Iran’s currency has fallen to a record low as the US seeks to increase pressure on the country’s battered economy and strikes threaten to reignite all-out war between Tehran and Washington.
The rial touched 1.95mn to the dollar on the open market on Sunday, down nearly 10 per cent since a fragile ceasefire between the US and Iran started breaking down in early July.
The tumble came after US President Donald Trump last week reimposed a blockade on Iranian ports to cut off oil exports and disrupt imports, part of their battle for control over the Strait of Hormuz. He also rescinded a waiver that allowed Iranian oil sales, Tehran’s economic lifeline.
Iran says the US military has also in recent days struck infrastructure including bridges, a railway and an airport along the southern coastline and further inland, in what analysts interpreted as an effort to pressure Tehran back into negotiations.
Even before the US-Israeli war started in February, Iran’s economy was in deep distress, struggling with soaring inflation, international sanctions and years of mismanagement. The pain has only increased since, with year-on-year inflation of nearly 90 per cent in June.
“I can barely afford the basic necessities for my toddler,” said Hessam, a 40-something electrical technician from Tehran.
He accused Iran’s leadership of overlooking the enormous hardship on people. “I understand what it means to defend one’s homeland,” he said. “But they’re financing this war with our money while shifting the entire economic burden on to ordinary people.”
The Islamic republic has spent years crafting what it calls a “resistance” economy, designed to be self-sufficient and diversified enough to allow the regime to survive sanctions, conflict and domestic unrest even as it presided over severe malaise. Anger over the state of the economy triggered mass anti-regime protests in December and January, to which authorities responded with a brutal crackdown in which thousands of people were killed.
“It will be tempting for US officials to think that the economic pressure . . . will tip the balance in their favour,” said Esfandyar Batmanghelidj, chief executive of the UK-based Bourse & Bazaar Foundation think-tank.
But he added: “None of this really is going to impinge on the ability of Iranian authorities to wage war. Iran can get a lot poorer and still cause a lot of problems for the US military.”
The scale of the economic challenge posed by the months-long war, during which the US and Israel spent weeks bombing not only regime and military targets but industry and civilian infrastructure, has little precedent, however.
Government spokesperson Fatemeh Mohajerani in April put the estimated damage from the war at $270bn. Before an April ceasefire, the US and Israel bombed Iran’s two largest steel companies and also attacked petrochemical plants.
This has led to widespread lay-offs, with a deputy labour minister saying in April that 2mn people had lost their jobs directly or indirectly as a result of the war. Batmanghelidj said Iran has been struggling to keep households spending.
Djavad Salehi-Isfahani, an Iranian-born economics professor at Virginia Tech who recently spent time in Iran, said the Iranian government was caught between competing priorities.
“One is maintaining living standards and food consumption in the midst of this fighting,” he said. “Number two is to prevent inflation from getting much worse into hyperinflation.”
“Iran has learnt to dodge some of the economic pressure from sanctions and blockade and so on,” he said. “But I don’t think there’s any magic way to deal with destruction. The Americans have a lot of bombs, and they can destroy a lot of things.”
President Masoud Pezeshkian warned on Monday that “economic pressures could undermine Iran’s military achievements . . . should they lead to widening public dissatisfaction”.
“The enemy has realised that it cannot force the Iranian nation into submission through military strikes,” he said, adding that the “economy and people’s livelihoods are the most important front in confronting the enemy”.
At the heart of the renewed fighting is a battle for control of the Strait of Hormuz, through which a fifth of the world’s oil and liquefied natural gas passed before the war.
Under a memorandum of understanding signed last month to extend the April ceasefire by 60 days, the US agreed to lift its blockade of Iranian ports and Iran agreed to allow the gradual resumption of commercial shipping through the strait.
Iran took advantage of the temporary US oil sanctions waiver under the deal to boost exports. According to TankerTrackers, Iran shipped more than 80mn barrels of crude and petroleum products during the period.
But the deal broke down as Iran targeted vessels they accused of using an “unauthorised” route through the strait, with the US once again launching days of strikes on Iran. Iran has retaliated with attacks on American bases in nearby countries, which have also accused it of striking infrastructure like water desalination plants.
Trump last week threatened to expand the bombing to more infrastructure unless Tehran agreed to negotiate. “We’re going to knock out all their power plants. We’re going to knock out all their bridges unless they get to the table,” he told Fox News.
In the meantime, Iranian authorities are attempting to contain the damage as much as they can.
The energy ministry has urged Iranians to switch off their air conditioning for an hour a day to help the supply of electricity to the south, where temperatures can reach 50C in summer.
Officials have also rushed to reopen damaged routes by providing temporary bypasses. Railway tracks hit by US strikes were repaired in less than 24 hours, according to the state railway operator.
Iran has also sought to maintain its supply chains through land borders, and grocery stores remain well stocked despite runaway inflation.
However, Albert Boghosian, an economist at the University of Tehran, said that while alternative routes through western and northern land borders worked as a stopgap, the Strait of Hormuz offered the “best combination of speed, cost and efficiency”.
Alternative routes “can be used for the time being to supply essential goods, but they are not economically viable for importing raw materials needed by industries”, he said.
Iran maintains that it will not be forced into submission, with its rulers hoping that disruption to global energy markets would force Trump — who is under pressure to control domestic gas prices ahead of November midterm elections — to back down.
Whatever the outcome, Iranians like Reza — a 35-year-old father of three in Tehran who lost his shoe factory job because it could no longer obtain raw materials — fear they will be the losers.
“We can’t live in a permanent state of war,” he said. “They need to get a deal and revive the economy. Once my savings run out, I suppose I’ll have to sell my house and car just to get by.”
Additional reporting by Susannah Savage in London
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