Iranian oil will make up for China's loss of Venezuelan supply - Reuters

For more than a decade, these ventures—framed as anti-imperialist cooperation between two heavily sanctioned states—served political purposes rather than a commercial ones.

They were designed to circumvent US sanctions, monetize Venezuela’s vast but increasingly stranded crude reserves and provide mutual economic lifelines. Their durability depended on the survival of aligned governments in Tehran and Caracas.

With the interim government in Caracas signaling openness to cooperation with the United States, Iran’s refinery projects risk shifting from sheltered geopolitical instruments into exposed financial and legal liabilities.

The fallout threatens not only Tehran’s assets in Venezuela but also the broader sanctions-evasion model it has refined across multiple theaters.

A partnership shaped by sanctions

Iran’s partnership with Venezuela dates back to the early 2000s, when Presidents Hugo Chavez and Mahmoud Ahmadinejad forged a relationship rooted in shared defiance of Washington.

Cooperation deepened after 2019, as US sanctions tightened around both Iran’s oil exports and Venezuela’s state oil company, PDVSA.

Iran supplied refinery repairs, gasoline and blending components; Venezuela provided heavy crude, gold, and other commodities. Both sides relied on barter, opaque contracts and shadow shipping networks to bypass sanctions.

The model kept fuel flowing during acute shortages and helped stabilize the Maduro government—but it never made commercial sense. Venezuela’s refineries never recovered, while Iran absorbed mounting costs in exchange for political influence.

A refinery bet that never paid

Iran’s most visible engagement centered on El Palito, a 140,000-barrel-per-day refinery in Carabobo state.

In May 2022, Tehran signed a $117 million contract with PDVSA to repair and expand the facility. By mid-2024, Iranian officials said they had managed to restore operations to about 20 percent of capacity amid chronic power outages and feedstock shortages.

Iran’s oil minister hailed El Palito as the country’s first overseas-built refinery—a symbolic milestone with limited operational impact.

Tehran’s ambitions extended to the much larger Paraguana Refining Center, Venezuela’s flagship complex with a nominal capacity of nearly one million barrels per day.

Leaked documents from late 2025 suggest Iran-linked projects in Venezuela totaled roughly $4.7 billion, underscoring the scale of exposure and the opacity surrounding the relationship.

These refinery projects formed part of a broader sanctions-evasion ecosystem.

In 2020 alone, Iran shipped more than 1.5 million barrels of gasoline and blending components to Venezuela. In return, Venezuelan oil revenues were routed through informal channels that helped sustain Tehran’s finances.

Beyond oil

The relationship also spilled into security and finance.

Iran supplied drones and military equipment, while Washington accused Hezbollah-linked networks operating in Venezuela of laundering money tied to senior Maduro-era officials.

Maduro’s removal marks a structural break: Iran’s Venezuelan strategy relied on political shielding rather than enforceable contracts.

President Trump has framed the transition as a US-led stabilization effort, with American energy companies positioning themselves to reenter Venezuela’s oil sector.

Interim authorities face pressure to attract foreign investment, secure sanctions relief, and manage the potential return of millions of displaced Venezuelans—priorities that favor transparency and compliance over legacy deals with sanctioned partners.

A sudden exposure

A US-aligned Venezuelan government is likely to reopen PDVSA contracts signed under Maduro, subjecting them to audits and potential legal challenges.

Iranian-linked assets could face expropriation or forced divestment, while Tehran’s unpaid claims for refinery work—estimated in the hundreds of millions of dollars—remain unsecured.

Operational displacement is likely to follow.

Western firms operating under renewed licensing frameworks are expected to take priority in refinery rehabilitation, sidelining Iranian equipment that engineers have often criticized as less reliable.

Tehran has pursued similar arrangements in Syria and elsewhere, using infrastructure repairs and energy swaps to monetize sanctioned oil and project influence.

A Venezuelan unraveling could embolden US enforcement against these networks, disrupting a system that has sustained an estimated 1.5 to 2 million barrels per day of Iranian oil exports despite sanctions.

Oil markets add another layer of consequence.

Venezuela holds the world’s largest proven reserves but produces less than one million barrels per day. A successful rehabilitation could lift output substantially over the coming years, increasing global supply and weakening Iran’s leverage within OPEC+.

