Trump may have found the weapon that truly threatens the Iranian regime

The United States has moved from making Iranian oil more expensive to trying to stop it from being shipped, paid for and spent. The difference looks technical, but it is not. If the blockade keeps those three doors shut, the regime will no longer be facing just another round of sanctions and will start losing the foreign currency with which it sustains subsidies, imports, internal security and loyalties. But Trump has not yet won the standoff. Iran still has the Strait of Hormuz, China and a capacity for resistance that should not be underestimated. Even so, for the first time in decades, Washington may have found the exact point where oil stops protecting Tehran and starts to choke it.

For decades the United States has tried to strangle Iran economically, with rather debatable results. It has frozen assets, pursued banks, sanctioned tankers, threatened intermediaries, banned dollar transactions and blacklisted half of Iran’s commercial architecture. Tehran, meanwhile, learned to live with it. It sold oil at a discount, switched off ships’ transponders, changed flags, routed operations through Dubai, Malaysia or Hong Kong, and always found some Chinese refinery delighted to buy a barrel cheaper than usual. The sanctions hurt, they hurt a lot, but they never managed to close the door.

Now Trump is trying something else. And this could indeed be different.

The oil still exists, but it no longer turns into foreign currency.

The difference can be summed up in one figure. Iran was loading around two million barrels of oil a day last March. By August that figure had fallen to roughly 220,000 to 255,000 barrels a day, depending on the maritime tracking firm used. We are talking about a reduction of close to 90% in just a few months. During the seven weeks after the US blockade was reinstated, practically no significant Iranian cargo managed to get through the strait to China.

Keep this in mind, because it is probably the key to the whole story. Traditional sanctions can make an Iranian barrel worth less, and make it harder to insure, transport or get paid for. But as long as someone manages to take it away, it keeps turning into money. A physical blockade does something quite different. The oil still exists, it may even still be produced, but it no longer turns into foreign currency.

And the Iranian regime does not live on oil. It lives on what it can buy with it.

The United States seems to have finally understood where the real vulnerability lay. Washington is trying to close three doors at once. That Iran cannot export its oil normally, that it finds it ever harder to get paid for it, and that it then cannot easily use that money to pay for imports either.

That is a far more dangerous strategy for Tehran than simply adding a few more companies to a sanctions list. The US Treasury recently christened its new campaign Operation Economic Outcast. Scott Bessent, the US Treasury Secretary, went as far as describing it as a kind of «economic D-Day».

Let us set aside the grandiloquence, which is never in short supply in Washington. What is interesting is the declared objective. The United States wants to break the international financial connections that for years have allowed Iran to keep trading despite the sanctions.

And this is where Dubai comes in.

For decades the United Arab Emirates has been one of Iran’s great economic lungs. Not only because of geographical proximity. Dubai has provided banks, intermediaries, shell companies, informal clearing systems and an enormous commercial infrastructure that made it possible to buy abroad what Iran could not acquire directly. Bilateral trade reached around 28 billion dollars in 2024.

The less money Iran has, the more expensive it becomes to evade the system that is taking it away.

Washington is now attacking that circuit. FinCEN has flagged bank branches in the Emirates for processing billions linked to Iran, OFAC has sanctioned bank officials and, even more importantly, Abu Dhabi announced in August the suspension of certain commercial and financial operations with Tehran.

If that closure genuinely holds, Iran will have to buy through longer, more expensive and more opaque routes. Every additional intermediary will demand its commission, and every agent willing to take on the risk of a US sanction will ask to be paid more. This is where sanctions start to behave in a particularly unpleasant way for Tehran. The less money it has, the more expensive it becomes to evade the very system that is taking that money away.

But there is still China, of course.

For years China has been the great explanation for the partial failure of US sanctions. Iranian exports of crude and condensates to China rose from little more than 300,000 barrels a day in 2020 to roughly 1.44 million in 2024. Today around 90% of the oil Iran exports ends up, directly or indirectly, in China. Let us not forget that the real objective of the US attack on Iran was not the nuclear bomb. Without downplaying the importance of the bomb, its primary aim was to stop the supply of Iranian oil to China.

Shandong’s small independent refineries, the famous teapots, have bought Iranian oil for years because it was cheap. Washington could sanction them, but Beijing could ignore the threat. The game was simple. Iran offered a discount, China bought, and everyone pretended it was all far more mysterious than it really was.

Floating inventories have turned the blockade into a clock.

The blockade changes the equation because China can ignore a US sanction, but it cannot possibly buy a barrel that physically cannot leave the Gulf.

There is still Iranian oil stored outside the blockaded zone. At the end of August more than a hundred million Iranian barrels were still afloat, although the volume had already fallen significantly. Inside Hormuz another 36 million barrels remained trapped, loaded on dozens of tankers. There are also sanctioned vessels waiting empty off Sri Lanka, because they can deliver their cargo but find it extremely difficult to return to Iran and load again. Iran is estimated to still have some 42 million barrels stored on tankers outside the blockaded zone, a reserve that allows it to keep supplying China for a while, but one it cannot replenish as long as access to its ports remains closed. Roughly twenty days of production before the conflict began.

