Building the Iranian Military: Understanding Tehran’s Defense Acquisition & Research and Development Decision-Making

MESOP NEWS TODAYS CENTRAL ANALYSIS :  By J. Matthew McInnis – April 5, 2017 | American Enterprise Institute

Key Points

  • Tehran’s military expenditures can be reasonably estimated based on Iran’s GDP growth rates and the price of oil, if the regime’s threat perceptions of potential major conventional conflict are generally understood.
  • Iran will retain a preference for proven domestic production of critical platforms over foreign weapons acquisition as it spends its post-JCPOA resources. Tehran could achieve more blue-water naval capabilities, but a full army or air force modernization remains unlikely.
  • Washington and its allies have an enormous capacity to influence military spending levels and allocations by affecting the regime’s threat calculus, foreign investment climate, and global energy prices.

Executive Summary 

This study examines how the Islamic Republic of Iran (IRI) makes defense budgetary decisions, explores current and future military spending trends, and assesses Iran’s military industrial base and procurement efforts. The principle factors that drive the IRI’s decision-making for weapons development and acquisition can help form an analytic framework for policymakers seeking to better understand Iran’s unique procurement and military production patterns. With this approach, policymakers can anticipate which military domains the Iranian military will most likely invest resources, taking into consideration realistic levels of projected funding and likely requirements tied to threat perceptions.

The IRI’s annual defense budget does not include the significant resources the Islamic Revolutionary Guard Corps (IRGC) generates and expends off the books or commercial activities that support their operations and procurements activities beyond their official allocations. However, the amount the Iranian leadership will be able and willing to spend on its defense and military activities, especially the relative scale of resources available for Tehran to acquire or develop new weapons, can be reasonably estimated at any gross domestic product (GDP) growth rate if the regime’s threat perceptions are generally understood.

Iran’s military expenditure fluctuation highly correlates to Iran’s GDP, which in turn highly correlates to oil prices. Estimated percentage of GDP dedicated to defense spending is, arguably, the optimal way of gauging the IRI’s fiscal prioritization of the military and for assessing past and future defense growth. Official spending on defense averages between 2.5 and 3.0 percent of GDP since the Iran-Iraq War.1 During periods with fear of regime-threatening conventional military conflict, official defense spending tends to rise above 3.0 percent of GDP.2 During periods with minimal fear of regime-threatening conventional conflict, official defense expenditure as a percentage of GDP tends to drop to 2.5 percent or below.3

An Iranian soldier stands guard in front of a picture of Iran’s late leader Ayatollah Ruhollah Khomeini during the anniversary ceremony of Iran’s Islamic Revolution in Behesht Zahra cemetery, south of Tehran, February 1, 2016. REUTERS/Raheb Homavandi

The full scope of the IRGC’s gray budget spending is uncertain but likely represents an additional 50 to 100 percent of military outlays.4 This makes total defense spending as a percentage of GDP 4 to 5 percent most years, although it can be higher.5 During peak unconventional operational periods, such as when Iran focused on countering the US in Iraq in the 2000s or the current Syrian civil war, it reaches up to 6 percent or more.6

Iran’s defense industrial base is large and diverse, but it is insufficient in meeting all of Tehran’s strategic requirements. Much of the base is built around the production of missiles, anti-access/area-denial (A2/AD) naval weapons, and unconventional capabilities for its proxy and asymmetric warfare activities, as well as to promote deterrence.7 Recent conflicts in Iraq and Syria highlight this orientation’s inherent limitations, showing the need for improved expeditionary warfare capabilities, close air support, and logistics support that may drive future modernization.

Tehran must rely on Russia and other foreign channels for procurement and sustainment of advanced conventional capabilities that its own military industries cannot produce. This is particularly true for air defense systems, armor, fighter aircraft, cruise missiles, and large submarines.8 Iran looks to indigenize production of military weapons and other platforms whenever possible, due to both the state’s relative isolation and the leadership’s ideological preferences to avoid dependence on foreign manufacturing for its defense.9 The IRI will likely continue to maintain certain legacy pre-1979 conventional weapon platforms, particularly its aging air force, if technically and strategically feasible.