Iran’s refinery investments in Venezuela were ultimately a wager on political alignment over economic fundamentals. With that alignment now broken, assets once protected by geopolitics are newly exposed to scrutiny, displacement, and loss.

For Venezuela, disentangling from Iran offers a path toward recovery under external oversight.

For Iran, it offers a harsher lesson: sanctions-evasion strategies endure only as long as political shields hold. When they collapse, the workaround becomes the liability.

The euro was trading around 1.72 million rials and the pound at about 19.94 million rials, traders said.

The latest slide follows sharp swings since late December, when the currency’s plunge helped trigger protests in Tehran and other cities that have increasingly taken on a broader political edge.

The government has floated new relief measures after moving to curb access to subsidized foreign exchange used for importing basic goods, a system critics say has fueled distortions and rent-seeking while failing to contain inflation.

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  Iran says food prices to jump as currency subsidies end

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  Can Iran's plan for a $7 monthly cash handout calm the streets?

President Masoud Pezeshkian’s administration has signaled it will shift support toward households, including a proposed monthly electronic credit or coupon scheme aimed at cushioning low-income families from price rises as the subsidy regime is rolled back.

Iran’s economy has been hit by years of sanctions and chronic inflation, and many Iranians turn to hard currency and gold as stores of value during bouts of political and economic uncertainty.

Public frustration over rising living costs has once again spilled into protests across the country, shining a harsh light on how state resources are allocated and managed.

As demonstrations continue, economic indicators are emerging as a central measure of both state capacity and public confidence.

That tension is visible in Iran’s draft budget for the next fiscal year, beginning on March 22. The document offers a snapshot of priorities at a moment marked by military confrontation, diplomatic strain and widening economic pressure.

A budget shaped by security concerns

According to the draft, the government has projected just 1,850 trillion rials in oil export revenues for itself—equivalent, at the official exchange rate, to roughly $2 billion.

By contrast, allocations tied to military and security institutions account for at least 16 percent of total budgetary resources, while the share of oil export revenues linked to the Islamic Revolutionary Guard Corps is estimated to be several times larger than that of the civilian government.

Funding for religious institutions is projected at close to half of the government’s oil income.

At the same time, projected tax revenues have risen by 63 percent, signaling a heavier burden on households and businesses amid high inflation and weak purchasing power.

Taken together, the figures raise questions about how effectively state revenues are being translated into economic stability or improved living standards. They also complicate expectations that external relief alone—such as sanctions easing—would be sufficient to reverse economic decline.

An economy with untapped potential

Official data underscore the scale of resources involved.

Even under extensive sanctions, Iran’s crude oil export revenues over the past five years have totaled approximately $193.5 billion.

Yet over roughly the same period, Iran’s gross domestic product has contracted sharply, falling from around $600 billion in 2010 to an estimated $356 billion in 2025. The divergence between export earnings and overall economic output has become a central puzzle for analysts.

According to Iran’s Central Bank (CBI), the country earned $65.8 billion from exports of oil, petroleum products and gas in the last fiscal year, while total general government revenues projected in the new budget amount to about $45 billion.

Growth, allocation and the missing link

In purely arithmetic terms, current energy exports alone exceed projected state revenues, even before accounting for taxation, domestic fuel sales or other income sources.

The structure of Iran’s economy further complicates comparisons with other sanction-hit or conflict-affected states. Services account for more than half of GDP, and non-oil exports remain substantial, according to the CBI—a markedly different profile from countries such as Iraq, where non-oil exports account for less than 10 percent.

These figures suggest that Iran’s economic capacity, diversification potential and revenue base remain significant, even under constraint.

The unresolved question is not one of resources alone, but of how those resources are absorbed, allocated and converted into sustainable growth.

As protests continue and political outcomes remain uncertain, the condition of the economy—more than any single diplomatic or security development—is likely to shape Iran’s trajectory in the years ahead.

Officials say the payments are meant to offset the elimination of a subsidized exchange rate previously used to import essential goods, a policy shift that has already pushed prices higher.

Under the plan, the government would issue monthly coupons worth one million tomans—about $7 at the open-market rate—to every Iranian.

Some economists have questioned whether the measure can achieve its stated aim.

In an editorial published on January 5, the daily Setareh Sobh described the policy as an “economic gamble,” warning that similar efforts in the past had failed to stabilize prices or restore public confidence.

