Vehicles move along an avenue beneath an anti-US banner in downtown Tehran, Iran, on September 24, 2026.
The Statistical Center of Iran released a set of rather jarring figures on September 20. From March to June this year, a period known in Iran as the first quarter of the Persian calendar, the country's real GDP contracted by 10.1 percent year-on-year.
The oil and gas sector plunged by 26.4 percent, industry and mining by 14.7 percent and the service sector by 4.8 percent. Excluding oil and gas, GDP still declined by 4.6 percent. The fallout of war, sanctions and trade disruptions has spread from the energy sector to the entire real economy.
Almost simultaneously with the release of the data, US President Donald Trump met with leaders and representatives of the Gulf Cooperation Council (GCC) countries in New York. Prior to the meeting, there was concern over whether the US would escalate military action again.
However, the signals released afterward were more complex. Trump continued to emphasize financial and military pressure on Iran, while revealing that the US was still in contact with Iran through intermediaries that day, and later expressed confidence that the two sides could eventually reach an agreement. Iran also proposed that Tehran could reopen the Strait of Hormuz within a week if the US reduced military pressure and lifted the blockade of Iranian ports.
The US-Iran war has thus entered a very special phase. Both sides continue to apply pressure, while neither has closed the door to negotiations. The direction of the next phase will increasingly hinge on how much economic and social cost each side can bear.
Iran's over-10-percent contraction
The most serious economic problem Iran faces is that oil, its largest source of foreign exchange, is losing its normal function. Shipments of Iran's crude oil and condensate averaged about 2 million barrels per day this March, but then slumped to about 740,000 barrels per day in July, and to only 220,000 to 255,000 barrels per day in August. Since the US reimposed its maritime blockade in July, almost no new Iranian crude oil shipments have passed through the Strait of Hormuz to China.
Meanwhile, the Iranian government acknowledged that foreign trade had declined by approximately 35 percent. Iran's rial briefly fell below 2.2 million to the US dollar in early September, depreciating by about half compared to a year ago. The war initially impacted oil exports and foreign exchange earnings, subsequently affecting the exchange rate, imports, industrial production and people's livelihoods.
Hence, an over 10 percent GDP decline is more of a temporary result, with further pressures accumulating. However, it is too simplistic to conclude that the Iranian economy will soon collapse due to this alone.
Iran has operated under long-term sanctions for decades, developing a complex economic network with multiple exchange rates, subsidies, gray market trade, shadow banking and a vast economic structure dominated by the Islamic Revolutionary Guard Corps (IRGC). Enterprises controlled and influenced by the IRGC penetrate deeply into sectors such as energy, construction, shipping, telecommunications and ports.
While the system may have limited operational efficiency, it possesses a considerable capacity for resource concentration. The more strained the economy becomes, the more the government will prioritize resources for the military, security and basic social functions.
Therefore, Iran still has the capacity to sustain the war in the short term. The real pressure will gradually loom large as the war drags on. If oil exports remain low for an extended period and imports of equipment, spare parts, medicines and industrial raw materials continue to be restricted, fiscal subsidies will become unsustainable, further pressuring residents' purchasing power, employment and industrial production.
More alarming for Iran is the continued decline in its social resilience, as well as the increasing concentration of fiscal resources in its security and military systems.
Growing heft of GCC states
Trump's meeting with leaders and officials of GCC states on September 22 also demonstrates that the US can no longer treat the Iran issue as a simple bilateral conflict between the two countries.
The Gulf states bear the most direct spillover costs. Before the war, the Strait of Hormuz typically saw around 125 large commercial vessels pass through daily. By September 21, only two cargo ships were recorded. Following the shipping disruptions, tanker transport, insurance and freight rates have surged, forcing Saudi Arabia and the UAE to accelerate the search for alternative export routes.
For the Gulf states, Iran's nuclear capabilities, missiles and regional military network are security concerns. The long-term blockade of the strait, attacks on energy facilities, capital outflow and a deteriorating investment environment directly impact economic development. Saudi Arabia needs to protect its oil facilities and its "Vision 2030," the UAE relies on shipping, finance and international capital, Qatar's natural gas exports rely heavily on maritime routes, and Oman has long served as a mediator between the US and Iran.
This makes it difficult for the Gulf states to simply choose between war and peace. They hope to curb Iran's military capabilities while simultaneously preventing a regional war from spiraling out of control.
If the US continues to expand its military operations, it will need regional states to coordinate on bases, airspace, air defense, intelligence and logistics. If it turns to talks, it will similarly rely on the Gulf states as intermediaries and participants in regional security arrangements.
In this vein, the Gulf states have transformed from bystanders to increasingly important cost bearers and bargaining participants in the US-Iran rivalry.
An Iranian electric taxi driver holds a charging connector in western Tehran, Iran, on September 24, 2026.
US-Iran attrition warfare
Another notable change in the status quo is that while maintaining military pressure, the US is further intensifying its maritime blockade, financial sanctions and crackdowns on Iran's third-country trade and financial networks. Iran, in turn, continues to leverage the Strait of Hormuz, regional allies and its military counter-attack capabilities to increase the economic costs on its adversaries.
The two sides are engaged in a classic war of attrition. Washington seeks to reduce Iran's oil exports, foreign exchange reserves and import capacity to a level that would prompt a policy change. Tehran, on the other hand, attempts to show the US that continuing the war also implies higher energy prices, more expensive shipping costs and greater security pressure on its Gulf allies.
The events of September 22 perfectly illustrate the point. While meeting with Gulf states, Trump continued to emphasize economic pressure on Iran and the red lines regarding the nuclear issue, but on the same day also confirmed that communication between the two sides remained ongoing. Iran also put the reopening of the Strait of Hormuz on the negotiating table. Both sides are simultaneously employing military, economic and diplomatic means to find the cost limits that the other can bear.
In the coming period, four key indicators warrant close monitoring: whether Iranian crude oil exports can recover, whether the rial continues its rapid depreciation, whether stable navigation in the Strait of Hormuz can resume, and whether the scale of the US military operations remains under control. These will not only determine the resilience of the Iranian economy, but also directly impact global oil prices and the attitudes of Gulf states towards war.
Iran will not immediately lose its war-fighting capability due to a 10.1 percent drop in GDP in one quarter, yet its ability to pay the war bills is clearly shrinking. The US also faces the problem of rising energy, shipping and security costs for its allies.
As the war drags on, the conflict between the US and Iran has increasingly resembled a contest of "who can't pay their bills first." Military power determines how far the war can continue, while economic capacity will increasingly influence where each side is willing to return to the negotiating table.
Photos | CFP
The author is Zhu Zhaoyi, Executive Director of the Middle East Institute at Pangoal Institution.
