As Iran’s civilian economy collapses, its military economy grows stronger

The second month of the war began differently. On April 2, while families were picnicking in a nearby valley, the US damaged B1, Iran’s highest bridge. (In response, Iranian drones attacked a Kuwaiti oil refinery.) Three days later Mr. Trump threatened to destroy more bridges and power plants if Iran did not ease its blockade of the Strait of Hormuz within 72 hours.

This threat reflects broader changes. After destroying military posts and naval vessels, weapons factories and what was left of Iran’s nuclear facilities, U.S. and Israeli officials say they now plan to target the engines of Iran’s economy. The goal of such attacks is to disrupt daily life and reduce the regime’s tax revenues, hindering its ability to fight and, should it survive, rebuild its nuclear program.

Attacks on civilian targets are controversial and illegal under international law in most circumstances. They may also fail in their basic purpose. This is because the Iranian regime and its elite fighting force, the Islamic Revolutionary Guard Corps (IRGC), draw little strength from the civilian economy, which has long been in poor shape. Their activities are funded by a commercial empire, and there has also been war good for business. Rising oil prices are boosting revenues, as well as the Guard’s ability to profit from shipping and trade disruptions.

For ordinary Iranians, life was already painful due to years of Western sanctions and, last June, 12 days of Israeli bombardment. The economy shrank last year and six in ten working-age people are believed to be unemployed, sparking protests against the regime in January. The 11,000 attacks carried out by the US since late February have brought daily existence to a standstill. Some projectiles destroyed university buildings, apartment blocks and banks next to military installations. Internet blackouts imposed by Iran to prevent further demonstrations have squeezed the service industry, which once employed half the workforce. The government claims that 70 lakh people, or one in four workers, have volunteered for military service.

Foreign commodities are becoming as scarce as workers and information. Iranian oil tankers are traveling freely through the Strait of Hormuz, keeping energy exports flowing. But despite the threat of US secondary sanctions, the flow of goods from Asia and the Gulf to Iran has almost stopped. The United Arab Emirates (UAE), the source of about a third of Iranian imports in 2025, has not sent a single ship since becoming the target of Iranian retaliation in the first days of the conflict. It has also closed its borders to most Iranians and turned a blind eye to thousands of shell companies in Dubai that had helped Iran evade Western sanctions. Emirati authorities have arrested dozens of people on money-laundering charges and are said to be considering freezing billions of dollars of Iranian assets.

The rial, already almost worthless, has fallen 8% against the dollar on the black market since the war began. According to the central bank, annual inflation was less than 50% on the eve of the war, and prices have increased by 6% since then. The government has done little to mitigate the impact of lost jobs or higher costs. Policymakers have printed cash to cover deficits for decades. Now the printing presses have started chirping once again.

But the war runs on the money of the regime and the IRGC, whose income has been insulated from the ups and downs of the broader Iranian economy. The fight is financed thanks to a vast portfolio, with income from three main areas: oil sales, domestic manufacturing and illegal trade. As Iran becomes increasingly isolated from the outside world, all three are thriving.

The IRGC processed about half of Iran’s oil exports in 2025, valued at at least $30 billion. The government once allocated money to the armed forces, but when the economy fell into crisis it sent oil in return. As the riyal has weakened, and other public spending has become almost worthless, the value of the military’s oil bounty has soared – in real terms and relative to the rest of the shrinking economy.

A sleek machine has been built to deliver shipments, most of which go to China, and process payments while avoiding sanctions. Thousands of shell companies and money exchanges buried deep in the banking systems of Russia and China make transactions so complex that they are almost impossible to trace. Iran’s central government has handed over more barrels than usual to the IRGC in the past month, according to two people familiar with the matter.

All of this has helped the Guards become the main Iranian profiteers from rising global oil prices. Despite the war, Iran is exporting at least as much as it was on average last year, and earning almost double. If the IRGC controls the same amount of oil as it did a year ago, it could capture half of that revenue. This is probably enough to cover the costs of a few months of fighting.

Domestic companies are another source of finance. According to one official, each of the IRGC’s five branches has huge conglomerates that own stakes in nearly half of Iran’s companies. These businesses do everything from building pipelines to selling homes. The Guards also control much of Iran’s diverse manufacturing industry. According to US officials, he was once linked to Bahman, a maker of Mazda cars in Iran, Sina Food Industries Development, one of the country’s largest producers of processed food, and several pharmaceutical companies.

IRGC producers are benefiting from the sudden absence of foreign competition and wartime price increases. Iranians generally prefer high-quality goods from Asia, the Gulf and Russia. Now they have no option but to turn to domestic products, which has increased the demand. Two Western officials expect IRGC-linked companies’ profits from cosmetics and processed foods to double in a month. Other companies are melting steel and aluminum and making mechanical parts, the prices of which have also surged in the past month. The IRGC’s aluminum facilities are now expanding more than before the war.

Rising prices have also increased the IRGC’s income from illicit trade. The guards run the ports, airports and border crossings, giving it a near monopoly on such trade. The weakening of Iran’s regional proxies such as Hamas and Hezbollah, which once helped run networks that smuggled cigarettes, drugs and food inside and arms shipments into and out of Iran, is a blow to supplies. But disruptions in shipping have added a premium to smuggled goods, and given an advantage to Iranian traders, who can pass through the strait with relative ease. An Israeli official believes that IRGC traffickers will make more money from its international narcotics business. The IRGC also plans to charge a formal toll of $2 million for each ship passing through Hormuz. Even if traffic resumed to half the pre-war level of about 140 ships per day, this would add $50 billion per year.

The Emirati actions are an inconvenience for the IRGC but not a major setback. According to two US officials, only a small portion of the Iranian money hidden in Dubai belongs to the regime, which has long been wary of the UAE’s closeness to the US. He says payments for oil and weapons are mostly channeled through China’s banking system, which also stores central bank reserves. And Iran’s domestic payments system, Shetabh, is now linked to Russia’s Mir system, meaning banks are able to make transactions without worrying about additional restrictions. “This shows that these fundamentals (payment systems) work even in a crisis,” says one official, “even if they are not disrupting the financial system.”

None of this is to say that war is without cost. The IRGC’s largest group, Khatam al-Anbiya, controls factories that produce goods deemed vital to national security, some of which are exported to China and Russia. There have been massive fires in its arms factories since the beginning of March. Iran’s two largest steel mills closed on April 2 after the strike, knocking out about 70% of production capacity. An Israeli official believes the blackout in Tehran, which Iran blamed on Israeli attacks, may be the first example of the regime saving power for its factories and oil infrastructure.

A US-Israeli attack on Iranian civilian targets could devastate what remains of the economy and further curtail Iran’s ability to produce weapons to fight. But it will never completely eliminate the IRGC’s financial firepower unless it goes after Iran’s oil. The Iranian regime has threatened to respond by setting fire to the Gulf’s energy infrastructure and world markets. It has also made clear by its actions that, in addition to such an explosion, it is willing to let ordinary Iranians bear the brunt of the economic pain of war.