THE LIQUIDITY crunch could not have come at a worse time. Usually, most of Hizbullah’s budget arrives on a plane in Damascus, the Syrian capital, with the country’s Iranian ambassador. The cash is then transported across the Lebanese border to the Shia militia. But on December 8th, just weeks after Hizbullah stopped fighting with Israel in Lebanon, Bashar al-Assad, Syria’s president and Iran’s ally, was overthrown. Iran evacuated officials and soldiers in Syria. Already financially emaciated, Hizbullah faces rebuilding deprived of its surest cash flow.

Iran has long vied with Gulf states for influence over the Middle East, despite being under American sanctions. Its financiers and traders have outfoxed Western officials with a labyrinthine economic system, built primarily across friendly countries, which funded proxies, traded arms with Russia and took oil payments from India and China. That was, at least, until October 7th 2023, when Hamas’s attack on Israel plunged the region into chaos and started to blow holes in Iran’s networks. A year on, the Islamic Republic looks like the war’s big economic loser. Saudi Arabia, the United Arab Emirates (UAE) and Turkey, all jostling to pick up lost trade and influence, are its likely winners.

To dodge sanctions, many of the supply chains Iran relies on to move capital and goods abroad criss-cross through allies (legitimately) as well as less friendly countries (often disguised). A weapons shipment destined for northern Russia, for instance, may pass through Syria and then be smuggled into Turkey before travelling by sea around Europe. Other big Middle Eastern economies, such as those in the Gulf and Turkey, which trade more in the open, can take simpler routes and have more options when war makes transport tricky. But Iran’s trade, banking and aid, the backbone of its regional outreach, are more furtive by necessity, and therefore more vulnerable.

Take trade first. Homs, in central Syria, was a trading outpost for Iranian goods under American restrictions. Iranian firms directed enough goods through Syria, according to an American official, to make Iran one of the world’s biggest arms manufacturers. Chemicals and mechanical parts were also shipped through Syria. The big buyers were Belarus and Russia, as well as Mr Assad himself. Iran now needs at least one new customer, and a way to reach it.

The loss of financiers in Damascus and Beirut, Lebanon’s capital, is also a headache. As much as half of Iran’s revenues come from oil exports in a typical year, despite the American sanctions. Payments flow through a series of correspondent banks and small exchanges, registered to international aliases and allies. One of many such arrangements made use of Hizbullah’s supporters in Lebanon’s diaspora, who, through companies affiliated with the militia, took payments for Iranian oil from countries ranging from Turkey to Senegal, and kept some profit for themselves. But Muhammed Qasir, the man who ran the network, died in October in an Israeli air strike. According to Israeli officials, Iran has had a hard time getting things going again in his absence.

Such losses could be disastrous for Iran’s remaining supporters in the Middle East. With Hamas and Hizbullah greatly weakened, and Mr Assad in exile, only the Houthis, the proxy over which Iran has the least influence, fighting for control over Yemen, are not in disarray.

Iran is now struggling to get weapons or cash to Beirut and the Palestinian territories to replenish forces, as much materiel arrived through Syria. The alternative is moving supplies covertly, but that limits the size of shipments to what can be hidden and takes longer. Extra cash is desperately needed. Al-Qard Al-Hassan, the financial institution at the centre of Hizbullah’s banking network, was targeted during Israeli air strikes in October. Though Hamas’s finances, run out of Istanbul, are stable, it is difficult to get any cash into Gaza, according to one official in Turkey.

It does not help that Iran’s finances have also been hit by debts that must now be written off. Its government has lost billions of dollars in loans to Mr Assad, which propped him up while Syria was shut out of global markets. Officials suggest a combination of personal loans to Mr Assad and credit lines for oil came to $5bn a year.

Meanwhile, the Gulf and Turkey are hoping to scoop up lost influence. As America has grown less willing to spend in the Middle East, Gulf states have become the biggest external financiers to its poorer countries. Qatar, Saudi Arabia and the UAE lent $34bn across the Middle East and North Africa in 2021-22, compared to $17bn in 2019-20. Their loans are also lubricating economies that Iran previously helped finance, including Kuwait. Long friendly with Iran, even as it enjoyed good relations with the West, Kuwait has recently become less willing to trade with the Islamic Republic, Iranian officials complain.

Gulf of expectation

The UAE and Saudi Arabia are negotiating with America to pick up some of the reconstruction bill in Gaza in return for a Palestinian state. In Syria, Turkey hopes to profit from its support for Hayat Tahrir al-Sham, the biggest presence in the new government. Some Western officials worry that Syria under the thumb of Recep Tayyip Erdogan, Turkey’s president, would be little better than it was under a leader loyal to Iran and Russia. But on December 18th the Iranian rial plunged to its lowest ever level against the dollar. The Syrian pound, meanwhile, has soared by 25% in two weeks. The market, at least, disagrees.