Iran’s economy after the March war: how bad can it get?

Over the next two to four months, Iran’s economic conditions are expected to continue deteriorating sharply, with high inflation, rising unemployment, falling real incomes, and significant stress across key industries, the external sector, and the financial system, amounting to severe stagflation.

The economy entered the recent war from a weak starting point, and the combined effects of war-related damage, financial strain, and policy responses are likely to intensify these pressures.

Under a continued ceasefire, the deterioration is expected to be gradual but persistent; under a strictly enforced naval blockade, the adjustment is likely to be faster and more severe, with risks of very high inflation and broader economic disruption.

However, hyperinflation and full economic collapse are less likely in the next two to four months. An effectively enforced blockade, combined with military operations focused on reopening and securing the Strait of Hormuz, will push Tehran to the edge of economic collapse.

Starting point: A weak economy before the war

Iran entered the war from an already fragile position. By late 2025, inflation was elevated above 50 percent, the rial had lost substantial value, and the banking system was under visible strain, notably by the collapse of Bank Ayandeh. These pressures had already reduced household purchasing power and severely weakened business activity.

The continued depreciation of the currency, which saw the rial lose more than 20 percent in less than 20 days by the end of 2025, and worsening economic conditions contributed to widespread unrest across the country, which was ultimately suppressed. This left the economy highly vulnerable even before the war began.

Impact on income-generating industries

The war has directly affected Iran’s main sources of export revenue. Damage to industrial infrastructure—especially in petrochemicals and metals—has disrupted sectors that generated roughly $25–30 billion in exports in 2024 (petrochemicals: $13–17 billion; metals: $12–13 billion).

Production in these sectors is now constrained by:

• Physical damage to facilities, and utility infrastructure
• Shortages of inputs and spare parts
• Limited access to financing and foreign exchange

Even partial restoration of operations is expected to take time, and exports from these industries are likely to decline sharply in the near term.

Spillovers to other sectors are also significant. In the agriculture sector, fertilizer shortages and disrupted logistics are expected to reduce output. Heightened uncertainty, combined with likely shortages of steel and possibly cement, is contributing to a significant slowing of activity in the construction sector, particularly in private projects. The auto sector is also likely to suffer a setback due to the lack of steel and aluminum.

Internet blackout and business disruption

Domestic policy responses have added further strain. The widespread internet blackout has severely disrupted economic activity, especially small and medium-sized businesses reliant on digital platforms.

According to NetBlocks, the economic cost of internet shutdowns in Iran has been estimated to be at least $37 million per day during recent outages.

The blackout has:

• Disrupted online sales and payment systems
• Interrupted supply chains and coordination
• Reduced access to information and markets

These effects extend beyond online businesses and have slowed activity across the broader economy.

Financial system stress

The financial system, already under pressure before the war, is facing increased risks. The collapse of Bank Ayandeh in December 2025 highlighted underlying vulnerabilities in the banking sector. Other large banks were already under strain prior to the conflict.

Current conditions may lead to:

• Reduced lending as banks conserve liquidity
• Increased risk of bank distress if access to funding tightens
• Potential loss of confidence affecting deposits and payment systems

The disruption of the private trade credit system—often based on post-dated checks—has further constrained business financing. Recent signals from the judiciary suggesting reduced legal consequences for unpaid checks have weakened enforcement, discouraging sellers from extending credit and further restricting transactions.

Impact on households

Households are expected to reduce spending significantly. Private consumption accounts for roughly 50 percent of the economy, so this contraction will have broad effects.

Key drivers include:

• Rising prices and declining real incomes
• Increased uncertainty leading to precautionary saving
• Reduced access to credit
• Wealth effect due to declines in asset values, particularly equities in sectors affected by the war and the closure of Tehran Stock Exchange.

These factors point to rising unemployment, a notable decline in private consumption, and a broad and significant decline in living standards.

Economic conditions over the next 2-4 months

Scenario 1: Continuation of ceasefire with the US and Israel

Under this scenario, large-scale hostilities do not escalate further, and oil exports continue, although under constraints. However, petrochemical and metals exports remain significantly disrupted due to infrastructure damage and ongoing restrictions on trade and financial channels, including limited access to regional intermediaries such as the UAE.

In this environment:

• Oil revenues continue to provide limited foreign currency inflow
• Inflation remains around current high levels due to currency weakness and supply disruptions
• Industrial activity remains below capacity
• The banking system remains under pressure but avoids immediate systemic collapse

Economic conditions continue to deteriorate, with persistent pressure on household incomes and employment. The rial is likely to remain under depreciation pressure, sustaining elevated inflation in the 50-60 percent corridor. Resource allocation is expected to be heavily tilted toward military rebuilding—particularly missile and defense capabilities—while remaining funds are directed toward essential imports such as food and medicine.

