Iran's Proxy Network Fractures as Funds Dry Up and Commanders Vanish

Iran's network of allied militias across the Middle East—the backbone of Tehran's regional influence for four decades—is showing cracks that intelligence agencies and conflict researchers say could fundamentally alter the region's strategic landscape. Hezbollah's budget from Iran has been cut by approximately 40 percent since late 2023, according to three Lebanese sources with direct knowledge of the organization's finances. Houthi operations in the Red Sea have slowed to sporadic attacks after peaking at 89 incidents in January 2024. And the Islamic Revolutionary Guard Corps' Quds Force, which coordinates all proxy operations, has struggled to replace its command structure after the death of Qassem Soleimani in January 2020 left his successor, Esmail Qaani, isolated and ineffective.

For Hassan Fadlallah, a 52-year-old shopkeeper in Beirut's southern Dahieh suburb—Hezbollah's stronghold—the change arrived in monthly installments. His son, a fighter wounded in Syria in 2018, received $450 per month in compensation until November 2023. The payment dropped to $320 in December, then to $270 in March 2024. "They told him the organization is under pressure," Fadlallah said in an interview last month. "Everyone knows what that means. Tehran doesn't have the money anymore."

The Architecture of Influence

Iran's proxy network took shape after the 1979 Islamic Revolution, when Ayatollah Ruhollah Khomeini embraced "exporting the revolution" as state doctrine. Hezbollah, established in Lebanon in 1985 with IRGC training and funding, became the prototype. The model was replicated across the region: finance local militias, provide weapons and training through the Quds Force, and maintain operational coordination while allowing tactical autonomy.

By 2023, Tehran was funding Hezbollah at approximately $700 million annually, according to the U.S. Treasury Department's Office of Foreign Assets Control. The Houthis received an estimated $200 million per year, largely in weapons and fuel shipments intercepted by U.S. and coalition naval forces 37 times between January 2021 and October 2023, according to U.S. Central Command data. Iraqi Popular Mobilization Forces (PMF), an umbrella of Shiite militias formalized after the 2014 ISIS surge, received direct IRGC training and equipment, though most funding flows through Iraq's own defense budget—a legacy of Iran's deep penetration of Baghdad's institutions.

Hamas, though ideologically distinct as a Sunni Islamist movement, received an estimated $100 million annually from Iran before October 7, 2023, according to the International Institute for Strategic Studies. That relationship has effectively ended. Tehran has provided no significant resupply to Hamas since the war in Gaza began, according to four Western intelligence officials who spoke on condition of anonymity. The silence reflects both logistical impossibility—Gaza is blockaded—and strategic recalculation in Tehran, where some factions view Hamas's October attack as reckless and its aftermath as a drain on Iran's broader objectives.

The Command Void

The structural crisis at the top of Iran's proxy apparatus is less visible but arguably more consequential. Qassem Soleimani, who commanded the Quds Force from 1998 until his death in a U.S. drone strike in Baghdad on January 3, 2020, was the network's architect and coordinator. His successor, Esmail Qaani, a career IRGC officer who previously oversaw operations in Afghanistan and Pakistan, has struggled to replicate Soleimani's authority.

"Qaani inherited the structure but not the relationships," said Phillip Smyth, a researcher at the Washington Institute for Near East Policy who has tracked Iranian-backed militias for over a decade. "Soleimani spent 20 years building personal ties with Nasrallah, with Houthi commanders, with PMF leaders. Qaani is managing a portfolio he didn't create, and the proxies know it."

The leadership vacuum is compounded by targeted killings. Israel has struck senior IRGC officers in Syria at least 14 times since Soleimani's death, according to data compiled by the Armed Conflict Location & Event Data Project (ACLED). Hezbollah has lost three senior military commanders since 2020, including Mustafa Badreddine's successors. The Houthis' top military coordinator with Iran, Hassan Irloo, died in Tehran in December 2021, officially of COVID-19, though U.S. intelligence assessed he was recalled and detained for operational failures.

Red Sea Slowdown

The Houthis' campaign against commercial shipping in the Red Sea and Gulf of Aden, launched in October 2023 in solidarity with Gaza, initially demonstrated Iran's ability to project power through proxies at global chokepoints. Between October 19, 2023, and February 28, 2024, the Houthis launched 96 attacks on vessels, according to the International Maritime Organization, forcing shipping companies to reroute around the Cape of Good Hope and adding an estimated $2.4 billion in annual costs to global trade.

But the campaign has declined sharply. U.S. and allied airstrikes degraded Houthi radar and missile storage sites, while interdictions at sea choked the supply of Iranian components. By March 2024, attacks dropped to fewer than six per month, according to the Combined Maritime Forces coordination center in Bahrain. The Houthis still fire missiles sporadically, but their ability to sustain a coordinated campaign has evaporated.

