Iran-Israel tensions: Can Iran's economy handle a war?

As the United States and 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 in the last six years, despite massive sanctions imposed by former US president Donald Trump in 2018.

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

To Iran's regime, the billions of dollars in oil revenue are instrumental in maintaining acquiescence at home. Much of the population is suffering the impact of international sanctions, which have led to a depreciation of the national currency, the rial.

Soaring inflation

Iranian inflation reached new heights recently, climbing to about 40% in February. Any exacerbation due to escalating geopolitical tensions will only stoke consumer prices further, Djavad Salehi-Isfahani, an economics professor at the Virginia Polytechnic Institute and State University, told DW.

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

"This exchange rate devaluation very quickly translates into higher prices, because Iran imports a lot of types of commodities, and many of the commodities it produces inside Iran also have an import component," the Middle East expert said, adding that the country is "bracing for higher inflation."

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

Oil: the main moneymaker

According to German data provider Statista, the most important contributor to Iran's gross domestic product (GDP) in 2022 was the services sector with 47%, followed by industry (40%), and agriculture (12.5%).

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

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

"Iran's economy has indeed grown, in part due to the increase in oil exports... the GDP increase amounts to about 5% per year, which is not bad compared to what happened in the region overall after the COVID-19 pandemic," Salehi-Isfahani said. He added that many financial resources had been invested in expanding the military and other regime-stabilizing measures.

Corruption and lack of transparency

In Iran, significant amounts of state income are said to disappear into the opaque structures of the government in Tehran. The Corruption Perception Index by international organization Transparency International ranks Iran in place 149 of 180 countries.

The Islamic Revolutionary Guard Corps (IRGC) — a paramilitary elite force within the armed forces — and numerous religious organizations reportedly control central parts of the economy. They do not pay taxes, nor do they have to submit balance sheets. They are primarily answerable 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 contender. With a population of around 88 million, it is almost ten times larger than Israel, home to 9 million. Yet its GDP in 2022 was significantly lower, ending the year at $413 billion, compared to Israel's $525 billion.

Protecting the oil industry

Iran's ability to sustain a war with Israel very much depends 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 (one barrel is about 159 liters, or 35 gallons) of crude oil per day. Almost all of this went to China. According to the data provider Vortexa, this was the highest volume since the third quarter of 2018.

Fernando Ferreira, head of the geopolitical risk service of the Rapidan Energy Group in the US, told Financial Times that "Iranians have mastered the art of sanctions circumvention."

"If the Biden administration is really going to have an impact, it has to shift the focus to China," he added.

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

Salehi-Isfahani thinks that Iran "is not ready" to sustain an extended military conflict, "which is why they have been very careful not to get too involved in the Gaza war. Rather than intending to do harm, the attack they made on Israel was more symbolic."

This article was originally written in German.