Executive Summary
The Iranian state is formalising a transition to a “war conditions” framework under Article 79, signalling a shift toward emergency command-and-control measures to address the systemic exhaustion of fiscal buffers and the “terminal volatility” of the rial.
A “Guerrilla Economy” where both the government and the populace have decoupled from the national currency in favour of gold and digital assets characterises this transition, effectively rendering traditional monetary policy obsolete. As a result, internal hardline factions are leveraging this economic downturn to undermine the Pezeshkian administration, while the Trump-Netanyahu alliance employs strategic ambiguity and military threats to ensure persistent internal unrest.
This report assesses the prevailing economic climate within the Islamic Republic of Iran, examining its implications for domestic political rivalries and the broader regional geopolitical landscape
Information background
The Vice-Speaker of the Islamic Consultative Assembly (Parliament) of Iran, Hamid-Reza Haji-Babaei, pointing to upcoming legislative developments, has teased a major announcement. He stated that on 31 December, 2025, Parliament faces a significant decision to be declared within the framework of current war conditions and the national interest.
Hajibabaei asserted that the Islamic Republic has become a globally influential power, and as its success grows, so does enemy pressure. He identified economic warfare and propaganda warfare as the two primary tools used against Iran (“Two Blades of Scissors”). The Vice-Speaker further highlighted the dominance of the digital space, noting that while people might spend two hours in a mosque, they spend twenty-two hours in cyberspace, where global media power is deployed against the state.
The Iranian economy is currently navigating a period of terminal volatility, precipitated by a decade of “Maximum Pressure” and exacerbated by recent kinetic engagements. The convergence of systemic sanctions, capital flight into decentralised assets, and the exhaustion of fiscal buffers has reduced the Central Bank of Iran’s (CBI) policy autonomy to negligible levels.
The consecutive Trump administrations have exerted a transformative impact on Iran’s fiscal solvency. Eight years of comprehensive primary and secondary sanctions have effectively decoupled the IRI from global banking architectures. The activation of Snapback provisions by European signatories has closed remaining diplomatic and economic backdoors, formalising a total embargo environment.
The 12-day conflict with Israel and the United States has transitioned the risk profile from speculative to imminent. Anticipation of a renewed offensive in 2026 has rendered the Iranian market toxic to both foreign and domestic direct investment (FDI/DDI). Moreover, Iran’s defense budget has seen a nominal increase of around 145% compared with the previous year, a notable pre-emptive deterrence cost.
The domestic response to the rial’s devaluation has created a self-reinforcing feedback loop of economic degradation. Private citizens, seeking to preserve life savings, have pivoted en masse to Bitcoin and other crypto-assets. This has caused a dual-threat: stripping liquidity from the formal banking sector while placing unsustainable loads on the national power grid due to mining activities.
The exodus of capital intensifies the demand for foreign exchange (FX) precisely when the state is facing an acute FX liquidity crunch. The CBI’s primary remaining lever is liquidity contraction. While this serves as a marginal brake on currency depreciation, the economy’s structural fragility means aggressive tightening risks inducing a deep, stagflationary recession.
The macroeconomic collapse is manifesting as an existential crisis for the Iranian social contract and the proletarianisation of the Middle Class. Formerly stable households are being downgraded into the vulnerable echelons, erasing the buffer between the state and the impoverished masses. Radical shifts in consumption patterns—moving away from durable goods toward survival-based subsistence—indicate a transition to a Survival Economy (Baqa).
Domestic policy interventions are currently relegated to reactive damage limitation. Until the primary external variables—specifically the threat of high-intensity conflict and the sanctions regime—are resolved, any internal fiscal adjustment will offer only ephemeral, short-term relief.
Geopolitical Dynamics and Asymmetric Information Operations
The Iranian state’s fiscal resilience has reached a critical inflection point following eight years of systematic resource exhaustion. Administrations in Tehran have depleted all available contingency reserves and alternative revenue streams to mitigate the impact of the “Maximum Pressure” campaign. While the initial phase of US sanctions sought the total cessation of Iranian exports, the current executive mandate in Washington has evolved into a high-fidelity interdiction of the IRI’s shadow banking networks and clandestine procurement channels, effectively sealing the remaining fissures in the sanction’s regime.
Despite this economic strangulation, the strategic impetus for direct kinetic confrontation appears to remain an Israeli rather than a primary US objective. Tel Aviv’s regional strategy has successfully neutralised several peripheral threats, yet the Iranian core has demonstrated an unprecedented degree of systemic resilience.
