DW analysis: Can Iran afford the war economically?

For years, Iran has been suffering from high inflation, the weakening of the currency and the consequences of international sanctions. New measures by the West and a long military conflict would put the country in front of a very serious crisis.

At a time when the US and the EU want new sanctions against Tehran, the country itself will stand out with news of success, such as news that Iran has managed to sell more oil than ever before in the last six years. And this despite the US sanctions imposed in 2018 by President Trump. Iran's Oil Minister Javad Ovji announced in March that oil exports have brought more than "$35 billion" to the Iranian state coffers. "Enemies of Iran" want to stop our oil exports, but today we can export oil wherever we want, and this with very good offers, the Financial Times quoted the Iranian minister.

Billions of income are very important for the country to ensure internal social peace. A large part of the population directly suffers the consequences of international sanctions, they have brought about the strong fall of the country's currency, the rial, and increased inflation, up to 40%.

The economics professor at the American University, Virgina Tech, Djavad Salehi-Isfahani, tells DW that the intensification of geopolitical conflicts is exerting new pressure on the Iranian currency, devaluing it even more against the US dollar. In recent months, the rial has lost 25% of its value against the dollar. "This exchange rate depreciation is quickly reflected in much higher prices because Iran imports a lot of goods." According to Salehi-Isfahani, Iran should prepare for a long period of high inflation.

Standard of living as in 2005

Because Iran cannot provide its own food items, the devaluation of the currency and high inflation cause food prices to rise sharply. "This has a strong effect on the well-being of the poorest part of the population, because the provision of food items accounts for half of their expenses," says the expert on the Middle East economy.

But the situation has worsened even for the middle class in the last two decades. "The standard of living is again at the level of 20 years ago because of the sanctions", emphasizes Isfahani. Even the economic volume has this level maybe only a few percent higher, says the expert.

Iran's economic situation is highly dependent on oil exports. Since more than 90% of oil goes to China, Western sanctions are increasingly losing their effect. Therefore, those in power in Tehran are very worried, if the oil sector, which is the main source of foreign exchange, could become the object of an attack as a response from Israel. This is how Isfahani formulates the situation in Tehran. "I'm very sure that they are very worried, because a war that could also damage the infrastructure for oil exports would be a serious blow to the economy." After the shock caused by the sanctions imposed by the US in 2018, Iran has meanwhile again reached 80% of the export amount of the time. But this has not led to the improvement of living conditions for the population, since most of the financial resources go to the military strengthening of the country and other measures of the mullahs' regime.

Corruption and lack of transparency

A lot of money also disappears in the non-transparent structures of the Shiite rulers in Tehran. In Transparency International's corruption perception index, Iran ranks 149 out of 180 countries. Also very unclear is the role of the Revolutionary Guards, a parallel army, and that of religious foundations, which control important parts of the Iranian economy. They do not pay taxes, do not have to present economic balance sheets and are directly dependent on the political and religious leader of the Islamic Republic, Ayatollah Ali Khamenei.

For Middle East expert Martin Beck of the University of Southern Denmark (SDU) Iran's economy consists of a "mix of the political and economic spheres that fosters a politics of clientelism and distribution that is closely linked to corruption."

Although oil revenues have stabilized in recent years, Iran is anything but an economic powerhouse. Although its population of 88 million is nearly 10 times that of its arch-nemesis Israel's 9 million, Iran's economic volume of $413 billion is significantly lower than Israel's, with 525 billion dollars. So how the country's economy will develop depends a lot on the effect of the new Western sanctions, if they would manage to significantly reduce oil exports.

Crucial oil exports

Tehran has managed in the first three months of this year to sell an average of 1.56 million barrels of oil per day, and almost all of it to China. This was the highest value of sales since 2018. "The Iranians have mastered the art of circumventing sanctions," Fernando Ferreira of Rapidan Energy Group was quoted as saying by the Financial Times newspaper. "If the Biden administration is really going to achieve anything here, it needs to focus on China."

The US itself is meanwhile much more independent of oil exports from the Middle East. However, the tightening of sanctions against Iran would lead to an increase in the price of oil in the world markets and would also have consequences in increasing inflation. For President Biden in this election year, this meant opening the door himself to his rival, Donald Trump.

But whether or not the sanctions escalate - Would Iran's economy be ready to handle an escalation of the conflict with Israel? The answer of economics professor Djavad Salehi-Isfahani is clear: "As a whole, it is not ready for a long military conflict. That's why they (those in power in Tehran, ed.) have been very careful not to get too involved in the war of Gaza. And the attack against Israel was more of a symbolic thing than an attack that really wanted to cause damage."/DW