Why has Iran wrecked its economy to fund war in Syria?

Estimates of Iran’s military expenditure in Syria vary from US$6 billion a year to US$15-US$20 billion a year. That includes US$4 billion of direct costs as well as subsidies for Hezbollah and other Iranian-controlled irregulars.

Assuming that lower estimates are closer to the truth, the cost of the Syrian war to the Tehran regime is roughly in the same range as the country’s total budget deficit, now running at a US$9.3 billion annual rate. The explanation for Tehran’s lopsided commitment to military spending, I believe, is to be found in Russian and Chinese geopolitical ambitions and fears.

The Iranian regime is ready to sacrifice the most urgent needs of its internal economy in favor of its ambitions in Syria. Iran cut development spending to just one-third of the intended level as state income lagged forecasts during the three quarters ending last December, according to the country’s central bank. Iran sold US$29 billion of crude during the period, up from $25 billion the comparable period last year. The government revenues from oil of US$11 billion (655 trillion rials) were just 70% of official forecasts, and tax revenues of US$17.2 billion came in 15% below expectations.

Chaos in Iran’s financial system prevents the Iranian government from carrying a larger budget deficit. The US$9.3 billion deficit reported by the central bank stands at just over 2% of GDP, under normal circumstances a manageable amount. But that number does not take into account the government’s massive unpaid bills. According to a February 27 report by the International Monetary Fund, the government arrears to the country’s banking system amount to 10.2% of GDP. Iran’s delegate to the IMF Jafar Mojarrad wrote to the IMF, “Public debt-to-GDP ratio, which increased sharply from 12% to 42% in 2015-16, mainly as a result of recognition of government arrears and their securitization, is estimated to decline to 35% in 2016-17 and to 29% next year. However, it could rise again above 40% of GDP after full recognition of remaining government arrears and their securitization and issuance of securities for bank capitalization,” Iran’s banks have so many bad loans that the government will have to issue additional bonds to recapitalize them, Mojarrad  added. Iranian press accounts put toxic assets at 45% of all bank loans.

Iran’s financial system is a black hole, and the government cannot refinance its arrears, recapitalize its bankrupt banks, and finance a substantial budget deficit at the same time. Its infrastructure requirements are not only urgent, but existential.  The country’s much-discussed water crisis threatens to empty whole cities and displace millions of Iranians, particularly the farmers who consume more than nine-tenths of its disappearing water supply. Despite what the Tehran Times called “a desperate call for action” by Iranian environmental scientists, the government slashed infrastructure spending by two-thirds during the last fiscal year.

The Iran Revolutionary Guards Corps evidently has first claim on the public purse. It is also willing to shed blood. Reported dead among Iranian-led forces in Syria include at least 473 Iranians, 583 Afghans, and 135 Pakistanis, as well as 1,268 Shi’a fighters from Iraq. In addition, perhaps 1,700 members of the Hezbollah militia have died. Other estimates are much higher. The IRGC’s foreign legions include volunteers from Afghanistan and Pakistan, where Shi’ites are an oppressed minority often subject to violent repression by the Sunni majority. IRGC-controlled forces include the Fatemiyoun Militia recruited mainly from Shi’ite Hazara refugees from Afghanistan, with reported manpower of perhaps 12,000 to 14,000 fighters, of whom 3,000 to 4,000 are now in Syria. Iranians also command the Zeinabiyoun militia composed of Pakistani Shi’ites, with perhaps 1,500 fighters in Syria.

This compares to an estimated 28 Russian casualties in Syria. Moscow has a very good bargain with Tehran. Despite the high casualty rate, the IRGC “has more  volunteers for the Syrian War than it knows what to do with,” Kristen Dailey reported last year in Foreign Policy.

Why is Iran willing to shed so much blood and divert so much money away from urgent domestic needs? The fanatical character of the Iranian regime and the fragility of a society with 40% youth unemployment explain part of it. But a deeper motivation for Iran’s profligacy and militancy lies in Iran’s dependence on China and Russia.

Since 2010, China’s total oil imports have nearly doubled. It has shifted its oil purchases away from Saudi Arabia to Russia, which rose from 5% to 15% of the Chinese total, and to what might be called the Shi’ite bloc: Iran, Iraq, and Oman. Iran’s share has fallen, but the Iran-allied total has risen sharply. Iran’s oil exports to China will rise sharply as Chinese investments come online. Reuters reported earlier this year, “Chinese firms were expected to lift between 3 million to 4 million barrels more Iranian oil each quarter in 2017 than last year, four sources with knowledge of the matter estimated. That would be about 5% to 7% higher than the 620,000 barrels per day (bpd) of Iranian crude the country has imported during the first 11 months of 2016, according to the customs data.”  China meanwhile provides a quarter of Iran’s imports.

Iran stands to benefit, moreover, from its geographic position in the midpoint of China’s One Belt, One Road infrastructure drive across Central Asia. China will spend an estimated US$46 billion to create an economic corridor through Pakistan, and Iran is eager to latch on to China’s expansion.

Both Moscow and Beijing fear the rise of Sunni militancy out of the ruins of Iraq, Syria and Libya. As Dr. Christina Lin reported in this publication as early as 2015, Russian and Chinese strategists viewed the American approach to regime change in Syria as an effort to destabilize Russia and China. Several thousand Chinese Uyghurs, an ethnically Turkish people in Western China, have joined US-supported Sunni jihadists in Syria. Uyghur members of the Turkistan Islamic Party have acquired anti-tank missiles and probably shoulder-fired anti-aircraft rockets as well as drones used to record suicide attacks against the Syrian army. At the same time, Saudi-financed Islamists threaten to destabilize Southeast Asia.