"We're seeing the limits of what a proxy can accomplish without continuous resupply," said a senior European naval officer involved in Red Sea patrols, speaking on condition of anonymity. "The Houthis fired off their best missiles in the first 90 days. What they have left is less accurate, older, and we've learned how to intercept it."

The Iraqi Variable

Iran's network in Iraq operates differently. The PMF, formalized by Prime Minister Haider al-Abadi in 2014 and integrated into Iraq's security apparatus in 2016, comprises roughly 122,000 fighters across more than 40 factions, according to a 2023 report by the International Crisis Group. The most powerful factions—Kata'ib Hezbollah, Asa'ib Ahl al-Haq, and Harakat Hezbollah al-Nujaba—are directly aligned with Tehran and have conducted at least 83 attacks on U.S. forces in Iraq and Syria since October 2023, according to the Pentagon.

But the PMF faces internal fractures. Iraqi Prime Minister Mohammed Shia al-Sudani, who took office in October 2022, has sought to bring the militias under state control and limit their autonomy. Several PMF commanders have been quietly sidelined or reassigned. The January 28, 2024, drone attack on Tower 22 in Jordan, which killed three U.S. soldiers and prompted massive American retaliation, embarrassed Baghdad and deepened rifts between pro-Iran hardliners and factions seeking accommodation with the state.

"The PMF is not monolithic," said Renad Mansour, senior research fellow at Chatham House and author of multiple studies on Iraqi militias. "There are factions that want to be part of the Iraqi state and factions that see themselves as servants of Tehran. Al-Sudani is trying to peel the former away from the latter, and Iran is losing that fight in places."

The Sanctions Squeeze

Underlying all of these trends is Iran's deteriorating fiscal position. U.S. sanctions, reimposed in 2018 after President Donald Trump withdrew from the Joint Comprehensive Plan of Action, have cut Iranian oil exports from 2.5 million barrels per day in 2017 to approximately 1.3 million barrels per day in 2023, according to energy consultancy FGE. Sanctions enforcement intensified in late 2023, targeting Chinese buyers and ship-to-ship transfer networks that had allowed Iran to evade restrictions.

Iran's currency, the rial, traded at 42,000 to the dollar in 2018. By April 2024, it had collapsed to 620,000 to the dollar on the open market. Inflation reached 47 percent in 2023, according to the IMF. The government's budget, presented in March 2024, projected a 23 percent real-terms cut in discretionary spending. Foreign policy expenditures—largely the Quds Force budget—are not publicly itemized, but regional analysts estimate the cuts are proportional or steeper.

"Iran can't afford the axis of resistance at 2015 levels anymore," said Esfandyar Batmanghelidj, founder of the Bourse & Bazaar economic policy think tank in London. "The question is whether the proxies can survive on less money, or whether the whole model starts to collapse."

A Shifting Balance

The fracturing of Iran's proxy network does not mean its disappearance. Hezbollah remains the most capable non-state military force in the region, with an estimated 130,000 rockets and missiles—albeit of declining quality. The Houthis still control northern Yemen and pose a latent threat to shipping. Iraqi militias retain political influence in Baghdad. But the trend lines all point in the same direction: contraction, not expansion.

For Israel, the United States, and Gulf states that have long viewed the network as an existential threat, the moment presents both opportunity and risk. Opportunity to degrade a strategic adversary. Risk that a weakened Iran will lash out unpredictably, or that its proxies—cut loose from Tehran's restraining hand—will become more volatile, not less.

"The worst scenario is not that the proxies get stronger," said Karim Sadjadpour, senior fellow at the Carnegie Endowment for International Peace. "It's that they fracture into dozens of smaller groups with no central command, no restraint, and no one in Tehran or anywhere else who can turn them off."

What Comes Next

Western intelligence agencies are watching three indicators. First, whether Hezbollah begins selling assets—real estate, businesses, investment holdings—to cover operational shortfalls, a sign of deep distress. Second, whether Iraq's PMF factions begin fighting each other over budget allocations, fragmenting the coalition. Third, whether Iran attempts a dramatic escalation—a direct strike on Israel, a push to close the Strait of Hormuz—to reassert deterrence on the cheap.

None of these outcomes is certain. Iran has survived sanctions before. Its proxies have proven resilient. But the combination of financial pressure, leadership voids, and battlefield attrition is testing the network in ways it has not been tested since the 1980s. For the first time in decades, the structure that has shaped the Middle East's conflicts is visibly weakening.

Back in Dahieh, Hassan Fadlallah has stopped asking when his son's payments will return to their previous level. "Everyone is tightening their belts," he said. "We've been through worse. But people are starting to ask questions they didn't ask before."