To give an Islamic Republic 100 Billion Dollars: Warming up Iran’s Frozen Assets

By Ryan Kuhns

As the months go by, it seems more and more likely that the work done by the P5+1 may well prevent the Iranian nuclear variable from inclusion in the already volatile function of Middle East security politics.[i] At the same time, among those who have decried the deal and called for more cautious optimism, the $100 billion of frozen Iranian assets to be released and Iran’s status as a state sponsor of terror are often mentioned in the same breath.

It is important, when talking about the reported $100 billion (a figure that has fluctuated between $100-150 billion in the media over the course of the negotiations), to recognize that $100 billion in frozen assets is not as simple to free up as a bank deposit, nor is it a centralized sum. It will probably take a considerable amount of time for large portions of the total to become available and liquidated into spendable assets. During the time it has been frozen, some of the assets (like property) may have lost significant portions of their value.

It is also crucial to frame that figure in terms of how Iran and other states involved in the region may view the value of their security and how they decide to actualize those value assessments through defense expenditures.

Iran’s spending on defense, like many countries, is opaque by nature. The average yearly defense expenditure of the Islamic Republic, as reported by the Stockholm International Peace Research Institute (SIPRI), sits between $8 – 15 billion. In statements to the media, US President Barack Obama has estimated Iranian spending at $30 billion. This is a distinct possibility given that Iran’s reported numbers do not include spending on the Islamic Revolutionary Guard Corps (IRGC) and its Quds force (which carries out its clandestine and asymmetric operations), or the money that is funneled directly to terrorist organizations and regional insurgencies (like the Houthis in Yemen).

According to a CSIS report, the Gulf Cooperation Council (which includes Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and Bahrain) spent $98.5 billion on defense in 2012. Saudi Arabia (Iran’s major regional rival) alone spent $56.5 billion in 2012 compared to Iran’s (reported) $10.6 billion. Since 2005, Saudi Arabia’s defense spending has risen by 117%, to 80.8 billion in 2014, making it the 4th largest military spender in 2014 (coming in at 4.5% of the global total). Turkey and the United States are two other powers whose regional objectives often clash with Tehran’s, with Turkey coming in at $22.5 billion in 2014 (# 15 in the world) and the United States (at # 1), with $610 billion in approved defense expenditures, which excludes additional funding for overseas contingency operations.

Comparative defense spending is difficult to thoughtfully consider in a vacuum. Gross domestic product (GDP) and the needs of the population are major factors in the equation when weighing the economic costs of investing in defense. The cost of security must not only be compared to the potential price of insecurity, but also with the opportunities lost to spending on something that might not be overtly productive for the domestic sector in times of relative peace. In this way, when it comes to how a society values its security in relation to its economic productivity, defense spending as a portion of GDP is a good way to visualize these tradeoffs. The table below is a rough, comparative visualization of these considerations among the powers invested in the region (using the latest figures from SIPRI for the years where there is data present for all nations).

Iran Defense as percent of GDP
Source: Author using SIPRI Data

From a historical perspective, you can see the slowdown in spending associated with the end of the Cold War and conclusion of the Iran-Iraq War, as well as the ramping up of defense expenditures in 2001 as the Global War on Terror kicks off. A comparison of the long term data shows that Iran’s defense expenditure has remained low, relative to its neighbors and interested regional parties. Even when taking the $30 billion figure that President Obama cited this year as Iran’s real military budget, this would only push its spending up to 7.2% of its GDP and its per capita expenditure to $371, placing Iran much closer to its regional rivals, Israel and Saudi Arabia, in terms of spending relative to GDP.

Outside of keeping up with regional rivals and interested parties, Iran must also attend to its domestic priorities and immediate concerns regarding unstable neighbors.

The Obama Administration has publicly stated that Iran needs a “half-trillion dollars to meet domestic investment requirements: $170 billion to develop oil and gas potential; $100 billion for agricultural projects; $100 billion for infrastructure; $50 billion to increase energy capacity; and $100 billion to pay for unfunded state and military pensions, government debts, and funding shortfalls.” Even if overstated, these numbers are relatively fantastic when considered next to Iran’s GDP of $415 billion and provide a sketch of the domestic interests that will be fighting over those unfrozen assets. In addition to material and measurable needs, Iran has social problems and internal security issues that need to be addressed as well. Drug addiction is a plague that has infected up to 2% of the country’s population, with some reports putting addiction rates as high as 6%. The main culprit, opium coming across the border from Afghanistan, has claimed the lives of 4,000 Iranian security personnel attempting to stem the flow since 1979, according to official sources. In addition to these societal issues, there are experts that believe that much of the $100 billion will be eaten up by mismanagement and corruption within the Iranian government itself.