That turns floating inventories into a clock. China can keep buying as long as there is Iranian oil stored outside the Gulf. But if those stocks keep shrinking and the blockade stays in place, there will come a point when the problem will not be finding a buyer. It will be finding Iranian oil within the buyer’s reach.

So far this might look like just another story about exports. It is not, because the Iranian economy was already extraordinarily weakened before this stranglehold began.

The IMF expects Iran’s economy to contract by close to 5.4% this year. Inflation is already around 70%, and in certain food-related components it is rising even faster. The rial has gone from roughly one million to the dollar a year ago to well over two million. Put simply, the Iranian currency has lost about half its value against the dollar in twelve months. In plain words, Iran sells little and, with what it earns, buys half as much as before.

Allow me a brief monetary digression, because this is probably where the most dangerous mechanism for the regime lies. If the state loses oil revenue it can cut spending, raise taxes, draw down reserves or finance the deficit by creating money. The first two options are politically explosive, reserves run out, and the last option feeds an even greater depreciation of the rial.

Less oil exported means fewer dollars; fewer dollars reduce the central bank’s ability to support the currency; a weaker rial makes imports more expensive; more expensive imports push up inflation; inflation forces increases in wages, subsidies and public spending; the deficit grows and the state needs even more financing. The very definition of value destruction.

You do not need to be a monetarist to imagine how the story might end.

The social data are even worse. Iran is said to have lost around 450,000 jobs compared with the previous year, and official unemployment exceeds 9%, although the fall in labour force participation probably hides part of the real deterioration. The average monthly wage stands at around 125 dollars, while an official estimate of the cost of a family’s basic needs is around 450. So that 9% hides a grim reality: the population is growing ever poorer, and poorer in absolute terms.

The cohesion of the apparatus that protects the regime also costs money.

In other words, the average worker earns well under a third of what a family needs to cover the basics. And this comes after January’s protests forced the regime to deploy repression of extraordinary intensity.

When Khomeini returned to Tehran, Iran was one of the countries with the best economic prospects in the Middle East. Almost half a century later, the result is hard to disguise. Real GDP per capita is roughly 20% below its 1977 level, before the revolution began to paralyse the economy. And had Iran managed since then a very modest growth of 2% a year per person, its income today would be more than three times what it is.

Here it is worth resisting a frequent temptation when we analyse authoritarian regimes. An impoverished population does not automatically mean a government on the verge of collapse. Cuba has been proving the opposite for decades. North Korea needs little explanation, and neither does Venezuela. A regime can shift an enormous amount of suffering onto the population as long as it keeps the apparatus that protects it cohesive.

That is why the important question is not yet whether Iranians can bear much more. The question is when economic deterioration starts to affect those who have to guarantee that the system keeps working.

The Revolutionary Guard is essential to this story. It is not only a military force. It is involved in companies, infrastructure, trade, energy, internal security and much of the informal economy that allows the regime to survive. As long as the IRGC, the Basij, the army and the religious elites remain cohesive, the Islamic Republic can endure a great deal of economic pain.

But maintaining that cohesion also costs money. And that is precisely why cutting off foreign currency is far more dangerous than any previous sanction. If the state starts to struggle to finance subsidies, public wages, imports, the military apparatus, internal security and patronage networks all at the same time, then the problem gradually stops being macroeconomic.

There is another figure that sums up the Iranian paradox rather well. Tehran could face petrol supply problems in the coming months despite having some of the largest hydrocarbon reserves on the planet. Iran produces a huge amount of oil, but certain refining limitations force it to import fuel. Iranian sources have spoken of reserves equivalent to about two months of consumption, and Bessent maintains that queues of several hours are already forming at some stations.

Few images can erode the perceived competence of an oil regime faster than citizens queuing for hours to get petrol.

Trump, however, has not won the standoff either.

Iran has its own economic weapon, and it is called the Strait of Hormuz. Before the war, roughly a fifth of the world’s seaborne oil and liquefied natural gas passed through it. Shipping traffic has fallen from more than 130 vessels a day to single figures on some recent days. Brent is once again approaching a hundred dollars.

Washington hopes Iran runs out of foreign currency first; Tehran, that Trump runs out of electoral patience first.

Tehran knows perfectly well what its bet is. If it can push the cost of petrol, diesel, shipping and electricity high enough in the United States and Europe, it can turn an economic war against Iran into Western inflation. And it also has a political date ahead: the US elections in November.

In a sense we are watching a race between two clocks. Washington hopes Iran runs out of foreign currency first. Tehran hopes Trump runs out of electoral patience first.

That is why I still do not buy the idea that the Iranian regime is necessarily going to fall. We have no evidence of significant fractures within the Revolutionary Guard or the coercive apparatus, and that, for me, would be the truly important signal. Nor do we know exactly how much liquid cash Tehran retains, or how much China could help if it decided to get far more involved.

But we do know something we did not know a few months ago.

For forty years the United States tried to make it difficult for Iran to sell its oil, and Tehran learned to do it anyway. Trump is trying to stop it from getting the oil out, from getting paid for it, and then from spending what it has been paid.

If he manages to keep those three doors shut for several months, the question will no longer be how much economic damage Iran can withstand. It will start to be how much economic deterioration the very political architecture that keeps the Islamic Republic standing can withstand.

And there, precisely there, Trump may finally have found a weapon that sanctions never were.