Middle East Shocks Beyond the Middle East

Israel’s attack on Iran will shift the geopolitical and economic calculus around the world.

What follows Israel’s attacks on Iran is anyone’s guess. The Israeli military may inflict damage that leaves the Iranian government vulnerable to internal unrest and ends its nuclear enrichment program indefinitely. Iran may emerge wounded, but ever more convinced it needs nuclear weapons. Or, more likely, the conflict will land in some middle ground that sends diplomats back to the negotiating table attempting to hammer out a deal that pleases no one.

But there are already implications to draw from these events that extend far beyond the Middle East. Some are easy to see, and some are only just dimly into view, but diplomats and investors alike will be watching closely.

Consider:

1. Recession risks tick higher: Financial markets have so far responded with a bump to oil prices and a flight to the safety of the dollar and gold. With no end to the missile barrages in sight, however, odds are that oil price pressures may delay further rate cuts in the U.S. or Europe. Meanwhile, businesses will freeze big investment decisions as trade war uncertainty is compounded by a fresh layer of geopolitical turmoil. Watch for the current slowdown to slow further.

2. America’s influence suffers another blow: President Trump says he greenlighted the Israeli attacks, but they clearly weren’t his first choice. As recently as last week, the president’s negotiations with Tehran seemed like they might freeze Iranian nuclear weapons programs. But America’s closest regional ally and biggest recipient of military aid didn’t like the deal and forced Trump’s hand before he was ready. Joe Biden was no more successful in restraining Israel’s response in Gaza. In some ways, Israel is a unique case, but this weekend represents yet another sign of Washington’s limited influence even with close friends.

3. Warfare will never be the same: Israel has been planning attacks on Iran’s nuclear facilities for decades, and work on this operation apparently began last fall. Regardless of the final outcome of the conflict, the pre-positioning of drones and precision-guided missiles inside Iran echoes the daring of Ukraine’s “Operation Spiderweb” that destroyed Russian bombers deep in Siberia. Anyone planning an attack or mounting a defense (say in Beijing or Taipei) will be analyzing this operation closely. This feels like a revolution that will upend traditional military balances from Europe to Korea and Kashmir to Sudan.

4. Putin turns “peacemaker”: Russia’s president seized a golden moment to change the subject from his escalating attacks on Ukrainian civilians. In a call with Trump (a call that Biden would never have taken), Putin offered his services as mediator in the conflict, and Trump welcomed the idea. This won’t go anywhere, but countries that have been steering clear of the conflict will see this as a fresh step in Russia’s emergence from diplomatic isolation.

5. The transatlantic rift deepens: We’ll see just who says what after this weekend’s G-7 Summit in Canada, but Israel’s attack looks certain to deepen the rift between the United States and Europe. While Europeans condemned the Hamas attacks on Israel on October 7, 2023, they have been far more critical of Israeli operations in Gaza than either Biden or Trump. No Europeans have sided with Iran over the last few days, but most declarations that Israel has the right to defend itself have been matched with urging all sides to return to negotiations. If the U.S. is, in fact, drawn further into the conflict to take military action against Iran, watch for Europe’s criticism of both Washington and Jerusalem to mount.

6. America’s politics shatter further: Democrats have been riven by Israel’s behavior following the Gaza attacks, with traditional party members backing Israel and progressive leaders denouncing Palestinian and Lebanese civilian casualties as self-defeating. As the risks mount this week of the U.S. being drawn into direct action against Iran, Trump’s Republican constituencies will be under similar stress. While traditional Republicans voice unequivocal support for Israel’s attacks, Tucker Carlson has already given voice to Republican isolationists worried about another “forever war.” Just where will J.D. Vance emerge on this issue when the dust settles?

7. Oil prices bounce: Extra production from Saudi Arabia has been keeping oil prices low this year, and Iran’s oil exports won’t affect global markets. But as long as there’s a threat to the Straits of Hormuz, where a third of the world’s seaborne oil passes, prices will edge higher to the benefit of the Russian state budget and America’s shale producers.

8. Beijing returns to its back seat: For all the talk of China’s expanding global influence, this news cycle exposes its limits. China is Iran’s biggest oil customer, but its response has been typically lame, denouncing the escalating violence, offering to help mediate, and hoping the U.S. Navy will keep its oil supplies flowing through the Gulf.

9. Nuclear non-proliferation wins – and loses: Taking out Iran’s nuclear program is clearly a victory for efforts to contain the spread of nuclear weapons, especially after the International Atomic Energy Agency revealed Tehran’s continuing efforts to build them in secret. But isn’t the lesson to others who are contemplating a nuclear program that they should accelerate their efforts?

10. There are always unintended consequences: Events like this have a habit of setting off developments that not even ChatGPT will flag in its wildest hallucinations. Does a defeated Iran weaken the Russia-China alliance or strengthen it? Will rogue governments in Myanmar or Sudan take advantage of the distraction to escalate their own conflicts? If there is a regime change in Tehran, will it be for the better?

The longer these attacks last, the higher the odds rise of consequences no one imagined.