The paper noted that Iran’s currency has lost roughly 20,000 percent of its value since the 1979 revolution, when the dollar traded at seven tomans.

“This devaluation,” the daily wrote, “is the result of policies such as hostage-taking, hostility toward the West and Israel, mismanagement and the exclusion of experts from parliament and government.”

Questions of feasibility

Mahmoud Jamsaz, a leading Iranian economist, went further, arguing that the handouts risk aggravating the very pressures they are meant to relieve.

“Under current conditions,” he wrote, “the president knows very well he lacks the executive power even to pay government employees’ salaries.”

The government has acknowledged inflationary risks. Fatemeh Mohajerani, a government spokeswoman, told reporters on Sunday that the policy could raise prices of some essential goods by 20 to 30 percent.

Labor Minister Ahmad Maydari said the payments would be issued as coupons redeemable for basic commodities, rather than cash transfers, in an effort to limit price pressures.

Still, critics question whether the state has the fiscal capacity to sustain such a program, particularly as tax revenues are already under strain.

A broader breaking point

Public reaction has been largely dismissive.

On social media, many pointed to continued protests despite the announcement, stressing that rising prices were only one factor behind demonstrations that have spread across more than 200 cities and towns.

Sociologist Taghi Azad Armaki told the Shargh newspaper that the unrest reflected “accumulated, unresolved social and political challenges,” adding that economic hardship had exposed deep divides within Iranian society.

“These gaps,” he said, “have eroded the government’s social capital and heightened concerns about the country’s future.”

Reformist commentator Abbas Abdi echoed that concern in Etemad, warning that Iranian society had reached a critical threshold. “Society has a breaking point,” he said, “and Iran is rapidly approaching it.”

Even Iran’s tightly controlled press has increasingly described the demonstrations as political in character, reflecting broader dissatisfaction with governance rather than price levels alone.

For now, the government appears to be betting that targeted relief can buy time. Whether it can ease public anger—or instead accelerate inflation while leaving deeper grievances unresolved—remains uncertain.

Following a US attack on Venezuela on January 3 and the arrest of Maduro, its economic muddle is unchanged. Unpaid debts, legal claims and arbitration rulings total between $150 billion and $170 billion.

The scale of liabilities far exceeds the capacity of Venezuela’s collapsed economy, casting doubt on whether creditors will recover their losses.

Iran is among the countries exposed to the fallout. Analysts say the Islamic Republic is not just a conventional creditor but potentially one of the main financial losers of any transformational change in Caracas, especially as it is sanctioned by the United States.

Over nearly two decades, Tehran spent around 2 billion of dollars in Venezuela according to Iranian media.

The economic projects ranged from joint automobile production projects launched in 2007, housing schemes estimated at about 23,000 units, banking cooperation and oil and logistical exchanges carried out under sanctions.

Iran also used Venezuela as a political and logistical base to bypass international sanctions and advance regional objectives.

According to Heshmatollah Falahatpisheh, a former head of Iran’s parliamentary national security commission, Venezuela's debts to Iran reflect only officially recorded investments and assistance.

No estimates exist for the value of undeclared financial flows linked to what the US calls smuggling networks or military and security cooperation between the two allies, due to their classified nature.

Venezuela’s debt crisis dates back to large-scale nationalizations carried out between 2007 and 2012 under Hugo Chávez and the early years of Maduro’s rule, when foreign oil, mining and industrial assets were seized. Western companies later secured arbitration rulings, which Venezuela failed to pay.

From 2018 onward, US courts recognized those rulings as enforceable debt, allowing creditors to pursue Venezuelan assets abroad. Venezuela’s first bond default in 2017 accelerated the crisis, with unpaid principal and interest accumulating into tens of billions of dollars.

The International Monetary Fund estimated Venezuela’s nominal GDP at about $82.8 billion in 2025, far below its total external debt. Creditors have since focused on foreign assets, particularly Citgo Petroleum in the United States, whose ownership has been contested in US courts since 2019.

With Maduro removed from power, Venezuela’s debt case has moved out of political limbo. However, it is unlikely that losses tied to Iran’s investments in Venezuela will be recovered through US courts, given Iran’s own sanctioned status and the scale of competing claims.