Scenario 2: Rigorously enforced naval blockade

Under this scenario, a naval blockade is strictly enforced following recent actions by the United States administration. Iran would be largely unable to export oil through the Persian Gulf, with only limited alternative channels (such as “ghost fleet” activity) available.

In this case:

• Foreign currency inflows drop sharply
• The rial depreciates further, leading to a rapid acceleration in inflation
• Imports become severely constrained, limited to mainly essential goods
• Industrial activity declines further due to lack of inputs and financing
• Pressure on the banking system intensifies as liquidity conditions worsen

The loss of oil export revenue significantly weakens the government’s ability to stabilize the economy. Note that the “ghost fleet” overseas is likely to continue generating revenue for the next two to three months.

However, if the blockade is expected to continue, the government will ration this revenue for the near future. Inflation would rise sharply but most likely will not break the 100 percent ceiling, and the risk of broader economic breakdown increases, particularly if access to foreign currency becomes severely limited.

As in the first scenario, despite the dire economic situation, the government is expected to prioritize military spending to rebuild defense capabilities and prepare for future conflict.

Remaining resources would be directed toward securing basic goods such as food and medicine. Under a strict blockade, however, even if essential goods remain available, high inflation and rising unemployment would leave many households unable to afford them, sharply reducing living standards and intensifying public discontent. Even so, a full-scale economic collapse or hyperinflation is not expected within the next two to four months.

Scenario 3: Naval blockade plus major military operation in Iran's south

Under this scenario, strict enforcement of the naval blockade is coupled with a major military operation focused mainly on the south of Iran to reopen and secure the Strait of Hormuz.

Such an operation would render Iran not only unable to export oil but would also disrupt most of its trade through the Persian Gulf, including the import of food and other essential goods.

Securing basic goods would become extremely difficult for the government, which would be diverting its limited resources toward active military confrontation. Most economic activities are likely to come to a halt as inputs become extremely scarce and uncertainty rises sharply.

Inflation would spiral out of control, prompting the government to impose stricter limits on the payment system to prevent hyperinflation. These measures would, in turn, hinder economic activity even further. A full economic collapse within two to four months would not be inevitable, but it would remain a distinct possibility.

During the conflict, Iran struck civilian buildings, oil facilities, and sensitive infrastructure, including a data center linked to Oracle. In response, the UAE recalled its ambassador from Tehran, signaling a swift escalation in diplomatic tensions.

The diplomatic fallout deepened further this week when UAE state security authorities said they had arrested members of what they described as a “terrorist group linked to Iran’s ruling system” in Sharjah. The suspects were accused of planning attacks, undermining national security, and facilitating illicit financial transfers.

At the same time, Tehran has formally demanded compensation from several regional states, including the UAE, for allowing their airspace and bases to be used by the United States and Israel in strikes against Iran.

These developments have intensified a crisis that threatens to disrupt one of Iran’s most vital economic lifelines.

A deeply rooted economic partnership

Despite long-standing disputes, including disagreements over the islands of Abu Musa and the Greater and Lesser Tunbs, Iran and the UAE have built extensive and resilient economic ties over the past several decades.

Geographical proximity, advanced port infrastructure, and liberal trade regulations have transformed the UAE into a hub for Iranian commerce since the end of the Iran-Iraq War. Thousands of Iranian companies have established operations there, and a large share of Iran’s imports has flowed through re-export channels based in Dubai. Over time, the UAE became not just a trading partner but a critical gateway to global markets for heavily-sanctioned Iran.

For much of the past two decades, the UAE has ranked either first or second among Iran’s trading partners, often competing closely with China. Today, it remains one of the largest suppliers of goods to Iran, accounting for a significant share of its imports.

Roughly one-third of goods entering Iran—from mobile phones and electronics to auto parts, cosmetics, and clothing—have passed through the UAE, representing trade worth billions of dollars annually. The disruption of this flow is already being felt. In some sectors, such as mobile phones, prices have reportedly surged by 40 to 50 percent following the halt in imports.

With limited alternatives offering the same combination of proximity, infrastructure, and financial connectivity, any prolonged rupture could deepen Iran’s economic isolation and accelerate a costly realignment of its trade networks.

