Iran's Proxy Network Loses $2 Billion Annually. Tehran Blames Sanctions.

Iran has reduced funding to its network of regional proxy forces by an estimated $2 billion annually since 2023, according to internal documents reviewed by Israeli intelligence and shared with Western governments, forcing Hezbollah, the Houthis, and Iraqi militias to seek alternative revenue sources and scale back operations.

For Abbas al-Khazali, a commander in Iraq's Kata'ib Hezbollah militia, the cuts have meant difficult choices. His unit in Diyala province, which once received $180,000 monthly from the Islamic Revolutionary Guard Corps' Quds Force, now gets $90,000. Salaries for fighters have been delayed twice since January. Training exercises have been postponed indefinitely. "We are told to be patient, that Iran is under pressure," al-Khazali told an associate in a conversation intercepted by Iraqi intelligence in March. "But patience does not feed families."

The funding crisis marks the most significant disruption to Iran's regional strategy since the assassination of Quds Force commander Qasem Soleimani in January 2020. Tehran has maintained proxy relationships with groups across the Middle East for decades, providing cash, weapons, and training in exchange for strategic leverage against Israel, the United States, and regional rivals. That model is now under severe strain.

The Numbers Behind the Cuts

Hezbollah, Iran's flagship proxy in Lebanon, has historically received between $700 million and $1 billion annually, according to U.S. Treasury Department assessments. That figure has dropped to an estimated $500 million in 2025 and early 2026, according to analysts at the International Crisis Group. The Houthis in Yemen, who have launched attacks on more than 2,000 commercial vessels in the Red Sea and Gulf of Aden since October 2023, received an estimated $200 million annually before the current cuts, according to a February 2026 report by the Center for Strategic and International Studies.

Iraqi militias within the Popular Mobilization Forces (PMF), a loose coalition of Shi'a armed groups, received between $400 million and $600 million combined, according to estimates by the Washington Institute for Near East Policy. Hamas, weakened significantly after the October 7, 2023 attacks on Israel and the subsequent Israeli military campaign in Gaza, had already seen Iranian support shift away before the current crisis, with Tehran prioritising groups that could strike Israel indirectly.

Iran's economic crisis has deepened sharply since late 2024. The country's currency, the rial, has lost 40 per cent of its value against the dollar since January 2025. Inflation reached 52 per cent in February 2026, according to the Central Bank of Iran. Oil revenues, which fund the majority of Iran's regional activities, have been hit particularly hard by enforcement of U.S. sanctions and reduced Chinese purchases.

Hezbollah Turns to Smuggling and Fundraising

Hezbollah has responded to the funding cuts by expanding its involvement in Lebanon's illicit economy. The organisation has increased control over smuggling routes through the Syrian border, trafficking in subsidised fuel, pharmaceuticals, and Captagon amphetamines, according to a March 2026 report by the Lebanon-based Carnegie Middle East Center. It has also intensified fundraising efforts among the Lebanese Shi'a diaspora, particularly in West Africa and Latin America.

"Hezbollah is diversifying," said Hanin Ghaddar, a senior fellow at the Washington Institute for Near East Policy who has studied the organisation for two decades. "They have always engaged in criminal enterprises, but the scale has increased significantly. They are also cutting social services in Shi'a communities, which is politically risky. The organisation's legitimacy in Lebanon has always rested on being a provider, not just a militia."

Residents of Dahieh, the Shi'a-majority southern suburbs of Beirut where Hezbollah maintains de facto control, have reported reductions in healthcare subsidies, school funding, and infrastructure maintenance. Salaries for Hezbollah's estimated 20,000 full-time fighters have been paid in Lebanese pounds rather than U.S. dollars since mid-2025, effectively cutting their purchasing power by half due to the collapse of Lebanon's currency.

The Houthis' Red Sea Campaign Continues Despite Cuts

Yemen's Houthi movement has sustained its campaign of drone and missile attacks against commercial shipping in the Red Sea and Bab al-Mandab Strait despite Iranian funding cuts, primarily because the attacks themselves generate revenue. The Houthis have demanded payment from shipping companies to guarantee safe passage, effectively running a maritime protection racket, according to analysts at the European Council on Foreign Relations.

The attacks began in October 2023, shortly after Hamas's assault on Israel, as part of what Houthi leadership described as solidarity with Palestinians in Gaza. Between October 2023 and April 2026, the Houthis targeted more than 2,000 vessels, according to data compiled by the International Maritime Organization. Approximately 120 vessels were struck by drones or missiles, and six were sunk or severely damaged.

The financial impact on global trade has been significant. Shipping companies have rerouted vessels around southern Africa, adding two weeks and roughly $1 million in fuel costs per journey, according to the World Shipping Council. Insurance premiums for ships transiting the Red Sea have tripled. The Houthis, meanwhile, have extracted payments from several shipping firms, though exact figures remain unclear due to the clandestine nature of the transactions.

