The Sanctions Equilibrium: When Coercion Becomes Structure

Spotlight

• Prolonged sanctions often stop functioning as temporary coercive tools and become embedded political-economic structures.
• Iran shows how sanctions can empower regime-linked actors, especially the Islamic Revolutionary Guard Corps (IRGC), by expanding parallel markets and sanctions-evasion networks.
• Syria demonstrates that sanctions relief does not automatically restore the pre-sanctions economy once informal systems have become dominant.
• Yemen reveals how incoherent sanctions can entrench rival political economies, weakening the very state structures they are meant to support.

Sanctions are designed as temporary instruments of coercion: a calibrated pressure meant to alter the behaviour of a targeted state and to be lifted after. Yet across the Middle East, this assumption has quietly collapsed. In Iran, the United States(US) has maintained sanctions continuously since 1979, with waves of intensification in 2010 and again in 2018. In Syria, a layered architecture of American, European and British sanctions persisted for over a decade before partial relief arrived in 2025. In Yemen, fragmented and inconsistently applied sanctions have accompanied a civil war now entering its eleventh year. In all three cases, the central question has long since ceased to be whether sanctions will work. The more pressing question is what they have built in their persistence.

The conventional debate identifies the failure of sanctions but misses a deeper structural phenomenon. When sanctions persist long enough, they stop functioning as external pressure and begin functioning as architecture: reorganizing domestic political economies from within, entrenching new actors, redistributing costs onto civilian populations and ultimately making their own removal as more economically disruptive than their continuation. This is the sanctions equilibrium: a state where international sanctions become constitutive of the economies they were designed to punish. The result is not sanctions fatigue but a stable, if deeply inequitable, new equilibrium.

Iran: The Perpetuation Problem

Iran represents the most advanced stage of sanctions equilibrium. Over four decades of economic isolation, the Islamic Revolutionary Guard Corps (IRGC) has expanded far beyond its original military mandate into a vast economic conglomerate controlling oil and gas, construction, ports, telecommunications and banking. Estimates of the IRGC’s economic footprint range from one-third to over half of Iran’s GDP: a sprawling, opaque empire built through no-bid state contracts, sanctions-evasion networks and the systematic displacement of private-sector competitors. The IRGC and the broader armed forces hold majority ownership or board control of at least 22 companies listed on the Tehran Stock Exchange and smuggling alone generating an estimated US$12 billion annually at profit margins of 200 to 300 percent for IRGC and Surpreme Leader-linked institutions.

The consequences for ordinary Iranians have been catastrophic. Sanctions have caused an average annual decline of 17 percentage points in the size of Iran’s middle class between 2012 and 2019.

Crucially, the IRGC did not thrive despite sanctions, it expanded because of them. IRGC-linked entities became uniquely positioned to access hard currency through smuggling networks and informal trade routes. Iran’s “resistance economy“, the doctrine of self-sufficiency, functioned in practice as political cover for the militarisation and the elite capture of rents.

The consequences for ordinary Iranians have been catastrophic. Sanctions have caused an average annual decline of 17 percentage points in the size of Iran’s middle class between 2012 and 2019. This has led to greater economic dependence on state-affiliated institutions.  Sanctions can create a vicious cycle where economic hardship fuels public discontent, prompting regimes to increase repression to maintain control. This repression further damages the economy by stifling investment, entrepreneurship and human capital, amplifying the original shock. In practice, sanctions often fail to weaken regimes; instead, they erode civil society—the very actors most likely to challenge authoritarian rule.

This presents the first dimension of the sanctions equilibrium: the perpetuation problem. The IRGC and regime-linked actors now have rational incentives to preserve the sanctions architecture. A full economic opening, through Financial Action Task Force (FATF) compliance and SWIFT reintegration would invite competition into sectors the IRGC currently dominates without challenge. As a result, hardline factions within Iran view sanctions relief not as an opportunity but as a threat to their political and economic dominance. The sanctions equilibrium has thus become self-perpetuating, sustained by domestic beneficiaries of the parallel economy who have no interest in dismantling it.

Syria: The Irreversibility Problem

Syria presents a different case of what happens when sanctions are partially lifted from an economy that has already fundamentally reorganised around them.

The Caesar Syria Civilian Protection Act imposed sweeping sanctions on Syria, targeting not just the Assad regime but any third-party entity engaging with it. Combined with prior American, European and British sanctions dating to 2011, these measures devastated Syria’s banking sector, energy infrastructure and formal trade networks. By 2024, Syria’s GDP had contracted by over 50 percent from its 2010 level, with over 80percent of Syrian population driven below the poverty line.

The critical insight, however, is what emerged in the vacuum. As formal banking collapsed, hawala networks became Syria’s primary financial infrastructure, routing remittances, facilitating trade and substituting for a banking system the sanctions had rendered non-functional. Informal dollarisation became widespread, with Syrians abandoning the Syrian pound for foreign currency transactions in everyday commerce. Black-market trade replaced formal supply chains across food and consumer goods.

The critical insight, however, is what emerged in the vacuum. As formal banking collapsed, hawala networks became Syria’s primary financial infrastructure, routing remittances, facilitating trade and substituting for a banking system the sanctions had rendered non-functional.

