BLACKSBURG, VIRGINIA ¨C The protests that erupted in Tehran on December 28 and quickly spread across Iran were triggered by a specific grievance: the collapse of the country¡¯s currency, the rial. Currency devaluation in Iran is never merely a technical matter; it quickly drives up prices and reduces purchasing power, especially given that many wages are set annually. In December, as the rial¡¯s value fell by 16% ¡ª for a total decline of roughly 84% over the past year ¡ª food inflation reached an annual rate of 72%, nearly double its recent average.
These developments follow decades of economic isolation. Starting in 2011, sanctions on Iranian oil sharply reduced the country¡¯s foreign-exchange earnings and slowed gross domestic product growth from a respectable 5% to 9% annually in the early 2000s to less than 3% thereafter. The loss of oil revenues created chronic budget deficits that the government has financed through monetary expansion, fueling inflation.
Iran¡¯s economic situation deteriorated further last year, when sanctions gave way to open confrontation. While the 12-day war with Israel and the United States in June 2025 caused limited physical damage, it exposed Iran¡¯s vulnerability to sudden escalation, belying the regime¡¯s claims to have things under control and raising the country¡¯s risk premium. Investment, already too low to compensate for rial depreciation, fell further, owing to fears of additional attacks by Israel and the U.S.
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