The geoeconomic battlefield

“You have almost like a perfect storm — a massive energy shock in prices and quantities, and a potential agricultural shock. That’s why you cannot rule out a serious outcome for India, both for prices and for real activity and standards of living.” Arvind Subramanian, former chief economic advisor to the Government of India, told the Blueprint.

“Oil marketing companies are already bleeding, so price increases are almost inevitable,” he added.

The two incidents are not directly related, yet there’s a clear cause-and-effect: The war in Iran may have begun with missiles and drones raining down on infrastructure. At the time of writing, it has transformed surreptitiously into an economic battlefield that has made the world sit up and take note. As one of the world’s biggest energy consumers, almost wholly imported, near the top of that list of worried nations is India.

The May 8 action by Iranian commandos was not an isolated incident — it was just the most recent move to break the crippling regime from the Western sanctions that the Islamic republic has come under. Iran has for years relied on a shadow fleet, a covert network of ageing oil tankers, shell companies, and logistical operations used to secretly export crude oil in defiance of international sanctions imposed by the United States (US) and the United Nations (UN).

The seizure of Ocean Koi made little sense on paper. Iran had just confiscated a ship that was, by all accounts, its own, moving Iranian oil through a network built by Iran to skirt US sanctions. Iranian state media claimed the vessel was “attempting to disrupt oil exports and the interests of the Iranian nation”. But no independent source has verified this claim.

  The more likely explanation is either an internal dispute between factions of the Islamic Revolutionary Guard Corps (IRGC), which is an Iranian multi-service defence that is separate from the Iranian Army, or Iran acting preemptively to prevent the tanker from falling into American hands.

This incident revealed a central paradox of Iran’s shadow fleet. These vessels are the foot soldiers of a shadow economy — the only reason Iran is still in this war. And yet, this economy is so shadowy, so fragmented and decentralised that even Iran cannot fully control it.

For decades, Iran has evaded US-led sanctions through its shadow economy. The scale of this parallel economy is staggering, with analysts estimating that China alone receives 1.38 million barrels of Iranian crude oil every day, despite sanctions.

This oil is disguised through ship-to-ship transfers in the Gulf of Oman and the Malacca Strait, where Iranian crude is mixed with other oils or simply relabelled as Malaysian or Omani blends.

According to the Atlantic council, the payment for the Iranian crude is often paid in China’s renminbi (RMB) system, which is the official currency and financial architecture of China and is tied to its Cross-Border Interbank Payment System. 

This benefits Iran as it is not dependent on dollar-controlled systems like the Society for World wide Interbank Financial Telecommunication (SWIFT) network, headquartered in Brussels. The SWIFT system facilitates international transactions and Iran is out of this framework as it is under heavy US sanctions.

In May, China invoked an anti-sanctions law against the US blacklisting of several of its oil refineries over purchases of Iranian crude.

“China is benefiting reputationally. The US is being seen as erratic and as having started this war and inflicted damage on the global economy. China, by contrast, is being seen as a more stable and reliable major power,” Subramanian said. According to reports, Iran is already charging a toll in Chinese yuan from ships passing through the Strait of Hormuz.

At this point in time, BRICS (an intergovernmental organisation and geopolitical bloc comprising major economies like Brazil, Russia, India, China), is also exploring alternatives to the US dollar and Western financial networks, like BRICS Pay and states are increasingly trading in local currencies.

US President Donald Trump had in December 2024 threatened up to 100 to 150 per cent tariffs on the trade and products of any nation attempting to replace the dollar.

Russia, which was sanctioned by the US and the EU in 2022, has shifted much of its trade to the RMB. According to Financial Times, most of the Russia and China trade, which is worth over $240 billion annually, is settled in yuan and rubles.

“They (Iran) have developed all kinds of shadowy ways to do business, including shadow banking, shadow finance, shell companies, exploiting virtual currencies, and crypto,” said Rachel Ehrenfeld, director of the American Centre for Democracy and its Economic Warfare Institute. “There are so many who are willing to circumvent the sanctions. And so this is how Iran operates: in untraditional ways of payment. They are very good at coming up with new ways to circumvent the system,” she added.

