SIPRI Has Revised Four Years of Data on Iran's Military Spending

SIPRI—the Stockholm International Peace Research Institute—has just published its “Yearbook” for 2022. The flagship annual publication offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

Last year, I identified a major problem with the data about Iran’s military spending. The 2021 Yearbook estimated Iran’s military spending at $24.6 billion, a total that put it just above Israel in the rankings, as the 14th largest military spender in the world. This did not make sense.

Iran’s military, while posing a threat within the region, does so primarily because of inexpensive missile and drone systems and heavy reliance on proxy forces. Iran’s military lacks the kinds of advanced aircraft, armour, and other systems that are typically found in the arsenals of the world’s top military spenders.

A closer examination of the SIPRI data, and communication with SIPRI’s researchers, revealed that the Swedish think tank had been using the wrong exchange rate to convert Iran’s local currency military expenditures into dollar values. The researchers were using the “official” central bank exchange rate, which has for several years been a subsidised exchange rate used exclusively for the import of essential goods.

This common mistake has been rectified. SIPRI researchers note in the 2022 Yearbook dataset that they are using the NIMA exchange rate to convert to dollars, which results in a far better estimate of the Iranian state’s true purchasing power. The historical data has been corrected going back to 2018.

The impact of the correction is significant. The revised figures mean that instead of ranking as the 14th largest military spender in the world in 2021, Iran was actually ranked 39th. In 2022, spending totalled $6.8 billion. That is a mere fraction of the military spending of regional rival Saudi Arabia, which spends an estimated $75 billion. Iran even spends less on its military than regional minnow Kuwait.

SIPRI should be commended for making this correction. But in certain respects, the damage has been done. For several years their data was used to suggest that Iran posed a much greater threat to regional and global security than it truly did. A significant number of authoritative publications and news reports relied upon the SIPRI data to put Iran’s military spending in context and unfortunately used the inflated dollar totals published between 2018 and 2021. Those inflated figures conformed to a pervasive and convenient narrative—this may explain why the issue went unresolved for so long.

Photo: IRNA

SIPRI Has Overstated Iran's Military Spending For Years

SIPRI—the Stockholm International Peace Research Institute—produces the world’s most authoritative data on global military expenditure and the arms trade. The SIPRI Yearbook, a flagship annual publication, offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

This year, the SIPRI Yearbook includes some significant statements about Iran’s military expenditure—which is estimated at $24.6 billion. In a factsheet summarising key trends, SIPRI’s researchers declared “Iran increased its military spending by 11 percent, making it the 14th largest military spender in 2021. This is the first time in 20 years that Iran has ranked among the top 15 military spenders.”

We are accustomed to thinking about Iran as a major military spender because we frequently hear about the country’s military, its missile programme, and its nuclear weapons ambitions. But on closer examination, SIPRI’s figures for Iran do not add up.

Iran is a country that is under the most significant sanctions programme in the world and its economy has stagnated for a decade. But SIPRI’s data suggests that Iran is spending even more than Israel, ranked 15th in the world with $24.4 billion in military expenditure in 2021. The comparison with Israel—a country in which the military is constantly procuring the most advanced military equipment in the world, including from foreign manufacturers—is clarifying. If Iran were indeed spending even more money, what could it possibly be spending all that money on? Iran produces nearly all its military hardware domestically, has basically no heavy armour, no modern air force, no modern naval fleet, and few advanced weapons systems. The country’s defence is primarily assured by a ballistic missile programme, which while impressive, is not a programme that costs nearly $25 billion to operate.

So where did SIPRI go wrong? The answer is simple and reflects a common mistake made by researchers who rightly want to put Iranian financial data into a comparative framework. To produce global rankings and to make data on military spending comparable over time, SIPRI converts local currency expenditures into US dollars. In 2021, SIPRI calculated Iran’s total expenditure in local currency at IRR 1033 trillion. In an email exchange, a SIPRI researcher clarified for me that SIPRI defines military expenditure using the following formula:

Military expenditure = Ministry of Defence and Armed Forces Logistics Total + Armed Forces General Staff Total + Artesh Joint Staff Total + Sepah Joint Staff (IRGC) Total + Armed Forces Social Security Organization Total

This is a reasonable formulation and corresponds to how Iranian sources calculate military spending. So there is no reason to doubt SIPRI’s calculation of military spending in local currency terms.

