“Today, you can get in a car in Tehran and get out in the Dahia, Beirut.” Five years and two months after Gen. Qasem Soleimani made this statement, the Islamic Republic of Iran is in retreat. Iran’s air and ground lines of supply to Lebanon now go through Sunni-dominated Syria, where the Assad regime recently crumbled. Even if Iran could more easily get to Lebanon, Hizballah is the weakest it has been in over a generation, having been relentlessly battered by Israel. In the words of one high-ranking commander in Iran’s Revolutionary Guard Corps: “We lost, we badly lost.”
Iran’s ability to deter and wage war in recent decades was largely through gray zone methods. And the structures, resources, and allies that allowed it to do this are now in tatters. But the erosion of Iran’s gray zone strategy was already happening when Assad was still in power and Hizballah loomed over Israel as a fearsome threat. Iran’s economic dysfunction and political disarray prevented it from building and sustaining resilience. This analysis highlights how Iran’s economic malfeasance, fueled by internal divisions among government stakeholders, has undermined its geopolitical ambitions and prevented it from converting regional influence into sustainable economic leverage, marking a potential turning point in its regional strategies.
Battle in the Fog
Iran’s gray zone strategy refers to a strategic approach that operates between conventional warfare and peacetime competition. Characterized by ambiguity, deniability, and reliance on proxies, Iran uses organizations like Hizballah in Lebanon, the Houthis in Yemen, and militias in Iraq and Syria to project influence and challenge adversaries — such as confronting the United States as the dominant external power in the Middle East, along with its regional allies, Israel and Saudi Arabia. Through asymmetric tactics — including political, economic, social, intelligence, and military support for various non-state actors — Iran pursues its geopolitical objectives while avoiding full-scale conflict. This strategy enables Tehran to expand its regional influence, counterbalance its rivals, and maintain plausible deniability in the face of international criticism or retaliation. The United States has sought to counter this strategy through various means, focusing particularly on “push back” and “roll back” approaches.
The Starting Point
Despite initial optimism in 2021 about President Joe Biden’s commitment to reviving the nuclear deal with Iran, which is known as the Joint Comprehensive Plan of Action, negotiations failed to result in any agreements. The administration then essentially pursued a pressure campaign far less aggressive than the Trump administration’s “maximum pressure” policy.
During the renewed nuclear negotiations, the first ambiguous attack on trade ships under Biden’s presidency occurred on July 29, 2021. On this date, the MT Mercer Street, a commercial oil tanker managed by an Israeli-owned company, was targeted by drones near the coast of Oman. These challenges escalated further with drone and missile attacks by the Houthis on Abu Dhabi airport and Emirati oil infrastructure, reportedly supported by Iran.
These ongoing tensions intersected with Russia’s invasion of Ukraine in February 2022. During the conflict, reports emerged that Iran was supplying drones to Russia, exacerbating the European Union’s frustration. The European Union, as the primary mediator in the nuclear talks for over a decade, had been striving to reach an agreement among all parties. The last significant round of negotiations took place in Vienna in August 2022, when the European Union presented a “final text.” However, Iran requested further changes, leading to a stalemate. Iranian hardline negotiators optimistically spoke of a “hard winter in Europe,” viewing it as potential leverage for getting more concessions during the talks.
The Economy Driving Decisions
After Iran rejected signing the final agreement, several significant attacks on commercial vessels occurred in the Persian Gulf, Red Sea, and surrounding areas. Amid these challenges, Iran sought to increase pressure on the United States and its partners in the Middle East in various ways. These conflicts deeply and negatively impacted the regional economy and global trade, while all “push back” efforts to limit or halt Iran’s progress proved ineffective.
