How Iran diversified its economy while suffering under sanctions

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For nearly 50 years, Iran has been treated as an outlaw, earning a spot as one of the most heavily sanctioned countries in the world for its nuclear and weapons programs, its support for terrorism, its human-rights abuses and more.

But despite persistent efforts by the United States, the European Union, Britain and the UN Security Council to choke off Iran’s international trade and freeze assets, the country has managed to keep doing business with much of the world, an analysis of trade data show.

The nation has exchanged goods with more than 170 nations since 2019, even as international restrictions have fuelled inflation, soaring unemployment and civil unrest. Overall trade is down, but the country has imported much-needed food, electronics and auto parts while it sells oil, gas, construction materials, specialty foods and thousands of other products. Sanctions hobbled Iran’s economy, but they have not broken its back.

“The expectation is that sanctions have isolated Iran from global trade but that is not entirely the case,” said Esfandyar Batmanghelidj, chief executive of the Bourse and Bazaar Foundation, a research organization based in London. “Iran’s trade has grown more complex over time in response to sanctions.”

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The war with the United States and Israel has conspicuously shifted the country’s prospects. Iran’s blockade of shipping traffic in the Strait of Hormuz has interfered with its own ability to access critical goods and conduct trade. Israeli and U.S. missiles have pounded the country, destroying infrastructure including electricity facilities, transportation, factories, military bases and schools. The possibility of more devastating damage looms if a two-week ceasefire does not hold.

Yet trade data over the past 30 years may offer clues about the shape-shifting power of the Islamic Republic’s 94-million-person economy. Its ability to adapt under the strain of sanctions and other disruptions could signal how it would operate going forward.

Precise trade figures are difficult to obtain. Most analysts distrust official government statistics, and Iran’s partners often omit or understate the value of commodity transactions.

Even so, what’s clear is that China has stepped up as Iran’s primary trading partner, accounting for a steadily growing share of Iran’s imports and exports over the past two decades.

During the pandemic, Beijing vowed to invest US$400-billion in the country in the coming decades in exchange for a steady supply of oil. In 2024, it purchased 90 per cent of Iran’s oil exports, according to the International Energy Agency. China also accounted for roughly one-quarter of Iran’s non-oil exports from 2019 to 2024, according to data compiled by Harvard University’s Atlas of Economic Complexity, purchasing billions of dollars of Iranian chemicals and metals.

Payments are made in renminbi, China’s currency, avoiding the use of dollars and the need to involve American banks, which are often the primary entities used to help enforce sanctions violations. China, in return, appears to provide nearly 30 per cent of the commodities that Iran imports, selling everything from furniture to sunflower seeds.

There is another crucial layer of trade between the nations not recorded in official statistics. Both countries have engaged in a complicated barter system that involves secret financing channels. Iran ships oil to China and in return, Chinese state-backed construction companies have built airports and other infrastructure.

This hidden system of trade extends elsewhere in the world, experts said, in part to avoid running afoul of sanctions. The shadow activity involves shell companies and frontmen that mask the identity of the actual buyers, the use of non-Iranian banks and diversions through other countries that are used to conceal the fact that Iran is involved.

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Twenty years ago, petroleum accounted for nearly 80 per cent of Iran’s export ledger, but that figure shrunk over time as Iran’s economy diversified.

The shift began accelerating when the United States, under president Barack Obama, imposed a new round of harsh sanctions that forced Iran into a tailspin.

“The Iranian economy didn’t start really struggling until about 2012,” Mr. Batmanghelidj said. “The rise in trade from 2000-2012 was associated with a rise in living standards and the growth of Iran’s middle class.”

The sanctions primarily targeted Iran’s oil trade and discouraged Western companies from doing business with Iranian counterparts. That pushed Iran to develop more trade in other areas, and with new partners, a pattern that is continuing, trade data show.

Some of the sanctions were lifted after the Iran-U.S. nuclear deal in 2015. But since 2019, when U.S. President Donald Trump reimposed sanctions against companies doing business with Iran, the pattern resumed.

During that time, Iran has exported more than US$120-billion in non-petroleum commodities, the Harvard data show – a figure roughly on par with the total exports of Costa Rica, Ecuador or Croatia.

Iran is helped by its access to several trade corridors, both overland and by water. It borders seven countries, including Pakistan, Afghanistan, Iraq and Turkey and has Caspian seaports in addition to occupying one side of the Strait of Hormuz that has been a central feature of the current war.

Both Turkey and Iraq are key customers of Iranian goods. With China, these three nations have accounted for more than half of Iran’s non-oil export trade since 2019.

Kuwait is a major buyer of Iranian cement and sheep. Bulgaria, Kazakhstan and Uzbekistan import large quantities of packaging material. Most of the imported saffron in Spain comes from Iran.

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One response to sanctions over the years has been to produce more things at home. The country has developed an extensive manufacturing sector that produces automobiles, steel, iron, electronics and pharmaceuticals, as well as a thriving business in food products.

“They’ve made a concerted effort at being self-reliant,” said Kislaya Prasad, academic director of the Center for Global Business at the University of Maryland.

Sanctions have made it much more difficult for Iran to import materials it needs for production like machinery and replacement parts.

European countries used to account for more than half of reported Iranian imports in the mid-1990s. Today, they make up less than 20 per cent.

The United Arab Emirates provides electronics; India ships large quantities of rice; and Brazil sells Iran soybeans and maize.