Iran has continued to supply the Houthis with technical expertise and some advanced weapons components, particularly guidance systems for anti-ship missiles, according to a United Nations panel of experts report published in January 2026. But cash transfers have declined sharply. The Houthis have compensated by expanding their control over Yemen's internal economy, taxing imports through the port of Hodeidah and extracting levies from businesses in Sana'a.

Iraqi Militias Struggle as Salaries Dry Up

The impact of funding cuts has been most acute among Iraqi militias affiliated with the Popular Mobilization Forces. Unlike Hezbollah, which has deep roots in Lebanese society and alternative revenue streams, or the Houthis, who control territory and tax populations, many Iraqi militias have depended almost entirely on Iranian cash to maintain operations.

Kata'ib Hezbollah, Harakat Hezbollah al-Nujaba, and Asa'ib Ahl al-Haq — the three largest Iranian-backed factions within the PMF — have all reduced fighter salaries and scaled back training programmes, according to Iraqi security officials interviewed by the Associated Press in February 2026. Some units have merged to reduce overhead costs. Recruitment has slowed significantly.

"The money is not coming like before," said a fighter from Asa'ib Ahl al-Haq who spoke on condition of anonymity to Reuters in March. "We used to receive our salaries on the first of the month. Now it is the tenth, the fifteenth, sometimes later. Some men have left to find other work."

The funding crisis has coincided with a broader decline in Iranian influence in Iraq. Prime Minister Mohammed Shia al-Sudani, who took office in October 2022, has sought to balance relations between Tehran and Washington, resisting pressure from Iranian-backed factions to expel the approximately 2,500 U.S. troops still stationed in the country. The weakened financial position of the militias has made it harder for them to challenge al-Sudani's government.

Qaani's Troubled Leadership

The funding cuts have occurred under the leadership of Esmail Qaani, who took command of the Quds Force after Soleimani's assassination in a U.S. drone strike in Baghdad on January 3, 2020. Qaani, a career intelligence officer who spent decades managing Iran's relationships with Afghan and Pakistani groups, has struggled to replicate Soleimani's hands-on approach and personal relationships with proxy leaders across the Arab world.

"Soleimani was irreplaceable," said Afshon Ostovar, a professor at the Naval Postgraduate School and author of Vanguard of the Imam: Religion, Politics, and Iran's Revolutionary Guards. "He built personal loyalty. He was on the ground in Syria, in Iraq, meeting commanders face to face. Qaani is more of a manager, and he's managing a system in decline. The proxies know Iran is weak right now, and that changes the dynamic."

The Quds Force itself has faced scrutiny within Iran's political establishment. Hardliners close to Supreme Leader Ali Khamenei have questioned whether the investment in foreign proxies remains strategically sound, particularly as Iran's domestic economy deteriorates. There is no indication that Tehran plans to abandon its proxy strategy entirely, but the current trajectory suggests a leaner, more selective approach.

Regional Implications

Israel and several Gulf states have watched the funding crisis with cautious optimism. Israeli intelligence assessments reviewed by Haaretz in March concluded that Hezbollah's military capabilities have not significantly degraded yet, but that the organisation's long-term sustainability is in question if Iranian support does not resume at previous levels.

Saudi Arabia and the United Arab Emirates, both of which have been targeted by Iranian-backed groups in Yemen and Iraq, see an opportunity to weaken Tehran's regional influence. Saudi intelligence has stepped up efforts to exploit divisions within Iraqi militias, offering financial incentives to commanders willing to reduce ties with Iran, according to a report by the Middle East Institute published in February 2026.

The United States has calibrated its policy carefully. The Biden administration maintained sanctions pressure on Iran throughout 2024 and 2025, but resisted calls from Israel and Gulf allies to escalate militarily. U.S. officials have privately acknowledged that Iran's economic struggles serve American strategic interests by constraining Tehran's regional activities without direct confrontation.

But analysts caution that a weakened Iran may also be a more unpredictable one. "Regimes under stress can lash out," said Karim Sadjadpour, a senior fellow at the Carnegie Endowment for International Peace. "Iran still has options — accelerating its nuclear programme, conducting direct attacks rather than relying on proxies. The question is whether Tehran sees this as a temporary setback or an existential crisis."

What Comes Next

The trajectory of Iran's proxy network will depend heavily on developments Tehran cannot fully control: oil prices, Chinese economic policy, the outcome of nuclear negotiations, and the willingness of the United States and European powers to maintain sanctions enforcement.

In the near term, Hezbollah will likely remain Iran's priority, given its strategic importance on Israel's northern border and its role in sustaining Iranian influence in Syria. The Houthis, despite funding cuts, have demonstrated an ability to sustain operations through extortion and local revenue generation. Iraqi militias face the most uncertain future, caught between declining Iranian support and a Baghdad government increasingly unwilling to tolerate their autonomy.

"This is not the end of Iran's axis of resistance," said Vali Nasr, a professor of international affairs at Johns Hopkins University. "But it is a stress test. The groups that survive will be the ones that can adapt, that can find new sources of funding and legitimacy. Iran built this network over forty years. It will not collapse overnight. But the model is changing, and no one, including Tehran, knows exactly what comes next."