Building the Iranian Military UNDERSTANDING TEHRAN’S DEFENSE ACQUISITION AND RESEARCH AND DEVELOPMENT DECISION-MAKING J. Matthew McInnis April 2017 AMERICAN ENTERPRISE INSTITUTE Contents EXECUTIVE SUMMARY ........................................................................................ 1 INTRODUCTION ................................................................................................ 3 UNDERSTANDING THE IRANIAN MILITARY BUDGET ................................................ 4 UNDERSTANDING IRAN’S DEFENSE INDUSTRIAL BASE AND ACQUISITION .................12 TOWARD A MODEL OF IRI ACQUISITION AND RESEARCH AND DEVELOPMENT DECISION-MAKING ...........................................................................................18 CONCLUSION: FUTURE TRENDS .......................................................................... 23 ABOUT THE AUTHOR ........................................................................................ 25 NOTES ............................................................................................................ 26 i Executive Summary his study examines how the Islamic Republic of conflict, official defense expenditure as a percentage TIran (IRI) makes defense budgetary decisions, of GDP tends to drop to 2.5 percent or below.3 explores current and future military spending trends, The full scope of the IRGC’s gray budget spend- and assesses Iran’s military industrial base and pro- ing is uncertain but likely represents an additional curement efforts. The principle factors that drive 50 to 100 percent of military outlays.4 This makes total the IRI’s decision-making for weapons development defense spending as a percentage of GDP 4 to 5 per- and acquisition can help form an analytic framework cent most years, although it can be higher.5 During for policymakers seeking to better understand Iran’s peak unconventional operational periods, such as unique procurement and military production pat- when Iran focused on countering the US in Iraq in the terns. With this approach, policymakers can antici- 2000s or the current Syrian civil war, it reaches up to pate which military domains the Iranian military will 6 percent or more.6 most likely invest resources, taking into consideration Iran’s defense industrial base is large and diverse, realistic levels of projected funding and likely require- but it is insufficient in meeting all of Tehran’s stra- ments tied to threat perceptions. tegic requirements. Much of the base is built around The IRI’s annual defense budget does not include the production of missiles, anti-access/area-denial the significant resources the Islamic Revolutionary (A2/AD) naval weapons, and unconventional capabil- Guard Corps (IRGC) generates and expends off the ities for its proxy and asymmetric warfare activities, books or commercial activities that support their as well as to promote deterrence.7 Recent conflicts operations and procurements activities beyond their in Iraq and Syria highlight this orientation’s inher- official allocations. However, the amount the Iranian ent limitations, showing the need for improved expe- leadership will be able and willing to spend on its ditionary warfare capabilities, close air support, and defense and military activities, especially the relative logistics support that may drive future modernization. scale of resources available for Tehran to acquire or Tehran must rely on Russia and other foreign chan- develop new weapons, can be reasonably estimated at nels for procurement and sustainment of advanced any gross domestic product (GDP) growth rate if the conventional capabilities that its own military indus- regime’s threat perceptions are generally understood. tries cannot produce. This is particularly true for air Iran’s military expenditure fluctuation highly cor- defense systems, armor, fighter aircraft, cruise mis- relates to Iran’s GDP, which in turn highly correlates siles, and large submarines.8 Iran looks to indigenize to oil prices. Estimated percentage of GDP dedicated production of military weapons and other platforms to defense spending is, arguably, the optimal way of whenever possible, due to both the state’s relative iso- gauging the IRI’s fiscal prioritization of the military lation and the leadership’s ideological preferences to and for assessing past and future defense growth. avoid dependence on foreign manufacturing for its Official spending on defense averages between 2.5 and defense.9 The IRI will likely continue to maintain cer- 3.0 percent of GDP since the Iran-Iraq War.1 During tain legacy pre-1979 conventional weapon platforms, periods with fear of regime-threatening conventional particularly its aging air force, if technically and stra- military conflict, official defense spending tends