Iran International
The Iranian year 1403 ending on March 20 marked one of the most challenging yet for the country’s ruling elite, which has been beset by economic malaise at home and historic setbacks abroad.
At the start of the year in March 2024, Iran was already grappling with a broken economy and the looming threat of political unrest. Regionally, however, it still appeared strong and could plausibly project itself as a serious challenge to US and Israeli interests.
Conflict with Israel
As the year began, Israel was deeply engaged in its war with Iran-backed Hamas in Gaza. Tehran confidently claimed that its regional adversary was stuck in an unwinnable conflict, boasting about its so-called Resistance Front and threatening to escalate against both Israel and US interests. Yemen's Houthis were already disrupting shipping in the Red Sea and launching missiles at Israel.
Houthi attacks on maritime trade which began in November 2023 following a declaration by Iran’s Supreme Leader Ali Khamenei inflicted an estimated $200 billion in losses on the global economy.
Less than a month into the Iranian year, Tehran launched a large-scale missile and drone strike on Israel In April 2024 in response to Israeli attacks on Iranian targets in Syria.
While most projectiles were intercepted with minimal damage, the Islamic Republic framed it as a significant blow against the "Zionist entity." At the time, Tehran appeared strong, seemingly capable of deterring its most determined adversary.
However, the tide began to turn in late July when Hamas leader Ismail Haniyeh was killed in an explosion while staying at a government guesthouse in Tehran.
It remains unclear whether the incident was caused by a planted explosive or an Israeli missile strike, but the ability of Tehran's arch-foe to strike seemingly anywhere was lost on no one.
The assassination would be just one of many, crescendoing with the killing of Hezbollah leaders via their bomb-laden communication devices and culminating in the assassination of its storied leader Hassan Nasrallah.
Political crisis
Before these epochal blow, Iran suffered another major shock in May when hardline President Ebrahim Raisi and his foreign minister died in a mysterious helicopter crash in northwestern Iran.
Many doubted the official explanation of bad weather, which was never conclusively proven, fueling speculation about a high-level internal plot or an Israeli operation.
Raisi had been widely regarded as ineffective, presiding over a rapidly deteriorating economy since taking office in 2021.
In June, Iran held presidential elections, with several key candidates disqualified through a vetting process controlled by Khamenei. Ultimately, Masoud Pezeshkian, a politician with no executive experience, faced hardliner Saeed Jalili in a low-turnout runoff and won.
During his campaign, Pezeshkian made it clear that he had no plans beyond executing Khamenei’s directives.
Some Iranians still hoped for limited reforms and a diplomatic breakthrough to ease US sanctions. However, when Khamenei formally banned negotiations in early February 2025, Pezeshkian pledged loyalty to his decision, disappointing even his Reformist supporters.
Economic crisis
By mid-2024, with Hezbollah and Hamas weakened and Israel growing more confident in striking Iranian military targets, Iran’s economic woes deepened. The rial, which had been around 550,000 per dollar in September, plunged to 900,000 by February and even hit one million by March 18.
The worsening economic picture underscored a government unable to halt a downward spiral. Severe energy shortages crippled both households and industries throughout fall and winter, with the government regularly announcing power shutdowns across the country due to heating and electricity failures.
Iran’s oil exports to China continued through intermediaries and at deep discounts, but the Trump administration escalated sanctions on oil tankers and trading entities following Biden’s late-term crackdown on exports.
Revenues from these limited exports fell far short of meeting the government’s foreign currency needs, especially given Tehran’s ongoing financial commitments to regional proxy groups.
Bleak outlook
Many political insiders in Tehran now say Pezeshkian’s administration may be incapable of addressing the worsening economic crisis. The only potential relief would come from easing US sanctions, but Khamenei has so far resisted Trump’s pressure to make concessions.
It remains unclear whether Washington seeks only a binding agreement to prevent Iran from enriching uranium to weapons-grade levels or whether it also aims to curb Tehran’s ballistic missile program and regional activities.
Khamenei appears to be employing delaying tactics, hoping circumstances shift in his favor or that he can stall until the next US elections. Meanwhile, Trump continues to tighten sanctions and increase military threats, either directly or through Israel.
Another critical challenge is the risk of public unrest due to soaring prices and a growing sense of political instability.