In several visits to Beijing during 2014 and 2015, I spoke to senior Chinese strategists who expressed extreme concern about the dangers of returning Uyghur fighters and the spread of Islamism to China’s periphery in Southeast Asia. A Russian-Chinese axis is emerging in the Asia stretching from Thailand to Turkey. As a counterweight to the Sunni jihad, Russia and China have encouraged the militarization of the Shi’ite belt that stretches from Lebanon through Syria and Iran to Afghanistan. Virtually all of China’s Muslims and 90% of Russia’s Muslims are Sunnis. Iran well may be the world’s largest state sponsor of terrorism, as both the Obama Administration and the Trump Administration claim, but it is not a sponsor of the specific sort of terrorism that Russia and China fear.

That helps explain Iran’s seemingly irrational decision to divert desperately-needed resources to the Revolutionary Guards. The IRGC is not merely the dominant political and economic force in Iran. It is Iran’s main bargaining chip with its arms suppliers and oil buyers in Moscow and Beijing. China’s economic influence in Asia is a geopolitical Death Star, a magnet for political influence unlike anything we have seen since America’s economic dominance in Europe during the 1950s. Iran and its Shi’ite surrogates in Lebanon, Iraq, Afghanistan and Pakistan have a nearly inexhaustible supply of cannon fodder to advance Russian and Chinese interests on the ground in Syria, Iraq and elsewhere. With Chinese economic support, Iran can sustain its military campaigns far longer than its neglected, bankrupt and dehydrated internal economy might suggest.

This leaves American policy in a quandary. The Obama administration— as Lieutenant General Michael Flynn warned in this and numerous other statements — inadvertently stood godfather to the birth of ISIS by blundering into the milieu of Syrian Sunni rebels. It is discouraging that the Trump administration lost the services of Gen. Flynn less than a month into his tenure at National Security Council. More broadly, Sunni radicalism in the region is the result of the George W Bush administration’s insistence on majority (that is, Shi’ite) rule in Iraq. As Lieutenant General Daniel P Bolger observed in his superb 2014 book Why We Lost: “The stark facts on the ground still sat there, oozing pus and bile. With Saddam gone, any voting would install a Shi’ite majority. The Sunni wouldn’t run Iraq again. That, at the bottom, caused the insurgency. Absent the genocide of Sunni Arabs, it would keep it going.”

Ten years ago, America might have persuaded Moscow to throw Iran under the bus in return for some kind of settlement in Ukraine. That train left the station some time ago. At low cost in the form of air support in Syria, and at a profit in the case of the sale of the Russian S-300 air defense system, Russia has a partner in Iran willing to shed large amounts of blood (especially if it is Iraqi, Afghan or Pakistani) in the service of its interests in Syria. China has an oil-rich neighbor engaged in a war of attrition against Sunni Muslims, and a captive market for its industrial exports. China and Russia have little to fear from an unleashed Iran. In 30 years the rootless, childless generation that now provides unlimited cannon fodder will turn grey, and Iran will have an elderly dependent ratio like Western Europe’s, but with a 10th of the per capita income. Iran faces a demographic implosion like no other in history.

There has been a good deal of talk in Washington about fostering a bloc of Sunni states to oppose Iranian influence. The trouble is that the only two Sunni states with real armies, Egypt and Turkey, have indicated that they prefer the Assad regime to a Sunni alternative. Turkey shifted towards Russia after the July 2016 coup attempt, which Ankara believes enjoyed American sympathy if not outright support. Egypt is more worried about Sunni jihadists than it is about Iran, and has moved closer to Russia in arms procurement and other areas. America is left with Jordan and the Gulf states, whose military capability is doubtful.

We are confronted with a war that feeds on itself. The destruction of civil society by war leaves young men with little to do but go to war, until war exhausts the manpower pool. That typically occurs after 30% of the military-age men are dead. I warned in 2010 that the Petraeus surge would culminate in a new Thirty Years War. Syria’s half-million dead are just a down payment. Four years ago I raised the prospect of a Pax Sinica in the Middle East. Today that seems whimsical. The emergence of ISIS and other Sunni jihad movements in the intervening years has persuaded Beijing to fight Sunni fire with Shi’ite fire.

The facts on the ground have shifted in favor of China and Russia, and diplomacy ultimately will reflect this shift. The best that can come out of this ugly situation is something like Sykes-Picot restored: a patchwork partition of the Levant and Mesopotamia with the creation of a Sunni state to oppose the non-state actors, kept in uneasy peace with Shi’ite satrapies of Iran by the agreement of Washington, China and Moscow. That is not a good solution, and certainly not a palatable solution from an American point of view, but it is the resolution suggested by the current state of the chessboard.

A new Thirty Years’ War will end sooner or later in a new Peace of Westphalia, the 1648 treaty that left Catholics and Protestants in more or less the positions they had occupied before the war began in 1618, minus roughly two-fifths of their respective populations. That the war would lead to stalemate was obvious by its midpoint in 1634, but France and Spain chose to fight on for another 15 devastating years. When peace came it pleased no-one. That is the sort of peace we will have one way or another, and we might as well have it sooner rather than later.