By Professor Matthew Tasooji, Ph.D., California State University San Marcos — Scholar of Economics, Management, and Iranian Political Affairs
Note: FISN research reports and papers may be used freely with proper referencing and credit to the authors and the Free Iran Scholars Network.
Abstract
Iran’s brief June 2025 conflict with Israel inflicted severe economic and social shocks on an already fragile economy. Before the war, Iran’s economy was under deep stress from U.S. sanctions, oil export collapses, and mismanagement: inflation had exceeded 40–50% for years, the Rial currency was plunging, and unemployment and poverty were rampant [1, 4]. The war precipitated a dramatic loss of oil revenues (oil exports fell ~94%), vast military expenditure (hundreds of missiles launched), and widespread infrastructure damage [10, 11]. The Tehran stock market and foreign exchange markets crashed on reopening, reflecting panic and dollar shortages [8]. Ordinary Iranians – especially workers and middle-class savers – have borne the brunt: food shortages and skyrocketing consumer prices emerged immediately, even as homes and businesses were destroyed and millions were displaced [10]. Meanwhile, the clerical regime used the crisis to divert attention from domestic unrest, doubling down on military and nuclear programs while intensifying repression at home [7, 4]. Opposition leader Maryam Rajavi’s “third option” – a democratic transition to a secular, non-nuclear republic guaranteeing gender and ethnic equality – is promoted as the only sustainable alternative. This paper outlines the pre-war economic baseline, examines the war’s immediate impacts, analyzes regime strategy, and concludes with international policy recommendations.
Introduction
The 12-day war (June 13–24, 2025) between Iran and Israel – triggered by an Israeli strike on Iranian military and nuclear sites – has underscored the fragility of Iran’s economy and society. Analyses by international observers note that by June 24, over 600 Iranians (including civilians) had been killed and thousands injured, and perhaps nine million urban residents fled major cities (often with little warning) as missiles and drones rained down [11]. This violence inflicted immediate human costs and is projected to exacerbate long-standing economic woes. Prior to the war, Iran was already grappling with a stagnant, oil-dependent economy under long-term U.S. sanctions. As this paper will show, chronic inflation, currency collapse, and unemployment had already pushed many Iranians into poverty [1, 4]. The war’s destruction of export capacity, infrastructure, and investor confidence has amplified these pressures: lost oil revenues (estimated at ~$120 million per day during the conflict) worsened budget deficits and inflation [10, 10], while stock and currency markets went into free-fall [8]. Meanwhile, the regime’s leadership sought to use the conflict as a political diversion, emphasizing militarization, nuclear goals and crackdowns on dissent rather than addressing domestic hardship [7, 4].
In contrast, the main Iranian opposition (embodied by Maryam Rajavi and the NCRI) has championed a “third option” of peaceful democratic change. This paper provides an evidence-based survey of (1) Iran’s economy before the war, (2) the war’s immediate economic and social effects, (3) how the regime has manipulated the crisis, and (4) Maryam Rajavi’s alternative vision, concluding with recommendations for foreign policymakers.
Economic Conditions in Iran Before the War
Before mid-2025, Iran’s economy was suffering chronic malaise. Even after a brief post-pandemic rebound, inflation remained extreme: Iran saw annual consumer inflation rates in the 40–50% range for several years [1, 4]. The World Bank notes that “the large contraction in oil exports… drove inflation to over 40% for four consecutive years,” causing a “substantial reduction in households’ purchasing power” [1]. Reuters reports that by early 2023 “inflation has soared to over 50%, the highest level in decades,” with many Iranians struggling to buy basic goods [4].
At the same time, unemployment – especially among youth – was high. The World Bank observes that job creation was “insufficient to absorb the large pool of young… entrants to the labor market” [1], while some Iranian sources place the youth unemployment rate above 20% and more than half the population near or below the poverty line [4, 2]. These economic strains helped spark recurring protests in 2019–22 over price hikes, currency crashes and inequality.
Iran’s economy was oil-dependent and heavily sanctioned. Hydrocarbons provided a large share of government revenue, but U.S. sanctions (re-imposed in 2018) sharply curtailed exports. Data show Iran’s oil income fell precipitously, triggering GDP declines (–2.25% in 2018 and –2.65% in 2019) [3]. Official and private analysis stress that Iran remained “largely dependent on oil and gas exports” for foreign revenue. Under sanctions, Iran turned to barter deals, regional trade, and discounted sales to China to sustain exports [1]. The World Bank notes that Iran pivoted its trade “towards neighboring countries and China,” using “bilateral currency exchange, barter, and other indirect payment channels” because its foreign assets were frozen [1].
