Is Iran's economy buckling under war pressure or holding up? — Counting the Cost

[0:13] Hey there, I'm Scott McLean. This is Counting the Cost on Al Jazeera, your look at the world [0:17] of business and economics. The Middle East conflict has devastated Iran's economy, [0:23] but soaring oil revenues have brought in much-needed cash. So is the war weakening [0:28] the Iranian regime or actually strengthening it? The U.S. has ramped up pressure on Tehran, [0:33] but who stands to lose most from tensions in the Strait of Hormuz? [0:37] Is it forcing Iran toward negotiations, or can it find a way around it? [0:41] Sanctions relief and access to billions of frozen funds could be a lifeline to Iran's economy, [0:47] but will Tehran get what it needs? And if not, what does that mean for millions of Iranians? [0:59] Well, the U.S. has spent decades trying to squeeze Iran economically, but [1:03] six weeks into the Middle East conflict, Tehran is still standing. American and Israeli strikes [1:09] on infrastructure, industry, and trade have damaged Iran's sanctioned economy even further, [1:14] but oil revenues have kept flowing, giving the regime a financial cushion. [1:19] The Strait of Hormuz is now at the center of this economic battle. Whoever controls it [1:23] controls the pressure. At the negotiating table, sanctions relief, billions in frozen assets, [1:29] and war reparations are all at stake. Meanwhile, millions of Iranians are bearing the brunt of [1:35] inflation, shortages, and a collapsing currency. Devastation on one side, resilience on the other, [1:41] which runs out first, may shape what comes next. Ferdi Akar reports. [1:48] After a month of U.S. and Israeli bombs hitting critical infrastructure, [1:52] causing power outages, internet blackouts, and shutting down regular life, [1:57] Iranians face major economic disruption. But even before the shock delivered by the war, [2:03] Iran's economic outlook was bleak. As one of the most sanctioned countries for nearly five decades, [2:09] Iran's economy has been squeezed. Inflation was at more than 42% in December. The official [2:17] unemployment rate is at more than 8%, though unofficial projections are higher. The value [2:23] of the Iranian riyal has plunged, sitting at around 1.5 million to the dollar. [2:30] The affordability crisis for regular Iranians was a major driving factor in protests over January, [2:36] some of the largest in the country since the 1979 revolution. But while Iran's wartime economy is a [2:44] major challenge for the government, Iran's military has been resilient. Unlike a conventional military [2:51] branch, Iran's Revolutionary Guard Corps has direct stakes across the country's economy in agriculture, [2:58] food production, and manufacturing. The group owns one of Iran's largest construction and engineering [3:05] conglomerates, Qatab al-Anbiya. The IRGC is also widely reported to control a large share of Iran's [3:13] oil economy, running so-called shadow fleets to evade sanctions and shell companies to sell it, [3:19] mostly to China. As other areas of Iran's economy are constrained, oil prices have risen sharply, [3:26] around 30% since the war began in February. The increase in revenue has been a lifeline for Iran [3:33] and the Revolutionary Guards. Exports have remained close to pre-war levels, around 1.5 million barrels [3:40] a day. And the IRGC's effective control of shipping through the Strait of Hormuz is a potential major [3:48] source of revenue. While Iran's parliament is yet to formalize a toll regime, maritime journal Lloyd's [3:55] List reports several vessels have made the payment for passage. All that faces being undercut by the [4:02] naval blockade of Iran's ports announced by U.S. President Donald Trump on April 13th. He's pledged [4:08] to stop all vessels going to and from Iranian ports and blocking tankers that pay toll fees to Iran. [4:16] If successful, it will squeeze funding for Iran's military and hit its wider economy. [4:24] This is the work of an economic terrorist, to close the Strait of Hormuz, to threaten everyone [4:29] and see the dollar go up. That puts us under pressure from this side. What would you call this? [4:38] We are not terrorists. We are seekers of economic relations for the whole world and for our country. [4:44] And the Strait of Hormuz is a lever for policies, and we are friends of the countries of the region. [4:49] The U.S. blockade also risks further restricting global oil supplies, affecting economies around the [4:56] world. And