Iran’s Economy: Can the Islamic Republic Afford to go to War with Israel?

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Iran’s population is nearly ten times that of Israel, but the Islamic Republic’s gross domestic product is significantly smaller. Can Iran even go to war?

The US and the EU are imposing new sanctions on Tehran, while Iran reports that the country has exported more oil than it has in six years. Iran’s oil minister, Javad Ouji, announced in March that oil brought more than $35 billion to the Islamic Republic.

This income is extremely important for Iran, including the maintenance of social peace. A large part of the population is suffering from the effects of international sanctions, which have led to the depreciation of the local currency and a significant increase in inflation, which has reached almost 40 percent.

In the last few weeks, as the conflict with Israel was expected to increase, the rial lost a quarter of its value against the US dollar. “This devaluation of the local currency has an immediate impact on prices, because Iran imports a lot of goods,” economist Javad Salehi-Isfahani told DV. He says that components that were imported are used for many of the goods that are produced in the country, which could lead to even higher inflation.

The standard of living is at the 2005 level

Since Iran cannot meet its own food needs, food prices are rising even more due to currency devaluation and inflation. “It affects the poor the most – they spend up to half of their income on food,” says Salehi-Isfahani.

The middle class has also suffered. “As a result of the sanctions, the standard of living has fallen to the level of 20 years ago,” said the economist. “Although the economy is at the same level or even slightly higher.”

Statistics show that in 2022, agriculture accounted for 12.5 percent of the gross domestic product, industry for about 40 percent, and the service sector for 47 percent.

The economic situation depends on oil exports

The country is heavily dependent on crude oil exports. Since 90 percent of it is exported to China, Western sanctions are relatively ineffective. But Tehran’s rulers are increasingly concerned that the vital oil sector could be a target for possible Israeli retaliation.

“I’m sure they are worried because a war that would damage the oil sector would be a heavy blow to the economy,” Isfahani said. He says that due to the increase in oil exports, an economy Iran has definitely improved.

However, this has not led to an increase in the standard of living of the people, confirms Isfahani. So much financial resources have flowed into the military expansion and other measures of the regime.

Israel is a much richer country than Iran

Much money at least flows into the opaque structures of the Shia rulers in Tehran. The Transparency International index, which measures corruption, ranks Iran 149th out of 180 countries.

Particularly unclear is the role of the Revolutionary Guards and the religious foundations that control key parts of the economy. They do not pay taxes, do not have to submit reports and are primarily under the control of the country’s political and religious leader, Ayatollah Ali Khamenei.

While oil revenues have stabilized in recent years, Iran’s economy remains robust. The population of 88 million is almost ten times larger than Israel, and the gross domestic product in 2022 is significantly lower than Israel’s number – 413 billion against 525 billion. The same is true with GDP per capita – in Iran it is 4,043 dollars, and in Israel – 54,336 For comparison – in 1990, GDP per capita in Iran was 10,660 dollars.

Is Iran ready for war against Israel?

In the first three months of this year, Tehran managed to sell an average of 1.56 million barrels of crude oil per day. “The Iranians have mastered the art of getting around sanctions,” energy expert Fernando Ferreira wrote in the Financial Times at the time. So here’s a suggestion – if the Biden administration really wants to get something done, it should focus on China, which receives almost all of Iran’s oil exports.

But whether sanctions are tightened or not, is Iran’s economy ready right now for a possible military escalation by Israel?

Javad Salehi-Isfahani’s answer is uncertain: “In general, it is not ready for a long military conflict. That is why the rulers in Tehran are careful not to interfere with the war in Gaza. And the attack on Israel was more symbolic than intended to cause damage.”