These sanctions also led to persistent currency and banking troubles. The Rial repeatedly lost value. Between mid-2024 and early 2025, Iran’s currency collapsed to historic lows – roughly halving against the dollar [8]. According to one analysis, by March 2025 the Rial traded at ~1,039,000 to the dollar, driven down by successive U.S. sanctions and lost confidence [8]. Such devaluations fueled even higher inflation. FocusEconomics describes the situation as “periods of hyperinflation and sharp currency devaluation in the parallel market,” eroding ordinary Iranians’ purchasing power [2]. Similarly, IMF and think-tank reports note frequent currency crises that outran government controls and punitive measures (including arrest of currency traders).
At the same time, the regime’s economic policies generally favored the military and patronage networks over broad reform. The budget passed in early 2023, for example, cut subsidies and salaries while boosting defense spending [7]. One policy analysis notes that President Raisi’s budget “includes no economic olive branches to the people and avoids structural reforms,” instead proposing “more money for the military” even as poverty and inflation surged. State intervention and corruption also stifled private-sector growth. All told, by June 2025 Iran’s economy was stagnating with GDP per capita well below regional peers, weakened by sanctions and mismanagement, and broadly unable to improve living standards [2, 1].
Immediate Economic and Social Effects of the War
The 12-day conflict inflicted acute economic damage on this vulnerable base. A variety of sources estimate enormous losses: Iran loses roughly 1.7 million barrels per day (mbpd) of export when tensions escalate; during the war exports fell by ~94%, from 1.7 mbpd to just 0.1 mbpd [10]. At pre-war discounted prices, this decline cost about $120 million per day in lost oil revenue [10]. Given that oil revenues underwrite much of Iran’s budget, these losses immediately widened deficits and put upward pressure on inflation and currency weakness. One Iranian parliamentary economist bluntly acknowledged that Iran’s economy “lacks the resilience for a decisive battle,” citing these revenue losses as a key weakness [10].
The cost of waging and sustaining the war was also astronomical. The Islamic Revolutionary Guard Corps (IRGC) launched an estimated 591 ballistic missiles (and over 100 attack drones) during the crisis [10]. With prices ranging from $250,000 to $8 million per missile, analysts estimate missile expenditures up to $4–5 billion [10]. Meanwhile, Iranian defense spending is likely to surge as the regime rebuilds destroyed launchers and facilities.
Conversely, Iran’s critical nuclear and military infrastructure was targeted and damaged. Israeli and U.S. strikes reportedly hit Iran’s Natanz, Fordow and Isfahan nuclear sites, destroying at least their outer buildings [10]. Hundreds of other facilities (oil refineries, airports, command centers and civilian infrastructure) were struck [10]. Even within Tehran, the governor reported over 120 residential units completely destroyed and 500 seriously damaged, adding tens of millions of dollars in civilian rebuilding costs. Given that Iran’s infrastructure backlog was already estimated at over $500 billion pre-war, the attacks aggravated critical capital deficits [10].
The war’s financial and market effects were dramatic. Iran’s foreign exchange market was thrown into chaos as the Rial plunged amid uncertainty and dwindling exports. According to analysts, the currency crisis pre-dated the war, but the hostilities deepened fears about hard-currency shortages [8]. The Tehran Stock Exchange, for instance, was shuttered for nine days and then reopened to a panicked sell-off. One report by Iranian opposition monitors described over 99% of listed stocks falling on the first trading day after the ceasefire, with a record 35 trillion-Toman sell queue (~$700 million) forming as investors rushed to liquidate [9]. Retail trading volumes collapsed and most major stocks were suspended to prevent further collapse [9]. Observers compared the market’s plunge to that of a nation in full crisis rather than one emerging from brief conflict. In short, middle-class investors (who had fueled a speculative stock bubble pre-war) saw much of their savings wiped out, while market confidence evaporated.
Ordinary workers and households also suffered immediate fallout. The war sparked inflationary pressures on consumer prices. With oil revenue gone, the government faced higher deficits that likely led it to monetize the shortfall. According to IranWire and other analyses, the oil revenue collapse was expected to “mean sharply increased budget deficits and high inflation” [10]. Indeed, staple goods – especially imported items like flour and fuel – began to see shortages. Reports from Tehran noted bread lines and rationing of flour. One NGO analysis warned that a country already reeling from food insecurity (30 million Iranians lacking adequate nutrition even before the war) would see conditions worsen [10].
