September 3, 2026

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Iran Responds to “Operation Economic Outcast”

(Morteza Akhoondi/Tasnim News Agency via AP)

The scale of the economic distress that a U.S. naval blockade and economic sanctions are inflicting on the Iranian population is not in doubt, but the conditions are intensifying debate within Iran’s regime over how to respond to the pressure. The internal debate will be muted, but by no means resolved, while the tit-for-tat exchanges between the U.S. and Iran that erupted on Sunday night continue. The Iranian deliberations will surely sharpen as U.S. strikes inflict ever more damage on Iranian infrastructure and personnel, and worsen economic conditions, even if U.S. President Donald Trump seeks to avoid a return to major combat. During the exchanges this week, the U.S. has refrained from striking any civilian economic infrastructure, mainly targeting Iran’s capability to detect and strike commercial ships in the Strait of Hormuz. But the outbreak of new clashes — breaking a month of relative calm — has unsettled U.S. and global energy and financial markets again and is sure to worsen the already dire economic conditions inside Iran.

Iranian leaders, including the head of its central bank, acknowledge the U.S. blockade and the ever-tightening U.S. sanctions initiatives — Operation Economic Fury and its successor, announced last week, Operation Economic Outcast — are taking a heavy toll on the Iranian economy. The value of Iran’s currency, the rial, fell to 2.2 million to the dollar on Wednesday, putting the cost of some basic imported goods out of reach for many Iranians. The official inflation rate is estimated by economists at over 80 percent, very high but nowhere near the 300 percent cited by President Trump on Monday. Social media accounts are replete with images of the bazaars in Iran’s major cities — the markets where most goods are bought and sold — devoid of customers, with many merchants closing their shops for lack of sales or products to sell.

Energy industry sources report that, for the first time on record, Iran has gone seven weeks without shipping meaningful crude exports through the Strait of Hormuz, ?as the U.S. naval blockade cuts off Tehran's main sources of foreign-currency earnings. Under previous U.S.-led sanctions campaigns, Iranian crude continued reaching buyers, particularly China, which before the war bought more than 80 percent of Iranian oil exports. Beijing has since shifted to other suppliers outside the region and cut its domestic oil consumption, transitions that might become permanent even if the war were to end in the short term. Some reports suggest that Iran is cooperating with its neighbor, Iraq, over which Tehran has influence, to blend Iranian oil with Iraqi oil to send the combined product out of the Strait, unhindered by either Iranian or U.S. forces. Iranian leaders are also expanding land and rail trade routes to its northern neighbors, as well as to Pakistan, and expanding seaborne trade across the Caspian. But the degree of mitigation Iran is achieving through these routes is unclear.

The most widely reported effect of the U.S. blockade and sanctions campaign has been a severe gasoline shortage. Fuel for cars and trucks is heavily subsidized, with an initial quota provided at pennies per gallon, rising toward regional market rates at higher volumes. But even before the war, Iranian refineries were unable to produce enough to meet demand, and about 10-15 percent of the needed volumes were imported. The U.S. blockade has prevented the importation of refined product, and Israeli strikes damaged a few refineries in the early days of the war. The net result has been major shortages of gasoline throughout Iran, as depicted in social media reports from Iran: hours-long waits for gasoline. To reduce consumption, Iranian authorities have cut the amount of gas drivers can purchase at the higher, less-subsidized price tiers. But the shortages are aggravating tensions between the moderate President Masoud Pezeshkian, who wants to draw down reserve gasoline stockpiles to avoid raising gasoline prices, and Islamic Revolutionary Guard Corps (IRGC) leaders, who argue that the country is at war and that the stockpile must be withheld for military use.

More broadly, as the economic downturn has worsened, the regime’s political structure has become polarized between elected civilian leaders, who are in close touch with their constituents, and the harder-line, ideologically driven IRGC commanders. The IRGC, backed by other hardliners in the office of the Supreme Leader, Mojtaba Khamenei, the judiciary, and the informal clerical networks allied with the government, argues the regime is in an existential battle against an untrustworthy adversary in Washington. The IRGC’s positions are represented primarily by IRGC Major General Mohsen Reza’i, recently appointed Secretary General of Iran’s highest security body, the Supreme National Security Council (SCNC). He and other senior IRGC leaders, including its current commander Ahmad Vahidi, insist on regaining and maintaining control over the Strait of Hormuz and on obtaining financial compensation for the war — conditions unacceptable to Washington. Some oppose any talks with Washington at all, advocating escalation to humiliate and punish the U.S. for starting the war. The IRGC’s insistence that Iran must not lose control of the Strait to the U.S. Navy led to its attempt on Sunday to introduce mines into the waterway, an operation discovered and preempted by U.S. airstrikes, setting off the latest round of tit-for-tat exchanges.

The counterpoint to the IRGC’s strategy is most notably articulated by Pezeshkian, who argues that economic deterioration will produce mass unrest. Only small, scattered protests over economic conditions have appeared to date, but even hardline leaders see potential for an uprising and are moving to deter protest organizers. Chief Justice Gholam-Hossein Mohseni-Eje’I, a noted hardliner, told state television last week: “If they once again think of committing an error and decide to stir up chaos and unrest, they can be certain that they will receive a very strong and firm response from the police, security, and intelligence forces, as well as the judiciary.”

Pezeshkian and other moderate leaders claim the only viable means to reverse the economic slide is to forge a compromise with U.S. leaders under the MOU he and Trump signed (electronically) in June. Speaking at the Shanghai Cooperation Organization summit in Kyrgyzstan on Monday, Pezeshkian said that “if the U.S. returns to its commitments in the memorandum of understanding, the Islamic Republic of Iran will immediately reciprocate.” His comments on state television Friday seemed to be a direct rebuke to the hardliners who favor escalation. He stated: “We may have many things; we may even have missiles and bombs, but they are of no use.” Last week, Majles (parliament) Speaker Mohammad Bagher Ghalibaf, who himself served as an IRGC leader and has close ties to hardliners, defended negotiations with the United States, arguing that talks should not automatically be viewed as a sign of compromise or retreat. He wrote in the Iranian daily Kayhan that: “Any rational action, any authoritative dialogue, or any attempt to take the nation’s rights from the enemy should not be incorrectly defined as compromise and passivity.”

The return of U.S.-Iran clashes will likely quiet the moderates, at least for now, as IRGC leaders paint the U.S. as intent on destroying the Iranian nation and moderate leaders, at least rhetorically, support Iran’s counterstrikes. But even if the fighting gives way to another period of quiet, whether moderate leaders can prevail in the internal strategy debate will depend on Washington’s willingness to provide an off-ramp. For now, the Trump team apparently assesses that it can strangle Iran’s economy and force Iranian leaders to capitulate. Trump reportedly has, for now, shut the door on any new agreement with the Islamic Republic, telling Fox News on Tuesday that a deal with Iran is “not worth the paper it’s written on.” He added that he has already given Iranian leaders “a lot of chances,” signaling that he sees little value in returning to negotiations as U.S. military and economic pressure intensifies. But experts agree that, in the absence of an available off-ramp, such as a U.S. offer to return to the June MOU, hardline leaders are likely to argue within regime circles, persuasively, that the only viable pathway to avoid economic strangulation is through escalation.