In addition to global trade disruptions, countries in the region were concerned about their economic development and efforts to attract substantial foreign direct investment. Between 2011 and 2021, Israel led the region with 238 percent growth in foreign direct investment (from $9.1 billion to $30.7 billion), followed by the United Arab Emirates with a steady 189 percent increase (from $7.2 billion to $20.7 billion). Saudi Arabia recorded an 18 percent rise (from $16.3 billion to $19.3 billion), with its economic ambitions tied closely to Vision 2030. Meanwhile, Turkey’s real GDP steadily climbed, achieving a compound annual growth rate of 5.7 percent during the same period and ranking as the 17th largest economy globally by 2021.
These major economic efforts depend heavily on one pivotal factor: stability. The economy’s demand for stability could create a foundation for agreements aimed at addressing sources of instability, such as Iran’s regional activities. However, amid these challenges, Hamas unexpectedly attacked Israel in October 2023 — resulting in another strategic trap for an ambitious Iran, which is now also aligned with Russia in recent conflicts. This time, it would be Iran’s turn to face broader consequences.
From Push Back to Roll Back
The Oct. 7, 2023 attacks on Israel initiated a process aimed at rolling back Iran’s influence to its borders, designed to eliminate or dismantle Iran’s preferred security structure in the region. What the Iranian Supreme Leader had feared in 2022 was beginning to unfold. He had then mentioned America’s intention in the nuclear deal as being a trap to deprive Iran of its natural nuclear rights. He had warned his militia supporters about the implications of a potential renewed nuclear deal, implying that Iran might have to completely withdraw from the region and abandon its strategic presence, similar to the pressure of reducing and abandoning its nuclear activities. These developments could be seen as a roll back strategy, designed to eliminate or dismantle Iran’s preferred security structure in the region.
This marked a new phase in the proxy war in the Middle East, with the United States targeting Iran’s geopolitical ambitions through the lowest level of direct intervention. Unlike previous proxy wars where Iran relied on its proxies while staying out of direct engagement, this time Iran itself was drawn into the conflict. Conversely, the United States, supporting Israel as its proxy in the conflict, remained largely in the background, mostly stepping in to help Israel thwart Iranian attacks and to deter escalation. The strategy proved remarkably effective, as it led to the removal of critical figures within the so-called Axis of Resistance, the destruction of Hizballah’s organizational capabilities, the fall of Bashar al-Assad’s regime in Syria, and heavy attacks on Houthi arsenals in Yemen.
It is also notable that the weakening of Iraq’s Popular Mobilization Forces, a paramilitary umbrella group that is closely tied to Iran, was facilitated earlier by pressuring it to integrate into Iraq’s official military structure. Iran now faces a new challenge in Lebanon with President Joseph Aoun, who aligns more closely with the Western–Arab axis.
What is Happening with Iran’s Gray Zone Strategy?
Success in a gray zone strategy hinges on harmonizing diverse elements of statecraft and ensuring effective management of resources and operations — something the Iranian political system has been unable to sustain. From the outset, the Islamic Republic’s statecraft has suffered from dysfunction, which has worsened significantly in recent years. This has left Iran facing deep challenges domestically and in foreign relations.
Triumph in the gray zone requires maintaining coherence between political, military, economic, and informational efforts, enabling activities to reinforce one another without creating vulnerabilities or contradictions. Centralized yet flexible command structures are essential for coordinating multiple actors, including state entities and proxies, while preserving plausible deniability. Effective management also demands precise goal-setting, adaptive strategies, and robust intelligence capabilities to anticipate adversaries’ responses. All of this, however, requires a crucial foundation: economic power.
Iran’s Achilles’ heel is its economic weakness, which has undermined the political system across multiple dimensions. Fundamentally, the Iranian political system has failed to design a viable and practical economic development model. This weakness has been compounded by heavy economic sanctions and, more critically, by systemic dysfunction rooted in ideological priorities rather than merit-based governance. Iran lost its territorial achievements due to two main economic reasons: First, government stakeholders within the system are united only in their opposition to each other, which prevents the country from achieving development. Second, as a result of the first issue, Iran has been unable to translate its regional influence into economic leverage, thereby failing to make its presence sustainable and constructive. For example, Iran’s significant investments in Syria (around $20–$30 billion) have not yielded long-term economic or strategic benefits, as the Assad regime’s instability drained resources without strengthening Iran’s position.