Agricultural and industrial production were disrupted by both physical damage and the breakdown of logistics and banking. A severe one-week internet blackout (likely due to wartime control measures) cost an estimated $400 million in economic output [10]. Cyberattacks also targeted financial institutions: Iranian banks and the digital currency exchange Nobitex were hacked, with over $100 million stolen from citizens’ accounts [10].
Socially, the war’s toll on civilians was acute. Al Jazeera reports that 610 Iranians – including dozens of women and children – were killed by missile and air strikes by June 24 [11], and thousands more injured. At least 7 hospitals and multiple emergency facilities were hit, straining health care. The chaos drove mass displacement: an estimated 9 million people in Tehran and other cities fled to safer regions as air raid warnings blared [11]. Survivors describe scenes of panic, traffic jams, and little government coordination during the evacuation. These dislocations disrupted employment and income: many workers could not reach jobs, while small businesses in bombed areas were shut or destroyed. The working and middle classes thus suffered on multiple fronts – steep price hikes reduced real wages, stock and bank losses erased savings, and war damage destroyed homes and jobs.
In sum, the 12-day war compounded Iran’s crises: it drained the economy’s limited buffers, inflicted large civilian harm, and pushed ordinary Iranians closer to humanitarian and economic collapse.
Regime Strategy and Priorities
Throughout this crisis, Iran’s regime has instrumentalized the war to advance its own agenda. Analysts note that faced with mounting internal unrest in recent years (from the 2009 Green Movement to the 2022 “Woman, Life, Freedom” protests), Tehran has lacked the political will or resources to address public grievances at home. An academic analysis argues that Iran’s leadership – starved of reform options by sanctions – turns to “diversionary conflict” as a third strategy: launching an international crisis to distract citizens when it cannot placate or forcibly repress them indefinitely [12]. Indeed, in the months before war Iran already engaged in periodic missile launches and cross-border strikes (e.g. against Kurdish groups in Iraq) [12]. By June 2025, confronting an unprecedented domestic legitimacy crisis, the regime seems to have bet on rallying nationalist sentiment around external confrontation.
The regime’s priorities in policy and spending have consistently been security-oriented rather than domestic reform. Even as ordinary Iranians faced hyperinflation, the government has funneled resources into the IRGC, missile programs, and foreign proxies. The national budget passed in 2023, for example, included deep cuts to subsidies and wages while allocating more funds to military forces. One policy report notes that Raisi’s administration “proposed de facto cuts to salaries and subsidies as well as more money for the military, while avoiding the tough reforms Iran’s economy needs” [7]. The judiciary and security apparatus have similarly received generous funding, alongside stepped-up censorship and repression of any dissent (as Amnesty and others have documented) [16].
The regime’s military/nuclear ambitions have remained paramount. Over decades the clerical leadership invested heavily in Iran’s nuclear enrichment and ballistic missile capabilities, often at the expense of social spending. Israel’s June strikes themselves underscored this: Prime Minister Netanyahu expressly aimed to force Iran to abandon its enrichment program and missile development (goals the regime had steadfastly pursued) [6]. Moreover, Western intelligence suggests Iran had spent on the order of $2–3 trillion over years on its enrichment infrastructure [10]. Despite the war damage, insiders predict Tehran will simply intensify these programs. U.S. and think-tank analysts warn that Iran will try to replenish its arsenal (possibly with Chinese aid), rebuild underground facilities, and pursue even more advanced missile designs [7].
Alongside its military focus, the regime has escalated repression of any internal opposition. Even in peacetime, authorities have silenced protesters and minorities to maintain control. For example, Human Rights experts note a surge of executions, torture and arbitrary arrests since 2022, targeting women’s rights protesters, journalists, students, and ethnic minorities [4, 16]. Amnesty reports that by 2024 Tehran had arbitrarily detained thousands for basic rights activities and used flogging, amputation and sham trials on “nonviolent” dissidents [16]. Reuters analysts conclude that the leadership sees brutal crackdowns as its only solution: Iran’s rulers view “ruthless repression” as necessary to deter unrest, reflecting an admission that they are “incompetent and incapable of change or good governance” [4].
In short, the war has allowed the regime to double down: it portrays itself as under siege and punishes critics who question spending on missiles instead of schools.
