Dire Strait: Why Economic Threats Might Escalate the War in Iran

Motorists drive past an anti-US billboard in Tehran on August 24, 2026. Iran responded with defiance on August 24 to a US threat of —AFP via Getty Images

Six months into the war between the United States and Iran, President Donald Trump has turned to economic warfare to force the country into submission and threatened an “ Economic D-Day ” against Iran. This new American strategy was spelled out by Treasury Secretary Scott Bessent earlier this week : a campaign of U.S. sanctions against countries and financial institutions that do business with Iran or help it evade sanctions.

The proposed new sanctions go beyond oil exports to target digital assets, gold, and the aviation sectors that help finance the Iranian economy. Bessent described it as a campaign to “collapse every last option for Iran.” Making all this work depends on whether the U.S. can convince Iran’s most important trade partners to cut out the Islamic Republic. China, which buys around 80% of Iran’s seaborne crude oil , has already pushed back, warning that it will “ take all necessary measures ” to protect its interests should it be targeted by U.S. sanctions. Beijing's response casts doubt on whether Washington’s new gambit can deliver results.

If the aim, as stated, is to deal an economic blow to Iran, the fact is that the country is already under severe strain. A U.S. naval blockade has constrained oil exports , the primary source of revenue for Iran. Ordinary Iranians are facing greater economic pressure as their purchasing power is eroding: food inflation reached 128% year-on-year in July and families are cutting back on meat and other items. The dollar value of the minimum wage has fallen from about $105 to $86 since late March as the rial has weakened significantly. On Monday, Iranian currency fell to a record low of 2.02 million rials to the dollar.

So what is the goal of Bessent’s announcement? Simply put, acknowledging the reality—even if the administration won’t state it in these terms—of avoiding a further, major military campaign as the conflict drags on. For their part, Iran’s leaders have dismissed the threat of intensified economic warfare, insisting the new punitive economic measures would fail. “It is the same movie they keep playing over and over again,” remarked Iran’s foreign minister, Abbas Araghchi.

Does this mean nothing will change with the American announcement? Put another way, are we likely to see a continuation of the current state of neither war nor peace , with Iran prolonging things until it can secure a favorable deal to end the conflict? It is true that Tehran has powerful reasons to avoid another major military escalation. Tehran, it is true, has powerful reasons to avoid another major military escalation. A new round of fighting could deepen the damage to Iran’s energy, transport and industrial infrastructure—much of it still under repair from earlier hostilities— and would also complicate reconstruction by further straining state finances, disrupting imports and exposing an already weakened economy to another cycle of destruction.

Yet American economic saber-rattling could alter this calculus. After all, on Aug. 10, Iran’s Supreme Leader Mojtaba Khamenei appointed Brigadier General Ahmad Vahidi , a hardliner with significant experience in intelligence and operational positions, as the commander of the Islamic Revolutionary Guard Corps (IRGC), instructing him to strengthen capabilities for “powerful offensive operations against the enemy.” That language was echoed on Aug. 22 by Mohsen Rezaei , who was recently appointed secretary of the Supreme National Security Council, the top national security body of Iran. In an interview Rezaei spoke of Tehran going to introduce “changes in the conduct of the war” and bring “new capabilities” into play. He also warned that Iran had so far targeted only U.S. military bases but could begin striking American economic interests if Washington intensified its economic campaign.

Tick tock, tick tock

If Iran is pondering a possible escalation in the military conflict, the Trump Administration appears to be betting that time may yield what bombs have so far failed to. The naval blockade in the Strait of Hormuz  remains in place, secondary sanctions are being tightened, and pressure is being increased on countries and financial networks that have allowed Tehran to circumvent previous restrictions. On Aug. 19, the United Arab Emirates, which has been a traditional financial gateway for Iran, suspended financial and commercial transactions with the country, a decision that is bound to hurt the Iranian economy.

Iran has declared the Strait of Hormuz closed, but oil has continued to move through the waterway, which is 29 nautical miles wide at its narrowest point. The U.S. military has established a protected route along the southern side of the strait, close to the shore of Oman. The Gulf states have experimented with ship-to-ship transfers and other means of moving crude around Iranian restrictions. Saudi Arabia and the United Arab Emirates have been working intensively to reduce their dependence on the strait, building pipelines and investing in storage facilities to transport their oil by other routes.

Precise estimates of oil passing through the strait are not available , but the volume seems to be somewhere between a quarter and half of the prewar flow of 20 million barrels a day. Oil prices remain elevated, hovering around $90 a barrel, but they are still far below the levels Tehran might have expected from an effective and sustained closure. Tehran had hoped that continued disruption in Hormuz would eventually make the economic costs of the confrontation intolerable for Washington and force Trump back toward compromise. Instead, the U.S. increasingly appears to believe that it can keep enough oil moving while allowing the blockade and sanctions to steadily increase the pressure on Iran.

For Iran, that creates a very different calculation. The...