While the Islamic Republic has repeatedly demonstrated its willingness to use deadly force against protesters, its ability to quash mass uprisings is not guaranteed.
If essential goods approach hyperinflation levels, even the security forces and loyalist cadres—who rely on fixed incomes—could begin to waver.
Tensions between Iran and the United States have risen sharply since Donald Trump re-entered the Oval Office on 20 January, presenting multiple risks of escalation.
A key deadline in October 2025 looms over whether European countries will trigger the snapback mechanism to re-impose United Nations sanctions removed as part of the Iran nuclear deal in 2015.
Indications, not least by President Trump himself, that he would like to negotiate a new agreement to address Iran’s rapidly-advancing nuclear program, have been offset by his administration’s restoration of its ‘maximum pressure’ policy on Iran.
Trump’s transactional nature and unconventional style of decision-making means nothing can be ruled out in a high-stakes confrontation without a clearly-defined plan.
Caught in the middle are Iran's Arab neighbours, where large-scale projects aimed at future-proofing economic development and growing non-oil sectors would be jeopardized by any conflict involving Iran.
‘De-risking’ has become a mantra in Arab capitals and particularly in Riyadh as the landmark year of 2030 draws closer and as the ‘giga-projects’ associated with Vision 2030 move into construction and delivery phases.
Qatar this month called for a diplomatic solution to the US-Iran standoff over Tehran's nuclear program and argued against military action.
The desire to reduce exposure to regional volatility has been evident in the process of rapprochement with Iran since 2020, with Saudi Arabia, the UAE, and Kuwait restoring full diplomatic ties with Tehran in 2022 and 2023 and maintaining regular dialogue on key issues of interest.
This was evident in regional responses to the war in Gaza after 7 October 2023 as the conflict did not regionalize, in part because there was little appetite in any capital on either side of the Persian Gulf for any escalation.
Excluded once, not twice
Back in 2015, officials in some Arab capitals and also in Israel expressed frustration that they were not included in the negotiations between Iran and the P5+1 that culminated in the signing of the Joint Comprehensive Plan of Action (JCPOA), from which Trump’s first administration withdrew in 2018.
In 2020, Saudi leaders called on the incoming Biden administration to consult with them as it sought to revive the Iran deal and explore an expanded ‘follow-on’ agreement, which ultimately did not happen.
As the indirect talks between US and Iranian officials broke down in 2022, the role of Iran's neighbouring Arab countries became more central to keeping open channels of communication between the parties.
Oman and Qatar, along with Kuwait, have long played roles in diplomacy and mediation in regional affairs, as they generally maintained pragmatic working relationships with Iran which, in the Qatari case, included one of the world’s largest reservoirs of natural gas which straddled their maritime boundary.
Officials in Oman placed a premium on balancing relationships with regional partners and being able to utilize their ability to engage with adversaries to address flashpoints and minimize their threat to regional security.
Prior to their passing in 2020, both Sultan Qaboos of Oman and Emir Sabah of Kuwait had well-earned reputations as diplomatists par excellence borne out of decades of involvement in regional affairs.
An example of their efforts to reduce tensions was seen in early 2017 when Emir Sabah sent a letter to Iran’s then-president, Hasan Rouhani, to establish a basis for dialogue after tensions had soared in 2016. Rouhani responded by visiting Kuwait and Oman and Emir Sabah then traveled to Muscat to meet with Sultan Qaboos to follow up, but the subsequent rift over Qatar put paid to those efforts.
In 2025, Kuwait is focused on domestic issues and relatively absent from the regional scene, but there is space for Saudi Arabia to play more of an active role than it has in the past and to build upon the progress in the Kingdom’s relations with Iran since ties were re-established two years ago.
Since 2023, the Saudi leadership has been active in regional diplomatic initiatives concerning Syria, Gaza, and Sudan, and has burnished its credentials as an intermediary with convening power across the Arab and Islamic worlds.
In its ongoing facilitation of meetings of Ukrainian, Russian, and U.S. officials, the Kingdom has shown that it has the ability to navigate between adversaries and leverage its growing non-alignment in world affairs.
Securing a seat at the table in the Russia-U.S. talks may be a prelude to inserting Saudi Arabia into the middle of any negotiations between the U.S. and Iran, thereby minimizing the risks of exclusion from the talks, as in 2015, but Iranian officials may still view the Saudis as too close to the U.S. and not impartial.
