Even before the bombs began to fall, Iran’s economy was in a bad way. Six in ten working-age people were unemployed. Prices had risen by 35% in the past year. Some 18% of the population was living below the World Bank’s poverty threshold. Despite exporting gas and oil, Iranian officials had to burn mazut, a low-grade refining byproduct, to keep the lights on. Binyamin Netanyahu, Israel’s leader, then went after economic targets. Amid attacks on military bases and nuclear facilities, Israeli planes bombed at least two gas fields, a few oil fields and a car factory.

The idea behind the airstrikes was similar to the thinking behind international sanctions already applied to Iran. Hitting the economy will in time reduce the regime’s tax revenues, which should be a blow to its nuclear ambitions. The problem is that the Islamic Revolutionary Guard Corps, the country’s security service, plays a crucial role in the development of Iran’s nuclear programme. And the IRGC’s financiers have nurtured a secretive commercial empire, which benefits from measures that hammer the wider economy.

Iran has long faced some of the world’s toughest sanctions. Led by America, the West eased their severity after Iran agreed to wind down its nuclear programme in 2015, before once again tightening them when President Donald Trump withdrew from the agreement in 2018. The most recent measures were applied in response to Iran’s support for Russia’s war against Ukraine, and then after Mr Trump’s return to the White House. Companies in the West are banned from buying Iranian oil, the country’s biggest export, and from dealing with its banks.

In 2018, the last time that Iran allowed the IMF to inspect its finances, the country exported $46bn of oil, counting for around half its total exports. American officials think the share is closer to a third today. This year Iran is believed to be exporting 1.7m barrels a day (b/d), about the same as last year, even if production may have fallen during Israel’s recent attacks.

Moreover, sanctions apply well beyond oil. A “blacklist” of targeted individuals, kept by America’s Treasury, is thousands of people long. It grows every month. Western companies are banned from trade with counterparts in nearly every Iranian industry, including cars, metals, mining and textiles. Only farmers and pharma firms supplying Iran’s population are exempt; they still face off-putting paperwork.

The result is that next to no business is done between the West and Iran. Iranian firms, cut off from the international banking system, which often settles transactions in dollars using SWIFT, a Europe-based payment system, must resort to subterfuge to pay trade partners even in China and Russia. This distorts Iran’s economy, which is set to shrink by 1.6% in the next 12 months, according to the World Bank. Unable to export, new companies mostly sell services to the domestic market.

All of which inflicts a toll on the government’s finances. In 2018 revenues from oil and taxation came to about 17% of GDP. Today they are worth 11%. Iran’s fiscal deficit was roughly 3% of GDP in 2024. Unable to borrow from private creditors, policymakers have resorted to raiding the sovereign-wealth fund and printing cash. As a consequence, inflation is soaring.

Revolutionary commerce

A closer inspection of Iran’s accounts reveals that little funding for Ayatollah Ali Khamenei, the country’s supreme leader, or the IRGC, comes from official sources. Instead, they rely on their own financial empires. For its part, the IRGC has three sources of income. The first is a range of local companies and foundations. Each of the organisation’s five branches has control of an astonishing array of banks, factories and startups. Their portfolios include Persian Gulf Petrochemicals, Iran’s biggest refiner of petrochemicals; Hara, a tunnelling business; and Bahman, once the manufacturer of Mazda cars in Iran.

Many fall under Khatam al-Anbiya, a conglomerate formed in 1990 to pool the IRGC’s resources. It is now the country’s biggest construction contractor. A Western official suggests Khatam is worth $50bn but, he adds, that is only a rough estimate because it holds stakes in so many smaller firms. He reckons that half of Iran’s registered firms are owned, at least in part, by the security service.

Most of the IRGC’s money, though, comes from abroad. Indeed, its second source of income is the oil trade. Historically a portion of Iran’s budget has each year been allocated to the security service. But in recent years the treasury has been short of cash, so has offered oil in lieu. Before the war about 500,000 b/d of crude, equivalent to a quarter of Iran’s exports, was going to the security service.

The IRGC then sells its oil via a fiendishly complex network of exchanges and shell companies. Buyers are mostly Chinese. According to American officials, the system is both cheaper and more adroit than that used by Iran’s government.

Security-service businesses also have a line in illicit imports and exports—their third source of income. America has long accused the IRGC of funnelling drugs that are destined for Europe from Afghanistan to the Middle East. The IRGC is also responsible for most of Iran’s imported weapons, charging a premium for those it passes on to the armed forces. Within these shipments, it sneaks through cigarettes, consumer electronics and food, all of which fetch a high price among Iran’s increasingly treat-starved population.

These varied sources of income leave Western policymakers with a headache. Iran’s economy is suffering under sanctions. But if they tighten the screws in order to reduce tax revenues, the goods that the IRGC’s smugglers import are worth even more. One official says that, since Mr Trump’s most recent round of sanctions, other recipients of oil payments from the government have asked the IRGC to sell on their behalf, since the security service’s network is so sophisticated.

Should Iran and Israel return to hostilities, Israeli generals might well target IRGC sites. The military locations they have already destroyed, which are suspected also to be nodes in the IRGC’s distribution network, will carry a hefty repair bill. However, the recent history of oil sanctions has demonstrated that tighter restrictions do not prevent Iranian trade—they only temporarily slow shipments until exporters find a way around them (see chart). And as inflation spirals and shortages abound, the Iranian population will continue to pay the price for their security service’s misadventures.