Why Hasn’t Iran’s Economy Collapsed?

A couple of months ago, once it had become clear that airstrikes alone wouldn't force an Iranian capitulation, the Trump administration pivoted from a strategy of military coercion to one of economic coercion. The bombing stopped and the US instead imposed a naval blockade of everything going in or out of Iran's ports, accompanied by some fresh sanctions, in the hopes of imposing enough damage on the Iranian economy to force further concessions. At first glance it looks like this plan, or at least the first bit of it, is working remarkably well. Iran's currency the rial has cratered against the dollar, inflation has duly spiked to a record high of about 90%, and in July the IMF said it expects the Iranian economy to contract by 5.4% this year, which would be the sharpest contraction since the Iran-Iraq war in the 1980s. This is probably an underestimate as well. Data released by Iran's statistical centre last month showed that GDP shrank by 10.1% year-on-year between March 21st and June 20th, the first quarter of the Persian calendar. Nonetheless, despite all of this, the regime has shown little interest in making further concessions. So in this video we're going to explain why Trump's new strategy of economic coercion isn't really working, and why Iran's economy, bad as it might be, hasn't yet collapsed. For the latest issue of our magazine Too Long, we interviewed The Economist's new Washington Bureau Chief Shashank Joshi, all about what he said has left Donald Trump bruised, weakened and humiliated. That's just one of the articles in our longest issue ever. Subscribe to get your copy by clicking the link in the description. So as we see it, there are mainly two reasons the Iranian economy hasn't collapsed, at least not to the extent required to force a change in Iranian strategy. The first is that the Iranian state has, over time, become very good at essentially transferring money and resources away from what we might call the normal economy towards the state itself. This makes life extra miserable for ordinary Iranians, but allows the state to continue pursuing its domestic and foreign policy goals. The exchange rate is a good case in point. For context, Trump's defenders, including US Treasury Secretary Scott Bessent, like to point to the cratering real dollar exchange rate as proof of the efficacy of their sanctions campaign, with the implication that the Iranian economy is inescapably headed for collapse. It is true that the rial now trades at about 2.6 million to the dollar, down from about a million last year. And in a normal economy, such a sharp depreciation would usually signal some sort of crisis. But Iran is not a normal economy. Unlike most of the rest of the world, the rial's exchange rate, or more specifically the one that Trump and co like to cite because Iran actually has a number of exchange rates, is not determined by the free market. Because the rial isn't freely traded. Rather, it's determined by Iran's central bank. The central bank obviously has to take into account what we might describe as the economic fundamentals, which effectively set an upper limit on the strength of the real. The central bank couldn't for instance set the rial at 1 to 1 with the dollar, but the central bank can quite easily devalue the real, which is exactly what they do and what is happening now when they want to essentially transfer wealth away from the so-called normal economy towards the state. This is because devaluations benefit exporters at the expense of importers. In Iran, because the state has control over basically every big export-oriented business, including most obviously the oil industry, and most households and small businesses are net importers, this means that devaluations materially benefit the state at the expense of the rest of the economy. Interestingly, this was actually the proximate cause of the massive protests we saw in December and January, which began with businessmen protesting the central bank's decision to devalue the rial, which they believed unfairly benefited well-connected exporters at the expense of their own import-dependent businesses. Anyway, one of the main channels through which this transfer of wealth occurs is the inflation rate. Devaluation stoke inflation, which in turn erodes living standards, meaning Iranian households consume and import less. Less consumption means more resources for the state to mobilize, and less imports reduces pressure on the real. This obviously makes things additionally tough for ordinary Iranians, but unless they rise up and topple the regime, which looks increasingly unlikely, allows the state to insulate themselves from the worst effects of sanctions. This also speaks to the more general myth about sanctions. Their advocates often justify their use by claiming that modern sanctions are targeted against political elites or specific decision makers. In reality however, this is rarely true. Elites can usually find ways to shift the economic burden onto someone else, and there's some evidence to suggest that sanctions have actually hit poorer Iranians hardest. So that's the first reason that the economic pressure campaign isn't working. The Iranian state has ways to divert resources away from the normal economy, which is additionally why the headline macro numbers aren't that informative. Onto the second. Sanctions become less effective with time. Iran has been under some sort of US sanctions for the best part of 30 years, and every time the US president of the day promises that this latest round of sanctions will finally be the one to break the ayatollahs. But while each new round of sanctions usually incurs some temporary economic pain, the Iranian economy always eventually finds its feet. Usually once Iran and its allies have engineered some new workarounds. 2018 when Trump withdrew the nuclear deal and imposed what he described as maximum pressure sanctions is a good case in point. Then as now, Trump claimed that this latest round of sanctions would bring the regime to its knees. Then as now, oil exports, Iran's main source of foreign currency earnings, fell towards zero. Then as now, there was subsequently a lot of speculation about impending economic crisis. But an acute crisis never materialised. Iran was able to find its way around the sanctions, and by 2022, oil exports would back up and the economy was going again. The private sector has also developed its own coping strategies, including most notably stockpiles. According to filings made by companies listed on the Tehran Stock Exchange, the average industrial firm has inventories that could last three months. In sensitive sectors, such as electrical machinery, which has been heavily targeted by US sanctions in the past, firms maintain inventories that could last nearly seven months. To be clear, this isn't to say that sanctions aren't painful, they clearly are, as evidenced by both Iran's dismal economic record and the emphasis that Iranian officials have put on sanctions relief in recent negotiations. Rather, the point we're trying to make is that their efficacy wanes over time, so if they haven't yet incurred an economic collapse or change in Iranian strategy, chances are they won't in the future. All in all, while the US has been able to impose real and very severe harm upon the Iranian economy, it's unlikely to engender a change in Iranian policy. Not least because the brunt of it has been borne by a public with very little means to affect policy, and that is, by most accounts, broadly supportive of the regime's war effort. Big issues like these don't just happen overnight, they're so often built up over time, sometimes even decades of small changes and consequences building up to something massive. And the same can be said about a lot of things in our day to day lives, even for something as small as the razor you use. Countless razor companies have just added new technology and more blades, hoping that they'd create a better shave, but they've actually done the opposite. They've created friction. Sure, you might think that the extra blades will compensate for inconsistent cutting, but each additional blade on your razor increases surface contact with your skin, which increases friction. More friction means more opportunity for irritation. Instead of solving the root issue, the industry has sold you solutions to a problem they invented. What you really need is a razor that focuses on precision, and that's where Henson comes in. Henson uses a single, precisely supported blade. Instead of layering blades to compensate for inconsistency, the design focuses on making one blade cut correctly and predictably every single time. This superb engineering and precise blade tech provides the incredible shave you've been looking for. Don't just take our word for it, try it out yourself and we promise you won't be disappointed. Henson's even offering 100 free blades with your purchase by using our code, as well as next day shipping for our UK audience. So just go to hensonshaving.com tldr or use code tldr at checkout and you'll never need to buy another razor again.