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

How to Think About Getting Foreign Firms Back into Iran

When the Joint Comprehensive Plan of Action (JCPOA) was adopted in July 2015, a wide range of companies began to explore commercial opportunities in Iran, anticipating the lifting of international sanctions that would follow about six months later. But the initial rush of commercial interest never became a cascade—while a significant number of foreign companies did commence or resume operations in Iran, there was no larger, second cohort that followed. Companies that did attempt to enter the Iranian market faced significant legal and financial challenges. The experiences of these companies deterred other entrants. Then, a little over two years after the lifting of sanctions, President Donald Trump made good on a campaign promise and withdrew from the Iran nuclear deal, unilaterally reimposing US secondary sanctions. The companies that had rushed into Iran quickly rushed out.

This history poses a dilemma for Iran’s negotiators as they seek to restore the JCPOA. While “modest progress” has been made during the 8th round of negotiations, one sticking point continues to be Iran’s demands around not only how US secondary sanctions will be lifted, but whether additional non-nuclear sanctions will be imposed by the US. In a recent interview, Iranian foreign minister Amir Abdollahian stated, “We demand guarantees that include not imposing any new sanctions, and not reimposing sanctions after lifting them under any pretext.”

Articulated this way, Abdollahian’s demand is problematic. Can Iran, with its reputation as a missile proliferator, proxy supporter, and human rights violator, really expect that the US won’t impose any new sanctions? The answer is no, but it is likely that Abdollahian knows this. His comments point to a legitimate concern as to whether sanctions relief commitments can be considered credible if sanctions imposed for transgressions beyond the nuclear file make it harder to conduct the trade and investment explicitly envisioned in the nuclear deal. For example, if the US were to maintain a tempo of human rights sanctions designations in the period of JCPOA implementation, it would contribute to a chilling effect that may deter companies and banks from proceeding with the trade and investment envisioned in the JCPOA, even if those sanctions are targeted on specific non-commercial actors. Of course, the US and Europe are not going to take sanctions, now the primary tool of Western statecraft, out of their toolkit. So how should the negotiators in Vienna balance the need to deliver economic benefits to Iran with the realistic expectation that coercive measures will continue to be used for non-nuclear reasons?

Timur Kuran’s seminal work on cascade theory—much of it completed in collaboration with Cass Sunstein—can help answer this question. Cascade theory is a heuristic that can be used to analyse a wide range of situations in which private preferences, perceptions, and thresholds combine to determine whether band wagoning will take place. While cascade theory has most often been used to analyse the decisions of individuals, it can also be applied to the commercial decision-making of firms. Firms can be understood to have their own preferences and thresholds, which are shaped by the perception of risk, whether commercial, legal, or reputational. For example, this body of research includes work on “reputation cascades” that influence political decision-making by corporations, and cascades observed in the decision making of investors in capital markets.

Along these lines, cascade theory offers a way to understand how the application of sanctions can lead to changes in firm behaviour. Major sanctions enforcement actions, such as the fines levied on a series of European banks by the Obama administration between 2012 and 2014 for knowing violations of US primary sanctions, can serve to change perceptions of perceived risk among other firms. These fines contributed to “de-risking” among many banks and multinational corporations which opted to limit their exposure to jurisdictions in which sanctions have been imposed, even in cases in which their commercial activities remained clearly compliant. In such a situation, cascade theory helps us understand how enforcement actions can serve as a signal to firms. In the cases in which the newly perceived risks exceed the firm’s threshold, behaviour is likely to change. One type of cascade occurs when companies decide to withdraw from risky jurisdictions. By 2016, responding to heightened regulatory risk, 75 percent of major banks reported having reduced their correspondent banking connections, a trend which predominantly saw major American and European banks limit ties with banks in the Global South.  

The global trend of de-risking is an example of cascading among firms, triggered by the punitive and deterrent power of sanctions and related enforcement actions. But cascade theory may also be insightful examining the inverse situation—what happens when policymakers decide to lift sanctions on a country, and seek to encourage firms to engage in trade and investment? In recent years, there has been increased focus on the “credibility” of sanctions relief—while American and European governments may lift sanctions, the move does not necessarily lead to the envisioned trade and investment, compromising the diplomatic agreements in which sanctions relief is a critical part of the negotiated quid-pro-quo.  

