One of the great mysteries surrounding the US-Iran war is why the economic toll from the months-long assault on Tehran has not compelled that country to make peace. Iranian officials estimated in April that US and Israeli strikes had caused $270 billion worth of damage to Iranian infrastructure. Iran had to borrow heavily from the central bank to keep fighting. Inflation is expected to rise, and it was already at more than 40% last year. Ordinary Iranians are undoubtedly suffering. How has the country then not been brought to surrender by now?
Part of the reason is that nations are not moved by economics alone. Nationalism, dignity, pride all play their part. But it is also worth noting that Iran's economy, as strained as it has been by decades of sanctions and now the war, has nonetheless been surprisingly resilient. For all the perceptions of Iran as an economic basket case, for all the real pain inflicted, it is also true that Iran is one of the region's more diversified functioning industrial economies. Iran borders seven countries and can trade over land. It also has several ports, some of which have been operational even during the war. Iran exports more than just oil.
Protectionist policies and entrepreneurship have fostered booming industries such as steel, petrochemicals, iron, and food products. Iran has adapted to international sanctions by producing more of what it needs at home, including cars, pharmaceuticals, and home appliances. These goods are not always internationally competitive, not by a long stretch, but they do cater to local demand, and that helps the country during wartime as well. And as for the oil, the Wall Street Journal reports that an increasing number of transactions are taking place, but in Chinese yuan rather than dollars, helping Iran evade sanctions. In 2024, Iran earned an estimated $43 billion in oil revenue, and the journal found that most of the sales were made in yuan. Tehran also uses cryptocurrency to evade sanctions, which is similarly hard to track.
And it's crucial to understand that Iran's elite directly benefits from the way the economy works right now. That is in an opaque system controlled by shadowy interests, including the country's clerics and its Islamic Revolutionary Guard Corps, the IRGC. As Kevan Harris writes in Phenomenal World, after the Islamic Revolution, the government seized elite assets and distributed them into two camps. Some, like banks, insurance companies, and heavy industries, were nationalized and run directly by government ministries. Others, including the Shah's foundations, were distributed to social organizations known as bonyads, which answered to the clerics.
The bonyads headed reconstruction and relief efforts surrounding the Iran-Iraq war in the 1980s and grew into sprawling conglomerates over time. Many of the nationalized industries were eventually privatized, and many of those companies ended up in the hands of the IRGC. Harris writes, "Today, the IRGC's commercial interests span Iran's shipping, construction, oil, car making, and telecom industries." And as Reuters notes, sanctions have reinforced the Revolutionary Guard's control of the economy because it facilitates clandestine exports and trade through intermediaries and shell companies. In other words, they control the smuggling. It is now estimated that the IRGC and the bonyads control more than 50% of Iran's economy.
And as Reuters notes, whenever post-war reconstruction is attempted, the Guard Corps will be a main beneficiary because of its dominance in construction and engineering. Iran's economy has, of course, operated at the expense of ordinary citizens, but there are millions of people who benefit from proximity to the regime. As the journal reports, members of the volunteer paramilitary force, the Basij, and the IRGC can enjoy positions in government-linked companies or access to cheap loans.
One of the many problems with Donald Trump's approach to Tehran is that he acts as though he's dealing with the straightforward imperatives of a normal market economy. But Iran's economy is dominated by a web of perverse incentives. Sanctions and isolation are bad for the country, but they are good for its rulers. For all the pain that the United States and Israel have inflicted on Iran since they began the war, they've also given that country a powerful gift of sorts: the opportunity to demonstrate to the world control over the Strait of Hormuz. The strait handled about 20 million barrels of oil a day before the war, a fifth of the world's total oil supply. By exerting control over the waterway, Iran has brought about what the International Energy Agency calls the largest disruption to global oil supply in history, sending oil prices soaring.
But Iran's weapon might be one with an expiration date on it. As the Wall Street Journal reports, Gulf countries are already scrambling to build up oil infrastructure to bypass the strait. In May, the UAE said it would speed up the construction of a second pipeline to its storage hub in Fujairah, which lies just beyond the Strait of Hormuz. Saudi Arabia has redirected oil from the strait to its western port of Yanbu via its East-West pipeline. That infrastructure, built up during the Iran-Iraq war in the 1980s, is moving nearly 7 million barrels a day. Before the war, it moved just 2 million barrels a day. And the journal notes Gulf countries are also talking about speeding up the construction of a rail corridor that would offer another route to move oil.
These solutions are imperfect. Pipelines are expensive and complicated to build, and they're vulnerable to drone attacks, and trains cannot move as much oil as ships, nor as cheaply. Another strategy is not to find new paths for the supply of oil, but to reduce the demand for it. As the World Economic Forum notes, many countries are adopting energy-saving policies to do just that. Indonesia and Myanmar have devoted one day of the week for public sector employees to work from home. Other countries have reduced school days or increased remote learning. Many countries are rationing fuel. But no country's attempts to slash oil imports and demand have been as consequential as those of the world's largest energy importer, China.
Today, China is taking in at least 3 million fewer barrels of oil per day than it did before the war. That's because Beijing has spent years insulating itself from just the kind of global energy supply shocks we're seeing today. It has stored up huge reserves of oil, and it runs its factories largely on domestic coal and renewables. And as NYU's global affairs professor Carolyn Kissane writes in her newsletter, the Asian giant's reduction in oil imports is a key reason prices haven't climbed even higher. China has also limited consumption of energy at home. As JPMorgan's head of commodity strategy, Natasha Kaneva observes, the reduction is not the result of government mandate. It seems to be largely driven by consumer choice and a ready availability of electric vehicles. China already has the largest fleet of EVs in the world, and people are using them more than ever.