With the wars in Syria and Iraq representing an almost existential security crisis for Iran, most of the money that becomes immediately available for the military and IGRC may be shifted toward the priorities evident in Iran’s current foreign policy rather than terrorism aimed at the west. Hezbollah, the Lebanese sub-state actor that was created and funded by Iran and has served as an enormous thorn in Israel’s side, has been pushed towards enormous sacrifices by Iran in support of Syria’s Bashar Al-Assad. Iran has shifted 7,000 – 15,000 militiamen and assets from Iraq and elsewhere in order to prop up the regime as it has suffered setbacks in recent months. These are in addition to the 80,000 Alawites and Shiites that Iran has trained and supplied in order to support the Assad Regime’s forces. If Syria and Iraq stay as violent and fragmented as they are now, there are plenty of places that Iran can spend its money, and for the United States, the added bonus is in the fact that ISIS is a mortal enemy of Iran and the groups in which it is heavily investing.

Even though Syria and Iraq are a major priority for the Iranian state, the Islamic Republic appears to be trying everything it can to avoid committing significant conventional forces. Outside of International opprobrium, the material reasons are illustrated in the figures above. In terms of conventional weapons and the ability to replace and augment stockpiles, all of the major regional powers are far more capable than Iran and have access to the wider global arms market. This is partially the reason that Iran turns to terrorism in its attempts to shape the region and project power. It is cost-effective and deniable, creating some bang from Iran’s meager bucks. While not anywhere near as effective as US or Israeli special operations (not to mention its moral questionability), it still mirrors the strategic desires that make special operations attractive, the projection of power without direct conventional engagement that fully risks total military or political retaliation.

8724116361_73a40fb923_b
Iran’s Hamaseh Drone Source: flickr

Another reoccurring question is whether Iran will be able to utilize an increase in future revenues in order to rebuild its conventional military, a prospect in which Russia and China would be particularly interested. While there has been some worry that the deal would lift longstanding restrictions on the Iranian ability to purchase weapons on the global market, in fact, the nuclear deal removes the current barriers and replaces them with new ones, to be removed in 5 years for most conventional weapons if Iran sticks to the tenants of the deal. Still, even the lifting of restrictions on Iranian conventional arms purchases will not change Iran’s domestic economic and political realities, and thus greater access to the world market may only make a marginal impact on its conventional military expenditures.

Ultimately, a non-nuclear Iran is a potential winner for everybody involved. Without a deal, Iran might not have access to the $100 billion (and future oil and gas revenues) that it may choose to invest a portion of in terrorism, but it could have a nuclear weapon within a relatively short period of time, a prospect deemed unacceptable by the United States, Israel, and many other powers in the region.

Short of a deal, one can only think of three broad possibilities. There could be a series of strikes to hinder Iran’s ability to produce a bomb in the short to medium term, there could be a major war with the goals of completely eliminating Iran’s nuclear program and regime change, or the powers with stakes in the region could back down and attempt to contain a nuclear Iran, an option that has often been cited as the greatest incentive for a Saudi nuclear weapon and heightened regional instability.

The first 3 months of implementing a bombing campaign (as calculated in a study by the Federation of American Scientists), would cost the world economy $1.138 trillion. An all-out war (over the same time period) averages out to $1.723 trillion, with the middle ground of a blockade of Iran coming in at around $325 billion to the world economy every three months. Juan Cole’s numbers, created by simply multiplying the projected costs of Iraq for the United States by the magnitude of difference between Iran and Iraq’s population, came out to 5.1 trillion in direct costs, $9-18 trillion to the US associated with caring for injured military personnel, and a $23 trillion opportunity cost to the United States in terms of “infrastructure and healthcare improvement.” Outside of estimates of the economic costs, many experts and simulations have pointed to the chaotic and uncertain aspects of a war with Iran and its lack of long-term strategic dividends for the United States.

While an injection of $100 billion to the Iranian economy will be a significant windfall, if the historical data is used as an indicator, it might not have too great of an effect on Iran’s overall military spending, given its domestic economic and security priorities as well as its obligations to servicing its relatively large population’s expectations. Instead of complaining about what $100 billion (and future revenue) might do for the Iranian sponsorship of terrorism, policy makers and wonks should look at the real considerations that Iran will face as that money becomes available in the context of Iranian priorities, based on the country’s internal politics and economic and social needs. Critics should also check their expectations.

It would be far more cost efficient for the United States to counter the negative effects of overt and covert Iranian defense spending through the US’s own substantial asymmetric and conventional capabilities (along with those of its allies) than attempt to contain and curtail the proliferation of nuclear weapons in the Middle East, with all the nightmare scenarios that could evolve out of the regional state and non-state dynamics. The US faces quantitatively and qualitatively more threatening states in other regions, and with higher stakes for long-term global peace.

[i] If one wants an overview of the terms of the Iran deal in a bit more depth, this article gives a more complete explanation of the terms and this one, from one of our contributors, details implementation and how phased sanctions relief will affect US companies.


resize 3Ryan Kuhns is a master’s student at the University of Kentucky’s Patterson School of Diplomacy and International Commerce. He studies International Security and Commerce with his main interests being in international relations, defense economics, strategy, and the social/political organization of war. He can be contacted at ryan.f.kuhns@gmail.com or followed on twitter @ryandfkuhns.

Advertisements

One thought on “To give an Islamic Republic 100 Billion Dollars: Warming up Iran’s Frozen Assets

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s