FROM IRAK TO IRAN
IRAN: SANCTIONS WORK. THE QUESTION IS WHEN
Prices, Time and the Political Economy of a War of Attrition
By Roberto F. Salazar-Córdova
Economist
ADN@+ | September 1, 2026
The Sachs' Hypothesis
Economic sanctions begin with prices. A transaction becomes more expensive, a financial channel carries a higher risk premium, an exporter accepts a larger discount, insurance costs rise, technology becomes harder to obtain, a currency depreciates, imported inputs become more expensive and eventually domestic prices adjust. What initially appears as a foreign-policy decision gradually enters the balance sheets of firms, the budgets of governments and the purchasing power of households.
This process takes time. That simple observation is central to understanding Operation Economic Outcast and, more generally, the economic strategy now being deployed around Iran.
Jeffrey D. Sachs and Sybil Fares have recently examined the prospects of the new American sanctions through the ability of Iran to maintain international economic relationships, particularly with China and Pakistan. The flows observed during the first months are important information. They represent the initial conditions of a much longer adjustment process.
The economically relevant question is how those conditions evolve.
THE PRICE MECHANISM
Sanctions change the relative prices faced by every participant in a transaction. An Iranian barrel of oil may continue reaching an international buyer, while the net price received by Iran falls because of discounts, transport, insurance, financial intermediation and the cost of concealing or restructuring the transaction. The physical flow can therefore survive while its economic value changes substantially.
The same mechanism operates on imports. A component that previously arrived directly can continue arriving through another country. Its price now incorporates additional transport, financing, inventories, intermediaries and risk. Production continues, although at a higher marginal cost.
These adjustments accumulate throughout the economy. The price of capital rises. Investment becomes less attractive. Imported technology becomes more expensive. Replacement parts become scarcer. The depreciation rate of the existing capital stock begins to exceed the rate at which firms can economically replace it. Productivity reacts gradually because the capital installed before the sanctions continues operating for some time.
This explains why the first year can provide a misleading picture.
The economy is living partly from capital, contracts, reserves, inventories and relationships accumulated before the restriction. The full price of the new equilibrium has not yet arrived.
TIME AND CONVERGENCE
Economic systems require time to converge after a large change in relative prices. Quantities adjust with different elasticities and at different speeds. Firms consume inventories. Governments use reserves. Consumers substitute products. Exporters discover alternative buyers. Importers search for new suppliers. Financial intermediaries develop new channels.
During this period, adaptation can look like neutralisation of the original policy.
The longer horizon reveals something different. Machines require maintenance. Infrastructure needs investment. Reserves are depleted. Fiscal subsidies become expensive. Exchange-rate pressures accumulate. Risk premia remain embedded in contracts. Human capital migrates. Investment decisions that were postponed become investment decisions that are never made.
Five years therefore provide a useful horizon for assessing the efficacy of this kind of policy. By then it becomes possible to observe whether the original intervention has persistently changed capital accumulation, productivity, trade, financial conditions and relative prices.
A horizon closer to ten years answers a more demanding question. It allows us to examine effectiveness: whether those economic transformations have generated sufficiently important changes in political behaviour, institutions or strategic choices.
The distinction matters because efficacy precedes effectiveness.
FROM EXTERNAL PRICES TO DOMESTIC INFLATION
The external restriction eventually enters the domestic price system. Foreign exchange becomes more expensive. Imported intermediate goods transmit those costs into domestic production. Fiscal resources become scarcer precisely when governments need larger subsidies to contain politically sensitive prices.
Inflation then becomes part of the transmission mechanism.
Inflation redistributes income and wealth. Real wages adjust imperfectly. Savings denominated in domestic currency lose purchasing power. Pensioners and households with limited access to financial protection absorb particularly visible costs. Firms with access to foreign currency, international assets or adjustable prices have greater capacity to protect themselves.
A foreign sanction has now become a domestic distributional shock.