For most countries, the next step in the analysis involves finding the average dollar exchange rate for the given year and dividing the total expenditure by that figure. But Iran does not have a single exchange rate and SIPRI’s researchers picked the wrong one. Over the years, they have relied upon data for Iran’s official dollar exchange rate published by the World Bank and sourced from the Central Bank of Iran. This was also confirmed in my email exchange with the SIPRI researcher. On face, this seems like the right approach—SIPRI is using an “official” rate from an authoritative source. But in Iran, the official exchange rate does not reflect market prices. It is a subsidised exchange rate that is only used for the importation of certain essential commodities, such as wheat and medicine. Since 2019, the official exchange rate has been capped at IRR 42,000. This is the rate that SIPRI mistakenly used to calculate Iran’s total military expenditure for 2021.

The exchange rate that ought to have been used is the exchange rate defined within the government budget itself. The Iranian government balances its budget by relying in part on foreign exchanges revenues, principally earned through the sale of oil. Prior to the budget for the Iranian calendar year 1395, which was submitted in November 2015, the official exchange rate was indeed the reference rate used in the budget. But after several years of sanctions pressure, the Central Bank of Iran could no longer prop up the value of the currency. So while the official exchange rate was kept low as a means to subsidise the purchase of key imports, a separate exchange rate was defined in the budget. The rates have diverged dramatically since.

Each budget includes a revenue target from the sale of oil and a target volume of oil sales. By comparing these two numbers with the price of oil fixed in the budget, it is possible to arrive at the dollar exchange rate on which the budget depends. This exchange rate, which we can call the budget exchange rate, expresses how many rials the Iranian government estimates it can spend for each dollar it earns. It is therefore a much better exchange rate to use when trying to account for different levels of purchasing power between countries when it comes to government expenditure.

For the draft budget in the Iranian calendar year 1401, which was submitted in November 2021 and forms the basis of SIPRI’s 2021 expenditure estimate, the budget exchange rate was IRR 230,000—a rate five times higher than the IRR 42,000 official rate. In other words, SIPRI’s 2021 yearbook overstates Iran’s military spending by a factor of five. Using the budget exchange rate, Iran’s total military expenditure is just $4.5 billion, a total that places Iran outside of the Top 40 military spenders in the world. The below chart compares the military expenditures reported by SIPRI using the official exchange rate and expenditures calculated according to the budget exchange rate.

In the last few years, annual inflation in Iran has been as high as 40 percent, leading to a sharp increase in nominal expenditures. But by using the official exchange rate, which has been capped since 2019, SIPRI has failed to account for the impact of inflation on relative prices between the dollar and rial. In some respects, this is a surprising mistake for the researchers to make, as analysts of Iran’s military expenditures have warned about the difficulty of pinning down real expenditures given Iran’s topsy-turvy economy. In 2018, Jennifer Chandler, a researcher at IISS noted that in “large increases in local currency, impressive as they might seem, do not necessarily reflect an over-prioritisation of the regime on defence spending.”

Another way to examine whether Iran is spending more on its military is to simply convert from nominal to real spending in the local currency, avoiding the pitfalls represented by the exchange rate. To do so, we can deflate the nominal military spending using Consumer Price Index data published by the Central Bank of Iran. This analysis reveals that Iran’s military spending has been flat for two decades, just barely keeping up with inflation.

The Iranian government does take its defence seriously. But it has developed the means to ensure that defence cheaply by focusing on specific capabilities such as ballistic missiles and drones and by relying on proxies as part of a “forward defence” strategy. Iran’s military does not look like a military backed by $24.6 billion dollars of spending in a single year—where are the next generation fighters, battle tanks, and naval vessels? Yet, regional actors and Western governments continue to assess that the Iranian military poses a significant threat, even while real military expenditures have been flat. To put it another way, Iran has been able to maintain its military spending in the face of sanctions in part because it has long been parsimonious. This raises questions about the wisdom of trying to throttle Iran’s economy to address security threats.