with Iran demanding any peace settlement must include reparations and control over the [5:03] Strait of Hormuz, a return to the status quo in the region is anything but certain. [5:09] Ferdi Akar, Al Jazeera, for Counting the Cost. [5:12] All right, to discuss this further, we are joined by our panel of experts from Hamburg, Germany, [5:18] Mohamed Reza Farzanagan, a professor of economics of the Middle East at Marburg University. [5:22] In Washington, D.C., we're joined by Paolo Fonshira, the president of the Global Policy Institute. [5:30] And in Doha, Nikolai Kozhanov joins us. He's a research associate professor at the Gulf Study Center [5:36] at Qatar University. And of course, I should mention before we get going that we are having [5:40] this discussion while there seems to be positive signs that the U.S. and Iran could resume talks, [5:46] but anything could have happened by the time that you actually are watching this. [5:50] All right, gentlemen, thank you all for being here once again. Mohamed, we're going to start [5:53] with you. The U.S.-Israeli bombing campaign has gone after a lot of things. I'm going to give you [5:57] a few examples. Steel factories, aluminum producers, airports, ports, bridges, railways, [6:02] and of course, oil and gas facilities. Can you give us a sense of the damage, the scale of the [6:08] damage that we are seeing in Iran right now? [6:10] Well, as you mentioned, many infrastructures in Iran have been affected, civilian infrastructures [6:15] and military infrastructures. So from the effect on the Iranian oil exports, we know that Iran was [6:24] still able to transit its oil to international market, mainly to the China, 1.5 million barrels [6:32] per day. So it was also tolerated by the U.S. before this current blockade. The estimations that we [6:39] have from the Iranian authorities as a result of these military attacks on infrastructure is close [6:45] to 300 billion U.S. dollars. These are, of course, the direct damages on all these buildings and [6:54] infrastructure that we have. And it's not taking into account basically the human costs, the social [7:01] costs, and the environmental costs of these damages, right? This is the number that we have from the [7:07] authorities. That doesn't also take into account this cost of internet shutdown, which we are now in, [7:16] it's almost, you know, 48 days of the internet cut in Iran, which is also affecting significantly [7:26] the small businesses, civilian economy in Iran. Furthermore, the sanction which was in place before [7:34] the war is still there and it's causing a substantial cost on Iran. [7:39] Paolo, let me ask you about the human toll of this that Mohammed mentioned. A report by the UN [7:46] Development Program said the following, I'll read it, quote, the number of people living below $8.30 [7:52] per day could increase by 3.5 and 4.1 million, depending on the magnitude of the conflict-related shock, [8:00] potentially raising the overall poverty rate inside of Iran to as high as 41 percent. Do you think that [8:07] that's what the Americans and the Israelis were trying to achieve with this war? [8:10] Not really. I mean, the Americans and the Israelis want the destruction, the obliteration, as we hear [8:18] often this term, of the Iranian regime. Well, let's not forget the initial pitch for doing this [8:27] big attack on Iran was we have a golden opportunity to decapitate the regime. When that is done, [8:36] something else will happen. Iran will change. It will become potentially a democracy and all these [8:42] good things. None of this happened. The American objective is not to create famine in Iran. [8:51] Okay, but Paolo, sorry, I have to take slight issue with that only because the White House Deputy [8:55] Chief of Staff Stephen Miller said that the U.S. is, quote, squeezing the economic life out of Iran. [9:00] I mean, that's not going after the regime. That's going after ordinary people. [9:03] Okay. Well, that's the thing. If that is the case, it doesn't work as intended. The idea is to destroy [9:13] the regime. We know very well that the regime is shielded from, in large measure, from the economic pain [9:21] that is suffered by the rest of the civilian population, as our reporting indicates. And so [9:27] it seems like, for the moment at least, that the pain will be suffered by, is suffered by the civilian [9:38] population while the regime, as long as they have enough money to pay the IRGC, to pay the militias, [9:45] to keep the infrastructure of