The 12-day conflict in June 2025 serves as a significant case study, as Tehran’s ability to challenge Israeli qualitative military edge exceeded prior intelligence estimates. The current synchronisation of the Trump-Netanyahu summit with domestic Iranian civil unrest suggests a calculated effort to exploit internal socio-economic fissures, specifically leveraging the rial’s volatility as a catalyst for state destabilisation.
Current assessments indicate a deliberate pivot in Israeli strategic communications, shifting the media focus from the protracted nuclear dossier to Iran’s ballistic and cruise missile architecture. This transition is identified as a calibrated psychological operation designed to manufacture a “perception of immediacy” within both the Israeli domestic populace and the US legislative branch.
By reclassifying the missile threat as an existential and urgent priority, Tel Aviv is effectively orchestrating the political justification for a comprehensive support package. This framework is intended to secure advanced operational coordination, the replenishment of strategic munitions, and the necessary international legitimacy for potential future escalations. The reported executive assurance from Washington, granting a contingent strike authorisation in response to Iranian technological upgrades, underscores a shift towards a policy of pre-emptive deterrence that integrates economic pressure with credible kinetic threats.
Survivalist Fiscal Policy & Political Friction
The Pezeshkian administration is currently attempting a high-risk transition toward a market-determined exchange rate, a manoeuvre colloquially identified as economic “shock therapy”. While the stated objective is to rectify structural budget deficits, the immediate consequence is a precipitous decline in purchasing power and an acute spike in the cost of living. This fiscal pivot is increasingly being weaponised by domestic political antagonists to catalyse civil unrest and undermine executive legitimacy.
In Iran the government often adopts a strategy of managed devaluation (tries to keep the price of the US Dollar low artificially to keep food and medicine cheap) which serves a dual purpose:
- Achieving fiscal solvency by maximising the rial-denominated returns on dollarised oil exports (if the government sells oil for Dollars, and the Dollar is worth more Rials, the government suddenly has more Rials to pay its local bills);
- Preserving diminishing foreign exchange reserves by ceasing the costly practice of market intervention. By retreating from the artificial price ceilings previously used to subsidise essential imports, the government is attempting to stem the haemorrhaging of national gold and hard currency stocks.
The re-emergence of the market liberal triumvirate—comprising Hemmati (Central Bank), Madanizadeh (Minister of Economic Affairs and Finance), and Pourmohammadi (Head of the Budget Organisation)—has formalised the ideological shift toward market determination. This faction posits that the state must abandon the fiction of a strong rial in favour of supply-and-demand realities. However, this transition is fraught with systemic risk; critics argue that the velocity of this devaluation is forcing hyper-inflation onto the foundational cost of essential commodities, such as bread and medicine.
This transition has fractured the traditional domestic support base. The Bazaar (mercantile class) is experiencing profound operational paralysis; extreme volatility prevents accurate inventory pricing, where the revenue from a sale today is often insufficient to replenish stock tomorrow. Conversely, the Paydari (Ultraconservative) faction is strategically exploiting this instability. Their tacit satisfaction stems from the political utility of the crisis, utilizing the economic disenfranchisement of the lower echelons as “political munitions” to frame the Pezeshkian cabinet as a failure of the reformist mandate.
The “Two Blades of the Scissors” metaphor, articulated by Vice-Speaker Hajibabaei, confirms a prevailing consensus within the security establishment that views exchange rate volatility not as a market correction, but as a coordinated external subversion operation. Hajibabaei’s public rebuke of the proposed 20% wage increase—characterised as woefully inadequate—serves as a high-level indicator of the deepening rift between the legislative security hawks and the executive’s economic reformers. This friction suggests that the administration’s shock therapy may be forcibly curtailed by securitised intervention should the threat of social contagion reach critical thresholds.
Constitutional Override and the Securitisation Of Fiscal Oversight
The recent rhetorical deployment of “war conditions” by Vice-Speaker Hajibabaei marks a critical transition from standard legislative discourse to the formal securitisation of Iran’s economic crisis. In the Iranian political lexicon, this nomenclature serves as a strategic precursor to the suspension of conventional bureaucratic protocols in favour of an emergency command-and-control architecture. Should the Islamic Consultative Assembly (Majlis) formally ratify this status, it would grant the executive branch emergency powers, facilitating, for instance, the immediate imposition of rigid price ceilings, commodity rationing, and the centralisation of supply chain management.
While the Constitution of the Islamic Republic expressly prohibits the declaration of martial law, Article 79 provides a critical legal aperture for “war or emergency conditions”. This constitutional bypass allows for the implementation of necessary restrictions on civil liberties and private economic activity, provided such measures receive parliamentary assent. Notably, these powers are subject to a mandatory 30-day sunset clause; however, the ongoing regional volatility and domestic unrest provide a high probability for successive legislative renewals,
By framing the current inflationary spiral as a kinetic war condition, Hajibabaei is providing the Pezeshkian administration with a formal security shield to deflect criticism of its economic performance.