EV charging volumes on highways rose by 56% on the first day of the annual May Day holiday compared to the year before. Residents are traveling more by train and less by jet. The tactics countries and consumers have used to limit oil consumption are born of necessity, not of a desire for a clean energy transition. In some cases, it is coal that is being substituted for oil. But in the long run, green technologies will benefit. NYU's Kissane predicts that oil demand will soon hit a plateau, not because climate policy suddenly triumphed or because governments collectively decided to consume less oil, but because insecurity forced adaptation. History bears out that hypothesis.
Look at the oil crisis of 1973. It led to a long period of lower oil consumption in the US. That's in part because it spurred America's introduction of fuel economy standards on cars. Europe and Japan were inspired to build up nuclear power capacity and expand public transport. The crisis made countries diversify their sources of energy, turning away from an over-reliance on oil. A more positive change is possible now because of the ready availability of renewables and EVs. As Bloomberg reports, the UK is introducing regulations that would require solar panels and energy-efficient heat pumps in new homes. Vietnam wants 10% of houses to have rooftop solar panels by the end of the year. Indonesia's president says he wants all vehicles in his country to be electric. EV purchases surged in more than 30 countries in March, Bloomberg notes.
So in the long run, the surprising effect of this crisis might be that Iran loses a lever it has gained and the world diversifies toward green energy. Who would have guessed?
Donald Trump was mad as hell with Iran this week. At the NATO summit in Turkey, he called the Iranian leadership cuckoo, evil, sick people and a cancer. In February, he called the regime a very wicked radical dictatorship. Weeks later, he threatened that if Iran didn't accept a ceasefire, a whole civilization will die tonight, never to be brought back again. By June, he changed course, signing the memorandum of understanding intended to bring an end to the war, temporarily lifting oil sanctions against Iran and dangling the prospect of a huge fund to rebuild the country. He said it was unfair to deny Iran ballistic missiles if other countries had them. And he said he would be honored to meet the new supreme leader, Mojtaba Khamenei, whose father Trump had called one of the most evil people in history when announcing that the US and Israel had killed him.
If this hot and cold diplomacy surprises you, it shouldn't. Let me take you back to Trump 1.0, when the president was trying to defang the nuclear program of another bitter antagonist, North Korea. As with Iran, it all started with maximalist threats. Faced with North Korea's advancing nuclear program, Trump told reporters in 2017 that the country will be met with fire and fury like the world has never seen. Sounds familiar. In September of that year, Trump pledged to totally destroy North Korea, saying that its leader, Kim Jong-un, was on a suicide mission for himself and for his regime. He also repeatedly insulted Kim personally, calling him Little Rocket Man, referring to Kim's short stature and penchant for missile tests. But then Trump switched course, agreeing to meet with Kim in Singapore. After that summit, Trump said of the North Korean leader, "I trust him," and that he had a great personality, that they fell in love through letters. Trump later invited Kim to meet him at the DMZ, where they posed for photographs together.
But the diplomacy went nowhere. And within a year, Trump seemingly lost interest. He has little to show for his sticks or his carrots: neither a nuclear agreement nor a totally destroyed North Korea. In fact, quite the opposite. North Korea's nuclear program is stronger than ever. Last month, Kim commissioned a 5,000-ton naval destroyer, the country's largest ever warship, that would be capable of carrying nuclear missiles. Pyongyang is also working toward a nuclear-powered submarine, which would combine stealth and range, theoretically allowing it to launch a retaliatory strike from sea if it were hit first on land.
The Stockholm International Peace Research Institute announced last month that North Korea may have as many as 60 nuclear warheads, with enough fissile material to assemble at least 30 more. Seven years ago, when Trump and Kim met, experts estimated North Korea possessed just 20 to 30 nuclear warheads. And last year, a top Air Force general told Congress that the hermit kingdom had tested a new ICBM that probably can deliver a nuclear payload to targets throughout North America. Trump has said that he wants to meet with Kim again, but it will be harder now than ever to tempt North Korea to give up nuclear weapons. North Korea is not the famine-struck, isolated country it was in the 1990s, eager for handouts of food and fuel.
Though a very poor nation, the North Korean economy grew by 3.7% in 2024, according to South Korea's central bank, which estimates that that growth has continued. Part of this turnaround has to do with the fact that North Korea is less isolated than it has been in the past. As the diplomat Junkeun Park notes in Foreign Affairs, Kim has used the growing rift between the United States and China to strengthen his relationship with Beijing, which is Pyongyang's largest trading partner. But Kim's geopolitical masterstroke may be that after the Russian invasion of Ukraine in 2022, he made himself indispensable to Vladimir Putin.
In 2023, North Korea started providing arms to Russia. It now supplies up to 40% of the ammunition that Russia is using in Ukraine, according to Ukrainian intelligence. In 2024, Putin traveled to Pyongyang and signed a mutual defense treaty with Kim, which reestablished a security guarantee that had lapsed at the end of the Cold War. The agreement paved the way for about 16,000 North Korean troops to fight in Ukraine on Russia's behalf. The relationship is a huge strategic win for Kim. As Oriana Skylar Mastro notes in Foreign Affairs, North Korean soldiers have learned the latest in drone warfare from the Russians. And now there's evidence that Russia is helping North Korea develop that nuclear submarine.
Trump's volatile, idiosyncratic, and shifting diplomacy did not, in the end, work with North Korea. And as of now, it doesn't seem to be working with Iran either.
