Iran’s Military Budget is Going to Get a Huge Boost From the Nuclear Deal

Post-nuclear deal Iran has shown the will to spend more on its military adventures in the Middle East and beyond, even though the price of oil has stayed low. 

The Joint Comprehensive Plan of Action (JCPOA) signed between Iran and a US-led group of six world powers ends the country’s economic isolation. It also provides Iran with $150 billion in short-term sanctions relief at a time when it is involved in a multi-front war in the Middle East.

Tehran has doubled down its support for Assad, and has vowed to increase funding for its proxies. The lifting of arms-related sanctions under the JCPOA will enable Iran to upgrade its arsenal: the country will receive the much-desired S-300 air defense system from Russia, and can renew its obsolete air force. 

To assess how the JCPOA will impact Iran’s military expenditures, one needs to look beyond the official defense budget. It’s necessary to identify all other sources of funding available to Iran’s military and evaluate the JCPOA’s effect on them. The JCPOA leads to an increase in Iran’s official public defense budget. But there will be a less observable boost to military expenditure through other funding sources.

Iran’s military budget comes from several different sources.

The first source is the official government budget. Last year’s defense budget was $10 billion, of which 60% went to the Islamic Revolutionary Guard Corps (IRGC), Iran’s ideological army backed by the country’s Supreme Leader. This budget is allocated on an annual basis by the cabinet and then submitted to, reviewed and ratified by the parliament.

The preliminary outline of the next year budget suggests that  even though the JCPOA increases Iran’s access to the international economy, falling oil prices, president Hassan Rouhani’s contractionary budget policy and the general shrinkage of the total Iranian government budget will result in the defense budget having only a modest growth rate of 10 to 20 percent,. In comparison, there was a 32 percent increase in the defense budget after the November 2013 interim nuclear deal. In other words, we estimate Iran’s official public defense budget to be around $11-$12 billion for the next Iranian fiscal year.  

Second, Iran has an oil fund. The military can get money from this fund for special or urgent projects. 

However, the oil fund is not transparent. It is not clear how much money is in it, how much money is taken from it, and where the money eventually goes. From time to time, some data about the oil fund is published either through reports and hearings or because rival political factions leak information to the press. 

As a result of the JCPOA, the oil and financial sector sanctions will be lifted and Iran will be able to export more oil, leading to more money flowing into the oil fund. And the IRGC can use the chaos in the Middle East to justify raiding the fund.  

Third, Iran’s military has its own financial activities and investments. These account for 20 percent of the Tehran Stock Exchange — between $15-18 billion — along with ownership of thousands of companies in the most lucrative sectors of Iran’s economy such as oil, gas, telecommunications, construction, petrochemical, automotive, and mining.

The revenue directly goes to different military organizations that are mostly tax exempt and have the ability to audit themselves. For example, IRGC and the Basij cannot be investigated by the parliament unless the supreme leader explicitly permits it. The JCPOA gives a huge boost to the military-owned conglomerate, which significantly increases Iran’s military capability.  

Fourth, Iran’s military and security establishment, specifically the IRGC, is heavily involved in smuggling, drug trafficking and the underground economy more generally.

The value of Iran’s underground economy has been estimated from 6% to 36% of Iran’s GDP. Assuming a conservative 15%, the underground economy is worth an additional $60 billion each year. While  the exact amount of the military’s share of the underground economy is not known, one can confidently say that the IRGC is in the best position to have the lion’s share of the benefits. 

The JCPOA may decrease the ratio of Iran’s underground economy to GDP by legalizing previously sanctioned sectors. But as the country’s GDP grows, the value of the underground economy in absolute terms probably will not go down and may even increase. 

It is misleading to just look at the official public defense budget as it is not its sole source of defense funding in Iran.  The JCPOA boosts Iran’s military capability in general.

Iran’s official public defense budget will increase, as it did after the interim agreement. But as business booms in Iran, the real boost to Iran’s defense budget will come from less observable sources.   

Saeed Ghasseminejad is an associate fellow at the Foundation for Defense of Democracies and its Center on Sanctions and Illicit Finance. Follow him on Twitter @SGhasseminejad