Iran Protests: An Economic Crisis Pushes Regime to the Brink

Governments in the US, UK, and Japan have recently fallen over public anger at the rising cost of living. Now, events unfolding in Iran show that authoritarian regimes are not immune to the political fallout from soaring inflation.

Protests ignited in Tehran late last month after the Iranian rial collapsed to a record low, driving up the price of essential goods. The demonstrations, fueled by an economic crisis deepened by global sanctions, have since spread nationwide. In response, Iran's religious and military leadership has threatened to crack down on what they label "rioters."

The Islamic Republic is no stranger to public dissent. In 2022, women led massive demonstrations against their treatment following the death of a young woman in custody. The 2009 "Green Movement" protests over the disputed re-election of President Mahmoud Ahmadinejad were the most severe unrest since the 1979 revolution.

Historically, Supreme Leader Ayatollah Ali Khamenei and the Islamic Revolutionary Guard Corps (IRGC) have suppressed these movements, often violently. This time, however, two crucial factors make the situation different, leading one expert to predict significant change is on the horizon.

Dina Esfandiary, who heads Middle East geoeconomics for Bloomberg Economics, forecasts that the Islamic Republic "is unlikely to survive in its current form" through the end of 2026. While change seems inevitable, its ultimate form remains an open question.

The Economic Collapse Fueling the Uprising

The primary difference in today's protests is the dire state of Iran's economy. After years of sanctions, the financial situation has deteriorated dramatically.

The rial has lost approximately 40% of its value, which has helped push year-on-year food inflation to an estimated 70%, according to Gavekal Research. This crisis is compounded by years of drought and poor water management that have crippled domestic food production.

The economic pressures on ordinary Iranians and businesses include:

• Protracted power cuts

• A weak job market, with one estimate putting labor force participation at just 41%

This challenging environment has caused many small and medium-sized businesses to collapse. Esfandiary notes that enterprises connected to the IRGC are attempting to fill the void, concentrating economic power.

As poverty spreads, so does resentment toward the politically connected elite who remain insulated from the crisis. Tom Holland, deputy global research director at Gavekal, observed that "broad swathes of the population" have now united to demand political change. In a telling sign of eroding support, even Tehran's Grand Bazaar—a traditional bastion of conservative government backing—has been on strike for nearly two weeks.

A Weaker Iran on the World Stage

The second key factor is Iran's diminished geopolitical standing. The regime's influence in the region has been significantly weakened by several recent events. Last year, the ouster of Syrian President Bashar al Assad ended a crucial alliance for Tehran. Furthermore, Iran's allies Hezbollah in Lebanon and Hamas in Gaza have been bombed and degraded.

More directly, a two-year exchange of fire between Israel and Iran culminated in a surprise American attack on Iran's key nuclear facilities last June. President Donald Trump has continued to threaten more action, including offering support to the protestors. Esfandiary argues that regardless of the credibility of Trump's threats, the Iranian government now faces a real possibility of external conflict.

Four Scenarios for Iran's Future

If the current system is indeed unsustainable, what might replace it? Esfandiary outlined four potential outcomes.

She assigns a low probability to either an outright collapse of the government or a genuine reform program that addresses public grievances. This leaves two more likely scenarios: the system remains in place but with different leaders at the helm, or a military coup led by the IRGC.

Another major variable is the health of the 86-year-old Supreme Leader, Ayatollah Ali Khamenei. His death would trigger only the second succession process since the Shah was overthrown in 1979.

"The difference this time compared with last time is the IRGC is much more prevalent," Esfandiary said. "There is no scenario in which the next supreme leader doesn't work very closely with the IRGC."

While these outcomes may not be promising for advocates of democracy, they could still lead to a form of rapprochement with Washington, marking a significant evolution in the complex history of US-Iran relations.