Three layers of mistrust behind US-Iran deadlock

Figures from Iran’s customs administration show non-oil trade collapsed in the final month of the previous Iranian fiscal year (February 21–March 22), falling to just $6.4 billion—down 30% from the previous month and 50% from a year earlier.

The plunge coincided with military escalation that began on February 28, when US and Israel attacked Iran and Iran retaliated with strikes against Arab neighbours across the Persian Gulf.

The conflict disrupted shipping routes and strained regional trade links.

The fallout has been especially visible in trade with Iran’s main commercial partners. The United Arab Emirates, Iran’s second-largest trading partner, reportedly suspended trade with Tehran in early March.

Chinese customs data also point to a steep decline in bilateral trade. China’s non-oil trade with Iran fell to just $184 million in March, compared with more than $907 million in the same month last year—roughly one-fifth of its level a year earlier.

While Iranian customs data exclude crude oil exports, tanker-tracking data from Kpler indicate Iranian crude deliveries to Chinese ports averaged around 1.53 million barrels per day in March, about 15% lower than in March 2025, suggesting energy exports are also under pressure.

In total, Iran’s non-oil foreign trade during the last fiscal year stood at $109 billion, down 16% from the previous year. Imports accounted for 53% of the total, underscoring the economy’s reliance on foreign supplies at a time of escalating geopolitical disruption.

The outlook may worsen in the months ahead.

Following Israeli strikes on petrochemical facilities, Iran has banned petrochemical exports. On Monday, the Iran Trade Promotion Organization ordered a halt to exports of steel slabs and sheets until May 30 as the country’s steel industry came under pressure following US-Israeli strikes.

The secretary of Iran’s steel producers’ association said work was underway on an urgent plan to import steel slabs and hot-rolled sheets, underscoring the scale of the disruption.

At the same time, steel production facilities in Isfahan and Khuzestan—which account for roughly 70% of Iran’s steel output—have reportedly suffered major damage.

Together, petrochemicals and steel generate an estimated $18 billion to $20 billion in annual exports, accounting for more than one-third of Iran’s non-oil export revenues. Prolonged disruption in those sectors would hit government revenues, industrial output and access to foreign currency.

Additional pressure is also emerging at sea. In response to Iran’s move to block the Strait of Hormuz, the United States has begun enforcing a naval blockade on Iran, a development likely to further restrict both oil and non-oil trade.

With US-Iran diplomacy still deadlocked and sanctions relief appearing distant, the outlook could worsen further in the absence of a deal to ease pressure on trade and energy exports.

Taken together, the data suggest Iran may be facing not a temporary slowdown but the early stages of a historic external shock.

Amid Iran’s closure of the Strait of Hormuz and the ensuing US blockade, an old energy fantasy has resurfaced that cutting off a country’s oil exports works like flipping a switch. But reality is less cinematic and far more uncomfortable.

If Iran faced a serious maritime blockade, its oil system would not collapse overnight. It would absorb the shock, adapt, and only gradually tighten under pressure.

That distinction between sudden failure and slow strain is not just technical. It is the difference between a crisis markets can price instantly and one that unfolds in uneasy stages.

As Washington says its blockade is tightening around Tehran, understanding that distinction matters.

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But behind the official narrative, even Iranian media and senior officials are beginning to acknowledge a harsher reality: talks with Washington are stalled, allies are limited and the country’s room to maneuver is narrowing.

The reformist daily Shargh wrote on Monday that the visits revealed “clear signs of a deadlock in negotiations with Washington.”

In an interview with ISNA, Araghchi himself acknowledged that “the first round of talks in Islamabad failed to reach its objectives,” blaming what he described as “the United States’ excessive demands.”

Media in Tehran have portrayed Araghchi’s visits to Pakistan, Oman and Russia as part of an effort to break the impasse with Washington through regional diplomacy.

But leaks in US media suggest Tehran’s message remains uncompromising: end the US blockade of the Strait of Hormuz as a precondition for immediate talks on Iran’s nuclear program.

That demand underscores the gap between Tehran’s public message of diplomacy and the harder line it may still be taking behind closed doors.

