DUBAI—President Trump is betting the pressure of sanctions and a naval blockade will force Iran to bend. But the country’s rulers are taking time-tested steps to keep their chronically battered economy functioning just enough to resist a drawn-out campaign.
Tehran is rationing scarce goods, limiting access to foreign currency, slashing investment and shifting more of the burden onto households while preserving strategic imports and the essential machinery of the state, analysts say. The result will be a deepening economic malaise that leads to rising poverty and dysfunction, but also more room for Iran’s leaders to stall talks with the U.S.
That leaves Trump’s strategy resting on a risky assumption that Iran will crack before Washington does. Mediators have warned their U.S. counterparts that Iran has been living under sanctions for years and betting that Tehran will compromise because of economic pressure won’t likely yield results. Instead, Iran will likely continue to escalate attacks to raise the price for Washington and its allies.
If Iran can outlast Washington’s expectations, it has less reason to give up leverage over the Strait of Hormuz, prolonging the standoff and the risk of renewed fighting. The longer that standoff lasts, the more pressure shifts back onto Trump as energy and shipping disruptions weigh on the global economy and inflation heading into the midterm elections.
“This pressure will gradually move Iran from a resilient economy that absorbs shocks towards a survival economy that keeps functioning but steadily loses its capacity to recover,” said Hadi Kahalzadeh, nonresident fellow at the Quincy Institute and former official in Iran’s Social Security Organization. “Repression and the structure of the state make it harder for that pain to translate into pressure strong enough to change national security decisions.”
After weeks of renewed fighting following the collapse of a June interim deal, Trump has embraced economic pressure as his preferred next step, setting aside further strikes while giving sanctions and a naval blockade more time to work. Treasury Secretary Scott Bessent has said the administration’s economic policies have pushed Iran’s currency into free fall and the inflation rate into triple digits.
Iranian officials are openly signaling concern. President Masoud Pezeshkian has repeatedly said Iran must move beyond a state of “neither war nor peace.” State media said he met Supreme Leader Mojtaba Khamenei in late July for talks that included the people’s livelihoods, securing resources, managing foreign currency and energy use.
The squeeze is tightening. Iran’s oil exports, which form the backbone of state revenues and foreign exchange earnings, fell to close to zero in July after the U.S. reimposed its blockade, down from $4.5 billion in June, according to Capital Economics. No tankers have loaded this month at Kharg Island, Iran’s main oil export terminal, said Homayoun Falakshahi, head of crude oil analysis at ship tracking firm Kpler.
Iran also has less of a buffer than before the first blockade in April, Capital Economics said. Iranian oil stored at sea beyond the U.S. naval fleet off its coast fell from roughly 180 million barrels to about 60 million in early July.
At home, annual inflation is running over 80%, with chicken prices up 190% from a year earlier and milk up 150%. The International Monetary Fund expects the economy to shrink 5.4% this year while Kahalzadeh estimates the war could ultimately destroy 2 million to 3 million jobs.
The problem for the Trump administration is that making Iran poorer is easier than making economic pain change the decisions of its leaders.
In a broad reshuffle of the leadership in recent days, Iran elevated veteran hard-liners to oversee security policy and the state’s coercive institutions. The changes come amid signs that hard-liners have gained the upper hand over technocrats and pragmatists who argue that negotiations are necessary to preserve what remains of the economy.
“The effects of economic pressure on Iran’s negotiating stance will depend on internal politics,” said William Jackson, chief emerging markets economist at Capital Economics. “The regime is highly divided with hard-liners seemingly in the ascendance.”
The political hardening is matched by an economic strategy built around endurance rather than recovery.
Jackson said Tehran’s response tool kit includes rationing fuel and electricity, restricting access to scarce hard currency, and printing money to fund wages, reconstruction and other government spending despite diminished revenues. It can also delay payments and investment and use its long established sanctions evasion networks to keep trade flowing.
Iran already has implemented rolling power cuts and restrictions on factories, with some plants allowed to shift production to Fridays, generally a day off, to make up for lost output. The government has instituted a heavily subsidized exchange rate for up to $3.5 billion of imports such as wheat, medicine and baby formula, giving priority to essentials over other uses of scarce dollars.
Households that receive welfare payments can buy essential goods on credit under a new program, with any unpaid debt deducted from future cash welfare payments. Authorities are also planning to adjust food voucher payments every quarter to keep pace with food inflation.
Households are making their own version of the adjustment. People in Iran said they are limiting spending to essentials such as food, petrol and medicine, dropping meat from their diets, and buying staples one item at a time as their wages lose value.
A 41-year-old man in Tehran who works in construction said business activity has fallen sharply. He is dipping into his savings and has cut back on expenses such as travel and leisure.
“The sense of fear and severe anxiety has intensified, and the feeling of uncertainty and instability has grown,” he said.
Survival-economy behavior can buy time but will eventually erode Iran’s financial underpinning. Prolonged lack of investment could eventually turn dysfunction into ungovernability, particularly if renewed military attacks seriously damage the energy infrastructure that keeps the economy afloat.
Still, history offers little guarantee that economic collapse produces political capitulation. In Cuba after the 1959 revolution and in Venezuela in recent decades, governments have remained in power despite economic collapse through repression and patronage.
“I see this increasingly as a contest of miscalculated speed,” Kahalzadeh said. “Washington may be right that prolonged economic pressure will eventually constrain Iran, and Tehran may be right that a prolonged conflict will create growing political costs for Washington, but both sides may be wrong about how quickly those pressures will become decisive.”
Write to Georgi Kantchev at georgi.kantchev@wsj.com and Summer Said at summer.said@wsj.com