The sanctions relief afforded to Iran in January 2016 as part of the implementation of the JCPOA did not lead to a cascade. While an initial cohort of multinational companies did re-enter the Iranian market, many companies, and especially banks, opted not to reengage, perceiving that the risks remained high. The lower-than-expected level of economic engagement that followed from the implementation of the JCPOA arguably made it less costly—both politically and economically—for President Donald Trump to unilaterally withdrawal from the agreement in May 2018, at a time when Iran remained in full compliance with its nuclear commitments.

As the P5+1 and Iran continue to seek the restoration of the nuclear deal, Iranian negotiators have demanded that the world powers intervene to ensure that sanctions relief occurs “in practice” and not simply “on paper.” The difficult history of the JCPOA makes clear that successful implementation of sanctions relief requires cascading, and the design of implementation policies ought to consider how those policies will impact the perceptions and thresholds of firms. Adapting from Kuran’s general model, it can be stated that firms with different preferences and risk appetites will have different market entry thresholds (T). To illustrate this variation, we can create the following threshold sequence, notating the thresholds for ten firms:

A = (0, 20, 20, 30, 40, 50, 60, 70, 80, 100) 

In this sequence, Firm 1 (T1=0) is willing to begin conducting business in Iran immediately after the lifting of sanctions.  At the other end of the sequence, Firm 10 (T10 = 100) will never enter the Iranian market. But the thresholds of other firms are responsive to a value we can call S, the proportion of firms that have already entered the market. For example, Firm 2 (T1=20) will only enter the market when at least 20 percent of firms have done so—a condition not met by the market entry of Firm 1 (T1=0), the entry of which means that S=10. Under such conditions, there is no cascade—the thresholds of most firms remain too high.

The variation in thresholds across such a sequence reflects the trade-off between external and internal payoffs faced by firms. For example, even if the external payoffs represented by entering a formerly sanctioned market are clear, such as new revenue streams, the internal costs may remain too high for the firm to decide to act on the evident economic opportunity. In this way, the internal payoff can itself be expressed through a threshold sequence comprised of the departments necessary to make a firm-level decision. For example, a firm’s decision to operate in a formerly sanctioned market will typically require buy-in from the business development department, the finance department, the legal department, and often the board of directors. Top executives and individuals in legal and compliance roles in firms conducting business in sanctioned jurisdictions can be held personally liable for compliance failures. These individuals have among the highest thresholds for supporting a business decision to work in a market like Iran and can veto the plans of other departments willing to pursue the opportunity, in effect setting the threshold for the firm. Broadly speaking, engaging in business shortly after the lifting of sanctions requires evaluating a trade-off between the external reward of previously untapped business opportunities with the internal cost of onerous operational and compliance requirements. Additional sanctions designations made after the lifting of JCPOA-related sanctions will inherently impact these trade-offs.    

Policymakers seeking to encourage commercial activity following the lifting of sanctions must therefore try to increase the external rewards and minimise the internal costs. This can be done through a series of policy interventions that go beyond the simple lifting of sanctions. If the sanctions relief implemented “on paper” results in a threshold sequence given by A, then we can conceptualise a different threshold sequence for sanctions relief implemented “in practice,” which we can call A*: 

A* = (0, 10, 20, 30, 40, 50, 60, 70, 80, 100)

In this sequence, as in sequence A, Firm 1 (T1=0) is ready to engage in business simply because sanctions have been lifted. But let’s assume that some new policy intervention has caused the threshold of Firm 2 (T1=10) to fall from 20 to 10. This means that the decision of Firm 1 to enter the market will trigger Firm 2 to do the same because S=T2. That small change is also sufficient for A* to become a cascading sequence, as the decision of Firm 2 triggers market entry by Firm 3 and so forth until nine-tenths of the firms are active, with Firm 10 (T10=100) the only holdout. But, if some subsequent policy intervention, such as the application of new sanctions, causes the threshold of Firm 4 (T4=30) to rise, the cascade will be interrupted because S will longer be equal to T4.