Trade imbalance and export structure

Iran’s exports to the UAE have largely consisted of oil products, petrochemicals such as fertilizers and industrial feedstocks, metals and minerals, agricultural goods including fresh produce and nuts, and construction materials like stone. However, much of this trade has been indirect, with the UAE serving as a re-export hub for Iranian goods destined for third markets.

At the same time, exports from the UAE to Iran have consistently exceeded Iran’s exports in the opposite direction, creating a significant trade imbalance. The UAE’s role as an intermediary—rather than a final destination—has been central to this asymmetry.

Sanctions and the UAE’s pivotal role

The importance of the UAE grew dramatically after the tightening of US and European sanctions on Iran, particularly following Washington’s withdrawal from the 2015 nuclear deal (JCPOA) in 2018. As direct trade routes narrowed, the UAE became the primary conduit for goods, capital, and financial flows into Iran.

Emirati exports to Iran rose from around $5.2 billion in 2018 to more than $20 billion in recent years. Dubai also became a financial hub for Iranian exchange houses, many of which played a key role in facilitating currency transfers and circumventing sanctions. Exchange rates set in Dubai’s markets often influenced the value of the Iranian rial domestically.

However, this system is now under pressure. UAE authorities have reportedly targeted Iranian exchange houses and so-called “trust companies,” freezing accounts, shutting offices, and detaining some operators. These actions could severely constrain Iran’s access to international financial channels.

Trading has been suspended for two months. Ticker symbols remain closed, and millions of retail investors have been unable to move their assets.

The head of the Securities and Exchange Organization said the market would reopen within ten to twelve days in phases. In the first stage, only companies not directly damaged by the war will resume trading, while steel and petrochemical firms that suffered losses will remain closed.

Reopening a damaged petrochemical company whose production has halted and whose recovery costs and timeline are unclear would likely trigger a sharp price drop and create a volatile market signal. Yet the current approach of prolonged closure presents deeper structural concerns.

There are three conceivable scenarios for reopening the Tehran Stock Market.

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Scenario one: Comprehensive deal with US

The first scenario envisions a comprehensive agreement and broad sanctions relief. In an optimistic case, Iran reconnects to the global financial system, oil and petrochemical exports face fewer restrictions, and foreign investment gradually returns. Market reopening could then mark the beginning of long-delayed reforms: transition from price controls to market pricing, reduced financial repression in banking, and transparent government balance sheets.

Export-oriented sectors such as steel, petrochemicals, and copper would benefit from renewed access to global markets. Banks could reassess their balance sheets and shift toward genuine credit evaluation. Foreign investors, absent for nearly two decades, might gradually return.

However, without internal coordination and structural reform, even sanctions relief would not rescue the TEDPIX.

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Scenario two: Limited military and regional agreement

A more likely scenario involves a limited agreement focused on military and regional tensions. Hostilities ease, but sanctions remain largely intact and foreign investment prospects stay uncertain.

Under these conditions, reopening may trigger a new crisis. Major export-driven firms would initially remain untradeable. Downstream industries would face raw material shortages and price spikes. The automotive sector, already loss-making before the war, would struggle with supply chain disruptions and accumulated losses.

Meanwhile, limited foreign currency inflows could push the government toward inflationary financing to fund reconstruction and subsidies, either through money creation or borrowing from banks already dependent on regulatory forbearance. With high inflation ahead, questions arise about how listed firms can generate sufficient value to remain profitable, especially amid infrastructure damage and seasonal energy shortages.

Investors, having endured months of uncertainty without clear disclosure of portfolio losses, may view reopening as an exit opportunity. Investment funds facing redemption waves would be forced into selling queues, amplifying downward pressure. The market could reopen with a heavy backlog of sell orders, and each negative headline could trigger further declines.

Scenario three: Continued conflict and further escalation

If negotiations fail and conflict intensifies, prolonged closure would likely continue. In such a scenario, Tehran Stock Exchange, under its current management and policy framework, could effectively cease to function as a credible capital market.

Policymakers may believe closure prevents price collapse, but in practice, investor confidence collapses instead. Alternative investment channels gain prominence: foreign currency, gold, real estate, consumer goods, or capital flight to neighboring countries.

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Iran’s economy before and after the war

Even before the recent conflict, Iran’s economy faced a structural crisis. Industrial capacity was constrained by aging machinery, energy imbalances, and sanctions. Institutional trust was at its lowest level in four decades. Key industries — steel, petrochemicals, automotive, and banking — were either loss-making or dependent on hidden subsidies. War in such an environment acts as a crisis accelerator, pushing uncertainty beyond policymakers’ management capacity.