In late April, the US Office of Foreign Assets Control sanctioned 35 entities and individuals overseeing Iran’s shadow banking architecture, which facilitates the movement of tens of billions of dollars tied to sanctions-busting.

At the centre of this network is oil magnet Mohammad Hossein Shamkhani, alias Hector, the primary architect of Iran’s shadow oil trade. His Shamkhani network controls dozens of vessels and front companies, moving Iranian and Russian crude globally, often to China.

The profits total up to tens of billions of dollars annually and do not move through traditional banks. Instead, the network uses Dubai-based hawala trust transfers, Hong Kong yuan swaps, and trade misinvoicing to launder the money back to the IRGC. The Shamkhani network serves as a critical logistical link for funnelling drones, missiles, and dual-use components to Russia for the Ukraine war and to the Houthis in Yemen.

What makes them so dangerous and difficult to track is their deliberate evasion of maritime law. Normal ships broadcast their location using an automatic identification system (AIS) transponder. Shadow fleet ships disable their AIS to “go dark” or they use a technique called “spoofing” that transmits false coordinates to mislead authorities. According to the advocacy group United Against Nuclear Iran (UANI), the shadow fleet now exceeds 500 vessels.

This parallel system did not materialise overnight — it has been built through decades of experience evading US sanctions through what some call a “resistance economy”. The country produces 80 per cent of its food domestically and has the region’s most diversified economy.

According to reports, Iranian oil exports have nearly doubled since the war began; the country is exporting 2.4 million to 2.8 million barrels of oil per day, sold at much higher prices. Most of these proceeds go to the IRGC to sustain the war machinery.

Iran has effectively blockaded the Strait of Hormuz, a waterway between the Persian Gulf and the Gulf of Oman through which 20 per cent of the global oil passes. The US responded with its own naval blockade of Iranian ports and vessels — it calls its campaign Operation Economic Fury.

“Disrupting the Shadow Fleet is obviously key for the US blockade to work. The US naval blockade has two purposes. First, to weaponise the Strait of Hormuz against Iran, but also to open the Strait of Hormuz,” said Rob Geist Pinfold, lecturer in defence studies at King’s College London. 

The Iranian subterfuge, by all accounts, has surprised the US, which thought its economic pressure would cause the Iranian economy to collapse, making it impossible for Iran to sustain the war. Kenneth Abramowitz, an investor, a threat analyst and author of The Multifront War, said, “President Trump publicly said, ‘If we have to use military means, we’ll stop Iran’.If we just keep the blockade up, they’re going to starve eventually.’ Personally, he would prefer the second plan. (There’s) 50 per cent chance that Trump continues with the blockade and 50 per cent chance he goes back to the military.”

“It’s a game of chicken: two cars running into each other at 100 miles an hour. We’ll soon find out if someone turns away,” he added. 

The game narrative has worked like this: when the US presented its initial 15-point proposal in late March through Pakistani mediators, it required Iran to unconditionally reopen the strategic waterway.

Iran rejected those terms and issued a counter-proposal: international recognition of Iranian sovereignty over the Strait of Hormuz. It even established a new agency, the Persian Gulf Strait Authority, to regulate vessel traffic and collect transit fees.

As expected, these conditions were unacceptable to the US.

Iran’s economic game plan was clear: through the blockade, it was waiting for the global economy to suffer to the point that the US would be forced into a ceasefire. “We did not expect Iran to close the Strait of Hormuz. That’s very clear. The US did not have the assets in place to prevent that from happening. The US was clearly surprised,” Pinfold said.

“Iran wants to cause so much chaos and so many second — and third-order effects to the global economy, negatively affecting US allies, that the US will be deterred from escalating confrontation.” This raises a central question: has the conflict between the US and Iran transformed into a geoeconomic war, where economic pressure replaces military confrontation as the primary weapon?