the government going, they're still okay. The blockade will damage the [9:54] whole of Iran, but it will take months for this to take a full effect. [9:58] Yeah, and I want to ask you about the blockade in just a moment, but I want to bring in Nikolai [10:04] for a second. President Trump, Nikolai, gave his perspective on the scale of damage in Iran. [10:10] I just want to play that for our viewers. Listen. I think it's close to over. I mean, I view it as very [10:15] close to over. You know what? If I pulled up stakes right now, it would take them 20 years to [10:22] rebuild that country, and we're not finished. We'll see what happens. I think they want to make a deal [10:28] very badly. Nikolai, do you agree that Iran has been set back by two decades by this? Well, I would say [10:37] that, of course, there is an element of the information campaign, information war. As of now, [10:44] we do see the serious damage for the Iranian's economic infrastructure. But at the same time, [10:50] Iran's economy also demonstrated a substantial durability, partly fueled by the higher oil prices [10:56] and previously accumulated reserves, that basically allowed Iran to partly caution the negative effects [11:04] of the war on its economy through actually receiving much more incomes from the exports of oil during the [11:12] march than it received a year ago. And as of now, we definitely see the certain change in the focus of [11:21] the war, of the campaign against Iran to exactly hormones and the necessity to deprive Iran of the [11:31] ability to, on the one hand, put the pressure on the global economy and thus modify the public opinion [11:38] necessary direction for it. And on the other hand, to gain an extra incomes that allow Iran to compensate, [11:46] partly compensate the losses it has. Although, again, speaking about the current situation, time is [11:52] definitely not playing in favor of Iran. So those words, those statements by President Trump, they might [11:59] indeed become true if we see the Kormuz blockade on the American side lasting more than a couple of months. [12:06] Yeah. Nikolai has made some good points here. Paolo, your response. Do you think that the U.S. [12:11] underestimated the Iranians' resilience in all of this, their pain tolerance level? [12:16] Absolutely. And I think it's remarkable because Iran has been under sanctions in one fashion or [12:23] another since 1979, since the Shah left and Khomeini and the rest. We all know that story, [12:29] how the Ayatollah's regime in 1979 and thereafter consolidated itself. And Iran has been almost on [12:38] perpetual sanctions of one kind or another. And we know they've become masters at evading sanctions [12:44] with the cooperation of all kinds of agents, including Arabs, you know, on the other side of [12:49] the Gulf who have been doing smuggling and money laundering, you name it, and then the shadow [12:56] fleets, and on and on and on. The Iranians have been very good at it. That doesn't mean sanctions [13:02] don't bite. The riots that you mentioned in your report at the beginning here today happened before [13:09] the war, right? It was January. The war started at the end of February. And thousands and thousands of [13:14] Iranians went in the streets and allegedly tens of thousands, we don't know the exact numbers, [13:19] were killed as they were protesting, not about the war, not about anything, but about affordability. [13:25] Of course. And affordability has a lot to do with the sanctions, of course, Paolo. And that's what [13:30] I want to ask Mohammed about because even before this war began, Mohammed, you were making the point [13:34] that, look, sanctions are not a surgical tool that governments make them out to be just to precisely [13:40] target the Iranian regime. They are a blunt instrument that really, you know, are felt by [13:45] ordinary people. And so I wonder how much worse off is the average Iranian today because of those sanctions? [13:52] Yeah, that's a very important point to discuss, that the economic sanctions are often presented as [14:00] an alternative to the war. But in the practice, it was a kind of economic war against Iran. My own [14:06] study on the effect of sanctions on the media class of Iran showed that the sanctions which imposed [14:12] after 2012 under the Obama administration up to 2019, that reduced significantly the size of media class [14:20] in Iran by around 12 to 17 percentage points. So it was a quite substantial decline in the size of [14:29] media class