After the three-month internet blackout imposed following the ​​​​​​US–Israeli strike that killed Ayatollah Khamenei in February, Iran emerged a fundamentally different regime. It had learnt the value of strangling the Strait of Hormuz, renewed its commitment to political and military decentralization, adopted a willingness to escalate conflict, and begun to leverage a more broadly palatable nationalist identity born from the casualties of war.  

Yet as Tehran adapted, Washington doubled down. In August, the US launched Operation Economic Outcast (or ‘Economic D-Day’) targeting five critical sectors of the Iranian economy, sanctioning 60 new entities and threatening secondary sanctions against countries doing business with Iran. This was the Trump administration’s most ambitious attempt since the war began to isolate Tehran economically and force the regime back to the negotiating table: either they ‘come to their senses’, the treasury secretary said, or face defeat.  

Yet this ultimatum overlooked how Iran has historically responded to pressure: by relying on illicit markets to weather sanctions and sustain the regime.  

Oil and the limits of sanctions 

The oil trade is Iran’s most lucrative illicit economy. In 2025, it earned an estimated US$45.7 billion from exports in the sector, the ‘overwhelming majority’ of which reached small, independent ‘teapot’ refineries in China, which have ​​​​​​​​limited exposure to international markets and are therefore better able to absorb sanctions risk. In an attempt to deter this trade, the Trump administration directly sanctioned several such refineries in 2025 and, in April 2026, expanded the list of sanctioned entities to include firms purchasing oil from them.  

However, the results have been mixed. While some internationally exposed Chinese companies withdrew from sanctioned suppliers, overall the trade has continued. Although China has not reported any crude oil imports from Iran since at least 2023, independent trackers have observed sanctions evasion practices, such as yuan-denominated transactions and ship-to-ship transfers, through which Iranian oil continues to reach Chinese teapot refineries.  

Furthermore, despite the rhetoric of an ‘Economic D-Day’ for Iran, the US administration is likely to remain reluctant to apply sufficient secondary sanctions to seriously disrupt Chinese trade, given its dependence on the Chinese economy.  

The difficulties of enforcing sanctions comprehensively and Iran’s creativity in evading them mean that sophisticated customers are unlikely to be deterred from purchasing discounted Iranian oil. In certain circumstances, sanctions can even be counterproductive. After US sanctions cut India-based Nayara Oil off from many of its existing suppliers in July 2025, for instance, the company became effectively dependent on Russian crude. 

Without a comprehensive and indefinite blockade of the Strait of Hormuz, therefore, the US and its partners cannot unilaterally halt Iran’s oil exports. Even under current conditions, Iranian oil continues to find its way to international buyers, with an estimated 534 000 barrels reaching China in August 2026 alone.  

Neighbouring Iraq is central to this ecosystem. Its own oil exports have repeatedly been used to mask Iranian oil sales through smuggling, blending and mislabelling. At the same time, Iraqi oil revenues also support Iran-aligned groups within Iraq, such as the Popular Mobilization Units (PMU), who continue to facilitate cross-border oil trafficking. While some PMU factions pledged to disarm in 2026, others have maintained their allegiance to Iran, thereby preserving routes to market for Iranian oil.  

Smuggling beyond the Strait 

Beyond the Persian Gulf, several land-based routes offer Iran options to evade oil sanctions and bypass the continued blockade. In the Sistan and Balochistan province, for example, smugglers known as soukhtbar have long moved subsidized Iranian fuel into Pakistan. Despite regular interdiction efforts, these networks continue to operate at a significant scale, involving thousands of vehicles and generating annual revenues estimated at US$1 billion.  

Since 2018, the Islamic Revolutionary Guard Corps (IRGC) has sought to control rather than eliminate this trade. A comprehensive blockade of the Strait of Hormuz would likely accelerate this process, enabling the IRGC to turn the south-eastern border into a profitable and reliable smuggling route for Iranian oil, much as it has done with ​​​​​​​​traditional smuggling corridors on the Iraqi border.  

While these alternative routes cannot replace more efficient maritime export paths, they could allow the regime to continue profiting from its most important industry during periods of heightened pressure. 

New opportunities in old networks 

Oil is just one component of Iran’s illicit economy. Deteriorating security conditions along the Afghan and Pakistani borders have facilitated the establishment of drip-irrigated poppy fields in Sistan Balochistan, as well as other parts of western Iran. Farmers displaced by Taliban bans on opium production have reportedly moved their operations into Iranian territory, while weakened border controls have reduced the risks associated with trafficking.  

Iran may also be seeking opportunities in the fragmented but lucrative market for ​​​​Captagon, an amphetamine-type stimulant popular across the Middle East. Reports that the Basij, a branch of the IRGC, has entered production remain uncorroborated, but such a move would supplement Iran’s existing methamphetamine processing and smuggling operations along cross-border corridors that are routinely taxed by the IRGC.  

These routes support a range of illicit activities. Migrants, weapons, drugs and other goods routinely move through unofficial border crossings that are controlled or influenced by state and non-state actors. Networks transporting Afghan, Pakistani and Bengali migrants towards Türkiye and Europe have remained active despite regional border closures and Tehran’s mass deportation campaigns. An IRGC commander recently stated that they had sponsored passage to the UK for a number of migrants ​​​​​​who were ready to ‘make London unsafe’ at his behest.  

Digital finance is also becoming increasingly important. The regime has long relied on virtual assets and online gambling networks to facilitate the movement of billions of dollars. US sanctions have only recently begun to target these systems. The first measures against regime-connected exchanges came in January 2026, after US$1 billion in transactions were connected to IRGC-associated stablecoins, and Shelbit, a Farsi-language gambling platform, was sanctioned as recently as August. As pressure increases, Tehran is likely to continue pivoting to new platforms rather than abandoning these tools altogether. 

Testing Iran’s resilience 

The death of Khamenei and six months of conflict have not fundamentally altered the logic of regime survival in Iran. Instead, these events have reinforced the importance of oil, drugs, migrants and digital finance as sources of revenue, while conflict and disruption have created new opportunities for sanctions evasion and illicit enterprise.  

Operation Economic Outcast is an attempt to coerce Iran through economic isolation. Yet it is being applied against a regime that has spent decades adapting to sanctions and cultivating alternative channels for trade. Ultimately, what the Trump administration regards as a final warning to Tehran is simply a test of whether sustained economic pressure can overwhelm its capacity for adaptation. In the meantime, the costs of sanctions will be carried by ordinary Iranians rather than the networks that sustain the regime.