It is evident that the severe economic sanctions, particularly following U.S. withdrawal from the nuclear deal, have significantly impacted Iran’s economy. U.S.-led sanctions have significantly reduced Iran’s oil revenue, which has traditionally been a primary source of funding for its proxies. from 2016 to 2024, Iran’s crude oil exports decreased by approximately 615,784 barrels per day, reflecting the impact of external pressures on the country’s oil sector. Alongside this major factor, numerous internal issues have also contributed to the Iranian economy’s growing fragility. Corruption within the ideologically driven political system and the mismanagement of resources are key obstacles to Iranian economic growth. Between 2003 and 2023, Iran’s average score on the Corruption Perceptions Index was 26.14, ranked 149 out of 180 countries in 2023, as reported by Transparency International.
Also, Iran’s Trade Freedom scores, as assessed by the Heritage Foundation’s Index of Economic Freedom, were consistently low from 2017 to 2022, reflecting significant barriers to international trade. In 2022, Iran’s overall economic freedom score was 42.4, ranking 170th out of 177 countries. This low score has critical domestic drivers: Some factions close to the core power of the political system are in favor of Iran’s economic isolation and seek to impose high tariffs, non-tariff barriers, and restrictive trade policies that impede trade freedom. As a result, from 2012 to 2022, foreign direct investment in Iran averaged only $2.4 billion annually, with a paltry $1.5 billion recorded in 2022.
These powerful factions and their aligned interest groups seek to exploit the situation to seize control of the entire Iranian economy, using resistance-driven rhetoric, while maintaining dominance over industries and financial institutions through their connections to the centers of power. This has led to severe corruption and profound dysfunction in Iran’s economy, which is largely state-controlled. As a result, the system is under immense economic pressure with no possibility of reform. Meanwhile, these stakeholders, who are a critical part of the political system and contribute to governing the state, are unwilling to surrender the advantageous situation that allows them to exploit and plunder.
As a result of these circumstances, Iran was unable to strengthen its economy, causing its GDP to decline to approximately $262 billion in 2020, the lowest level since 2006. Further, the Iranian Parliament Research Center announced that in 2020 Iran’s share of global trade had decreased to a low of 0.2 percent.
The dire economic situation has increased domestic dissatisfaction, reducing support for the Islamic Republic’s regional approach and posing a challenge to the political system on one hand. On the other hand, it has hindered Iran’s ability to strengthen its geopolitical reach in the region, due to a lack of economic power and the loss of human resources and experts, many of whom have left the system or immigrated abroad in search of a better life. Heavy sanctions, increasing financial constraints, and serious economic inefficiencies have limited Iran’s financial resources, leaving the government struggling to maintain supply lines and operational support for militias in Lebanon, Syria, Iraq, and Yemen. Additionally, heightened sensitivities, such as the recent scrutiny over the search of an Iranian plane and diplomat at a Beirut airport, have compounded logistical challenges in supplying arms and funds to these groups, significantly undermining the effectiveness of Iran’s efforts.
As a result of these challenges, Iran has been unable to sustain internal support or align diverse factions under a shared strategic vision. This lack of unity has eroded consistency and long-term resilience, leaving the country vulnerable to intensifying domestic and external pressures. It is time for the Islamic Republic to make a decision: remain on the path of resistance or turn to the path of development. The first route briefly opened a direct pathway from Tehran to Beirut—a connection that has since been lost. Perhaps following the second route will elevate Tehran to a position of prominence, like a shining city on a hill.
Farzin Zandi is a geopolitical analyst, PhD student, and research assistant in political science at the University of Kansas, specializing in Middle Eastern politics and Iran’s gray zone strategies.
Image: Midjourney
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