Introduction
When the United States and the European Union impose economic sanctions on a country, the underlying logic is straightforward: make the cost of certain policies — nuclear weapons development, regional aggression, human rights violations — so economically painful that the targeted government changes course. It is a theory of pressure and compliance, grounded in the assumption that economic pain translates into political change. Nowhere has this logic been applied more intensively, or for longer, than in Iran. Since the 1979 Islamic Revolution, Iran has lived under successive waves of American and international sanctions. By the early 2020s, it had become among the most heavily sanctioned countries in the world.
Yet the Iranian state has not collapsed. Iran’s core security and foreign-policy positions have remained largely unchanged despite sanctions pressure. Iran has not abandoned its nuclear ambitions, its ballistic missile programme, or its network of regional proxies. Instead, something more paradoxical has occurred: the Islamic Republic has used the pressure of sanctions to consolidate its grip on the Iranian economy, marginalise independent business actors, expand the economic footprint of the Revolutionary Guards, and entrench a political economy that is, in many respects, more resistant to external pressure than it was before sanctions were intensified. This article argues that Western sanctions on Iran have not functioned as a development weapon that forces political liberalisation. Rather, they have functioned as a development weapon of a different kind — one that the Iranian state has wielded internally to deepen authoritarian control over the economy.
Iran’s Political Economy Under Pressure: From Resistance to Entrenchment
Iran’s pre-revolutionary economy was dominated by a large private sector, an internationally integrated oil industry, and a relatively diversified industrial base. The revolution replaced much of this with a hybrid system in which the state, the clerical foundations known as bonyads, and eventually the IRGC became the dominant economic actors. Sanctions did not create this system, but they accelerated and deepened it.
The mechanism is straightforward. As Western sanctions cut Iranian businesses off from international financial systems, global supply chains, and foreign investment, the only actors capable of continuing to operate were those with state protection access to subsidised foreign exchange, exemptions from import restrictions, and the logistical networks to circumvent banking blockades. In practice, this meant the bonyads and the IRGC, which had developed extensive informal trade networks across Iraq, the UAE, Turkey, and Central Asia. For ordinary Iranian entrepreneurs and the private sector, sanctions were devastating. For IRGC-affiliated companies, they created a near-monopoly on the surviving channels of trade.
The currency crisis driven by sanctions illustrates this dynamic clearly. When the Iranian rial came under severe strain following the Trump administration’s “maximum pressure” campaign after 2018 falling heavily against foreign currencies, particularly on the parallel market those with access to state-allocated hard currency at official exchange rates could import goods and resell them at market rates for enormous profit. This arbitrage opportunity was concentrated almost entirely within IRGC and bonyad networks. The middle class and the urban poor bore the inflation. The connected elite accumulated.
This pattern of external pressure redistributing wealth upward toward regime-connected actors is not unique to Iran. Scholarly work on Zimbabwe, Russia, and North Korea has documented similar dynamics. What makes Iran distinctive is the scale and duration. What distinguishes Iran in this respect is the long time period and the magnitude: four decades of increased pressure allowed the IRGC to build an economic empire in construction, telecommunication, energy, finance, and import industries. In consequence, the IRGC became one of the most influential economic powers in Iran; yet it is difficult to assess what percentage of the economy it controls.
The IRGC: Sanctions as a Business Model
The Islamic Revolutionary Guard Corps was established in 1979 as the ideological army of the revolution, distinct from the regular Iranian military and answerable directly to the Supreme Leader. Its economic expansion began gradually in the 1990s but accelerated dramatically after 2005, when President Mahmoud Ahmadinejad awarded IRGC-linked companies a series of major infrastructure contracts. By the time the JCPOA nuclear deal was signed in 2015, the IRGC was already too economically powerful to be sidelined even had Iran’s political leadership wished to do so.
Sanctions, paradoxically, gave the IRGC a compelling justification for expanding further. Because Western sanctions targeted specific companies and individuals, Iranian authorities could frame the privatisation of remaining state assets as a necessity to transfer control to domestic actors immune from foreign pressure than to leave assets exposed. In practice, “domestic actors immune from foreign pressure” often meant IRGC-affiliated entities. This process, documented in detail by the Iran Human Rights Documentation Center, moved some sanctioned and semi-privatised assets into the orbit of state-linked and IRGC-connected entities under the cover of sanctions resistance.
The IRGC also became the indispensable manager of Iran’s sanctions evasion architecture. Through front companies registered in third countries, informal hawala networks, and control of key border crossings, the IRGC developed the logistics infrastructure that kept Iran’s external trade alive. This infrastructure is not merely a workaround it is now a core revenue-generating asset. Any significant easing of sanctions would threaten the IRGC’s monopoly on these channels, giving the organisation a direct institutional interest in the continuation of a confrontational posture toward the West
The IRGC’s economic reach has not remained confined within Iran’s borders. Through its Quds Force and affiliated networks, it has developed significant commercial interests across Iraq, Syria, Lebanon, and Yemen interests that are themselves partly financed through the same informal trade architecture built to circumvent Western sanctions. This regional economic footprint reinforces the IRGC’s institutional incentive to resist any settlement that might dismantle the infrastructure underpinning it. What began as a survival mechanism under pressure of sanctions has evolved into a self-sustaining political economy that spans borders and that is, in important respects, designed to be irreversible. The longer the sanctions architecture remains in place, the more deeply embedded this network becomes and the harder it is to imagine a diplomatic resolution that does not simultaneously threaten the financial foundations of one of the most powerful institutions in the Islamic Republic.
