The report examines the trends in Iran's current and future defence procurement, and the order of battle across its armed forces. The report's general conclusion is that, despite the domestic and diplomatic respite President Hassan Rouhani's tentative engagement with the US and the West may bring, Iran faces extreme economic and security challenges. Primarily, the fact that Israel has rejected the ongoing international overtures to Tehran means Iran is still at risk (albeit unlikely) of a unilateral strike from Israel. Other risks partly stem from Iran's controversial nuclear programme and also from its unpopular support for the Assad regime in Syria. International sanctions have gutted Iran's oil exports, which have now sunk to less than half of their usual level. However, given the improvement in international relations caused by Iran's engagement with West, BMI has revised the real GDP growth forecasts this quarter, and is projecting an improved performance in real terms in 2014, up from our previous forecast of 2.4% growth. Iran's economy will return to growth in 2014, as improving relations with the West and better macroeconomic management, coupled with low base effects, will lead to an improved outlook for exports and increased business and consumer confidence.
Given this tangible benefit from a military detente with the West, Iran's leadership - subject to the veto of its ideologically led Supreme Leader - may be pragmatically weighing up the supposed benefits of continuing its pursuit of nuclear weapons. The US hopes that this extreme economic pressure, combined with the build-up of military assets in the region, will encourage Iran to continue with the tentative diplomatic steps seen over the last quarter. This has somewhat stymied Israeli hawks' enthusiasm for a military strike against Iranian nuclear facilities.
This report tackles several defence issues from the last quarter and contains a number of revised forecasts/ views, including:
- Mehr News Agency revealed an overall increase in the Iranian defence budget for March 2014-2015 with a significant cut in funding to the ideological Basij militia in favour of more conventional forces.
- Iran has continued with ostentatious military displays and manoeuvres: a two-day aerial wargames exercise in December 2013 saw Iran's air-defence system operate a full alert amid tests of the new 'Qader' rockets from jet fighters.
- Major naval manoeuvres are to continue over the winter months; Iran also revealed details of refurbishments to several warships and the roll-out of a naval training vessel.
- BMI is projecting defence expenditure to rise to 2018.
Iran will face more political and diplomatic pressure in the MENA region; its proxy in Lebanon - Hizbullah - continues to become embroiled in Syria's civil war. Lebanon itself is becoming more unstable due to pro- and anti-Assad tensions within its population, a situation exacerbated by Iran's influence there.