The “Third Option”: A Democratic Alternative
In response to this cycle, Maryam Rajavi – president-elect of the opposition National Council of Resistance of Iran (NCRI) – has advanced a “Third Option” for democratic change. Rejecting both appeasement and foreign-imposed regime change, her platform envisions Iranians themselves leading a transition to a secular republic. In her Fox News interview (June 2025), Rajavi explicitly outlined this alternative:
“We offer the Iranian people a democratic and inclusive alternative: a republic based on separation of religion and state, complete gender equality, [and] respect for the rights of ethnic and religious minorities” [14].
Central to her vision are abolition of the theocratic rule (velayat-e faqih) and Iran’s nuclear weapons ambitions, on the grounds that democracy and peace are the only sustainable foundations for an Iranian state.
Mrs. Rajavi emphasizes that this solution draws on “universal principles of human rights” and has a detailed roadmap (her Ten-Point Plan). The plan explicitly guarantees equal rights for women and minorities, freedom of speech, and a market economy – all of which stand in stark contrast to the current regime’s policies. The NCRI portrays itself as having the organizational capacity to implement this “Third Option”: it points to its own People’s Mojahedin Organization (MEK) as a 60-year resistance group that would underpin a future government. Indeed, NCRI statements underline that only Iranians acting together – rather than external military intervention – can end the theocracy. As one NCRI analysis argues, concessions to the mullahs merely embolden them; only internal upheaval can topple clerical rule without war [15].
Whether or not one accepts the NCRI’s claims, the concept of a secular, democratic alternative has gained wider circulation amid Iran’s crises. Policymakers and scholars note that Iran’s active civil society – from urban protesters to ethnic activists – yearns for change [11, 14]. Several international opinion pieces have referenced Rajavi’s Ten-Point Plan as a clear articulation of what a post-regime Iran could look like (though this remains controversial in Iran itself) [14].
For the purposes of international policy, Maryam Rajavi’s platform represents the leading organized vision for regime replacement by Iranians. Its core tenets – a secular republic, non-nuclear status, and equality – resonate with global norms of governance and human rights. In this sense, the “Third Option” serves as a foil to the current regime’s priorities and a rallying point for dissidents and supporters abroad.
A Constructive Path Forward for International Actors
In light of the above, international policymakers face a complex dilemma. Sanctions have already been tight, but the war leaves Iran weaker and potentially more isolated. Western governments (U.S., EU, etc.) should continue to insist on strict limits to Iran’s military programs. Experts advise using the regime’s post-war vulnerability to negotiate a verifiable freeze on any nuclear or missile reconstitution [17]. In practical terms, this means any return to dialogue should demand intrusive IAEA inspections and legally binding bans on enrichment and weapons-capable research, as well as clear consequences (e.g. automatic sanctions snap-back) for violations [17]. A unified front – involving the U.S., EU, and Arab states – can maximize leverage.
Simultaneously, the international community must press for domestic human rights and political reforms. It is crucial to make clear that any easing of sanctions or official normalization is conditional on concrete improvements – for example, halting executions of protesters, ending discrimination against women and minorities, and releasing political prisoners. Human rights organizations (Amnesty, UN monitors) should remain engaged: their reports on Iran’s abuses (including in the 2024 annual review) underscore the need for accountability [16]. Governments should publicly support the UN’s Special Rapporteur and fact-finding mission on Iran (mandates recently renewed) [16], and call out regime crimes in international forums. Sanctions targeting individuals responsible for repression (e.g. judiciary and IRGC leaders) should be expanded, while humanitarian channels remain open to alleviate civilian hardship.
Crucially, policymakers should reach out to Iranian civil society and exiled opposition seeking a regime change in Iran rather than only dealing with Tehran. The resilience of Iranian protesters suggests that engagement at the people-to-people level is vital. For instance, Western governments and NGOs can fund independent media broadcasts into Iran, support human rights activists (including women’s and labor groups), and welcome dissidents and victims fleeing persecution. Any future aid for Iran’s economy should be carefully structured: rather than paying ransom to the regime, international actors could earmark assistance for healthcare, education and infrastructure projects managed by independent bodies. At minimum, flexibility should be given to non-regime banking (even if through trusted third parties) so that humanitarian trade (food, medicine) can flow without empowering corrupt officials.
Finally, diplomatic strategy should keep war avoidance and regional stability as top goals, while delegitimizing forced regime change. Policymakers should reject any pressure that would leave Iranians feeling attacked or humiliated, which would only strengthen hardline narratives. Instead, public statements should emphasize support for an eventual democratic transition chosen by Iranians. To this end, the NCRI’s vision can be highlighted as evidence that Iranians seek non-violent solutions. Parliamentary resolutions or international conferences could be organized (as NGOs have done) to showcase Iranian exiles articulating the demand for secular democracy and gender equality [14].
