Tehran – As sanctions against Iran become more stimulating with the reinvigoration of the UN snapback mechanism, questions arise about the long-term economic and geopolitical consequences for the country. Measures targeting Iran’s trade, defense and financial sectors have sparked debate about its impact on the public and its ability to innovate. Among these challenges, it is important to understand Iran’s position in a changing global landscape.
To shed light on these complex issues, the Tehran Times conducted an exclusive interview with Dr. Mohammad Reza Farzanegan, a well-known professor of Western Asian economics at the Centre for Middle Eastern and Middle Eastern Studies (CNMS) in Germany. Research by Professor Falzangan, a leading scholar of Western Asia’s economic dynamics, examines the interactions between sanctions, social structures and regional development, providing important insights into Iran’s economic resilience and vulnerability.
In this first part of the two-part series, Professor Falzangan offers a comprehensive analysis of the impact of snapback mechanisms on Iran’s economy, from trade disruptions to inflation and middle class erosion. He also explores the hidden costs of sanctions, including lost opportunities for technological advancement.
The second part of this fascinating discussion will be published in upcoming editions, delving deeper into Iran’s strategy to navigate these pressures.
Below is the full interview:
From your perspective, what long-term impact will the snapback mechanism have on Iran’s economic and geopolitical situation?
Various economic impacts are expected from the reinvigoration of UN sanctions on Iran. My recent focus was to some extent the possibility that various segments of Iranian society would suffer under these new sanctions. Importantly, the effect is not uniform across all categories of sanctions.
Several measures specifically target Iran’s defense capabilities, including the missile industry and nuclear programmes. These have imposed restrictions on Iran’s access to traditional weapons and international markets. However, this is nothing new. Even after the JCPOA, Iran remained largely disconnected from the international arms market. For this reason, I do not expect any major new consequences for Iran’s defensive capabilities. Similarly, the impact on Iran’s nuclear program may be limited. Much of that progress relies on domestic resources, and recent US military strikes have already caused damage to nuclear facilities. Therefore, in the short term, additional sanctions may not be determined in this area.
What’s more problematic are sanctions related to transport inspections and financial restrictions. Here are important differences compared to unilateral US sanctions. The new UN measures require all 193 member states to implement inspection controls for Iranian trade. In principle, this means that member states can request inspections of Iran’s imports and exports. It remains uncertain whether this will actually be carried out consistently, but legal obligations exist. Such measures could create trade delays, increase transaction costs and offer significant discounts to trading partners who recognize its constrained position in Iran.
These sanctions can be particularly harmful to Iranian consumers. Higher transaction and mediation costs promote inflation and further erode purchasing power. In contrast, financial sanctions can have more marginal effects. Even before these UN measures, Iranian banks and citizens faced serious restrictions in access to the international financial system. The new restrictions could make it more difficult for Iranians overseas to open accounts and small European banks to maintain limited ties with Iran. However, given existing financial isolation, incremental damage can be modest.
In short, sanctions on defense and nuclear capabilities may have limited additional impacts, but trade-related measures, particularly testing and transaction costs, pose the greatest threat to the Iranian economy and ordinary consumers.
How will the continued sanctions affect Iran’s technological development and innovation capabilities?
We are currently in a period defined by rapid innovation, especially in artificial intelligence. Arab countries in the Persian Gulf region have seen governments invest heavily in AI. Just a few months ago, Donald Trump visited Saudi Arabia and the United Arab Emirates, and AI is one of the central topics. These technologies require important capital, and the Persian Gulf countries are well positioned to attract investment thanks to subsidized energy and favorable terms for international high-tech companies. They not only build domestic capabilities, but they also invest in the AI markets in the US and China.
For Iran, things are very different. The sustained risks of foreign investors make it extremely difficult to attract international investments in this sector. As a result, Iran is at risk of falling behind its neighbors. This is another hidden cost of sanctions. There is not only negative impacts on macroeconomic indicators, but also about lost opportunities. While neighbouring countries are moving forward, Iran will either narrow the revenue gap or lose the opportunity to benefit from technological advances in the region.
Development of innovation requires large investments and long-term commitment. Iran has domestic resources, but the incentives to allocate them to long-term high-risk projects are weak under current conditions. In a licensed economy with inflation and price instability, investors tend to support short-term or speculative activities. Rent-seeking behavior increases, startups struggle to survive, and the environment of serious technological advancements deteriorates.
In short, sanctions do not only constrain current economic performance. They also discourage the types of investments and innovations that can shape the future.
What impact will the continued sanctions have on the levels of livelihood, employment, inflation and access to essential goods for Iranian people?
That’s an important question. Inflation is very noticeable in Iran. According to the Statistics Office, the annual inflation rate in September was about 45% compared to the same month last year. This is a major burden, especially for households with significantly reduced purchasing power, especially households with fixed income.
One driver of this inflation is depreciation of Iranian rial. When the currency loses its value, imports become more expensive and these costs are passed on to the consumer. Reinvigorating UN sanctions could strengthen this issue, particularly due to its impact on Iran’s oil exports. Countries such as China are publicly opposed to UN measures, but in reality they can be used as leverage, demanding significant discounts on Iranian oil. This will reduce Iran’s oil revenues, weaken foreign exchange supply, and put even more pressure on the currency market. The limited supply of hard currency combined with rising demand will further accelerate inflation.
The effectiveness of employment is uneven. Services sectors that rely primarily on the domestic market are relatively stable with past sanctions, with agriculture being more affected by climatic conditions than sanctions. The biggest damage can occur in industries that rely on imported input, foreign technology, and international partners.
Sanctions also affect different social groups in different ways. Unemployment among Iranian youth is already high, with sanctions exacerbating the issue, especially among women. Women and young people often become disproportionately vulnerable because they lack the network and resources to navigate the crisis. Meanwhile, some groups benefit from sanctions through rent sought or access to privileged markets, but represent only a small minority.
The middle class is the heaviest burden. Our study shows that sanctions steadily erode its position and lowered many households to poverty. Some middle class members move abroad, while others fall into low-income groups. This decline has broader consequences. The middle class has traditionally been a key driver of innovation and technological advancement. Loss of financial stability and resources also undermines Iran’s potential for innovation.
This is essentially a wider picture. Sanctions not only raise inflation and weaken macroeconomic stability, but also reconstruct social structures by calling out the middle class and eroding the foundations of long-term economic development.
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