in Iran, which was associated with the increasing of poverty. And this is what the [14:35] sanctions basically resulted and shifting the media class to lower income and basically increasing the [14:43] risk of conflict and instability in Iran was the consequences of these sanctions. As my colleague [14:50] already said, in January, we had this larger scale protest, which was obviously driven mainly by economic [14:59] dissatisfaction of the public with respect to the government policies. [15:04] The sanctions in that term contributed a lot on the destabilization of the Iranian system, [15:12] the society by making the people average Iranian much more poorer than it could be at the absence of [15:19] those sanctions. Okay, gentlemen, pause for just one second, because I want to talk a little bit about [15:23] the impact of oil sales on the Iranian economy. So I want to watch this report from my colleague, [15:29] Laura Hahn, and then we'll talk on the other side. Watch. [15:31] Oil exports are the backbone of Iran's economy. It's part of a sea trade that powers around 90 percent [15:39] of the economy, funding government spending, the military, and helps to withstand sanctions. [15:46] Oil and gas tankers rely heavily on one route, the Strait of Hormuz. It's one of the most critical [15:53] shipping lanes on Earth. When the U.S. and Israel began bombing Iran at the end of February, Iran immediately [16:00] block ships from entering the strait, but also increase its own exports. From the 15th of March [16:08] to the 14th of April, Iran exported 55.2 million barrels of oil. With the current price at around [16:15] $90 a barrel, Iran would make almost 5 billion U.S. dollars. That's 40 percent more than it did before [16:22] the war. But on the 12th of April, U.S. Central Command announced it would blockade all Iranian ports [16:29] in a bid to sharply restrict its ability to export oil. This could impact not only the economy, [16:36] but also the military and Iran's revolutionary guards. Reuters reported in 2024 that the IRGC [16:44] controlled up to 50 percent of Iran's oil exports. Experts say Iran may have some ways around it. [16:52] It could store oil until routes reopen. There is also a direct freight railway between China's Xi'an [16:59] and Iran's Arpene dry port as the majority of its oil goes to China. Or it may use so-called ghost [17:06] ships, which previously switched off automatic identification systems to evade naval sanctions. [17:13] But it's not clear if they have the infrastructure to freight oil and ghost ships come with risk. [17:18] But if exports stop, Iran's economy may feel it fast. And if Hormuz stays closed, the world feels it too. [17:27] Laura Khan recounting the costs Al Jazeera. All right, Nikolai, you heard there in [17:33] Laura's report that the Iranian regime should be making some 40 percent more from oil sales than [17:39] previously because of the high oil price. So in some ways, are the Iranians actually better off [17:45] with the high oil prices despite the war? Well, basically, yes. Again, we should not consider them [17:52] also as a kind of a bulletproof nation. So the sanctions, they do have the effect and the [17:59] overall situation, the war is undermining the Iranian economy and especially its very core base. [18:07] But at the same time, for now, the high oil prices, they definitely favors the Iranians. [18:12] Well, at least they were favoring before the decision on the closure of hormones on the American side was [18:17] taken. Because right now, the big question will be to what extent the U.S. government will be [18:24] persistent in the implementation of this decision. For now, the Iranian economy has certain durability. [18:34] It has oil in reserves floating around that it can export. And the volumes, they are quite high. [18:43] And according to different estimations, it also has necessary onshore reserves where it can storage [18:51] the oil to maintain the necessary level of output. However, all calculations show that Iran has no [19:01] more than probably two months before it will really start feeling the effect of the closure of hormones [19:08] on the American side and when both its oil output will substantially fall, according to different [19:15] estimations, up to 500,000 barrels a day in the worst case scenario. And definitely, there will be [19:27] serious problems with the experts of oil to its main consumer, China, who is not demonstrating that much of [19:33] practical readiness to ignore the blockade, but