The regional mediators of longer standing, Qatar and Oman, are likely to continue to offer their services in relaying messages between the Unites States and Iran and ensuring that opportunities for dialogue remain open, joined by the United Arab Emirates which delivered a letter from Trump to Iranian leaders on 12 March.
Trump redux
Trump’s mercurial approach to policy appears even more unpredictable second time around and has led to whipsaw decisions on tariffs that have added to market uncertainty and left analysts scrambling.
A similar pattern may well overshadow the next phase of the delicate dance between the U.S. and Iran, especially if Trump and Iranian leaders engage in verbal sparring matches of ever-increasing volume.
If this happens, officials in the Gulf States may focus on practical measures to limit the possibility of escalation, whether by accident or design, and identify the parameters of realistic dialogue going forward.
Taken together, their efforts are illustrative of the prevailing opinion in the region in favor of resolving the standoff between Tehran and Washington, and the depth of Emirati (and Saudi) political and economic relationships in DC may resonate with the Trump White House and its Congressional allies.
While tensions in other parts of the Middle East have soared in the wake of the Gaza war and the degradation of Iran’s ‘axis of resistance,’ the rulers in Riyadh, Muscat or Abu Dhabi are more closely aligned than they were in Trump’s first term, and may thus be better placed to play a proactive and productive role in de-escalatory regional dynamics.
Isa Bozorgzadeh, spokesman for Iran’s water industry, said on Tuesday that the usable capacity of Karaj Dam near Tehran has dropped to nearly half, much of it rendered useless due to sediment buildup.
“Lar Dam has practically dried up, and Latian, Taleqan, and Mamloo reservoirs are facing a 46% decrease in rainfall compared to the average and 25% compared to last year,” he told ILNA news agency.
Water shortages have triggered growing concerns in recent weeks, particularly in Tehran and Isfahan provinces, where officials have raised the possibility of rationing.
Bozorgzadeh cautioned that Tehran is consuming 50 million cubic meters of surface water each month while the combined reserves of the capital’s five main dams—including dead storage and sediment—amount to just 60 million cubic meters.
“Conditions have deteriorated to the point where even a motorcyclist could drive through the reservoirs,” he said.
Eastern Tehran’s water and wastewater company reported that Latian and Mamloo dams are each only 12% full, while Lar is down to just 1%. Karaj, a historically stable reservoir, has shrunk to 7% capacity.
Iran’s water supply depends largely on rainfall, snowmelt, and underground aquifers, but decades of over-extraction have left groundwater tables severely depleted. The sharp decline in precipitation—down more than 40% in Tehran province relative to long-term averages—has compounded the problem.
Beyond Tehran, Bozorgzadeh identified Hormozgan, Sistan and Baluchestan, Khuzestan, Kohgiluyeh and Boyer-Ahmad, and Bushehr as regions struggling with a 50% drop in rainfall.
Government spokeswoman Fatemeh Mohajerani acknowledged the severity of the situation, saying, “A nationwide decrease in average rainfall this year has led to shortfalls as high as 75% in some provinces.”
Iran’s energy ministry reports show that despite lower rainfall, hydropower generation increased by 24% in the fiscal year beginning March 2023, amid the country's energy crisis, reaching 17 terawatt-hours and maintaining that level into the current year.
Dalga Khatinoglu, an oil and gas analyst, suggested the government’s decision to sustain hydroelectric output was a factor in the current crisis.
“Iran failed to achieve its planned growth in thermal and renewable energy, leaving it dependent on hydropower,” he told Iran International. “Over the past two years, the country commissioned just 4 gigawatts of new plants—about 30% of its target—with 90% being gas-fired. The rest came from renewables.”
Hydropower reliance, combined with a persistent drought, has accelerated reservoir depletion, leaving little room for recovery even if precipitation levels were to improve.
Meanwhile, Iranian media has begun to raise alarms about broader implications. Etemad newspaper warned that 2025 could mark a turning point in the country’s water and energy crisis, predicting that shortages could become more severe than any previously experienced. Some hydrologists have cautioned that Iran has used up nearly 1,000 years' worth of groundwater reserves in just three decades.