For more than four decades, Iran has built what it calls a “resistance economy,” designed to withstand conflict, sanctions and hostility with other states near and far. The Islamic Republic manufactures products it finds difficult to import, including pharmaceuticals, car parts and white goods.
That model, which has helped the regime survive even as it presides over worsening economic distress, is now being put to the ultimate test
The several hundred power plants are scattered across the country, a lesson learned after the Iran-Iraq war of the 1980s, in part to make it harder to destroy the grid. And it uses the exchange to circumvent sanctions, exporting oil in exchange for food and machinery.
That model, which helped the regime survive even as it presided over a deepening economic crisis, is now being put to the ultimate test, the Financial Times said in an analysis.
Since the start of the war on February 28, the US and Israel have hit Iran with thousands of airstrikes, killing its leaders and targeting its military infrastructure. Critical infrastructure has also been hit, including fuel depots, Iran’s largest natural gas complex and even a bank — all in an effort to weaken the regime’s influence.
Some industrial plants have already been damaged by the bombing, according to Iranian media, including two of the country’s largest steel mills that were hit on Friday.
Steel is an important export product for Iran, apart from oil. Esfandyar Batmanghelidj, managing director of the British think-tank Bourse & Bazaar Foundation, estimated that Iran was on track to export about $7 billion worth of steel products during the last Iranian year.
This has exacerbated the intense pressure on a country that was in deep crisis long before the war began. With inflation exceeding 40%, living standards had fallen sharply and anger at the state of the economy was a major driver of anti-establishment unrest.
But despite this, analysts say there are signs that the “resistance economy” is so far doing some of what it was supposed to do.
Survival of the Iranian regime
The cost of war to Iran will be severe, with the resulting economic pressures likely to fuel further domestic discontent. But for now, it’s about regime survival.
“There is no doubt that Iran’s economy will suffer a shock because of this war,” Batmanghelidj said. “But I don’t think the economic crisis will be what breaks the spine of the Iranian state in the conflict.”
With Brent crude oil prices above $100 for most of last month, foreign analysts estimated the country was earning more than $140 million a day
“From the point of view of the Iranian authorities, the challenge for them is not to try to operate the economy normally,” Batmanghelidj added. “There is a lot of scope to cannibalize the political economy to provide this kind of war economy.”
In preparation for the war, Iranian President Massoud Pezheskian decentralized power to the provincial administrations, allowing them to speed up imports. Bureaucratic hurdles have eased and approvals have been expedited.
Trade has continued through land borders, despite the fact that few merchant ships pass through the Strait of Hormuz, Iran’s main gateway for exports and imports, which the Islamic regime has effectively blocked.
Even with Iran under constant bombardment, authorities have sought to project stability, insisting there are no shortages of basic goods.
Supermarket shelves remain full, with fresh produce widely available. A period of gasoline restrictions helped stabilize fuel supplies after Israeli attacks on Tehran storage facilities caused temporary shortages.
The risk of damage to energy production infrastructure
But if US President Donald Trump follows through on his threat – which is currently on hold – to strike Iran’s power plants, the economic situation will deteriorate rapidly.
Iran was in severe economic decline before the start of the war, thanks to a combination of sanctions, mismanagement, declining oil revenues, and widespread corruption.
This helped spark mass protests against the regime, which responded with a violent crackdown in January that killed thousands of protesters. Israel’s 12-day war against the country last June also helped fuel a sense of unease.
However, an Iranian former economic official said that despite the strain on the economy, it has the resilience to survive even if the war lasts a year.
Iran has one of the region’s most diversified and industrialized economies — despite dysfunction and inefficiency — rooted in the modernization drive led by the last shah in the 1960s and 1970s, analysts say.
The theocratic regime and private enterprise were built on this foundation in response to decades of US and Western sanctions after the 1979 Islamic Revolution.
They became more adept at circumventing sanctions, building alternative trade routes and accelerating import substitution during Trump’s first term, when he tightened sanctions and cut Iran off from the global financial system.
Iranian industry can “flexibly switch from imported to domestic products,” said Djavad Salehi-Isfahani, an Iranian-born economist at Virginia Tech.
Diversified industrial base
“This is what makes Iran stand out from its Gulf neighbors. It has an industrial base that has existed since the time of the Shah,” he said. “They can survive on some basic level, but life will be very difficult.”
Batmanghelidj said the country is not solely dependent on oil and can earn $2 billion a month from exports of products such as metals, chemicals and food to offset costs.
“The driving force of the Iranian economy is not oil exports,” he said. “Even if the oil trade were to be completely eliminated … Iran could conservatively maintain its exports through the other tariffs as long as there are reserves to continue producing goods.”
However, the disruption in the Strait of Hormuz leaves Iran vulnerable in other ways. While Iranian authorities say the country produces about 80% of its food domestically, Iran still imports some of its wheat, oilseed and rice needs. It also depends heavily on soybeans, corn and other grains for animal feed.
These typically rely on complex logistics chains and are often routed through the United Arab Emirates — which has borne the brunt of Iran’s attacks against US allies in the Gulf — much of which uses Dubai’s Jebel Ali port. The UAE has toughened its rhetoric against Iran as the war threatens Tehran’s trade relations with one of its key import and export hubs.
With maritime traffic through the Gulf severely disrupted, alternative routes, including rail links between China and northern Iran and smaller ports such as Chabahar in southern Iran, offer potential solutions, albeit with significantly lower capacity. Iran has also allowed a limited number of cargo ships carrying grain and other agricultural products to pass through the narrow sea passage.
“It’s true that there are other options,” said an Iranian cargo importer, but added that those alternatives did not have comparable capacity to the Imam Khomeini Gulf port, Iran’s largest. “It may work in the short term, but it will pose a significant challenge in the long term.”
So far, the state — the largest employer — has continued to pay civil servants and year-end bonuses, despite some disruption caused by cyberattacks on the banking system. Food prices have not been as volatile as in recent months, in part because the foreign exchange market has effectively become inactive.
Those who rely on daily wages — such as drivers and cleaners — have sought to keep working, even as a wartime slump in demand has strained livelihoods.
Higher oil prices
The US-Israeli attacks have also brought at least one paradoxical boost to Iran’s economy: higher oil prices.
With Brent crude prices above $100 for most of last month, foreign analysts estimated the country was earning more than $140 million a day as it continued to export millions of barrels, with the U.S. saying it was prepared to tolerate sales to shore up global supplies.
“Rising oil prices have already helped Iran’s economy and offset some of the war costs,” said a senior Iranian energy byproducts trader. “These [οι πωλήσεις] mean a few billion dollars more in revenue.”
But Batmanghelidj said Iran’s economic resilience can only go so far. If the US and Israel expand their attacks into a broader campaign against Iran’s political infrastructure, the country could be plunged into a much deeper crisis.
“If the US and Israel decide to hit civilian infrastructure, such as power plants, then the impact can be much more severe and much more immediate,” he said.
But he added that the Iranian retaliation this could trigger against comparable infrastructure in the Gulf states means that “even if it shortens the duration of the war … the cost to all parties involved may be equally high.”
Salehi-Isfahani said that even if the regime survives the war, Iran’s road to recovery will be long. “You can’t have this level of destruction and bombs and not go back 10 years or more,” he said.
Source: OT.gr
