How the new war in the Middle East will affect the economy. Analysis
Israel and the United States have launched a large-scale military operation against Iran. The attacks affected multiple targets across the country. As a result, the supreme leader of the Islamic Republic, Ali Khamenei, and members of his family were killed. In response, Tehran launched rocket attacks on Israeli territory and on American military installations located in the Middle East region. The consequences of this can be found in the Izvestia article.
Economic consequences
• The US and Israeli strikes on Iran on Saturday were not chosen by chance — the world oil exchanges were closed so that the first news would not cause a sharp shock. The main threat to oil prices is the blocking of the Strait of Hormuz, through which a third of the world's oil and a fifth of LNG pass.
• The probability of a prolonged blockage is low, so quotes are expected to rise at the beginning of the week, but not sharply. If there are interruptions of 1-2 million barrels per day, the price of Brent may rise to $ 90-120 per barrel, and with a multi—week blockade of Hormuz - up to $ 150-200. However, this is an unlikely scenario.
• The closure of the strait can severely affect the global market, as alternative routes are limited and cover only part of the volume. Iran is unlikely to be able or willing to maintain the blockade for long, as major importers, including China and India, will suffer. Rising oil prices are beneficial for Russia: with Brent above $80, budget revenues remain at the planned level, despite export discounts.
Investment assessment
• Investors perceive geopolitics differently today than they used to. The oil market is considered to be controlled and manipulated. The United States has coordinated actions with key Middle Eastern producers in advance, and the possible loss of Iranian volumes can be offset by other countries. With a short–term blocking of the strait, the price increase is likely to affect futures for several months and will amount to about $ 3-5 per barrel, no longer than two to three weeks.
• A short-term blocking of the strait will not create significant and long-term consequences for the oil market. The key factor for the global economy will not be a brief escalation, but possible political changes inside Iran, which may affect the market in months, not days.
• At the same time, it is not the short-term market reaction that is more important for investors, but a period of several weeks. The US and Israeli military operation against Iran was expected, and the market as a whole took this risk into account in advance. A similar situation has already arisen before: last year's exchange of blows between Iran and Israel lasted 12 days and led only to a moderate increase in oil futures, which quickly came to naught.
• OPEC, the United States and the countries of the Middle East have a key influence on prices. At a time when the Donald Trump administration is interested in restraining prices, long-term investments in oil look unprofitable. Therefore, the current conflict is hardly used as a reason for investment, except for short-term speculation. Investors are more likely to choose gold rather than oil as a defensive asset.
• In the medium term, the situation is expected to stabilize within a few months. A protracted war is not predicted, and the objectives of the operation are related more to political pressure on the Iranian regime than to the destruction of infrastructure. A return to negotiations or an internal transformation of power in Iran is possible. Even in such scenarios, the impact on global markets will be limited, as modern conflicts rarely cause long-term economic shocks.
Development scenarios
• The scenario is complicated due to the multitude of participants. These are not only Iran's neighbors, but also internal political groups in the United States, Israel, and Iran itself. The leaders of the countries are not united, decisions are made in conditions of chaos and uncertainty. Operations are not always carefully coordinated, and plans are adjusted on the go. Israel played an active role in this situation, acting with the support or influence of Great Britain.
• The American side has been building up its military fleet and aircraft in the region in advance, which is part of its usual pressure strategy. The use of force demonstrates the willingness of the United States to defend its interests and affects the dynamics of negotiations. The Israeli attack made it impossible for Washington to withdraw support from its allies, otherwise it would have looked like weakness.
• If the conflict escalates into a protracted confrontation, especially in the Strait of Hormuz, it will cause an increase in the prices of oil and other resources. Logistics will become more expensive, trade will become more difficult, and inflation will increase far beyond the Middle East. The main threat is the unpredictable consequences for the economy and the stability of global markets if important infrastructure nodes start to collapse chaotically.
Consequences of the attacks
• Iran's response to the U.S. and Israeli strikes could have serious consequences for Tel Aviv, including an environmental disaster. If Tehran decides to strike a nuclear center in the Negev Desert with hypersonic Fattah missiles, radiation may be released. The existing air defense systems of Israel and the United States are not capable of intercepting such missiles, so the defeat can be accurate and devastating.
• Tehran is able to actively resist with the help of ballistic missiles, attacking Israel and American bases. Any attempt to limit the conflict to a short period of time may prove ineffective, since Iran has the means and capabilities for a long-term counteraction.
• The United States sees the operation as a way to strengthen control over Iran's oil resources. The safety of American citizens is being used as a pretext for intervention, while the real goals are related to economic interests and strategic influence in the region. This creates a high degree of uncertainty for the development of the conflict and its consequences for the entire Middle East.
• Such an escalation is nothing new for the region. The Middle East has long been a zone of constant conflict, where Israel regularly conducts military operations with the support of the United States. Iran has already announced retaliatory strikes against American bases in the Persian Gulf countries, but they understand that there is likely to be no widespread involvement of other states. The operation is unlikely to be lengthy: This is not a ground war, but an exchange of blows that usually lasts for several days, although the consequences for the stability of the region remain serious.
When writing the material, Izvestia talked and took into account the opinions of:
Pavel Seleznev, Dean of the Faculty of International Economic Relations at the Financial University under the Government of the Russian Federation;
military expert, historian of the air defense forces Yuri Knutov;
military expert Andrey Koshkin.
Переведено сервисом «Яндекс Переводчик»
