economy is the dominant role of the Revolutionary Guards (IRGC). The IRGC controls approximately 45% to 50% of the country’s economic activity, which impedes the efficient allocation of financial resources. A substantial portion of oil revenues is directed toward companies affiliated with the IRGC, thereby diminishing investments in the population’s welfare. Consequently, income inequality increases, and social unrest deepens. The IRGC’s control over the economy also hinders the effective management of resources allocated to finance Iran’s foreign policy objectives, leading to inefficient utilization.
Social and Political Dynamics
Economic crises have precipitated significant social unrest within Iranian society. High inflation, rising unemployment, and escalating prices of basic consumer goods have severely diminished the population’s purchasing power. In 2019, widespread protests erupted in response to increases in gasoline prices, underscoring the growing public dissatisfaction and a marked decline in trust in the government. This unrest reflects broader economic discontent as the Iranian populace struggles with financial instability. A growing concern is that the youth unemployment rate exacerbates these tensions, further fuelling social discontent and heightening the risk of future political instability. These economic and social dynamics echo the conditions that led to the Arab Spring uprisings in the early 2010s, where similar economic hardship patterns, rising living costs, and declining public confidence in governance contributed to mass protests and calls for political change. In Iran, these socio-economic challenges suggest that the risk of deepening instability remains high without effective policy interventions.
Regional Policies and Economic Burden
Iran’s war effort in theatres such as Syria, Lebanon, Iraq, and Yemen has placed a significant strain on the country’seconomy. The allocation of substantial resources to these conflicts diverts funds that could otherwise be directed toward addressing domestic needs and enhancing the population’s welfare. Iran’s pursuit of regional influence, combined with the impact of international sanctions, has further exacerbated the economic burden. This ongoing situation necessitates a revaluation of Iran’s foreign policy priorities. A strategic reduction in resources allocated to regional conflicts could provide a critical opportunity for economic recovery by redirecting funds toward domestic development and stability.
Need for Reform and Future Perspective
The resolution of Iran’s economic and energy crises extends beyond merely easing international sanctions. Fundamental domestic reforms are imperative. Specifically, modernizing the energy sector and transitioning toward renewable energy sources could mitigate Iran’s energy challenges. Strengthening the private sector and reducing the economic dominance of the Revolutionary Guards would allow for a more efficient allocation of economic resources. Additionally, restructuring relations with the international community—particularly by advancing nuclear negotiations—could pave the way for Iran’s reintegration into the global economy.
On 23 January 2025, President Trump suggested that a new nuclear agreement with Iran could be possible, but only if Tehran fully commits to preventing the development of a nuclear weapon. At the same time, Trump has distanced himself from the hawks in his administration who have long advocated for military action against Iran. This position indicates that the administration is currently torn between two conflicting approaches: on one hand, the possibility of diplomacy and negotiation, and on the other, the continued application of the “maximum pressure” campaign. If Tehran fails to comply, Iran will likely face even stricter economic pressures, keeping the country economically fragile and isolated.
The ambiguous situation and the dire state of the economy deepen Iran’s social tensions, making it increasingly difficult for the government to manage public dissatisfaction and political instability. Although Iran has recently concluded a comprehensive cooperation agreement with Russia to find some alternatives, such an arrangement may not be sufficient to extricate Iran from its current predicament in the long term.
In conclusion, Iran’s economic and energy crises are driven by international sanctions and deep-rooted structural issues within domestic politics. The Revolutionary Guards’ pervasive influence over the economy plays a significant role in exacerbating these crises. However, with targeted policies and comprehensive structural reforms, there is a clear path toward resolving these issues. Should Iran fail to adopt practical solutions to its current economic and energy predicaments, it risks further social unrest and the continued erosion of public trust in the government. Iran, which has already lost ground in Syria and Lebanon, could turn boon into bane by negotiating with Western powers to give up some of its nuclear ambitions, which would end its international isolation and recover its economy.