The mistake SIPRI has made is understandable given the scope of the yearbook project and the difficulty of accounting for the peculiarities of each country’s economy. Yet, Iran is likely the country whose military spending is under the greatest international scrutiny, meaning that the impact of the mistake is profound. The exaggerated military expenditures unwittingly reported by SIPRI have reinforced the view of the Iranian military as especially large and threatening. The figures have also been used by a wide range of actors, including Iran’s regional rivals, to justify their own increases in military spending and the acquisition of advanced weapons systems. In this way, the presumed value of military spending has overshadowed the sober assessment of military capabilities. Encouragingly, SIPRI have told me they will “definitely investigate” the exchange rate issue. They will be forced to do so because of a planned change in Iran’s foreign exchange policy that will see the subsidised rate eliminated altogether during this budget year. But while a correction would be welcome, the damage has already been done.

Photo: IRNA

China Will Not Capitalise on the End of the Iran Arms Embargo

On October 18, the arms embargo imposed on Iran by the United Nations expired. The provision, which was part of UN Resolution 2231 (2015) that endorsed the Iran Nuclear Deal, expired five years after the resolution’s endorsement and a month after the failure of a U.S. attempt to extend its terms.

There has been some speculation that China will rush in to export conventional weapons to the Islamic Republic. Iranian Foreign Minister Javad Zarif’s visit to Beijing two weeks ago no doubt set off alarm bells in Washington. China appears keen to maintain its reputation as a legitimate international player that abides by the rules. In July, Chinese Foreign Ministry Spokesperson Hua Chunying stated, "China has practiced caution and responsibility in arms exports. And no one can criticize China for conducting regular arms trade with any country that does not violate international obligations."

Between dueling words from Beijing and Washington, the reality is that an influx of Chinese arms to Iran not track with the trend of Chinese arms sales in the Middle East or the broader Chinese-Iranian relationship, which is characterised by mutual anxieties. While the expiration of the arms embargo could offer some opportunities in the long-term, China is not set to become a major arms exporter to Iran.

Conventional weapons trade is a lucrative business in the Middle East. The countries of the region are consistently global leaders in arms imports. Purchases are on the rise—between 2014 and 2019, arms flows to the Middle East increased 87 percent. At the same time, the Chinese military is moderising and seeking advanced weaponry, propelled by the priorities of Xi Jinping’s rising China. While the Chinese defense industry will always have the People’s Liberation Army as their supreme client, arms exports have been encouraged by Beijing. The PRC ranked the world’s fifth-largest weapons exporter for the period of 2014-2019.

To be among the most competitive international defense contractors, Chinese companies need to acquire customers in the Middle East. China’s unique selling point for buyers in the Middle East is the promise of apolitical trade. The arms market, however, is not just a commercial market, but a political one as well. The PRC views the Middle East as a political tar pit and Chinese policymakers see the failures US policy in the region as a cautionary tale. But Chinese defense contractors have benefited from the region’s instability—the Middle East is an arena where Chinese weapons can be battle-tested.

China first made inroads selling weapons to Iran during the Iran-Iraq War in the 1980s, a conflict in which it also sold arms to Iraq. Iran ordered fighter aircraft, tanks, guns, and missiles from the PRC. There were some sporadic orders in the 1990s and 2000s, the final one being in 2005, according to data compiled by the Stockholm International Peace Research Institute. After the imposition of international sanctions, no more orders have been recorded, though previously scheduled deliveries may have been taking place as late as 2015. 

To date, there is no hard evidence of any major Chinese violations of international arms embargoes, although the U.S. has sanctioned Chinese defense companies before. International sanctions, which China voted for, have worked to halt Chinese-Iranian arms trade. Iran has not acquired the latest high-tech weaponry to come out of the Chinese defense industry. The PRC has supplied a majority of Iranian arms imports since 2006, but that is only by dint of international sanctions regimes. As in many fields, Iran is not paired with China by choice. Iran’s only other reliable supplier is Russia, with some sporadic business with Belarus, North Korea, Pakistan, and Ukraine. The end of the arms embargo is unlikely to return momentum to a trade relationship that has none. Even Russia, Iran’s only other realistic alternative for advanced weapons expiration the end of the arms embargo, faces its own hurdles and hesitations in selling arms to Tehran—Russia too is unlikely to prove a major weapons supplier to Iran.

While China’s sales to Iran have languished, arms sales to the countries like the United Arab Emirates and Saudi Arabia have grown, reflecting that relations with Iran are just one pillar of China’s overall strategy in the Middle East. One of the Beijing’s diplomatic feats is maintaining relationships with regional powers such as Iran and Saudi Arabia, whose rivalry is responsible for a great deal of bloodshed.