What the sequence A’ illustrates therefore is that the policy intervention needed to trigger a cascade does not necessarily need to be so significant as to shift the thresholds of all firms in the sequence. Rather, it should be targeted to create a change in behaviour among those firms whose decision to enter the market would trigger the cascade. Policymakers seeking to make sanctions relief commitments more credible can therefore use cascade theory to conceptualise different sets of interventions intended to encourage more companies to engage in trade and investment in formerly sanctioned jurisdictions more quickly.

These interventions ought to focus on calibrating the external and internal payoffs. First, to change external payoffs, policymakers, including in Iran, must seek to make the economic benefits of early market entry more significant. Presently, being among the early movers after the lifting of sanctions means contending with high costs of doing business. These costs include higher transaction fees and risk premiums related to banking services and financing, or surcharges related to the importation of equipment or technology necessary to operate local facilities or infrastructure. These costs could be reduced through incentives, such as grants and loans that would see the state shoulder some of the costs and financial risks in the initial period of sanctions relief, increasing the external payoff. While some European countries did seek to provide state-backed credit lines to support companies aiming to engage in trade with Iran, the operationalisation of these credit lines was clumsy, meaning that no facilities were available to companies even two years after the lifting of US and EU sanctions, and that there was no impact on the perceived external payoff.  

Second, policymakers will also need to address the internal costs that can keep companies from pursuing the opportunities afforded by sanctions relief. Practically speaking, these interventions would reduce the perceived legal risks of commercial activities in formerly sanctioned jurisdictions. Here, policymakers should provide greater legal clarity around the activities made permissible following the lifting of sanctions and provide opportunities for firms to confirm, for example through the solicitation of so-called comfort-letters, the specific permissibility of their planned activities beyond the blanket guidance currently provided by regulatory authorities. Moreover, there should be an effort to reduce the threat of personal liability around inadvertent sanctions violations. Finally, the possible impact of additional sanctions designations, such as sanctions imposed after the implementation of the JCPOA on human rights grounds, need to be considered in the context of the trade-off between internal and external payoffs. If Western governments decide that a sanctions designation must be made, the impact of that designation on internal payoffs needs to be considered. Of course, targeted sanctions imposed on human rights grounds are not intended to interfere with the broad implementation of the JCPOA, and so the unintended consequences ought to be mitigated, most likely by ensuring that the external payoff continues to outweigh the internal risks. Such an approach will increase the likelihood that firms perceive a better trade off in conducting business in formerly sanctioned jurisdictions—this will lead to a more favourable threshold sequence, in which there is a higher probability of a cascade.

Designing policy interventions to make sanctions relief more credible and effective will be crucial not only for the restoration of the nuclear deal, but also for the long-term viability of sanctions as a tool of economic statecraft. Cascade theory is a compelling heuristic to understand how such interventions will need to influence firm behaviour to create the conditions necessary for an increase in trade and investment in post-sanctions environments.

Photo: IRNA

Here’s What the French Proposal for Trump and Iran Actually Entails

A new report in the Daily Beast exclaims that Trump is flirting with a “$15 billion bailout for Iran.” But the mechanics of the proposal Trump is considering, put forward by French President Emmanuel Macron, are far more limited and reasonable than this and other reports may have you believe. What is being deliberated is a plan that does nothing more than restore Iran economic benefits it was already receiving under the Joint Comprehensive Plan of Action (JCPOA), until Trump withdrew from the agreement, reinstating U.S. secondary sanctions. 

Back in 2017, French, Italian, and Spanish refiners were importing around 600,000 bpd of Iranian oil on an annual basis. When the U.S. reimposed sanctions on Iran in November of 2018, it provided waivers for eight of Iran’s oil customers to sustain their imports at limited volumes. Italy was the only European customer to receive a waiver, but given the complicated nature of U.S. sanctions, the waiver itself was insufficient to give Italian state oil company ENI enough comfort to continue buying Iranian oil. 