rather support Iran onwards. [19:40] Yeah. Mohamed, with this U.S. blockade of Iranian ports in place, yes, the Iranians have done well in [19:46] the short term. But long term, how bad are things going to be for them? [19:50] Well, it depends how much this blockade would be effective and would seriously implement it in [19:59] practice. Up to now, it seems that Americans basically are insisting to stop any shipping to and from [20:06] Iranian ports. And this is bad news for Iranian economy if this is going to continue for a longer [20:13] term. We know that 90 percent of Iran imports and exports is working through the Persian Gulf and Oman [20:20] Sea. And for the non-oil trade, of course, this is around 70 percent. This is not, by the way, only oil [20:29] business. Iran is very much dependent on the food imports. So 30 percent of its merchandise imports are [20:37] food imports, which is very high compared to the other neighboring countries in the Persian Gulf. And this [20:43] is also humanitarian cost for Iran. It's not only that they are not able to export their oil to China. [20:52] So alternative routes for Iran are quite limited. In the Caspian Sea, from the logistic point of view, [20:59] they're available to three ports in the north are much more limited capacity in order to substitute the [21:06] damages which this blockade would cause on the south of Iran. And we are expecting that the inflation [21:14] in this year is going up close to 70 percent as a result of these higher transaction costs. This is, [21:20] by the way, the prediction of IMF, the inflation rate of 70 percent in 2026 for Iran. And the GDP of Iran, [21:27] gross domestic product of Iran, is expected to decrease by minus six percent. So it very much [21:36] depends whether the Americans insist on this blockade and whether they are successful to implement it, [21:42] because Iranian Revolutionary Guard also said that if Iranian ports are not functioning on this blockade, [21:48] no other ports in the Persian Gulf would also function as is expected. [21:52] But, Paulo, since President Trump tore up the JCPOA, the previous Iran nuclear deal that President [21:59] Obama had brokered with the Iranians, he's gone with this maximum pressure campaign. Obviously, [22:04] he has done damage to the economy with sanctions. But the Iranians have also demonstrated, I think we [22:08] can agree, a remarkable pain tolerance, though obviously not unlimited, given that there were protests, [22:14] you know, just a couple of months ago before this war. But I wonder, can you honestly say that this [22:21] U.S. strategy of, you know, inflicting maximum economic pain to try to get the Iranians to the [22:27] negotiating table to accept something more on America's terms is actually working? Is it, Paulo? [22:34] Well, look, now let's get to the latest stage of this strategy, which, as you correctly indicated, [22:40] what goes back to the first Trump term when he denounced the treaty and said we were going to put [22:47] maximum pressure on the Iranians so that we can renegotiate this and get a good treaty. [22:53] Okay, that was many years ago. Let's fast forward to today. We've got the blockade. The blockade, [22:58] in principle, is a pretty good tool in the sense that it prevents, as the other guests indicated, [23:05] anything from moving in or out, whether it's oil or critical food imports or anything else. In principle, [23:12] if the country is sealed off, nothing comes in, nothing goes out, that means the end of the oil [23:20] economy for Iran. When, at the point in which the storage capacity that exists in Iran will be filled [23:29] up, they have to close production. But doesn't really, they also have a railway that goes to China, [23:34] though. Shouldn't that also facilitate some capacity? That doesn't do anything. [23:38] Not enough. Sure. That will mitigate somewhat the damage. But not enough. [23:46] Nothing beats the amount of oil that is shipped by tankers or supertankers. So once they have filled up [23:56] their storage capacity, they have to shut down production. Shutting down is complicated, very [24:02] expensive. And once facilities are shut down, depending on the circumstances, it may take, you know, [24:08] weeks, months or longer to restart once the blockade ends. However, and here's the point. [24:15] This is the theory. For the blockade to take full effect and to really, really bite, it may take at [24:23] least four or five, maybe even six months. Wow. [24:27] Because President Trump has six