Ultimate magazine theme for WordPress.

Can the Iranian economy withstand a war with Israel? – DW – April 19, 2024

As the United States and the European Union (EU) consider new economic measures against Iran, the Islamic Republic is touting its resilience to Western boycotts. According to the government in Tehran, the country has exported more oil than ever before in the last six years, despite massive sanctions imposed by former US President Donald Trump in 2018.

Last month, Iranian Oil Minister Javad Owji said oil exports had “generated more than $35 billion.” [€32.8 billion]”in 2023. The British business newspaper Financial Times quoted him as saying that while Iran's enemies wanted to stop its exports, “today we can export oil wherever we want and with minimal discounts.”

For the Iranian regime, billions of dollars in oil revenues are crucial to maintaining toleration in its own country. A large part of the population is suffering from the effects of international sanctions, which have led to a devaluation of the local currency, the rial.

Iran's oil sector may not have suffered from sanctions, but food prices have gone through the roof. Image: Atta Kenare/AFP/Getty Images

Rising inflation

Iranian inflation recently reached new heights, rising to around 40% in February. Any tightening due to escalating geopolitical tensions will only push consumer prices higher, Djavad Salehi-Isfahani, an economics professor at Virginia Polytechnic Institute and State University, told DW.

He also noted that the US dollar has gained about 15% against the Iranian rial in recent weeks amid expectations of increased conflict with Israel.

“T“Its exchange rate devaluation leads to higher prices very quickly because Iran imports many types of goods and many of the goods it produces in Iran also have an import component,” said the Middle East expert, adding that thThe country is “bracing for higher inflation.”.”

According to Salehi-Isfahani, the standard of living of Iran's middle class has also fallen sharply in recent years and is now “back to 20 years ago.

Is the Iranian economy ready for war?

This browser does not support the video element.

Oil: the main money maker

According to German data provider Statista, the services sector made the largest contribution to Iran's gross domestic product (GDP) in 2022 at 47%, followed by industry (40%) and agriculture (12.5%).

The majority of the industrial sector's revenue comes from the oil industry, with more than 90% of crude oil shipped to China. Western sanctions have had little impact on Iran's oil trade with Beijing, but Iranian leaders are increasingly concerned that oil facilities could become the target of an Israeli military attack.

After the initial shock following Trump's sanctions in 2018, Iran has returned to 80% of its previous export volume. Most experts attribute this to the easing of sanctions since US President Joe Biden took office.

The Iranian oil industry has withstood the shock of the Western oil embargo by finding new markets in the Far East. Image: Maksym Yemelyanov/Zoonar/Picture Alliance

“The Iranian economy has actually grown, partly due to the increase in oil exports… the GDP increase is about 5% per year, which is not compared to what happened in the region as a whole after the COVID-19 pandemic is bad,” said Salehi-Isfahani. He added that a lot of financial resources had been invested in expanding the military and other measures to stabilize the regime.

Corruption and lack of transparency

In Iran, significant portions of state revenue are expected to disappear into the opaque structures of the government in Tehran. The international organization Transparency International's Corruption Perception Index ranks Iran 149th out of 180 countries.

The Iranian Revolutionary Guard is not only an army within the army, but also a shady business within the economy. Image: Sephanews/ZUMA Press/Picture Alliance

The Islamic Revolutionary Guard Corps (IRGC) – an elite paramilitary force within the armed forces – and numerous religious organizations reportedly control key parts of the economy. You don't pay taxes and you don't have to submit any balance sheets. They are primarily responsible to Iran's head of state and commander in chief, Supreme Leader Ayatollah Ali Khamenei.

Although oil export revenues have increasingly stabilized in recent years, Iran is anything but an economic heavyweight competitor. With around 88 million inhabitants, it is almost ten times larger than Israel with 9 million inhabitants. Still, its GDP was significantly lower in 2022, standing at $413 billion at the end of the year, compared to Israel's $525 billion.

Protecting the oil industry

Iran's ability to sustain a war with Israel depends largely on whether new Western sanctions can significantly reduce Iranian oil exports.

In the first three months of the year, Tehran managed to sell an average of 1.56 million barrels (a barrel is about 159 liters or 35 gallons) of crude oil per day. Almost all of it went to China. According to data provider Vortexa, this was the highest volume since the third quarter of 2018.

Fernando Ferreira, head of geopolitical risk services at Rapidan Energy Group in the US, told the Financial Times: “The Iranians have mastered the art of evading sanctions.”

“If the Biden administration really wants to make a difference, it needs to shift the focus to China,” he added.

So is the Iranian economy currently prepared for a possible military escalation with Israel?

Salehi-Isfahani believes that Iran is “unwilling” to sustain an extended military conflict, “which is why they have been very careful not to get too involved in the Gaza war. The attack they carried out on Israel was not intended to cause harm, but was rather symbolic.”

This article was originally written in German.

Comments are closed.