Eventually, in May of 2019, the oil waivers were fully eliminated, causing Iran’s oil exports to plummet further. Only China and Syria continue to buy Iranian oil in defiance of US sanctions. The cessation of European imports of Iranian oil has been the single greatest source of frustration for Iranian policymakers, who feel that Europe is failing to keep up its end of the bargain under the JCPOA nuclear deal. Iran imports a large volume of machinery and medicines from Europe—the loss of euro denominated revenues makes it much harder and more expensive for Iran to sustain these crucial imports, putting a strain on the Iranian economy. 

In the face of these challenges, Europe established INSTEX, a state owned trade intermediary that would allow trade in non-sanctioned goods to flow without the need for cross-border financial transactions, and by extension, Iranian use of its now precious reserves of euros. But INSTEX has been hampered by the fact that it offers Iran no solution to sustain its oil sales to Europe. Not only is Iran ceding market share, but in its current form INSTEX will be unable to facilitate the billions of euros worth of imports from Europe that are currently left vulnerable without Iranian oil being sold to Europe in tandem.

This is the problem the French proposal seeks to solve. It is basically a riff on a proposal first put forward by the Iranians. The Iranians argued that if Europe is unable to purchase Iranian oil due to the reticence of European tanker companies and refiners to handle the crude, then Iran should “pre-sell” oil to Europe. Iran would be provided a line of credit today guaranteed against future oil sales to Europe to be completed when sanctions relief allows.

The figure that has been associated with the French plan—$15 billion—is a direct reflection of what it would take for Europe to restore the financial component of their oil purchases under the JCPOA. Over the course of a year, the value of 700,000 bpd in oil exports at a price of $58 per barrel is approximately $15 billion dollars. For context, in 2017, Europe imported 29,035,298 metric tonnes of crude oil, which is the equivalent of approximately 583,092 bpd. At the then still low oil prices, the value of those imports was just over EUR 10 billion. Accounting for a higher oil price and the need for round numbers, a $15 billion commitment is reflective of a normal state of affairs for European purchases of Iranian oil.

In short, the French are not aiming to provide any new money to Iran. Their plan is designed to provide Iran a financial benefit it was already receiving—in accordance with US sanctions relief—back in 2017. In this sense, the French are merely seeking permission from the Trump administration to restore their own compliance with the implementation of economic benefits of the JCPOA—a request growing more urgent as Iran loosens its own compliance with its nuclear commitments under the deal. 

In some respects it is surprising that the French would embrace this plan given their relatively tepid push to sustain the economic benefits of the deal for Iran to date. But it would appear that President Macron believes a more substantial move is necessary to bring about a “ceasefire” in the economic war waged by Trump, and the Iranian escalations being pursued in response.

Crucially, the French plan does not call upon the U.S. to lend a single cent to Iran. The reason the Macron has appealed to Trump reflects both the political reality that he needs to de-escalate tensions between the U.S. and Iran as well as the practical reality that Europe is unable to provide the envisioned financial support without a sanctions waiver from the Treasury Department, either for the credit line itself, or for resumed oil sales. 

The creation of new credit facilities for Iran was actually first considered in the summer of 2018 prior to the creation of INSTEX. European central banks were asked to consider opening a direct financial channel to Iran’s central bank to ease payment difficulties and enable the provision of export credit. But the central banks balked at the idea, both because Iran has yet to fully implement the financial crime regulations required by its FATF action plan (reforms which have still not been fully implemented) and also because of concerns about U.S. retaliation. Close advisors to the Trump administration were publicly calling for European central bankers to be sanctioned if such faculties were extended to Iran.

So some consent from the U.S. will be required to operationalized the French proposal. That may irk the Iranians, but it also makes the plan more feasible. European and Iranian policy makers alike have been disabused of the idea that direct defiance of U.S. sanctions is possible for France and the other EU member states. Macron has therefore decided to try and coax Trump towards a negotiated solution, dangling in front of him the prospect of talks with Iranian President Hassan Rouhani. 

But importantly, the U.S. would be making a minimal concession to secure such talks. Any waiver granted to the Europeans could be revoked and the financial benefit Iran would receive is only part of the full financial benefits they were receiving prior to Trump’s withdrawal from the JCPOA and the reimposition of U.S. secondary sanctions. 

Photo: Wikicommons