The idea that Tehran can quickly repair relations with neighboring states also appears optimistic. Regional capitals still vividly remember Iran’s recent strikes on the United Arab Emirates, Qatar, Kuwait, Bahrain and Saudi Arabia.

While Tehran insists diplomatic channels remain open, only a handful of neighbors appear willing—or able—to engage.

Oman, traditionally a trusted mediator, may have less incentive to play that role after Tehran’s recent actions and amid Washington’s hesitation. Russia, meanwhile, is increasingly viewed with suspicion inside Iran, where critics accuse Moscow of exploiting Tehran’s isolation without offering meaningful support.

Yet despite the impasse, signs of a possible diplomatic opening remain.

Pakistan’s active mediation has positioned Islamabad as an important hub for indirect US-Iran communication, suggesting both sides still see value in keeping channels open.

In Washington, President Donald Trump’s recent references to an “agreement in principle,” including possible limits on uranium enrichment in exchange for sanctions relief, suggest discussions may have moved from whether to talk toward what terms might be acceptable.

Economic pressure is also pushing both sides toward pragmatism.

In Iran, the economy is buckling under war, inflation and disruption to oil exports. In the United States, rising gasoline prices are creating domestic political pressure.

The so-called pragmatists in Tehran appear increasingly willing to pursue compromise to preserve stability. Hardliners, especially among a younger generation of officials, increasingly frame the conflict as existential and may see concessions as surrender.

If they conclude Washington’s ultimate goal is regime change rather than policy change, pressure could grow for nuclear escalation rather than restraint.

Washington’s insistence that Iran halt all uranium enrichment and remove previously enriched material remains a central sticking point. The Strait of Hormuz is another.

The United States has reportedly conditioned any pause in military action on the complete and safe reopening of the waterway. Any renewed Iranian interference with shipping could trigger immediate retaliation and collapse diplomacy.

Israeli strikes on Iranian nuclear or leadership targets—or retaliatory actions by Hezbollah or the Houthis—could drag both Tehran and Washington into a cycle neither fully controls.

For now, the immediate question is no longer whether Washington and Tehran are talking. It is whether either side is prepared to soften their demands before events overtake diplomacy.

And in Tehran, where the costs of war are rising by the day, that question is becoming harder to ignore.

If Iran faced a serious maritime blockade, its oil system would not collapse overnight. It would absorb the shock, adapt, and only gradually tighten under pressure.

That distinction between sudden failure and slow strain is not just technical. It is the difference between a crisis markets can price instantly and one that unfolds in uneasy stages.

As Washington says its blockade is tightening around Tehran, understanding that distinction matters.

Kharg Island: The pressure point

Nearly all of Iran’s crude exports flow through Kharg Island, which handles about 90 percent of outbound shipments. On a typical day, that means roughly 1.5 to 2 million barrels moving through its loading facilities.

Kharg is more than a transit point. It is also a buffer. With storage capacity estimated at between 20 and 30 million barrels, the island allows Iran to keep producing even when export schedules fluctuate.

Under blockade conditions, that flexibility becomes a liability. If tankers cannot load or leave reliably, crude begins accumulating in storage. At current export levels, even the upper bound of capacity could be filled in a matter of weeks.

The island would not fail immediately. But it would begin operating under a visible constraint: every additional barrel has fewer places to go.

When storage becomes a bottleneck

Oil systems are built with redundancy. Storage tanks, pipelines and floating storage options all provide breathing room. That is why disruption rarely produces instant collapse.

In a blockade scenario, Iran would likely continue exporting in reduced and irregular ways at first. Some cargoes might slip through via evasive shipping practices. Others could be rerouted or delayed. Meanwhile, crude that cannot be exported would accumulate in storage tanks on Kharg and elsewhere.

But storage is finite. As tanks fill, flexibility narrows. The system shifts from optimizing flows to managing congestion.

Operators are no longer asking how to move oil efficiently, but how to avoid hitting physical limits. This is the quiet phase of disruption: no dramatic cutoff, just a steady tightening that forces increasingly constrained choices.

Adaptation under pressure

Iran’s oil sector is no stranger to operating under constraint. Years of sanctions have trained it to improvise.

Cargoes could still move through ship-to-ship transfers and opaque shipping routes designed to obscure origin and destination. Parts of the tanker fleet could be repurposed as floating storage to buy time offshore as onshore tanks fill.