This transformation is politically important because citizens do not experience international relations primarily through diplomatic communiqués. They experience them through purchasing power, employment, food, transport, housing, energy and expectations about the future.
Prices transform international pressure into domestic political information.
PRICES AND POLITICAL SURVIVAL
Every political regime faces a mechanism through which economic deterioration reaches political stability.
In democracies, an important part of that mechanism operates through elections. Inflation, employment, real income and economic expectations influence voters and therefore alter the probability that the government responsible for a particular policy remains in office.
Authoritarian regimes use a different transmission mechanism. Political adjustment can appear through demonstrations, emigration, increased repression, conflicts among elites, changes within governing coalitions and the fiscal cost of maintaining the institutions that support the regime.
Both systems therefore face intertemporal political constraints.
A government can distribute economic losses for some time. Its ability to continue doing so depends on fiscal resources, institutional strength, political legitimacy, coercive capacity and the availability of groups willing to continue supporting the existing equilibrium.
The relationship between economic deterioration and political change is consequently nonlinear.
A system can absorb successive shocks and appear stable for years. The cumulative adjustment may eventually reach a threshold. Reserves become insufficient, a currency loses credibility, a subsidy becomes impossible to finance, an essential productive input disappears or a politically decisive group changes its behaviour.
Years of gradual deterioration can then converge through a sudden crisis.
Economic convergence sometimes ends in political convergence. In extreme historical circumstances, political convergence takes the form of regime collapse.
THE RUSSIAN EXPERIMENT
Russia provides an unusually valuable contemporary experiment because enough time has now passed since the major sanctions imposed after 2022 to observe several stages of adjustment.
The initial response demonstrated substantial adaptive capacity. Russian energy found new buyers. China became more important. India increased purchases of Russian oil. Türkiye acquired additional commercial and financial functions. The United Arab Emirates became an important intermediary.
These substitutions kept economic flows operating.
Over time, the distribution of bargaining power began to change. Russia increasingly required access to markets and services supplied by a smaller number of partners. China consequently acquired greater relative importance for Russia, while Russia represented a much smaller share of China's overall economic alternatives.
The approximately 6.5 percent decline in China-Russia trade in 2025, the first annual contraction in five years, is relevant within this longer process. The strategic relationship remains substantial while the economic asymmetry embedded within it becomes increasingly important.
The price mechanism explains why.
A seller with fewer buyers has less bargaining power. A buyer facing a constrained seller can demand a discount. A country with fewer financial channels pays more for intermediation. A firm with fewer technology suppliers accepts conditions that would have been unattractive when alternatives were abundant.
Economic isolation therefore operates through margins as well as quantities.
CROWDING OUT OF ROLES
The substitution of international actors produces a second dynamic. When one bank leaves, another can take its place. When one shipping company exits, another can transport the cargo. When one country reduces purchases, another can increase them.
The new participant enters because an economic opportunity has appeared.
Its participation has a price.
As alternatives disappear, the intermediary becomes more valuable and acquires greater bargaining power. It can charge more, demand larger discounts or impose different contractual conditions. Part of the economic surplus gradually moves away from the sanctioned actor and towards those willing to provide access.
This is a crowding out of roles.
The process evolves further when secondary sanctions increase the expected cost faced by intermediaries. Turkish financial institutions provide a useful illustration. Increasing sanctions exposure around Russian transactions led banks to examine transactions more carefully and, in some cases, delay or restrict them. Similar incentives have affected institutions elsewhere.
The mechanism requires no political conversion. It requires a change in expected prices.
An intermediary participates while the expected return exceeds the expected cost of risk. Greater enforcement raises that cost. The intermediary then adjusts its commission, reduces its exposure or reallocates its capital towards another opportunity.
Time magnifies this process because every renewal of a contract creates another opportunity to reprice risk.
CHINA AND THE PRICE OF SUPPORT
The same framework can be applied to China's relationship with Iran.
