Iran does not operate through a single economy. It operates through two completely separate economic systems, and this distinction explains why decades of sanctions, diplomatic pressure, and economic isolation have failed to stop Tehran’s march toward nuclear threshold capability.
Despite some of the harshest sanctions in modern history, Iran continued advancing toward nuclear breakout capability. On the eve of the Israeli operations Rising Lion and Lion’s Roar, Tehran had already accumulated enough enriched uranium for nearly 11 nuclear bombs, according to Western assessments.
Even pressure in the Strait of Hormuz and efforts to disrupt Iranian oil exports did not force Tehran into surrender. While this affected China, a key buyer of Iranian oil, and carried strategic weight in the broader confrontation with the emerging anti-Western axis, it did not cause existential damage to the Iranian regime.
The reason is simple: Iran prepared for this scenario decades in advance.
A parallel economy
The Islamic Republic built alternative financial systems, global operational networks, sanctions-resistant revenue channels, and strategic partnerships designed to ensure regime survival under prolonged economic warfare.
As a result, while ordinary Iranians absorbed severe economic pain, the regime’s core, especially the Islamic Revolutionary Guard Corps (IRGC), continued funding nuclear development, regional proxies, missile programs, covert operations, and global influence networks.
The first economy is the formal state economy, based on oil, gas, petrochemicals, steel, shipping, and domestic taxation. This is the visible system targeted by Western sanctions.
The second is the IRGC parallel economy, a global shadow network operating through front companies, illicit trade, criminal networks, covert logistics, proxy groups, cash laundering systems, cryptocurrency channels, and foreign partnerships.
Sanctions primarily damaged the first economy. But the second economy, the one essential to regime survival, remained resilient.
That is why Iran has never truly surrendered – even after the United States imposed a blockade on the Strait of Hormuz.
Failed economic pressure
It also explains why its nuclear program has never suffered strategic collapse. Even under sustained economic pressure, it has repeatedly recovered, reorganized, and advanced.
Iran understood earlier than the West that survival requires global operational reach, decentralization of capabilities and alliances, and deep external worldwide presence.
One key example is Venezuela. As early as 2009, reports described cooperation between Tehran and Caracas on uranium-related activity and broader nuclear-linked collaboration. While the Obama administration largely ignored these warnings, the Trump administration came to better recognize the threat Iran was building in Latin America and the link between criminal activity and terrorist organizations, reflecting how different leadership approaches can significantly shape global security outcomes.
On May 14, 2026, the US State Department Office stated: “The United States has removed excess highly enriched uranium from Venezuela’s shuttered research reactor.”
The key point is that Iran built outsourcing capabilities long before the current escalation.
It never relied on a single economic system.
The formal economy
Iran’s official economy depends on oil, gas, petrochemicals, steel, shipping, and state infrastructure.
Sanctions have significantly damaged this sector. Inflation, currency collapse, unemployment, and shortages have created widespread hardship. Banking restrictions and trade isolation have reduced state revenues and weakened formal capacity.
But this burden has fallen mainly on society, not the regime’s core power structure.
In fact, Tehran often weaponizes sanctions politically, portraying economic suffering as Western hostility while diverting attention from internal corruption and the prioritization of military expansion over civilian welfare.
From the regime’s perspective, public hardship is acceptable as long as internal control and security funding remain intact.
That is why sanctions alone have repeatedly failed to produce strategic surrender.
The IRGC economy
The IRGC operates a global financial system beyond Iran’s borders, through an illegal financial network that spans continents. It uses private companies and businessmen, investments, shell companies, and charities, as well as crowdfunding mechanisms through websites and social media platforms.
It also makes use of digital currencies, alongside covert cash transfers that move beneath regulatory radar. In parallel, it relies on criminal networks, money laundering systems, and illicit trade across multiple sectors. In addition, through its proxy organizations, such as Hezbollah.
This system was designed specifically to survive sanctions.
Many front companies are registered abroad or masked through intermediaries. These entities generate revenue, facilitate procurement, enable sanctions evasion, and support covert technology acquisition.
Some so-called charitable foundations operate under humanitarian or religious cover while serving as financial channels for ideological expansion, recruitment, and sanctions circumvention. They provide legitimacy while enabling discreet financial flows.
Hezbollah-linked networks are widely associated with narcotics trafficking, laundering, and smuggling operations. A significant portion of this activity involves cocaine routes originating in Latin America, moving through West Africa, and reaching Europe and the Middle East.
This convergence between organized crime and ideological networks creates diversified revenue streams beyond oil.
Iran has also adapted to modern financial systems.
Cryptocurrency, cash smuggling, gold trading, informal transfers, and trade-based laundering are now key tools. These mechanisms allow financial flows outside traditional banking oversight and blur legal and illegal commerce.
The West’s strategic error
The fundamental Western mistake is treating Iran as a conventional state economy. It is not.
Iran is both a state and a transnational system led by a regime that operates terrorist and illicit criminal networks beyond its borders.
Sanctions that target only the visible economy while ignoring the IRGC’s global infrastructure cannot produce surrender. They may weaken Iran economically, but they do not dismantle its operational core.
As long as this dual structure is ignored, Tehran will continue absorbing pressure while maintaining strategic continuity.
The Islamic Republic survives not because sanctions fail but because the West fights only half of its system.
A return to direct confrontation with Iran is no longer a question of if – but when. It appears closer than ever. This would mark a third round in which Israel could find itself fighting alongside the United States against a quasi-superpower adversary like Iran.
The head of the octopus (IRGC) is a vast, multi-armed and resourceful network that cannot be neutralized through a rapid or single military strike, if such a strike is possible at all. As time continues to work in its favor, enabling it to strengthen its regional influence and operational capabilities, the strategic conclusion is that there is no alternative but to sever the arms from the head that directs and sustains them from Tehran.■
Danny Ayalon is a former deputy foreign minister, Knesset member, and ambassador to the US.
Moran Alaluf is an analyst on Middle East affairs and counterterrorism, and specialist on Iran and Hezbollah.