Iran Sanctions and Blockades Push Economy Toward a Costly Stalemate
The Economic and Political Impact of Sanctions on Iran
By Samia Nakhoul
Stalemate After Six Months of Conflict
BEIRUT, Aug 27 (Reuters) - The Iran war has reached its endgame: a costly stalemate.
Six months after U.S. and Israeli forces attacked Iran, killing its supreme leader and maiming his son and successor, the Iranian government is under economic siege, but it still holds power and believes it has time on its side.
US Sanctions Strategy and International Dynamics
A threat by U.S. President Donald Trump to impose crippling new sanctions on Iran faces a fundamental problem: Tehran is betting he will not take the final step to break the stalemate - aggressively enforcing secondary sanctions on the countries keeping its economy afloat, foremost among them China and India.
Washington's latest measures, announced on Monday, mark a new phase in the conflict that began on February 28, shifting the battlefield from missiles and airstrikes to Iran's oil revenues, banks and trading partners.
Treasury Secretary Scott Bessent has said the United States will cut off the financial lifelines sustaining Iran's economy, while a U.S.-led naval blockade restricts Tehran's oil exports and access to hard currency.
"The (Trump) administration is groping in a sort of desperate fashion to try to find a pathway out of this,” said Aaron David Miller, a former U.S. diplomat and senior fellow at Carnegie Endowment.
Bessent invoked the 1944 D-Day landings in France during World War Two when he unveiled the sanctions, but Miller said: "To me, this isn’t D-Day. It’s Desperation Day. I don’t think the administration is any closer to finding a way out of this.”
Blockade and Sanctions: Immediate and Long-Term Effects
Consequences of the Naval Blockade
Michael Knights, head of research at Horizon Engage, a New York-based strategic advisory, said the blockade may prove more consequential than the sanctions themselves because Iran's immediate challenge was no longer how to survive economic pressure but how to break out of it.
Tehran has spent decades adapting to sanctions and endured previous "maximum pressure" campaigns without altering its behaviour, he said. Mounting economic pressure, he said, may increase Iran's incentive to raise the cost of the confrontation for its adversaries by pressuring Gulf states, particularly Saudi Arabia, to push Washington towards a diplomatic off-ramp.
Potential for Escalation and Disruption
Knights said Iran could increasingly adopt the model used by its Houthi allies in the Red Sea: periodic attacks, intermittent negotiations and a prolonged campaign of disruption short of all-out war, potentially targeting shipping, ports, energy infrastructure or other critical assets to make the conflict increasingly costly for Gulf states to tolerate.
Washington rejects that assessment and says the balance of power is in its favour.
"The Iranian economy is in free fall and the regime’s military has been decimated," U.S. State Department spokesperson Tommy Pigott said in response to questions for this article. “President Trump holds all the cards, and we are cutting off every financial lifeline the regime has remaining.”
Iranian Officials Dismiss US Strategy
International Support and Diplomatic Challenges
Alan Eyre, a former U.S. diplomat who worked on Iran, questioned whether Washington has the international support and bureaucratic machinery to make the sanctions stick.
He said that unlike the multilateral campaign preceding the 2015 nuclear deal between Tehran and major powers, which curbed Iran's nuclear programme in exchange for lifting sanctions, the latest measures rely on public threats rather than sustained diplomacy with allies and trading partners.
Iran's Response and Perceived Flaws in US Policy
Iranian officials dismiss the U.S. strategy as a replay of a playbook that has already failed. One senior Iranian official told Reuters that countries such as China would not stop cooperating with Iran simply to serve U.S. interests.
Some political analysts say the strategy faces a deeper flaw: from North Korea to Russia and Iran itself, sanctions have rarely forced governments to abandon goals they view as existential for their survival.
The senior Iranian official said Tehran believes Washington's broader objective is to fuel domestic discontent in the hope that economic hardship could eventually translate into political unrest, but that the "maximum pressure" campaign failed during Trump's first term and would fail again.
"If the pressure increases, Iran's approach will change too," he said, adding that Gulf Arab governments understood that squeezing Tehran further could put them at greater risk as well.
Threat of Unrest for Iran's Leaders
Economic Hardship and Social Consequences
For Iran’s rulers, the biggest threat may not be economic pain itself. It may be the risk that worsening hardship again spills into mass unrest, according to insiders and an Iranian official.
Annual inflation reached 66% in July, while consumer prices were 87.9% higher than a year earlier, according to Iran’s Statistical Centre. Food prices rose 128% year on year.
President Masoud Pezeshkian acknowledged the severity of the squeeze last week, saying: “Our problems have multiplied several times over, while our income has also fallen.”
Government Response to Protests
Economic grievances have repeatedly erupted into nationwide protests in recent years. In January, demonstrations over economic hardship were crushed by the Revolutionary Guards and the Basij militia, with thousands killed.
The appointment this month of Hossein Taeb, a key architect of previous crackdowns, to lead the Basij was one of the clearest signs yet of official concern about renewed unrest, a former reformist official said. The Basij, a paramilitary force affiliated with the Revolutionary Guards, has repeatedly been deployed by Iran's clerical rulers to suppress protests.
That points to a paradox at the heart of Washington's strategy: sanctions may deepen Iran's economic damage without forcing its rulers to change course. The leadership has historically answered domestic unrest with repression, and external pressure with th