Iranian energy has economic value for China. Discounts can increase that value. Energy security adds another component. The relationship with Tehran also possesses geopolitical value within China's broader international strategy.
These benefits have a price counterpart.
The economic value of maintaining a transaction with Iran must continuously be compared with access to other markets, financial relationships, technology, investment and the probability of secondary restrictions. That calculation can change substantially over five or ten years.
China therefore becomes part of the dynamic probability of the policy.
Its role is not fixed at the position observed today. The quantity of support, the instruments used to provide it and the price China demands for maintaining it can evolve.
The Russian experience already illustrates how a strategic relationship can simultaneously persist and become increasingly asymmetric.
The same economic force can operate around Iran.
PATIENCE AND SIEGE
Operation Economic Outcast takes place within a broader set of instruments. Financial restrictions interact with trade policy, technology controls, tariffs, secondary sanctions, intelligence, energy, maritime capabilities, diplomacy and military power.
The resulting strategy resembles a modern form of siege.
The relevant objective of such a siege is not necessarily to stop every transaction. It is to increase progressively the price of the alternatives available to the target.
Credit acquires a higher price. Insurance acquires a higher price. Technology acquires a higher price. Transportation acquires a higher price. Financial intermediation acquires a higher price. Maintaining an international relationship acquires a higher price.
Military capabilities also affect those prices through expectations.
Banks, shipping companies, insurers, investors and governments make decisions using probabilities about future conditions. The credible possibility of military escalation changes expected losses even when military force is not actually used.
Patience and siege therefore interact.
Siege changes the prices. Patience gives those prices time to transform quantities, capital stocks, income distribution and political incentives.
THE AMERICAN CONTINENTAL EQUILIBRIUM
The capacity to maintain such a strategy depends on the economic depth of the country applying it. This gives the renewed American hemispheric strategy particular relevance.
The emerging “Donroe Doctrine”, understood as a contemporary extension of the hemispheric logic historically associated with the Monroe Doctrine, can be interpreted economically as an attempt to strengthen the strategic depth of the Americas.
The economic foundations are substantial. The United States contributes energy, technology, capital and industrial capacity. Canada adds minerals, energy and advanced production. Mexico provides an increasingly integrated manufacturing platform. South America contains extraordinary reserves of food, water, biodiversity, copper, lithium, energy and other strategic resources. Panama, the Caribbean and both the Atlantic and Pacific coasts provide critical logistical infrastructure.
Greater continental integration increases the capacity to absorb external shocks.
This becomes particularly important in a prolonged confrontation because economic depth determines patience. A country that can secure more energy, food, minerals, manufacturing and logistics within its own strategic environment can sustain external pressure for longer and at a lower domestic price.
SHIELD OF THE AMERICAS AND THE ECONOMICS OF DISPLACEMENT
The same price mechanism applies to continental security.
If Shield of the Americas succeeds in materially increasing the cost of narcotics trafficking, money laundering and transnational organised crime within the hemisphere, criminal organisations will face a new set of relative prices.
Higher interdiction probabilities increase the expected cost of traditional routes. Stronger financial controls increase the price of laundering revenues. Better maritime and aerial surveillance increases logistical risk.
The supply chain responds.
A sufficiently large increase in the shadow price of supplying North American markets creates incentives to search for alternative routes and markets. Europe already represents a major destination. Africa can increase its importance as a transit platform. Asia provides enormous potential markets. The Middle East combines major logistics hubs, high purchasing power in several economies and geographical connections between Europe, Asia and Africa.
The eventual geographical response depends on prices, enforcement probabilities and demand.
A successful security policy in one region can therefore alter the economic geography of illicit activity elsewhere.
The same crowding-out principle appears again. Closing one profitable space increases the relative attractiveness of another.
TARIFFS, FACTOR PRICES AND THE AMERICAN VOTER
The price mechanism also operates against the country applying pressure.