to tegically feasible. rise above 3.0 percent of GDP.2 During periods with Tehran will likely prefer spending new resources on minimal fear of regime-threatening conventional proven domestic production or promising research 1 BUILDING THE IRANIAN MILITARY J. MATTHEW MCINNIS and development activities for critical weapon plat- ability to increase defense expenditure: the price of forms, based on analyses of the IRI’s decision-making oil, the rate of GDP growth, and the amount of assets patterns for procurement and domestic production. recovered under the Joint Comprehensive Plan of The IRI will minimize foreign acquisition unless Action (JCPOA).11 After sanctions lift, Tehran will there is a strong likelihood that Iran’s defense indus- likely accelerate procurement and modernization tries will soon be capable of producing such a system in all its military domains, and it may try to achieve indigenously through technology transfer or reverse real gains in building a blue-water navy. A recapital- engineering. ization of its air force or army over the next decade Without a real change in threat perceptions, is doubtful. US policymakers should understand that there will likely be political resistance to pushing debates about what Tehran’s increasingly offensive official military spending above 2.5 percent of GDP military would look like are still underway and driven and total defense spending above 5 or 6 percent of predominately by two factors: threat perceptions GDP (including the gray budget) once Syria and Iraq and resources. Washington and its allies should also operations de-escalate.10 If Iran’s economy grows at recognize they have an enormous capacity to influ- around 4 percent a year, as expected in the near term, ence Iran’s military spending levels and allocations Tehran should still have the resources to improve its by affecting both the regime’s threat calculus and the conventional forces. Three factors dictate Tehran’s foreign investment climate. 2 Introduction he Islamic Republic of Iran (IRI) is on the cusp Supreme Leader Ali Khamenei, this strategy seems to Tof making significant decisions about what it be the consensus among military leaders, the execu- wants to be as a state and what it wants its military tive branch, and legislators. However, given increas- to become following the implementation of the Joint ing concerns with Khamenei’s health, it is unknown Comprehensive Plan of Action (JCPOA). In my pre- if or how a new ayatollah would shift Iran’s approach. vious report, Iranian Concepts of Warfare, I laid out This report examines how Iran makes such deci- an argument that Tehran may have begun shifting its sions about military procurement and production. view on warfare and that it is appropriate and ideologi- Specifically, it attempts to assess: cally acceptable now for the IRI to seek offensive capa- bilities and doctrines in addition to defensive ones. • How should we understand Iranian defense This represents profound change in Tehran’s narrative spending? since the 1979 Islamic Revolution, but it fits well com- ing from a leadership more confident at home and see- • What are the current and future military budget ing evolving threats in its neighborhood. trends? If Iran plans to place a much greater emphasis on conventional offensive weapons than it has in the • What are the strengths and weaknesses of Iran’s past, this will likely require greater resources or a dif- military industrial base? ferent allocation of resources than it has traditionally provided for its military. Historically, unconventional • What drives IRI decision-making on weapons forces dominated Iran’s military and were relatively development and acquisition? inexpensive to maintain. As a result, Iran’s industrial base is not optimized for constructing, equipping, and The study concludes by exploring Tehran’s likely deploying a large conventional force. paths to modernize its military, post JCPOA. Most of However, the JCPOA does provide new finan- these choices are still upcoming, which should offer cial means and, eventually, access to additional mil- policymakers the opportunity to shape the military itary weapons and technology that may allow Iran balance and threat picture in the Persian Gulf and to undergo a real military transformation. Under greater Middle East region. 3 Understanding the Iranian Military Budget s previously discussed in Iranian Concepts of Others maintain that Iran should pursue policies that A Warfare, the IRI approaches economic decision- are more autarkic to ensure that threats of future making through a heavily statist approach. This reflects embargoes and sanctions will have minimal effect.13 the Marxist influences of Ayatollah Khomeini and other This debate is perhaps the biggest economic