In sum, a dual-track approach is warranted: apply economic and diplomatic pressure on Iran’s nuclear/military ambitions, but simultaneously encourage and empower domestic democratic forces.
Conclusion
The 12-day Israel-Iran war has laid bare the unsustainability of the current system in Tehran. Its economy – already crippled by sanctions, inflation and mismanagement – has taken a fresh shock from lost exports, destruction and investor flight. Society has endured tragedy and upheaval, and the majority of Iranians now see the regime as weaker and isolated. At the same time, the clerical leadership’s reaction – doubling down on repression and arms – has deepened alienation at home.
In this context, Maryam Rajavi’s “third option” of a secular, non-nuclear democratic republic appears as the only viable future. International actors concerned with regional stability and human rights should therefore align policy to constrain Iran’s war machine while empowering Iranian aspirations for democracy. This means sustained pressure on nuclear and missile programs, continued sanctions on regime elites, and robust support (political, moral and limited material) for Iran’s democratic opposition and civil society.
In short, the lessons of the war suggest that appeasement has failed; only by combining strategic pressure with a genuine offer of support for reform can the world help Iran avoid further conflict and humanitarian catastrophe [17, 16].
References
[1] World Bank, “Islamic Republic of Iran – Country Overview,” (Oct. 2022), pp. 466–472, 477–484 (on oil dependency, sanctions, inflation, barter trade).
[2] FocusEconomics, “Iran Economic Outlook,” (2025) (on sanctions, oil reliance, inflation, barter trading).
[3] Economics Observatory, Mohammad Reza Farzanegan, “What are the big economic challenges facing the government in Iran?” (Mar. 2023) (on sanctions effects, GDP drop).
[4] Reuters, Parisa Hafezi, “Iran executions quash protests, push dissent underground,” (Jan. 10, 2023) (on inflation >50%, poverty, repression).
[5] Reuters, Parisa Hafezi, “Despite tough talk, economic woes may force Iran to bargain,” (Mar. 14, 2025) (on economy worse than Iran-Iraq war, dependency on China, sanctions impact).
[6] Reuters, Samia Nakhoul et al., “Israel’s airstrikes aim to break foundations of Khamenei’s rule,” (Jun. 19, 2025) (on regime’s nuclear, missile priorities and Iran’s existential crisis).
[7] The Washington Institute, Henry Rome, “Iran’s New Budget Perpetuates Economic Challenges,” PolicyWatch 3692 (Jan. 12, 2023) (on budget priorities cutting subsidies/salaries and raising military spending).
[8] FDD Flash Brief (Mark Dubowitz & Saeed Ghasseminejad), “‘Maximum Pressure’: Iran’s Rial Hits Record Low,” (Mar. 26, 2025) (on Rial collapse to new lows).
[9] NCRI (Iran opposition) report, “Iran’s Stock Market in Crisis Following the 12-Day Conflict,” (June 2025) (on stock market crash).
[10] IranWire, Arezoo Karimi, “Iran Missile Strikes Cost Billions of Dollars in 12-Day War,” (June 29, 2025) (on lost oil revenue, missile costs, infrastructure damage, bread lines).
[11] Al Jazeera, Alia Chughtai, “Visualising 12 days of the Israel-Iran conflict,” (June 26, 2025) (on civilian casualties and displacement in Iran).
[12] London Politica, Redouane Acoudad, “Protests in Iran and the Risk of Diversionary Conflict,” (Feb. 19, 2024) (analysis of regime using war to distract from unrest).
[13] Reuters, Timothy Gardner et al., “US imposes fresh sanctions targeting Iran oil trade, Hezbollah,” (July 3, 2025) (on Iran’s oil smuggling networks funding proxies).
[14] Maryam Rajavi (NCRI), Fox News Digital interview (26 June 2025), as excerpted on maryam-rajavi.com, “We offer the Iranian people a democratic and inclusive alternative…” (on secular, egalitarian republic).
[15] Maryam Rajavi (NCRI), “The Third Option: Overthrowing of the Religious Fascism,” (viewpoints.ncr-iran.org) (on change by Iranian people as alternative to war/appeasement).
[16] Amnesty International, “Iran 2024,” Annual Report (2024) (on intensified rights violations, crackdown on women, minorities).
[17] Washington Institute, “Back to the Table? Recommendations for Negotiations with Iran,” (July 2025) (on using leverage to restrict Iran’s nuclear/missile programs).