How Sanctions Affected Iran's Military Capabilities

Four days into the war with Iran, U.S. Secretary of War Pete Hegseth proudly announced that the U.S. and Israel were “punching them [Iran] while they are down”. While he was mainly praising his own country’s military strength, the statement also highlighted the asymmetry of the conflict. In this blog post, I will explain how the economic sanctions against Iran have further reduced its military capabilities.

The asymmetry is most obvious in Iran’s defensive capacity. For almost half a century, the country has been preparing for a confrontation, and as the American military was moving assets into the region for weeks, the recent attack did not come as a surprise. Still, Iran’s air defenses seem to stand no chance against the American and Israeli air forces. The two countries are able to strike Iran where they want, whenever they want. In just a few days, they killed Iran’s supreme leader and several senior officials. The air superiority was predictable. While the U.S. and Israel deploy some of the most advanced fighter jets, most of Iran’s aircraft are almost half a century old.

Yet the asymmetry is also present in Iran’s offensive capabilities. Contrary to the mild reactions during the Twelve-Day War in June and after the assassination of the head of its elite troops in 2020, Iran is retaliating fiercely against the assaults. The counterattacks resemble, however, those of a guerrilla unit more than those of a highly militarized state and demonstrate Iran’s lack of means. Since its command and control structures have been taken down, Iran’s retaliatory strikes are conducted by autonomous units because communication with the units has become almost impossible. In addition, Iran has resorted to targeting merchant shipping in the Strait of Hormuz by attacking vessels and threatening to deploy naval mines. Several of the strikes, both on land and at sea, are conducted with Shahed drones. At a cost of $20,000 to $50,000, the drones are called ‘the poor man’s cruise missiles’. The mines are even cheaper, as they can cost as little as $1,500. Above all, Iran’s retaliatory attacks show a lack of resources.

The shortage of means is remarkable, as Iran is well-endowed. The country is three times larger than France and is rich in natural resources. It has the second-largest natural gas reserves and the fourth-largest crude oil reserves. In addition, it has a large population of 93 million inhabitants that is well-educated, as the majority has enjoyed higher education. Under normal circumstances, Iran should have been able to afford more advanced military equipment.

Part of the explanation for why Iran could not buy or develop better weapons are the excruciating sanctions that have been imposed by Western countries. Since the revolution in 1979, American sanctions were imposed and lifted several times. Initially, they were introduced as a reaction to Iran’s failure to protect U.S. embassy personnel, aggression against vessels, and support for terrorism. When Iran was accused of building nuclear arms in 2006, the U.S. and its European allies implemented tougher sanctions in line with a UN Security Council resolution. As Iran did not comply, the sanctions were tightened over the years. The 2012 attempt to cut Iran off from the global financial system was the peak of the sanctions regime. Relief came in 2015, when six major economies lifted sanctions on the condition that Iran end its nuclear program. Three years later, the Trump administration unilaterally reimposed them. In sum, for most of the past four decades, the Iranian economy has been repressed by sanctions.

Whereas the efficacy of sanctions have often been debated, most analysts and scholars agree that the imposition of (especially financial) measures against Iran has been wreaking havoc. The entire first part of Edward Fishman’s account of modern economic warfare details how the U.S. gained a chokehold on the Iranian economy by decoupling the country from the global financial system. The insights of Henry Farrell and Abraham Newman’s seminal article and book are almost entirely based on the success of economic coercion against Iran. The analyses recount how the financial sanctions that were introduced from 2006 onward were far more successful than the original embargoes on hydrocarbons. They allowed the U.S. to leverage the centrality of the dollar to dissuade countries that did not impose sanctions from doing business with Iran. If a firm or bank continued to engage with Iran, it was fined or denied access to the dollar, which effectively banned the entity from any cross-border financial transactions. In practice, the imposition of so-called secondary sanctions meant that most countries ceased economic relations with Iran. To show that they were serious, the Americans imposed a $1.9 billion fine on HSBC and an $8.9 billion fine on BNP Paribas for, among other things, violations of the sanctions regime. In 2012, the isolation of Iran tightened even further when the U.S. and the EU decided to remove Iran from SWIFT, the global messaging system for banks. As a result, Iran’s currency, the rial, plummeted.

The exceptionally tough sanctions had severe economic and military consequences for Iran. Studies almost unanimously find significant negative effects from sanctions on the Iranian economy. Between 2012 and 2015, sanctions lowered the country’s GDP by 17 to 19%. Without them, annual growth could have been 1-2 percentage points higher. The lower economic output also led to lower tax revenue. One study shows that the sanctions reduced government income by 40-50%. As the military budget depends on government revenues, the decrease also affects the funding of Iran’s military forces. While Iran prioritized military spending because of national security threats, a study found that the sanctions still reduced it by about 77% in the long run. The largest impact on hard power capabilities came from the multilateral and secondary sanctions that were imposed in 2012. The economic harm therefore partly explains why Iran has to resort to cheap drones and mines, and use outdated aircraft and vulnerable communication systems.

While the sanctions did not bring the Iranian elite to comply with Western demands or force a regime change, they did significantly weaken Iran’s military power. The case shows that sanctions can shape the balance of power in conflict. It also demonstrates that multilateral financial sanctions are particularly powerful. Yet the strangulation of Iran also reveals the darker side of high-intensity economic warfare. Some studies find that the sanctions disproportionately affect already disadvantaged households. In addition, history shows that banks remained reluctant to resume business with Iran even after the U.S. officially lifted the sanctions. Empirical research confirms the lasting effects of the sanctions. Even if the sanctions were to contribute to overthrowing the Iranian leadership, the economic hardship is likely to persist.