The President is currently immobilised by a dual-front crisis: a market-driven devaluation that necessitates inflationary adjustments, and a domestic populace nearing a breaking point over the cost of essential needs. The “major decision” anticipated from the Majlis suggests the Parliament is assuming the role of a political referee, offering the administration the legal justification required to bypass the market liberal triumvirate and implement heavy-handed state interventions.
The “Guerrilla Economy” vs. The “Triumvirate”
The Iranian economy has transitioned into a “Guerrilla” phase, where the state and the citizenry have effectively decoupled from the national currency in a desperate bid for value preservation. While the triumvirate of market-liberal technocrats attempts to exert influence via standard monetary tools such as interest rate adjustments, these levers have rendered themselves obsolete. The Iranian Rial (IRR) is increasingly classified by market participants as dead money—a non-viable medium of exchange—forcing a systemic migration toward a shadow tripod of Gold, Tether (USDT), and Barter.
From a strategic perspective, the Central Bank of Iran (CBI) has pivoted to treating gold as a primary kinetic asset. By stockpiling bullion, the state is architecting a sanction-proof payment architecture designed to bypass the SWIFT messaging system entirely. In this framework, gold is not merely a reserve but a physical weapon used to settle international trade accounts for critical dual-use technologies and essential supplies. However, this state-level securitisation of gold has triggered a frantic, high-velocity acquisition of the same asset by the general public.
The socio-economic consequences of this gold rush are devastating for the lower and middle echelons. Ordinary families are liquidating remaining liquid assets to purchase bullion at record-high premiums, often driven by panic-inducing war rumours. This has created a ‘locked wealth’ trap: while households may appear to possess assets, their capital is immobilised in a highly volatile commodity. When global or local gold prices experience a minor correction, these families suffer catastrophic losses, leaving them with paper wealth but no liquid Rial to purchase basic needs or medicines.
The traditional Bazaar culture—the historical cornerstone of the Iranian economy—is undergoing a structural collapse. The mercantile class can no longer maintain inventory cycles; the extreme volatility of the guerrilla economy makes future pricing impossible. Merchants find themselves in a state of forced bankruptcy, where the revenue from today’s sales is insufficient to restock tomorrow’s goods.
Conclusion
The Islamic Republic of Iran is currently bifurcating into a dual economy that marks the terminal exhaustion of conventional fiscal policy. While the government economists attempt to manage a formal economy characterised by a moribund Rial and systemic hyper-inflation, a parallel shadow market has emerged as the primary vehicle for survival.
This shadow architecture, underpinned by gold and digital stablecoins, is now utilised symmetrically by the state to circumvent the sanctions regime and by the populace to preserve what remains of their domestic wealth. This reliance on decentralised assets signals a profound loss of monetary sovereignty, rendering the Central Bank’s traditional tools—such as interest rate adjustments or the mere replacement of the Governor—largely performative and ultimately indecisive.
Internally, this economic fragmentation is being weaponised by the Paydari faction and other hardline elements to systematically erode President Pezeshkian’s executive mandate. By instrumentalising the public’s acute livelihood grievances, these political rivals are adopting a high-risk strategy reminiscent of the December 2017 unrest, effectively leveraging the economic misery of the masses as a tactical asset to destabilise the current administration. This internal power struggle creates a hazardous feedback loop, where legitimate socio-economic protests are susceptible to hijacking by elite factions, potentially escalating into a broader anti-government movement that the state may struggle to contain.
Simultaneously, the geopolitical “limbo” maintained by Washington and Tel Aviv serves as the primary external driver of this volatility. By keeping the threat of kinetic escalation and Snapback sanctions on a hair-trigger, the Trump-Netanyahu axis ensures that Iran’s currency markets remain in a state of permanent agitation.
This strategic ambiguity is designed to reach a pressure peak, sabotaging long-term economic stabilisation while forcing Tehran into a defensive crouch that complicates its efforts to advance its missile and nuclear programmes. Until the core variables of export revenue decline and the immediate threat of high-intensity conflict are resolved, the Central Bank is forced into a posture of extreme resource preservation.
*The term Guerrilla Economy is coined by Majidreza Hariri, the President of the Iran-China Chamber of Commerce, who is quoted as saying:
“If other countries run their economies like conventional armies, we operate like guerrillas. Today it might be gold, tomorrow [cryptocurrency] Tether, and so on.”