Sales of unarmed aerial vehicles (UAVs), or drones, are a hallmark of China’s international arms sales. China has two series of drones on the international arms market: The Wing Loong I and II and the Chang Hong series, the most exported of which in the Middle East is the CH-4. The CH-4 drone is a medium-altitude, long endurance armed drone comparable to the U.S.-made Predator series, only cheaper. China has exported Wing Loong and CH-4 drones to Saudi Arabia, the UAE, Iraq, and Pakistan, but not Iran. Saudi Arabia and the UAE have both deployed CH-4 drones in the war against the Iranian-backed Houthis in Yemen, a fact sure to vex Iran. The sale of ballistic missile systems and certain kinds of long-range UAVs to Iran remain subject to a nuclear-weapons related embargo in force for a further three years.

Saudi Arabia also enjoys joint arms production with China. During King Salman’s visit to Beijing in 2017, one of the agreements signed included China’s first drone factory in the Middle East. King Abdulaziz City for Science and Technology (KACST) signed a partnership agreement with China Aerospace Science and Technology Corporation (CASC) to manufacture the CH-4 drone line.

Iran has sought to address what it perceives as unequal treatment. In a leaked draft of the Chinese-Iranian Comprehensive Strategic Partnership agreement, there are provisions calling for joint defense production ventures as part of security cooperation. Whether such joint production enterprises will materialize has yet to be seen, as China has yet to even sell drones to Iran. Other Chinese efforts to invest in production in Iran have struggled, particularly oil and gas.

Selling a substantial arsenal to Iran would endanger China’s other partnerships in the region, to say nothing of heightening regional threat perceptions and tilting the Middle East towards further instability. The financial rewards of any such sales are not worth upsetting the entire basis of Chinese foreign policy in the Middle East.

Another pillar of China’s Middle East strategy is reliance on the U.S. security architecture in the region. While China has made its own strides in mobilising its naval fleet and leveraging a logistical base in Djibouti off the Gulf of Aden, these developments pale in comparison with the U.S. military presence in the region. The U.S. presence serves to secure the flow of oil from Middle Eastern producers to China. Significant arms sales to Iran could increase the likelihood of a confrontation between U.S. and Iranian forces in the Persian Gulf—an outcome Chinese policymakers fear. Furthermore, China’s relationship with the U.S. will always be a higher priority than its relationship with Iran. Historically, China has pulled back from engagement with Iran under U.S. pressure. Until the latest UN vote to extend the arms embargo in Iran, China generally did not defy the United States on Iran. In this regard, the vote was more of an ill-omen for U.S. multilateralism and the U.S.-China relationship than a material promise of China’s commitment to Iran.

Finally, there is also the matter of whether Iran can actually pay for large orders of advanced arms. Years of sanctions had taken their toll even before the COVID-19 crisis has ravaged the country’s economy and taken over 29,000 lives. Even with the appetite for defense spending of an increasingly militarised state, Iranian priorities will have to adapt, and Beijing’s motivation is profit. Additionally, the PRC does not manufacture the kinds of weaponry Iran covets. Iran is desperately in need of air-to-air machinery and air defense systems. Despite much effort, China cannot yet produce passable jet engines, and there are questions about its drones. China and Iran are mismatched when it comes to the weaponry on offer and spending capacity.

When it comes to trade, politics, and wider security, Chinese and Iranian interests can often align, but the partnership between the countries has not developed into a functional alliance. Certainly, the end of the UN arms embargo on Iran presents a long-term commercial opportunity for China’s defense industry. But in concert with both China’s ambitions and restraint in the region, it is unlikely that China will move to capitalise on the expiration of the arms embargo.

Photo: Wikicommons

After UN Showdown, INSTEX Can Help Sustain Iran Nuclear Deal

In return for limits to Iran’s nuclear activities under the 2015 agreement, or the Joint Comprehensive Plan of Action (JCPOA), the other side—the United States, the EU/E3 (France, Germany and the UK), China and Russia—were supposed to lift sanctions on the country. The US opted out of this compromise in May 2018 by withdrawing from the JCPOA. By deterring most private sector actors from Iran-related activities, US secondary sanctions have also prevented other JCPOA parties from living up to their end of the deal. In addition to a deep socio-economic crisis within Iran, US sanctions have undermined Iranian people’s access to basic humanitarian goods--and pushed the country to reduce its nuclear commitments. The EU and E3 efforts to protect the JCPOA under these circumstances have offered a grim lesson about the limits of European autonomy in a dollar-dominated world economy. 