Production would not stop overnight but would likely be trimmed gradually, with operators calibrating output to avoid overwhelming storage while trying to preserve reservoir integrity.

Domestic refiners could absorb some additional crude, and inland storage might be stretched, though both options are limited and cannot fully offset lost export capacity.

These responses would not neutralize the impact of a blockade. But they would slow its effects, allowing the system to continue functioning in a constrained and increasingly inefficient state.

The result is not resilience so much as endurance: the ability to delay more severe disruptions.

The limits beneath the surface

What happens underground imposes its own discipline.

Oil reservoirs are not infinitely flexible. Shutting in production, especially in mature fields, can damage reservoir pressure and reduce long-term recovery.

That means Iran cannot simply halt output the moment storage fills. Production cuts must be sequenced carefully, prioritizing fields that can be shut in safely while protecting long-term capacity.

The system slows, recalibrates and absorbs damage where it must, all while trying to avoid irreversible losses.

Pressure builds, markets adjust

For global markets and policymakers, the difference between a sudden cutoff and a gradual squeeze is critical.

A sharp disruption would trigger immediate price spikes and emergency responses. A slower, adaptive contraction produces a different dynamic. Prices may rise in stages. Other producers have time to respond.

Strategic reserves can be deployed more deliberately. Trade flows can be rerouted.

Yet this slower progression carries its own risks. It creates uncertainty rather than clarity and tempts decision-makers to underestimate the severity of the situation, even as constraints tighten.

No switch, just strain

A blockade of Iran’s oil exports would not look like a sudden shutdown. It would resemble a system under mounting pressure, adapting in real time while steadily losing room to maneuver.

For Iran, the effect is less a collapse than a managed deterioration. Revenues would erode, costs would rise, and each workaround would become harder to sustain.

For global markets, the danger lies in misreading that slow burn as stability.

By the time constraints converge into something more acute, the system may already be far closer to its limits than it appears.

At a Security Council debate on maritime security, the U.S. envoy accused Tehran of holding the global economy “hostage,” while Iran’s envoy denounced Washington as “pirates and terrorists” for targeting commercial vessels.

“The world’s critical waterways are not bargaining chips that belong to any one country,” U.S. envoy Dorothy Shea told the council.

She said Iran was using the strait “like its own moat and drawbridge” and accused Tehran of laying sea mines, firing on civilian ships and threatening to charge tolls to allow vessels through.

Iran’s ambassador to the UN, Amir Saeid Iravani, rejected the accusations and said the United States was “acting like pirates and terrorists” by targeting commercial vessels through “coercion and intimidation,” terrorizing crews, seizing ships and “taking crew members hostage.”

He said countries condemning Iran over the strait “do not dare” criticize Washington’s actions and insisted Tehran’s measures were “grounded in its rights and obligations under the law of the sea and its national laws.”

The Strait of Hormuz, which links the Persian Gulf to the Gulf of Oman and the Arabian Sea, typically handles around 20% of the world’s daily oil and liquefied natural gas supplies.

Before the U.S.-Israeli war on Iran began on February 28, between 125 and 140 ships passed through the strait each day. In the past 24 hours, only seven vessels have done so, according to ship-tracking data.

Iran closed the strait after the start of U.S. and Israeli military operations against the Islamic Republic and launched attacks on Arab Gulf states, prompting Washington to begin enforcing a naval blockade on Iran-related shipping.

Hundreds of ships and an estimated 20,000 seafarers remain stranded inside the Gulf, according to maritime analysts.

UN Secretary-General António Guterres appealed directly to the parties to restore maritime traffic.

“Open the strait,” he said, “let ships pass, no tolls, no discrimination, let trade resume, let the global economy breathe.”

Arsenio Dominguez, secretary-general of the International Maritime Organization, also weighed in, saying Iran could neither legally close the strait nor impose fees on vessels using it.

“There is no legal basis for any country to introduce payments, tolls, fees or discriminatory conditions on international straits,” he told the council.

Dominguez warned that crews were under “significant risks and considerable psychological strain” and said the longer the crisis continues, “the greater the risk of serious accidents, including environmental accidents.”