Iran’s Economic Instability and Sanctions  

Key Judgments:

• It is highly likely that the increasing sanctions against Iran will result in it deepening its relationships with other hostile nations such as Russia and China, leading to an emerging economic and military axis that challenges Western interests. (High confidence).

• Over the short to medium term, Iran’s economic isolation will likely lead to greater regional instability, with potential long-term impacts on both regional power balances as well as international security. (Moderate confidence).

In a significant escalation of its military cooperation with Russia, Iran has reportedly delivered a shipment of over 200 Fatah-360 short-range ballistic missiles to Moscow. This move, intended to bolster Russia’s depleting missile stockpiles as a result of its ongoing conflict in Ukraine, has resulted in immediate responses from Western powers. As a result, the United States, European Union, and the United Kingdom have imposed a fresh round of sanctions on Tehran.

These sanctions are aimed at disrupting Iran’s military and defence sectors, whilst also tightening restrictions on Iran’s financial institutions. The new sanctions come on top of an already extensive sanctions regime, which has severely restricted Iran’s ability to engage in international trade, access global financial markets, and export its energy resources. This latest round of sanctions will further isolate Iran, cutting off critical supply chains and increasing the pressure on its economy.

The sanctions imposed on Iran over the last two decades have been extensive, targeting nearly all sectors of the Iranian economy, from energy and finance to military and technology. The key sanctions include:

UN and EU Sanctions: Since 2006, the UN Security Council has passed multiple resolutions targeting Iran’s nuclear program, freezing the assets of key Iranian individuals and entities. The European Union has followed suit, imposing a comprehensive embargo on arms sales, freezing assets of individuals linked to Iran’s nuclear activities, and restricting oil imports from Iran.

US Sanctions: The US has led the charge in imposing economic sanctions on Iran. These have included restrictions on Iran’s banking system (particularly its ability to access the SWIFT international payment system), its oil exports, and its access to foreign currency reserves. Sanctions have also targeted individuals and entities tied to Iran’s Revolutionary Guard Corps (IRGC) and missile development programs.

Post-JCPOA Sanctions: Although the Joint Comprehensive Plan of Action (JCPOA) provided temporary sanctions relief in 2015, the US withdrawal from the agreement in 2018 led to the reimposition of sanctions, especially targeting Iran’s oil sector and foreign trade. The Trump administration’s “maximum pressure” campaign further tightened these sanctions, bringing Iran’s economy to its knees in 2019.

The impact of these sanctions has crippled Iran’s economy, with inflation skyrocketing, the value of the Iranian rial plummeting, and unemployment remaining consistently high. Iran’s GDP has shrunk by more than 10% since the reimposition of US sanctions, and the country’s oil exports have fallen from over 2 million barrels per day in 2017 to less than 500,000 barrels per day in 2023. The recent sanctions imposed in response to the missile shipment to Russia are expected to deepen this economic crisis further.

With Iran facing increasing isolation from the West, it is highly likely that it will seek to deepen its economic, military, and political ties with other hostile powers, particularly Russia and China.

The military cooperation between Iran and Russia, which has expanded significantly since 2022, is driven by mutual strategic interests. Russia’s need for military equipment in its conflict with Ukraine has made Iran a key supplier of drones, munitions, and now missiles. In return, Iran has benefited from Russian military technology transfers and geopolitical support, particularly in Syria. The sanctions are likely to further deepen this relationship, with Moscow and Tehran forming a more robust alliance that challenges Western influence in the Middle East and Eurasia.

China, as Iran’s largest trading partner, has also been instrumental in helping Tehran circumvent sanctions. The two countries signed a 25-year strategic cooperation agreement in 2021, which includes significant Chinese investment in Iranian infrastructure and energy projects. As Iran’s access to Western markets becomes increasingly restricted, it will likely seek to increase its economic reliance on China, including expanding oil exports to Chinese markets in spite of Western sanctions.

Together, Russia and China are providing Iran with the ability withstand the economic pressures from Western sanctions. This emerging partnership between the three nations represents a significant challenge to the West, both economically and militarily.

In the short term, the new sanctions will likely result in increased domestic unrest in Iran. Already facing widespread protests over inflation, corruption, and political repression, the Iranian regime will be forced to dedicate resources toward managing internal dissent. This unrest could spill over into the broader region, with Iranian-backed militias in Iraq, Syria, and Lebanon potentially escalating their activities in response to Tehran’s increasing isolation.

Over the medium-to-long term, Iran’s economic struggles are likely to drive more aggressive foreign policy actions. As Iran grows closer to Russia and China, it may increase its support for proxy groups across the region, including Hezbollah in Lebanon and the Houthis in Yemen. This would lead to heightened tensions in the Middle East as Iran seeks to counterbalance its economic losses with military influence, as well as drain the resources of Western powers enforcing the sanctions.

To conclude, the recent shipment of ballistic missiles to Russia and the subsequent fresh sanctions are likely to deepen Iran’s economic crisis, further isolating Tehran from the international community.  In response, Iran is highly likely to deepen its relationships with hostile nations such as Russia and China, leading to an emerging economic and military axis that challenges Western interests. Over the short to medium term, Iran’s economic isolation will likely lead to greater regional instability, with potential long-term impacts on both regional power balances as well as international security.