EU designates IRGC as a terrorist group: What are the consequences for Iran?

On January 29, the European Union (EU) designated the Islamic Revolutionary Guard Corps (IRGC) as a terrorist organisation. This move aligns the bloc with the US and Canada. The move comes against the  backdrop of the regime's brutal crackdown on domestic protesters; two Iranian officials told Time magazine that approximately 30,000 people have been killed so far.

With this watershed step, the EU abandons years of strategic ambiguity and marks a break with the previous positions of countries like France, Italy, and Spain, which had refrained from such a bold diplomatic stance. The European Parliament has voted for this designation on several occasions over the past three years, notably in January 2023 and again in April 2024. But the European Council and high-ranking officials such as Josep Borrell have been hesitant to act. Nevertheless, the extraordinary domestic repression in Iran at the start of this year and new European court decisions tying the IRGC to yet more local terror plots have smashed the walls that once protected the IRGC. Notable in this regard is the Düsseldorf Higher Regional Court’s ruling of  2023 regarding an attempted arson attack on a synagogue in Germany’s Bochum that changed this calculus, by legally establishing that the Iranian state agencies orchestrated the plot.

To understand why this designation is so damaging, one must examine the IRGC’s economic empire, which operates independently of the Iranian state’s official budget. At the centre of this empire is a single  entity that converts military influence into business dominance: the  Khatam al-Anbiya Construction Headquarters (KAA). Established by a   1989 decree of Supreme Leader Ali Khamenei to oversee the reconstruction after the Iran-Iraq war, it has since become a multi-sector conglomerate controlling an estimated 25 to 40 per cent of Iran’s total GDP.

Under the auspices of the IRGC’s main engineering branch, KAA holds a dominant position in strategic industries, including oil, gas, petrochemicals, and mining, as well as in major infrastructure projects such as the South Pars gas field and the Tehran Metro. The organisation serves as the financial backbone of the IRGC, managing over 800 subsidiaries, employing around 40,000 people, and channelling significant, unreported revenues outside the official state budget into the Guards’ paramilitary and foreign operations.

The EU's terrorist designation, which High Representative Kaja Kallas describes as "if you act as a terrorist, you should be treated like a terrorist," could turn this economic powerhouse into a liability on the global stage. Unlike before, this "terrorist" label effectively criminalises any dealings with KAA’s entire business network. For European engineering firms, technology providers, and financial institutions, KAA is no longer just a sanctioned partner but a banned criminal entity. The geopolitical significance of this European designation lies in the potential to fracture the “Axis of Resistance,” Tehran’s regional proxies.

For decades, the IRGC’s Quds Force has used the commercial cover of various entities like KAA to fund and equip groups like Hezbollah in Lebanon, the Houthis in Yemen, and Shia militias in Iraq. By placing a terrorist label on the IRGC, the EU member states would globalise the fight against Iran’s resistance economy. International banks and reconstruction firms, particularly those operating in Lebanon and Syria, now face legal risks if their projects intersect with IRGC-linked front companies. This financial stress threatens to deplete the liquid capital required to sustain proxy operations, forcing groups like Hezbollah to rely more heavily on internal revenue generation and informal financial networks, with longer-term implications for their operational capacity.

Moreover, the EU’s designation of the IRGC acts as a blow to the internal viability of Iranian moderates, effectively burying the balanced foreign policy once championed by figures like President Masoud Pezeshkian and Foreign Minister Abbas Araghchi. By blacklisting an official branch of the state military, the EU has validated the hardline narrative that Western diplomacy is merely a mirage designed to facilitate regime change. Araghchi’s recent warning that the EU is in a predicament of its own making and his vow that Iran would reciprocate any restrictions underscore this shift; even the most pragmatic voices are now forced to adopt the language of defiance to survive.

The latest EU move transforms the IRGC from a controversial domestic entity into a symbol of national sovereignty under attack, allowing ultra-conservatives to frame any call for renewed nuclear talks as a betrayal of the martyrs, thereby sealing off the middle ground in Tehran.

This move would undo the European diplomacy and would potentially undermine the political viability of Iranian moderates, signalling that the EU no longer views Tehran as a partner for negotiation, but as a systemic threat to be contained. Above all, what remains certain for Iran is the further deterioration of its economy.

Mohammed Shoaib Raza is a doctoral candidate at the Centre for West Asian Studies, Jawaharlal Nehru University, New Delhi.