From the US perspective, Ehrenfeld said, “The goal is to weaken Iran to the extent that they won’t be able to create a nuclear power, but they will be busy in really surviving. If they don’t have money to pay the soldiers, the fighters, or the Basij (Iran’ss regular army), people will go out to the streets.”

The concept of economic warfare is nothing new. In 1990, American political scientist Edward Luttwak argued that the waning of the Cold War would see states preferring economic and commercial instruments to using armed forces in their strategic competitions. ‘Geoeconomics’ was the term Luttwak coined to describe “the logic of war transposed into the grammar of commerce”.

The US, with its grip on the world economy, has waged economic wars for decades, deploying instruments like sanctions and blockades. Former US president Jimmy Carter imposed a trade embargo and froze approximately $12 billion in Iranian assets after Iranian students took diplomats hostage in 1979.

“If I can solve a problem without military means and use economic means, namely a boycott or a blockade, if that serves the purpose, I’d rather do that,” Abramowitz said. “I think the feeling of the West in the Middle East (West Asia) is we’re going to win the war with Iran, whether it’s through kinetic war or through economic war.”

These sanctions have remained in place because the leaders and supporters of the Islamic revolution in Iran, led by former supreme leader Ayatollah Khomeini, were ideologically hostile to the West.

Economics underpinned their first clash: In 1953, a US-backed coup deposed Iran’s democratically-elected prime minister, Mohammad Mosaddegh, who had decided to nationalise the Anglo-Iranian Oil Company (which today is British Petroleum).

American and British intelligence services conspired to stage the coup that placed the pro-West Shah Mohammad Reza Pahlavi in charge. When the king was ousted by the Islamic revolution in 1979, Iran severed all ties with the US.

The West’s sanctions grip on Iran has only increased with time. In 1984, the US State Department designated Iran as a state sponsor of terrorism, which triggered a ban on US foreign assistance and arms sales. Under US former president Bill Clinton, there were executive orders for a total ban on US trade, investment and involvement in the Iranian oil and gas sector.

By 2006, the focus had turned to Iran’s nuclear programme: The US and the UN Security Council imposed multilateral financial and proliferation-focused sanctions on Iranian individuals, institutions and the Central Bank of Iran. The following year, the sanctions were extended to the IRGC.

The US was particularly concerned about Iran’s nuclear enrichment and its alleged pursuit of a nuclear bomb, something denied by Iran.

As concerns about Iran’s nuclear programme grew, the US increasingly targeted Iranian banks and entities involved in weapons of mass destruction proliferation. This culminated in the Comprehensive Iran Sanctions, Accountability, and Divestment Act in 2010.

In July 2015, an agreement was reached between Iran and the P5+1 countries — China, France, Russia, the United Kingdom, the US (under Barack Obama) and Germany — on a Joint Comprehensive Plan of Action (JCPOA). In exchange for heavy curtailment of Iran’s nuclear programme and stringent International Atomic Energy Agency inspections, the US and its partners ended nuclear-related secondary sanctions against Iran, giving the country access to frozen funds and enabling it to export oil in the international market.

In 2018, the Trump administration pulled out of the JCPOA and reimposed the suspended sanctions. This was a reversion to a hardline ‘maximum pressure’ policy aimed at compelling Iran to negotiate on issues, including ballistic missiles and its regional proxy network of armed allies.

The reimposition of these sanctions had a crippling effect on the Iranian economy — its famed hand woven persian carpets, a $2 billion industry that was a major export product, plunged to $40 million annually. 

The US has been strongly opposed to Iranian support for non-state militant allies such as Hamas in Gaza, Hezbollah in Lebanon and the Houthis in Yemen. These groups are not only hostile to the US presence in the region but are also in constant conflict with its principal ally in the region, Israel.

“This war was a strategic disaster for Iran because it didn’t do enough damage to deter Israel or to de-escalate tension, and it normalised the paradigm of state-on-state warfare,” Pinfold said.

Iran’s involvement in civil wars, such as backing Syrian dictator Bashar al-Assad in Syria and the Shia militias in Iraq, has meant the US and Iran have often been on opposing sides in proxy conflicts. Iran calls this network of militias in the region the Axis of Resistance.

