Nearly six months after the U.S. and Israel launched an operation to overthrow the Iranian government, it’s fair to say their assault hasn’t exactly gone according to plan. Still, the ensuing war has followed a clear, predictable logic.
After decades of sanctions failed to persuade Iranians to overthrow the regime, Israel and the U.S. resorted to war; after that failed too, they turned to a naval blockade. Each escalation has had an impact, adding to the misery of life in Iran, but so far each has missed its ultimate target: forcing a surrender.
The military stalemate has once again turned attention to the economy and to the question that has always hovered over this strategy: just how much economic punishment can Iranian society absorb?
No one should doubt that Iran’s economy is in its worst shape in decades. Years of strict sanctions erased two decades of economic growth, and months of war caused hundreds of billions of dollars in damage to infrastructure and productive capacity and added millions to the ranks of the unemployed.
According to the World Bank’s constant-price PPP measure, GDP per person, a popular measure of living standards, recovered after the imposition of harsher sanctions. In 2025 it was 9.6% higher than in 2018, when Trump launched his maximum pressure campaign, and 5.5% more than in 2011, when sanctions first tightened under President Barack Obama and increasingly restricted Iran’s international trade.
These are hardly impressive growth rates. Had Iran’s economy continued to grow at 5% per year after 2011, its GDP per capita would have been more than twice what it was in 2011. Still, these numbers do not describe an economy on the verge of collapse. That distinction matters because the political strategy of maximum pressure has rested heavily on the assumption that one more tightening of the economic vise could push an already exhausted economy —and therefore the political system — over the edge.
The U.S. and Israel appear to have initiated this war believing that Iran was on the brink of economic ruin. Much as an Iranian nuclear bomb was repeatedly said to be only weeks or months away, economic collapse was expected to arrive with the next ratchet of pressure.
But it has now become apparent that both the picture of extreme economic fragility and the expectation of regime change were highly exaggerated.
How much did the war add to the grim picture? The latest GDP figures covering the period of the war are for spring 2026. They show a surprisingly small contraction
During the three years before the June war, from 2021/22 through 2024/25, real average per capita expenditure increased, and poverty rates declined.
A major reason for this economic resilience was the revival and expansion of cash transfers under the Raisi and Pezeshkian administrations, which focused on redistribution of funds to the poor rather than the more market-and business-friendly policies of President Hassan Rouhani.
Cash transfers have their limits. As sanctions and the blockade choke off oil revenues and force the government to print money to pay for the transfers, the cost of war is increasingly felt in rising prices. In spring, as bombs were falling on Tehran and major cities, prices rose at triple-digit annual rates.
The government’s policy of allowing prices — including the exchange rate — to rise, rather than fixing prices and resorting to rationing, has contributed to the economy’s resilience, and it helps explain why repeated predictions of imminent economic collapse have proved unreliable. It is difficult to predict how long the Pezeshkian government can continue this course and avoid rationing if food and fuel shortages emerge.
Iran has paid an enormous price in resisting sanctions and war to preserve its independence. Sanctions have reduced growth, hurt investment, and exacerbated inflation, while the war has destroyed productive assets and jobs. But an economy can perform badly for a very long time without collapsing, particularly when the state is able to redistribute income to the poor and when the people place a high value on national independence.
“But an economy can perform badly for a very long time without collapsing”
Likely a reason Russia can continue their Ukrainian adventure.