Tehran will likely prefer spending new resources on proven domestic production or promising research and development activities for critical weapon plat­forms, based on analyses of the IRI’s decision-making patterns for procurement and domestic production. The IRI will minimize foreign acquisition unless there is a strong likelihood that Iran’s defense indus­tries will soon be capable of producing such a system indigenously through technology transfer or reverse engineering.

Without a real change in threat perceptions, there will likely be political resistance to pushing official military spending above 2.5 percent of GDP and total defense spending above 5 or 6 percent of GDP (including the gray budget) once Syria and Iraq operations de-escalate.10 If Iran’s economy grows at around 4 percent a year, as expected in the near term, Tehran should still have the resources to improve its conventional forces. Three factors dictate Tehran’s ability to increase defense expenditure: the price of oil, the rate of GDP growth, and the amount of assets recovered under the Joint Comprehensive Plan of Action (JCPOA).11 After sanctions lift, Tehran will likely accelerate procurement and modernization in all its military domains, and it may try to achieve real gains in building a blue-water navy. A recapital­ization of its air force or army over the next decade is doubtful. US policymakers should understand that debates about what Tehran’s increasingly offensive military would look like are still underway and driven predominately by two factors: threat perceptions and resources. Washington and its allies should also recognize they have an enormous capacity to influ­ence Iran’s military spending levels and allocations by affecting both the regime’s threat calculus and the foreign investment climate.


The Islamic Republic of Iran (IRI) is on the cusp of making significant decisions about what it wants to be as a state and what it wants its military to become following the implementation of the Joint Comprehensive Plan of Action (JCPOA). In my previous report, Iranian Concepts of Warfare, I laid out an argument that Tehran may have begun shifting its view on warfare and that it is appropriate and ideologically acceptable now for the IRI to seek offensive capabilities and doctrines in addition to defensive ones. This represents profound change in Tehran’s narrative since the 1979 Islamic Revolution, but it fits well coming from a leadership more confident at home and seeing evolving threats in its neighborhood.

If Iran plans to place a much greater emphasis on conventional offensive weapons than it has in the past, this will likely require greater resources or a different allocation of resources than it has traditionally provided for its military. Historically, unconventional forces dominated Iran’s military and were relatively inexpensive to maintain. As a result, Iran’s industrial base is not optimized for constructing, equipping, and deploying a large conventional force.

However, the JCPOA does provide new financial means and, eventually, access to additional military weapons and technology that may allow Iran to undergo a real military transformation. Under Supreme Leader Ali Khamenei, this strategy seems to be the consensus among military leaders, the execu­tive branch, and legislators. However, given increas­ing concerns with Khamenei’s health, it is unknown if or how a new ayatollah would shift Iran’s approach.

This report examines how Iran makes such deci­sions about military procurement and production. Specifically, it attempts to assess:

  • How should we understand Iranian defense spending?
  • What are the current and future military budget trends?
  • What are the strengths and weaknesses of Iran’s military industrial base?
  • What drives IRI decision-making on weapons development and acquisition?

The study concludes by exploring Tehran’s likely paths to modernize its military, post JCPOA. Most of these choices are still upcoming, which should offer policymakers the opportunity to shape the military balance and threat picture in the Persian Gulf and greater Middle East region.

Read the full report. 


  1. World Bank Group, “Military Expenditure (% of GDP),” 2016,
  2. Ibid.
  3. Ibid.
  4. Ali Alfoneh, The Revolutionary Guards’ Looting of Iran’s Economy,American Enterprise Institute, June 2010,
  5. Jon Greenberg, “Obama: Iran Spends $30 Billion on Defense; U.S. About $600 Billion,” Politifact, April 9, 2015,
  6. Eli Lake, “Iran Spends Billions to Prop Up Assad,” June 9, 2015,
  7. IHS Markit, “Iran — Defence Industry,” Jane’s World Defence Industry, August 7, 2015.
  8. IHS Markit, “Procurement,” Jane’s Sentinel Security Assessment—The Gulf States, January 5, 2016.
  9. Ibid., 4–5.
  10. John Matthew McInnis and Ashton Gilmore,Iran at War, American Enterprise Institute, December 2016,
  11. Mohammad Reza Farzanegan,Military Spending and Economic Growth: The Case of Iran, no. 23 (April 21, 2012)