This network was more or less put in place and coordinated through Iranian major general Qassem Soleimani, who was killed by a US drone in 2020 in Baghdad.

The militias, along with the IRGC, have attacked Israel, its Gulf allies like Saudi Arabia and US bases in the region, most notably the October 7 attacks in 2023 by Hamas in southern Israel, which triggered a regional war beginning with Gaza and has culminated in the ongoing US-Iran conflict.

Although significantly weakened and battered in the conflict, they remain present on the fringes of the current war.“The Gaza war is the key precipitant factor for all of this. Hamas, as far as we know, did not get Iranian approval to launch the October 7 attacks. That caught the Iranians by surprise,” Pinfold said.

During the 12-day war with Iran in 2024, the US, through its B-2 Spirit bombers and GBU-57 bunker-busting bombs, attacked Iranian nuclear sites in Isfahan, Fordow and Natanz. These caused massive damage to the sites but reportedly did not effectively destroy Iran’s nuclear enrichment capabilities.

Coming into the current phase of the US-Iran war, Trump again cited the Iranian nuclear threat as a reason to go to war. The Pentagon renamed it Operation Epic Fury 2.0. “The desired political goal has never been fully clear to us. We get a lot of discussion about why we don’t want Iran to get a nuclear weapon. Well, if that's the case, we can drop bombs on Iranian nuclear facilities all day long,” Dan Grazier, a former US Marine Corps ground combat officer and senior fellow and Director at the Stimson Centre, told Blueprint.

“But if that destruction isn’t immediately followed up and exploited on the ground, as soon as the Iranians’ ears stop ringing, they’re going to clean up and start over again.”

For most Americans, the Iran war was characterised by severe economic stress and rising inflation. As many as 61 per cent of US adults disapprove of the conflict. Polling by the Pew Research Centre indicates that only about 36 per cent of Americans support the strikes, while 49 per cent explicitly oppose further US airstrikes.

“I drive a Toyota 4Runner. I just filled up that gas tank on Monday. And yeah, I definitely noticed the cost of that racking up very quickly as they were pumping gas,” Grazier said.

“I think the longer this goes on, the more Americans are going to feel it on the ground, too, because rising fuel and energy costs have a downstream effect.”

The cost of Brent crude went up to $126 per barrel during the conflict. The International Monetary Fund (IMF) warned that if the price stays well above $100 a barrel, the world economy would be headed for a recession.

“The inflation numbers in the US are high today. Because this is one global market, rising prices are also creating pressure,” Subramanian said.

“Had the US been importing directly through Hormuz, the pressure would have been even greater.” he added.

Meanwhile, the US spent an estimated $890 million to $2 billion daily during the peak of its military campaign against Iran. The Pentagon is seeking an additional $200 billion from the US Congress. And Iranian strikes on US bases in West Asia have caused at least $800 million in direct infrastructure damage, according to the Centre for Strategic & International Studies (CSIS). 

According to a congressional report, 42 US aircraft were either destroyed or extensively damaged. This damage is thought to include about 24 to 30 MQ-9 Reaper drones (each drone costs $30 million), stealth planes, and a radar surveillance jet worth $700 million. According to CSIS, the value of American equipment lost is estimated to be between $2.3 billion and $2.8 billion.

A key point of the war came when Iran used low-cost barrages of Shahed 134/136 drones to overwhelm US air defences, which were made up of expensive Patriot and Terminal High Altitude Area Defence (THAAD) interceptors.

These barrages were able to overwhelm and exhaust US air defences and cause massive damage not just to US bases and assets but also to infrastructure; oil refineries of Gulf countries like Ras Tanura (Saudi Aramco’s largest crude processing plant) were hit.

Attacks like these changed the economics of warfare in Iran’s favour and caused damage to its Gulf neighbours that not only affected their manufacturing capacities and oil trade but also damaged their reputation as an oasis of stability in West Asia. 