months. And here is not an economic issue. This is a political issue. [24:33] He has President Trump declared many, many times, the war is over. We're done. We won. We have achieved [24:40] all our objectives. This is it. Now the Iranians are suing for peace. So we're going to have a deal [24:46] or something like that. If this doesn't happen soon, well, then there are political repercussions [24:52] in the United States. We were talking about before. Of course, with the November midterm elections. [24:57] Sorry to interrupt, Paolo, only because we're running out of time. But I just want to get [24:59] Mohammed in. Do you agree with what Paolo just said, that it may take six months for the effect [25:04] of this blockade to really do damage to the Iranians? It's very much. I mean, if the if the Americans [25:11] insist on full blockade, I guess the effects could be filled in Iran sooner than six months. [25:18] If Iran is not able to export 1.5 million barrels per day, so that means and most of these oil are [25:28] transited from the Khark Islands. So we know that the Persian Gulf and the Strait of Ormond is basically [25:34] the key area that Iran is exporting. That means there would be no foreign exchange revenues for Iranian [25:39] government. I'm assuming that this blockage is fully implemented and also Iran is not trying to [25:47] spread the cost to the other countries. And also from the point of imports. I mean, [25:53] majority of Iran imports coming from the southern areas, from the port of Bandar Abbas and Imam Khomeini, [25:59] these are the major ports for imports. So I would expect the significant effect for Iranian society [26:09] feels sooner than six months. But it's not only the blockade. So we are talking about the damage that [26:16] the war has created for the Iranian economy and the sanctions. So these two, the interaction of [26:22] sanctions, military damages and this blockade jointly reduces this resilience of Iranian society. So [26:32] exact timing is very difficult, I guess, to make. [26:35] Of course, of course. [26:36] To make. [26:36] Mohamed, I just want to give Nikolai the last word. So we're running out of time. But just in a nutshell, [26:41] when the dust settles here and surely when a deal is reached between the United States and Iran, [26:46] do you think that Iran may actually be better off than they were before or are surely they going to [26:52] be worse? Well, I wouldn't be that optimistic. It all depends on when the dust settles and when we see [26:57] agreement achieved. So if it's achieved within the next week, days, then definitely the Iranian losses, [27:04] they are not going to be that big. But the damage has already been inflicted by the military operation [27:12] that was taking place within the last months. And definitely we will see a certain necessity to [27:19] restore the electricity production base, the water supply base. There are lots of damage done by the [27:27] living sector. So we and Iran definitely will face problem with the bringing in necessary funds and [27:33] investments to rebuild its economy. But it's still a manageable damage, especially given that, I guess, [27:41] that the period of high oil prices will stay with us for a while. Not a long period, but still. [27:47] The problem is if the conflict indeed takes months. My assessments are a little bit shorter than [27:53] my colleagues, though I fully agree with them on all their assessments. So within two, [27:57] three months, we might see even a way more challenging situation for Iran and its reconstruction, [28:05] revival after the conflict is over, will require much more time and the social consequences will be way [28:11] higher. All right, Mohamed Reza Farzaneghan, Paolo Fonshira and Nikolai Kozhanov, thank you all for your time [28:17] today. I wish we had more time, but it's a fascinating discussion. Thank you again. And that's it for our show. [28:24] You can get in touch with us on X. My handle is at Scott McClain. And make sure to use the hashtag [28:28] AJCTC when you do. Or drop us an email, countingthecost at aljazeera.net. That's our address. [28:34] And there's more for you online at aljazeera.com slash ctc. That'll take you straight to our page, [28:39] which has individual reports, links and entire episodes for you to catch up on. All right, that is [28:45] it for this edition of Counting the Cost. I'm Scott McClain. For the whole team here in Doha, [28:49] thank you so much for watching. The news is next here on Al Jazeera. See ya.