The implication is striking: the organisation whose behaviour Western sanctions are most directly designed to constrain the IRGC was designated a foreign terrorist organization by the United States in April 2019 has become the primary beneficiary of the economic architecture that sanctions created. This is not an irony. It is a structural feature of coercive economic statecraft applied to authoritarian states with powerful internal security institutions.
Rethinking Economic Coercion: What the Iran Case Tells Us
None of this is to say that sanctions have been entirely without effect on Iranian behaviour. The JCPOA itself signed in 2015 after years of intensified pressure demonstrated that sanctions could contribute to a negotiated outcome when they are multilateral, sustained, and accompanied by a credible diplomatic off-ramp. The Obama administration’s approach combined pressure with engagement in a way that the subsequent maximum pressure campaign did not. The lesson is not that sanctions never work, but that they work only under specific conditions that are rarely satisfied in practice.
The more fundamental problem is what might be called the political economy of evasion. Sanctions create scarcity. Scarcity creates rents. In authoritarian states, the capacity to capture rents is concentrated among those closest to coercive power. The longer sanctions last, the more deeply these rent-capture networks become embedded in the political economy and the more resistant to both external pressure and internal reform they become. This is the paradox at the heart of Western Iran policy: the instrument designed to weaken the regime has, over decades, helped finance and entrench its most intractable component.
There is also a striking parallel with Venezuela. After 2017, when US sanctions were tightened against Venezuela, a total economic collapse ensued, but the state’s power structures remained surprisingly durable. Although there have been some changes in the nature of Venezuela’s political elites, sanctions have not brought about the desired political change. Much like in the case of Iran, the sanctions have largely affected only civilians while the military and political elites have continued enjoying special access to the country’s foreign exchange, food imports, and fuels. In 2021, a UN report by the Special Rapporteur on unilateral coercive measures highlighted that the sanctions had “disproportionately” hurt average citizens of Venezuela without influencing the country’s political elite’s conduct. This logic is exactly the same as Iran’s: sanctions imposed against states with strong internal security infrastructures tend to further fortify rather than weaken these institutions. Acknowledging this parallel does not mean we should stop using coercive measures in international relations; it means we should carefully consider how authoritarian states deal with such coercive pressure.
For scholars of international relations, this points toward a more nuanced understanding of economic coercion. The traditional framework treats the target state as a unitary actor that either complies or resists. In reality, sanctions interact with existing patterns of political economy in ways that produce distributional consequences winners and losers within the target state that may systematically strengthen rather than weaken regime durability. Future research should focus less on whether sanctions “work” in the aggregate and more on which domestic actors benefit and which are harmed, and what that distributional map implies for political stability.
On the other hand, sanctions do not necessarily have to be coercive measures alone. They also work as means of restraint and communication. Restriction on access to technology, funding, and procurement networks can help increase the costs and delay the buildup of military capabilities, especially when they involve advanced technologies. Furthermore, sanctions can communicate the implications of escalation both to the targeted state and its allies. In the Iranian case, it seems that although sanctions have not been able to alter Iran’s policy priorities, they may have helped affect the costs associated with implementing such policies.
Beyond the Unitary State: Intra-Regime Dynamics
It is important to note that this analysis does not imply that the Iranian state is a homogeneous actor whose interests are uniformly affected by sanctions. On the contrary, sanctions have had differential impacts even within the regime. The technocratic elite who are responsible for economic policy and foreign relations, which include certain parts of the bureaucratic apparatus as well as businessmen and policymakers who are linked with the private sector, have been adversely affected by sanctions, which have hindered their efforts to stabilize the economy, attract foreign investment, and integrate the country back into the international economic system. Other elements within the regime, such as the Islamic Revolutionary Guard Corps and certain parts of the clerical establishment, have been inherently advantaged by sanctions as a consequence of their role in informal trade routes, strategic industries, and revenue generation systems. This has resulted in internal contradictions within the regime, whereby certain players seek to engage in limited ways or seek a reduction in sanctions, whereas others have both ideological and practical motivations for maintaining an adversarial stance.
Conclusion
Iran is among the most heavily sanctioned countries in the world, and the Islamic Republic is arguably stronger today in terms of the IRGC’s economic dominance, the regime’s internal security apparatus, and its regional military footprint than it was when maximum pressure began. This is not because sanctions are universally ineffective. It is because the specific political economy of Iran has allowed the state to exploit scarcity: sanctions created scarcity and rents that were often captured by regime-connected networks, directing costs toward the population and benefits toward the institutions of the revolution.
Western policymakers have repeatedly assumed that enough economic pain will produce political moderation. The Iranian case suggests this assumption rests on a flawed model of how authoritarian states actually respond to coercion. Rather than forcing political change, sustained sanctions have deepened the IRGC’s economic empire, marginalized the Iranian private sector and middle class, and given the regime’s most hawkish institutions a direct financial stake in prolonged confrontation with the West.
If economic coercion is to serve genuine strategic purposes in the Middle East and beyond, it must be designed with a far more sophisticated understanding of how target states absorb, distribute, and ultimately exploit external pressure. The Iran case is not a failure of sanctions in principle; it is a failure to understand the political economy of the states at which they are aimed.
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