Iran's Hormuz leverage wanes as US economic squeeze bites

Highlights:

• Sanctions squeeze hits revenues, inflation and trade
• Global markets adapt, blunting Tehran's coercive power
• Officials hope economic pain sparks unrest in Iran
• Sceptics say Iran's resilience could thwart US strategy

Six months after a conflict that rattled markets and pushed the Gulf to the brink of a wider war, the tide may be turning against Iran as Washington unleashes an unprecedented economic offensive to achieve what military force could not.

After years of surviving sanctions, Tehran is now confronting one of the harshest squeezes in the Islamic Republic's history, according to Iranian insiders and regional sources. A US naval blockade and tougher sanctions are curbing oil exports, restricting access to foreign currency and exposing growing strains in the economy.

The campaign has led US and regional officials to wager that mounting economic pressure can force Tehran to allow free passage through the Strait of Hormuz, which carries about a fifth of global oil and LNG supplies.

Their bet rests on a simple calculation: Iran is suffering more economic damage than it is inflicting. Efforts to choke off oil exports have cut state revenues, while attempts to disrupt shipping through Hormuz have not triggered the global economic shock Tehran hoped would force Washington to compromise. Energy markets have adjusted and alternative supplies have continued to flow.

"The balance of power has tilted against Iran a bit," said Iranian analyst Arash Azizi. Iran is losing some of the leverage it had over the Strait of Hormuz because it has been unable to close it fully, he said, adding that the US naval blockade was "really hitting Iran."

Azizi said Tehran had expected disruption in the strait to trigger a major shock to the global economy and drive Washington back to the negotiating table. "It hasn't happened, really," he said. Other countries had adapted, exposing limits to Iran's ability to inflict economic pain on the region and beyond.

Whether the pressure will force concessions remains unclear, the regional sources said. Tehran has failed to impose the costs it hoped would break Washington's resolve but has shown little sign of abandoning demands for sanctions relief, access to frozen assets and recognition of its security role in Hormuz.

Still, a new formula for resolving the standoff is now under discussion between mediators and Iran, the sources said.

Can Tehran outlast the squeeze?

Three senior Iranian sources acknowledged that Washington's campaign is becoming increasingly difficult to withstand. The latest measures have sharply restricted Tehran's ability to access foreign currency, import goods and tap global financing networks that have helped keep the economy afloat.

Iranian leaders fear a worsening economy, marked by surging prices, weaker trade and pressure on household incomes, could reignite nationwide unrest that has repeatedly challenged the Islamic Republic.

Shortages of key imports, including fuel and wheat, are becoming an increasing concern, officials said.

US Treasury Secretary Scott Bessent described the strategy as a "one-two punch" combining the blockade with "the toughest sanctions in history."

"It is going to work in Iran and we are going to collapse this regime," he told CNBC.

For some US, Israeli and regional officials, such strains strengthen hopes that economic pressure could eventually carry political consequences inside Iran by triggering unrest, widening rifts within the leadership and weakening its grip on power.

Others remain sceptical that economic and military coercion will produce a political rupture, pointing to decades of failed efforts to destabilise the Islamic Republic and Tehran's willingness to suppress dissent. They argue Iran's rulers may again prove more resilient than their adversaries expect.

The resilience test

Dennis Ross, a former US negotiator, said Washington may be interpreting Iran's economic distress as evidence of strategic success when the reality is more complicated. Tehran remains determined to demonstrate it can control Hormuz, but appears to be calibrating its use of force while keeping further escalation in reserve.

The Revolutionary Guards may believe Iran can absorb the economic pain and outlast the pressure rather than compromise, Ross said.

"The Iranians have consistently surprised us in terms of their resiliency," he added, saying he doubted economic and military pressure alone would force a retreat. Hardliners, he said, may believe they can endure and ultimately secure what they want.

Resilience may depend as much on public tolerance as Tehran's ability to absorb economic hardship, said Burcu Ozcelik, a senior research fellow at the Royal United Services Institute.

"Of course, the economic squeeze raises the risk of public unrest, but for now, a wartime mentality appears to have a significant hold over the population," said Ozcelik. "Foreign military intervention, civilian casualties and the perception of a wider civilisation confrontation with a US-led order are sustaining a degree of 'Iran-first' patriotic support, tolerance or simply patience with the regime."

The result is a more stubborn impasse than Washington may have anticipated. Economic pressure is deepening the pain, but Tehran's powerful Revolutionary Guards may see endurance, backed by the threat of escalation, as leverage rather than a reason to concede.

The key question is not whether Iran is hurting, but whether it is hurting enough to compromise before either side slips towards another confrontation, the regional sources said.

Ross said the clearest path to a deal may lie in the dispute over shipping fees through the Strait of Hormuz. Iran could abandon any demand for a toll while retaining the right to charge for legitimate navigational, security or environmental services, he said.

Such an arrangement could give both sides a claim to victory, allowing Tehran to step back without appearing to capitulate.

"If you could announce that the Strait were reopened," Ross said, "I think Trump would do a deal."