Oil, currency, inflation; how did Iran's economy reach a deadlock?
Widespread protests in Iran and reports of an unprecedented number of thousands killed, injured, and detained as a result of the bloody crackdown on protesters have plunged the Islamic Republic into a deep political and security crisis.
Regardless of the outcome of this crisis, a question that may still arise is whether the government has a remedy for the economic pressures at the heart of the protests. Can the Islamic Republic find a way to control runaway inflation, distrust in the national currency, and panic in the currency and investment markets?
If we strip down the details of Iran's economy and leave only a simple and general picture, the entire economy resembles the management of a small company: income and expenses.
Government revenues in Iran come from taxes, oil sales, and other raw materials, along with some non-oil exports. Expenses cover a wide range, from paying salaries to employees and retirees to cash subsidies, hospital budgets, organizations and institutions (and their employees' salaries), and construction projects like building bridges, hospitals, schools, etc.
In our simplified dimensions, this small company has seen its income decrease, but its expenses have not only not decreased but have increased year by year, as salaries and budgets are expected to rise along with inflation.
The reason for the decrease in income is the government's inability to sell more oil due to sanctions and even other foreign currency revenues due to banking sanctions, which have effectively pushed the economy towards barter and importing gold instead of currency.
This trend in the economy is known as a budget deficit. For small companies, the way to escape a budget deficit is to cut costs, lay off employees, and find ways to increase income. However, the government has limited choices due to political, security, and even ideological considerations.
The path that the Iranian government has consciously chosen is borrowing from the central bank or other banks and selling bonds. Part of this borrowing is evident in the budget, while another part is hidden in overly optimistic forecasts of next year's revenues.
This problem is not hidden and does not even require reliance on the opinions of economic analysts. The Iranian Parliament Research Center publishes a report on the government's annual budget every year, detailing all these weaknesses and criticisms; this trend has continued for years and is fully accepted even by officials.
Oil sales are the main and essential income of the Islamic Republic of Iran, and of course, the dependency and vital need for oil sales revenue has always been a strategic weakness for the government. To the extent that one of the government's goals was to reduce its dependence on oil.
An occurrence that only existed on paper and perhaps by rearranging budget lines and changing the name of oil revenues to other names became a propaganda tool for governments. However, oil sanctions to limit the nuclear program revealed the vital importance of oil sales revenue for balancing the government's annual budget.
Statistics on Iran's oil sales became opaque about 15 years ago, coinciding with the start of oil sanctions during Mahmoud Ahmadinejad's presidency. Nevertheless, tanker tracking companies have managed to estimate Iran's exports using innovative and advanced methods such as satellite imagery. The company Kepler has estimates of Iran's oil sales during the sanctions period.
According to these reports, Iran's oil sales, which were over 2.5 million barrels per day until 2011, fell below one million barrels. This period coincided with the rise in the dollar price in Iran, but the nuclear agreement helped the government, and with increased oil sales, the dollar price stabilized.
The U.S. withdrawal from the JCPOA after Donald Trump's presidency led to an unprecedented drop in Iran's oil sales to below one million barrels, comparable only to the production cuts in the years 1979 to 1981.
During Joe Biden's presidency in the U.S., Iran's oil exports clearly increased, but Iran's revenue from oil sales was not sufficient to cover the budget deficit.
Oil revenue: sanctions, discounts, and global prices
According to estimates from Kepler, Iran's oil revenue has decreased despite increased exports last year. Part of this is due to the drop in global oil prices and subsequently the reduction in Iran's oil prices, which must sell at a discount due to sanctions. Additionally, the intensification of U.S. sanctions in 2025 has also affected the purchase of Iranian oil by Chinese companies.
Fereydoun Falkeshahi, an analyst at Kepler, states: "The set of sanctions that the Trump administration imposed in 2025 against Chinese buyers and intermediaries has not been without effect. The entry of Iranian oil into China has dropped from 1.43 million barrels per day in the first half of 2025 to about 1.2 million barrels per day in the fourth quarter of 2025."
"Meanwhile, floating reserves have increased from about 15 million barrels in March 2025 to 52 million barrels currently, and the discount on Iranian oil (Iranian light oil) compared to Brent has risen from about $1 per barrel in April-May to nearly $10 per barrel currently."
The reason for the discounts is practically the limitation of Iranian oil customers to China, particularly to small companies in that country that do not trade in dollars and can withstand U.S. sanctions. However, in return for the discount, Iran's access to dollars has also directly decreased.
Oil sanctions have a direct impact on the dollar price. Since 2018, with the U.S. withdrawal from the nuclear agreement, the dollar price in Iran quadrupled in one year, and the continuous increase in price since then has pushed it above 150,000 tomans. (Due to market closures and internet restrictions, it is not possible to estimate the current dollar price.)
The increase in the dollar price has a direct impact on the toman and especially on food inflation. Food prices rise due to the dependence of production inputs on the high dollar and clearly follow the annual changes in the dollar price. Although the statistics published by the Iranian Statistics Center may not reflect the prices that consumers feel in their localities.
Sanctions and reduced government revenues, budget deficits, borrowing, and rising inflation have been a vicious cycle in Iran's economy for years. However, at least since 2022, the government has been trying to compensate for the budget deficit by increasing its tax revenues by an average of 50% annually, raising it from about 130 trillion tomans in 2022 to 280 trillion tomans in next year's budget.
However, this tax increase, which effectively loses its value due to annual inflation, puts heavy pressure on producers and, in general, economic enterprises that must transfer the pressure to the market or directly to consumers.
The constant rise in inflation, concerns about the future, and distrust in the national currency due to continuous inflation lead to increased demand for currency and gold to maintain asset values, which in turn fuels inflation and the problem of currency supply, creating a vicious cycle that has no exit without a significant increase in government revenues.
47 years of the Islamic Republic's confrontation with the U.S. has been accompanied by an emphasis on the ineffectiveness of sanctions and efforts to circumvent them. However, after the U.S. withdrawal from the nuclear agreement in 2018, the surge in the dollar price from about 4,000 tomans to over 150,000 tomans is a clear indication of the government's inability to manage the consequences of sanctions.
Alongside increased tax pressure during a recession, reliance on printing money to cover budget deficits, from the perspective of economic critics and even the Parliament Research Center, is a short-term solution to postpone a deeper crisis; a crisis that in its classical sense leads to the government's inability to pay salaries and provide basic services, interpreted as economic collapse.
Continuing down this path, with an awareness of its inflationary consequences and at the cost of reducing citizens' purchasing power, occurs while the ways out of the crisis — including sustainably increasing government revenues, attracting foreign investment, and international borrowing — require political decisions that could lead to a fundamental change in the path and identity of the Islamic Republic, what Donald Trump referred to as "unconditional surrender."