Tariffs can encourage domestic production and strengthen strategic industries while raising the domestic price of imported products and intermediate inputs. Restrictions on energy-producing countries can reduce their export capacity while contributing to higher world energy prices. Reorganising supply chains can improve strategic resilience while requiring expensive new investment.
Factor prices matter as much as product prices.
Capital, labour, energy, land, minerals, technology and logistics all enter production costs. Policies that change their relative scarcity eventually change consumer prices.
Those prices eventually reach voters.
This establishes a political transmission mechanism inside the United States that parallels the mechanism operating inside Iran.
Inflation reduces real purchasing power. Higher energy prices affect households and firms. Tariffs redistribute income between sectors. Interest rates respond to inflationary conditions. Employment moves between industries. The resulting gains and losses enter electoral behaviour.
American patience therefore has a domestic price.
THREE DIFFERENT CLOCKS
Iran, China and the United States operate under different economic and political time horizons.
Iran must preserve sufficient resources, political cohesion and external relationships to sustain resistance. China must continuously compare the economic and geopolitical return from supporting Iran with the opportunity cost created elsewhere in its global economy. The United States must preserve sufficient domestic political support to maintain its strategy through elections, congressional changes and economic cycles.
The three clocks move simultaneously. This is what makes the probability dynamic.
At the beginning, Iran's installed capital, reserves and international relationships provide substantial capacity for adjustment. Over five years, investment, technology, inflation, productivity, risk premia and bargaining power can materially alter that position. Over ten years, the cumulative changes can reach political institutions and governing coalitions.
China's calculation changes during the same period. So does America's.
The probability of success therefore evolves as the relative prices confronting all three actors evolve.
FIVE YEARS, TEN YEARS
Five years provide a useful horizon for evaluating efficacy because prices have had time to affect investment, capital replacement, trade relationships, productivity and financial structures.
Ten years provide a useful horizon for evaluating effectiveness because those economic changes have had time to penetrate institutions, coalitions, political preferences and strategic behaviour.
The distinction gives Operation Economic Outcast a different interpretation.
The observable outcome in its first months tells us about the initial elasticity of the system. It tells us how quickly Iran finds buyers, how China responds, how intermediaries react and how international markets absorb the shock.
The decisive information comes later.
It comes from the evolution of Iran's capital stock, productivity, real wages, inflation, fiscal capacity and bargaining power. It comes from the price China demands for maintaining the relationship. It comes from the willingness of intermediaries to continue accepting risk. It comes from the ability of the Americas to increase their strategic depth. And it comes from the willingness of American voters to continue paying the domestic price of the policy.
Economic convergence takes time.
It can also accelerate dramatically after critical thresholds are crossed.
A long period of apparently manageable adjustment can therefore end in a currency crisis, fiscal crisis, recession, political rupture or, under exceptional conditions, regime collapse.
THE PRICE OF PATIENCE
The central question surrounding Iran is ultimately intertemporal.
Iran must finance resistance.
China must finance the economic and geopolitical value it assigns to supporting that resistance.
The United States must finance patience.
Each finances it differently. Iran pays through lost output, inflation, discounts, depreciation, lower investment and increasing dependence on a smaller number of partners. China pays through opportunity costs, financial exposure and the potential deterioration of relationships elsewhere. The United States pays through military expenditure, energy prices, tariffs, factor costs, inflationary pressures and ultimately votes.
The relevant probability is therefore never static.
It evolves with every change in prices, every investment that is postponed, every intermediary that reprices risk, every voter who changes preference, every new trade route, every technological restriction and every shift in the relative value of alliances.
Sanctions operate through quantities and prices. The broader policy mix determines how strongly those prices move. Time allows the changes to accumulate. Economic convergence transmits them into income and wealth. Political institutions translate those changes into decisions.
This provides the appropriate horizon for assessing Operation Economic Outcast.
Time is the fundamental variable. Prices are the transmission mechanism. Patience and siege determine the intensity of the process. Economic convergence transforms the equilibrium. And the final outcome is political.
Roberto F. Salazar-Córdova
Economist
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