The UAE, famous for its futuristic skyline, luxury lifestyle, and flamboyant architecture, has seen the most drone and missile attacks. These losses cannot be quantified and are set to haunt the region for years to come. 

“Iran is looking for softer targets, those with far less skin in the game, those who are far more linked up to the global economy,” Pinfold said. 

India, though without a direct stake in the conflict, has not been insulated from the ill effects of this war; it enjoys good strategic ties with both Iran and the US. With the US, it has deepened defence cooperation through the Quad grouping, intelligence-sharing agreements, and a mutual interest in countering Chinese expansionism.

With Iran, India maintains diplomatic and economic relations rooted in historical ties and access to the Chabahar port. However, the current war has exposed the limits of this neutrality. India’s oil tankers have been unable to pass the Strait of Hormuz and have even faced a few attacks. When the US imposes sanctions, Indian banks fear secondary penalties.

In 1965, the then Indian prime minister Lal Bahadur Shastri, while on a fundraising tour in Hyderabad, made an appeal to Indian citizens to part with their gold for the national defence fund during the war with Pakistan. As Pakistani forces crossed the border into Kashmir, Shastri also asked the country to skip a meal every week so that the nation could save foodgrains for the war effort.

Nearly 61 years later, Prime Minister Narendra Modi also made an appeal from the same city. The only difference was that in 1965, India was at war. Now, the economic effects of a war elsewhere were hitting India at home.

Since the start of the war between the US and Iran, the price of global crude oil has surged, putting a huge strain on India as it imports nearly 48 to 50 per cent (2.5 million barrels per day) of its crude oil requirements from the Gulf. Tanker risks in the Strait of Hormuz have raised shipping insurance premiums by 20–25 per cent ever since the waterway was declared closed by the Iranian navy.

Meanwhile, gold imports from the international market have remained high. Both these issues posed a danger to the rupee’s stability: the currency has weakened past 95.69 per $1 that has widened the country’s trade deficit.

Economically, the war has hit almost every single Indian household. The closure of ship traffic through the Strait of Hormuz triggered a severe supply crisis of liquefied natural gas, forcing the poor to switch to firewood and those who could afford it to electric stoves for cooking. Restaurants across the country have had to increase food prices, lay off staff or permanently shut down.

The crisis is also disrupting India’s agricultural production, as roughly three-fourths of its imported urea and ammonia come from the Gulf region. These inputs are critical for producing nitrogen-based fertilisers, which in turn are essential for wheat, rice, and sugarcane.

Equally, Indian exports to Gulf countries are at an all-time low — nearly 400,000 tonnes of basmati rice are stuck at ports or in mid-transit. Total exports to the region have fallen to $2.15 billion in March, down 57.6 per cent from $5.07 billion a year ago.

“Remittances might also be affected. If Gulf countries cannot export oil and construction activity slows down, that becomes both a remittance shock and an export shock. That adds to why this is becoming such a major economic shock,” Subramanian said.

“Geopolitically, we have very few levers to change any meaningful outcomes significantly. We have no real say in the outcome. I think we just have to wait it out.” 

In this climate, Modi has reframed patriotism as economic discipline. “There was a time when, during a crisis or war, people would donate gold to the country. Today, there is no need for donations. But for the nation, we must decide that for one year, we will not buy gold jewellery at any function or event,” he said.

The irony, of course, is that India is not a party to this conflict. It is a bystander. But in a globalised economy, bystanders can bleed first. Both sides are indirectly involved in ceasefire negotiations and have agreed on a broad framework, but after the Islamabad talks failed to deliver a long-lasting solution, peace remains elusive.

The war may yet end with negotiations. As of late May, both nations are evaluating a 60-day memorandum of understanding. The US claims the deal will mandate a completely open strait with no tolls, but the shadow economy built to survive sanctions will likely remain. And far from the Gulf, countries like India will continue paying the price of conflicts they neither started nor control.

“The only certainty is that there will be another war in the future. It’s just a matter of when that is and who the key players are,” Grazier said. In this war of economic attrition, it is a game of which side blinks first.