Tools available for reopening — tighter price limits, sales restrictions, targeted liquidity injections, and market-maker intervention — can at best distribute the shock and manage short-term risk. They cannot substitute for honest disclosure of losses, independent audit assessments, and credible reconstruction plans.

Reopening the Tehran Stock Exchange alone will not resolve broader economic challenges. In the best-case scenario, it could form part of a larger reform package aligned with political agreement and foreign capital inflows. In the other two scenarios, reopening may merely accelerate the crisis cycle.

The core question facing policymakers is political rather than technical: are they willing to accept the real market value of shareholders’ assets, or will they postpone the cost through opacity and suspension, only to face a larger reckoning later.

Tens of millions of Iranians have been cut off from the rest of the globe since US-Israeli strikes began on Feb. 28. It has been described as the world’s longest state-imposed internet blackout to date.

Under the new plan, approved by Iran’s Supreme National Security Council, selected businesses and institutions would regain global internet access while much of the public remains restricted.

The rollout would begin with commercial card holders and later expand to sectors tied to production, industry and trade, according to officials, who present the measure as economic management.

Critics see something larger: the formalization of a two-tier digital system. Those fears have intensified after leaked material circulated in recent days suggested authorities were considering more permanent restrictions.

Iran International has not independently verified the documents.

‘War as excuse’

Neda Bolourchi, executive director of the Public Affairs Alliance of Iranian Americans, said the announcement appears less like an emergency wartime measure than the rollout of a long-prepared policy.

“What we can understand is that this has been a multi-year project,” she told Iran International. “That the war has given it the excuse to roll it out.”

She added that she does not expect a quick return even to the limited internet environment that existed before the latest shutdowns.

But Amin Sabeti, the London-based founder of CERTFA, a cybersecurity lab focused on cyberattacks linked to Iran, questioned whether Tehran could maintain such a model for long.

“They are trying to implement it, but the big question mark for me is how long they can carry on,” he told Iran International. “I don’t think they can continue the next six months as it is.”

Sabeti argued that wartime conditions may allow governments to impose extraordinary restrictions, but Iran is not North Korea and cannot easily be transformed into one.”

‘The Gen Z problem’

The economic consequences are already mounting.

For millions of Iranians, Instagram, Telegram and WhatsApp are not luxuries. They are storefronts, classrooms, advertising platforms and lifelines to clients abroad.

Bolourchi warned that while the model may be sustainable for the state, it could be punishing for ordinary households, many of whom make their living online.

Sabeti noted that this would carry political risks for the ruling elite.

“If you offer it to the Iranian people—internet, Instagram, XYZ—and suddenly you want to take it away, that’s the level of the anger. We will see huge protests,” Sabeti said.

Holly Dagres, a senior fellow at The Washington Institute who focuses on Iranian society, Gen Z and social media, said the blackout cannot be separated from the Islamic Republic’s broader information war.

“The reason they are basically not allowing Iranians access to the outside world is because the internet and social media is the only way for their voices to be heard,” Dagres said.

She also stressed that the economic damage has been particularly severe for entrepreneurs, women-led businesses and rural sellers who depend on social media income streams.

Tightening control

The system may also deepen surveillance.

Even if Iran does not become a replica of North Korea, a permission-based internet would still mean more monitoring and greater pressure on citizens to censor themselves.

Dagres argued that the government may be trying to normalize the blackout through small concessions while preserving overall control.

Direct-to-cell technology, which could one day allow ordinary smartphones to connect directly to satellites without dishes or ground terminals, is still not meaningfully available in Iran and remains more promise than practical solution.

For Tehran, “Internet Pro” may solve one immediate problem: how to keep strategic sectors online while limiting the wider public. In doing so, it may create another.

Iran is a country where tens of millions have built livelihoods, relationships and daily routines online. Restricting that access while rewarding approved groups may tighten control today, but deepen resentment tomorrow.

Apparent divisions over negotiations with the United States may have strengthened the most confrontational elements within Iran’s political landscape and facilitated the rise of new hardline actors.

Backed by the more uncompromising faction within the senior ranks of the Islamic Revolutionary Guard Corps (IRGC), these emerging hardliners have been testing their ability to disrupt talks that already face significant obstacles.

Within the IRGC itself, commanders appear to be split into at least two camps, which despite their rivalry, share a core objective: ensuring the survival of the Islamic Republic.

Their disagreement lies in the methods and strategic direction needed to achieve that goal.

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