When the Trump administration withdrew from the JCPOA, the EU stressed its commitment to ensuring continued sanctions lifting and to upholding the agreement. This determination was also expressed in practical measures. In summer 2018 the EU included the upcoming US sanctions on Iran in the so-called Blocking Regulation, thus banning EU companies from complying with them. In September 2018 the EU and the E3 announced that they would develop a special trade instrument to facilitate European-Iranian trade, including in oil, which was to be targeted by US secondary sanctions.

However, the Trump administration’s obliviousness to the Blocking Regulation soon exposed the absence of an effective enforcement mechanism to enforce it, and in practice US law took priority over EU law in the private sector’s risk assessments. Apparently recognizing their lack of political and economic leverage over US policy, by January 2019 the E3 had reduced the mission of the trade instrument—then named Instrument in Support of Trade Exchanges (INSTEX)— to trade in humanitarian goods.

While its limited focus fell short of previous expectations that the EU could counter or even significantly minimize the negative effects of US sanctions, INSTEX addresses a critical problem created by them. Humanitarian trade, which is in principle exempt from sanctions, has also been hit by the banking sector’s fear of US penalties, leading to a medicine shortage in Iran. In addition to being urgent, addressing this particular area of sanction over-compliance is also practical, as humanitarian trade runs a lower risk of being targeted by US sanctions than other trade areas.

INSTEX seeks to enable the exchange of humanitarian goods or services between Europe and Iran without the transfer of currency, thus minimizing the risk of US penalties. European exporters are to be compensated with funds located in Europe, based on the value commensurate with the value of imports from Iran. INSTEX’ Iranian counterpart, the Special Trade and Finance Instrument (STFI), is similarly tasked to coordinate payments within Iran.

INSTEX can reassure banks and companies through its joint ownership by the E3 and four other European states—Belgium, Denmark, the Netherlands and Norway, as well as Finland and Sweden, which are expected to join soon. In addition to providing a high level of trust in the instrument’s due diligence procedures, governmental ownership raises the threshold for the USA to impose sanctions on INSTEX.

Having processed only one pilot transaction thus far, INSTEX still needs to overcome major obstacles to function as intended. One key challenge is that the value of European exports to Iran exceeds the value of Iranian exports to Europe. Potential solutions to the problem include paying European exporters using Iran’s revenues currently frozen in foreign banks, or offering Iran a loan to buy humanitarian goods. However, the US is seeking to block these options.

The chances of striking a functioning trade balance could also be increased through the expansion of INSTEX to non-European companies, and extension of the INSTEX mandate to non-humanitarian trade that are not targeted by the USA but are impeded by fear of secondary sanctions. While INSTEX is unlikely to deliberately go against US sanctions, the E3 might decide to take further steps to protect is economic sovereignty if the instrument is targeted by the USA.

Currently it might seem that INSTEX is being taken over by political events, in particular the 2020 US presidential elections. Democratic Party victory in the elections could open the door for the US re-entry into the JCPOA, which would appear to make INSTEX less relevant. However, restoring the JCPOA or reaching any new agreements with Iran is dependent on sanctions lifting. This is likely to be difficult given the private sector’s disillusionment with the Obama administration’s previous assurances about the safety of engaging with Iran. INSTEX could help address this problem by providing additional guarantees to risk-averse banks and companies fearing the next U-turn in US policy towards Iran. 

Alternatively, the possibility of Trump’s re-election as US president—or a snapback of UN Security Council sanctions on Iran—could lead to the collapse of the JCPOA. While this can be expected to reduce European commitment to INSTEX, its humanitarian mission should be pursued as a matter of ethical necessity, even without the JCPOA.

Clearly, INSTEX alone cannot save the JCPOA, the future of which essentially depends on US-Iranian relations. INSTEX can nevertheless help maintain the nuclear agreement until, or even after, diplomatic solutions are found. In addition to demonstrating solidarity on the JCPOA and commitment to basic humanitarian principles, INSTEX can also been seen as a test case of a more independent European foreign policy.

Photo: IRNA