When Assad fell in December 2024 and the Caesar Act was ultimately repealed in 2025, the anticipated economic bounce did not materialise. The Syrian pound appreciated sharply on news of relief, by about 25 percent in two days following Trump’s May 2025 announcement, before falling back as markets recognised that perhaps the pre-sanctions economy no longer existed to return to. The formal banking sector has limited infrastructure and therefore remains practically isolated, with little trust in formal financial institutions and lack the architecture to re-engage with international correspondent banks. Syria’s SWIFT reconnection was a necessary milestone, yet Syria is still on the Financial Action Task Force (FATF) gray list and designated by the US as a state sponsor of terrorism which makes reintegration harder.  Hawala operators have an incentive to capture financial intermediation and resist reintegration into regulated systems. The informal sector has expanded so rapidly that it now undermines state revenues and long-term stability. Reconstruction, estimated by the World Bank at US$216 billion, requires not merely capital but institutional re-architecture that the years of sanctions have systematically dismantled. Of the US$216 billion required, only approximately US$28 billion in investments had been pledged or attracted by October 2025.

Syria demonstrates a second dimension of the sanctions equilibrium: the irreversibility problem. Sanctions relief is not the mirror image of sanctions imposition. Removing pressure from an economy that has reorganised around that pressure does not restore the prior equilibrium, it creates a new and unpredictable disequilibrium.

Yemen: The Perverse Symmetry Problem

Yemen offers another alarming case. Here, the problem is that the sanctions have been applied incoherently and target primarily the Houthi movement in the north, while leaving the Internationally Recognized Government (IRG) in the south operating under a fragmented regulatory framework. The resulting competing structures present a bifurcated equilibrium in which the sanctions architecture has become load bearing for both sides. This iteration has produced two entrenched political economies, each internally rationalised and each threatened by the peace that would end it.

Yemen’s economic data tells a story of this institutional breakdown. Real GDP per capita has declined by 58 percent since 2015, with the economy effectively split between two competing central banks, two currency systems and two regulatory environments. In Houthi-controlled territory, deflation and liquidity constraints are driving reliance on informal and barter-based transactions. In IRG-controlled areas, inflation exceeded 30 percent in 2024 and the Yemeni rial depreciated from YER 1,540 to YER 2,065 per US$ over the year.

Houthis collected US$789 million in tax and customs revenues from oil derivatives and commodities through their controlled ports between May 2023 and June 2024, with smuggling being a key revenue source for the Houthis.

The Houthi economy has adapted to sanctions through a parallel revenue architecture. Houthis collected US$789 million in tax and customs revenues from oil derivatives and commodities through their controlled ports between May 2023 and June 2024, with smuggling being a key revenue source for the Houthis. Therefore, the sanctions have strengthened the movement’s economic grip and reduced the competitors to challenge it. The Houthi leadership has little incentive to seek peace that reopens formal trade and invites competitors into markets it currently monopolises. The IRG’s economy, meanwhile, has collapsed into severe aid-dependency. IRG revenues, excluding external grants, fell to just 2.5 percent of GDP in 2024, making the government possibly insolvent without Saudi transfers. The International Monetary Fund (IMF) states that external financing remains critical to sustain government operations and maintain critical public services. Therefore, the IRG has no sustainable fiscal base and benefits from external aid that might be scaled back if the conflict resolves. More than two-thirds of civilians now face inadequate food consumption, absorbing the cost of sanctions.

The result is the third dimension of the sanctions equilibrium: the perverse symmetry problem. Designed to coerce the Houthis, it has simultaneously hollowed out the government it was meant to strengthen, punishing ally and adversary alike. The two rival political have reorganised its institutions around the sanctions architecture. They now have limited incentive to reach a resolution that would force them to compete on terms they might not win.

Conclusion

Read together, Iran, Syria and Yemen reveal sanctions to be something quite different from the instrument their architects imagined. The conventional debate frames the question around effectiveness but this is misleading because it treats sanctions as exogenous pressure applied to an unchanging system. However, prolonged sanctions become endogenous to the political economies they target, restructuring incentives, redrawing the boundaries of the formal and informal economy and producing entrenched actors who benefit from continuation of the pressure regime. Across the three cases, the structural finding is that sanctions do not so much punish targeted states as remake them.

The conventional debate frames the question around effectiveness but this is misleading because it treats sanctions as exogenous pressure applied to an unchanging system.

The policy implications are rarely confronted. With the sanctions equilibrium problem, the moment of imposition is also implicitly the moment of construction. The exit problem is not the mirror image of the entry problem and considerably harder. At the point of imposition, policy makers need to forecast the distributional consequences: the institutions, intermediaries and rent flows that prolonged pressure will generate. Eventually, sanctions cease to function merely as external pressure and instead become a form of political economy in their own right. Until this reality is acknowledged in design rather than discovered in hindsight, the sanctions architecture will continue to outlast the policy objectives that produced it.

Samriddhi Vij is an Associate Fellow, Geopolitics, at ORF Middle East.