Regional implications of the Iran-Israel-US conflict

Iran has taken a physical and psychological pounding from the US and Israel. The regime will know that it has been tested and found wanting – it lacked air defence systems and adequate quantities of ballistic missiles to act as an effective deterrence to Israeli attacks. Its regional allies did not rush to its aid and neighbouring Arab States allowed Israeli jets to repeatedly overfly their territory. Iran has been brought face-to-face by the exceptional mismatch between the capabilities of its armed forces and those of Israel and the US. This is a humiliation from which it will take time to recover.

Equally, they will draw strength from the fact that they managed to continue to launch missiles at Israel until the last moment; that they were able to choreograph a retaliatory attack on a US military base without major repercussions; that the population did not rise up against them despite (or perhaps because of) urgings to do so from Israel and the US; and that (apparently) its stash of highly-enriched Uranium is safe.

In the absence of further attacks, Iran will not retaliate again - they have too much to lose and recognise their inability to fight the combined military might of the US and Israel. It is worth noting that Iran did not seek this fight, did not start it and has been making urgent calls for a ceasefire (through Cyprus, the UAE, Qatar and Turkey) since the third day of the Israeli bombing campaign.

Airspace and straits

A number of countries closed their airspace over the past 48 hours. Those closures are now likely to be reversed (if they have not already been). Iran will not shut down the Straits of Hormuz - that was always highly unlikely because of the damage it would have done, not only to its own interests and ability to export its oil to (amongst others) China, but also to its Gulf neighbours, with whom Iran had worked out an increasingly stable modus vivendi over the previous six months and who were quick to criticise the Israeli bombing raids. Closure of the Straits would also have triggered a swift and decisive US reaction and Iran has made very clear that it does not seek any sort of direct confrontation with the US – the awesome demonstration of US deployment of firepower has given everyone in the Region (and beyond) cause to reflect on how to avoid antagonising the US…

So, back to as we were, then…?

That does not mean that we can expect a return to the status quo ante in the region, or for peace to break out and Israel and Iran to become bosom pals. Iran has been too badly damaged to forgive and forget quickly. Russia is deeply worried about the condition of its major ally in the region – the Iranian and Russian Foreign Ministers met in Moscow over the weekend. Whilst Russia is in no condition to offer military hardware assistance to Iran, it seems highly likely that the two countries will find common cause in anti-Western feeling which is likely to manifest itself in increased cyber-attacks and other forms of asymmetric warfare (via industrial and economic sabotage and disinformation campaigns against Western interests – both public and private sector). The Houthis may feel emboldened to renew their attacks on shipping, despite their truce with Trump.

So regime change is off the menu, then?

For its part, Israel has also been hit much harder militarily than it expected and will feel the missing uranium and continued survival of Iran’s theocratic regime means there is unfinished business. It appears that the price of Trump’s intervention on Fordow was the ceasefire which means Israel has had to forego its objective of regime change.

In stark contrast to Israel, most countries in the region do not want regime change. Not only because the past record of that approach has not been entirely reassuring (Libya, Iraq are not hugely positive case studies), but also because an Iranian theocracy, hedged about by snapped-back sanctions and isolated from the region by the decapitation of its allies in the Axis of Resistance feels like a much less directly competitive neighbour than one which a free-market, open Iran full of cheap oil and gas, critical minerals, a well-educated and capable population and led by a democratic (or at least accountable) government would present to Saudi, UAE and other Gulf countries.

And how about the medium-to-long term implications…?

In the medium to long-term, there are other impacts. The biggest and most damaging of which may be the loss of confidence and trust and the implications of that for investment in region. A few questions underline those longer-term consequences:

• In such a volatile region, with the tensions bubbling away just below the surface, will Western companies be willing to take the investment risk? Or will they simply look elsewhere where the operating environment is more benign?

• Will Saudi et al be able to demonstrate an attractive enough investment platform to persuade international investment that it is sound and safe?

• The US has been anything but a neutral umpire in this conflict (the same can be said of its stance over Gaza). If the US is no longer welcome in the region, will it pivot further away, opening the doors even further for other third country players?

• If it does, that will inevitably lead to a loss of US influence in the Region, opening the door for an increased role for Chinese influence (…it was China that negotiated the détente between Saudi and Iran). Does that change the rules of the operating game? Will Chinese contracting practices become the norm? What are the implications of that shift for health and safety or ESG etc?

Although closure of Hormuz is very unlikely to materialise (as noted above the damage to Iran would simply be disproportionate to the impact), the mere threat of its closure may lead consumer countries to conclude that they need to seek more reliable long-term hydrocarbon supply agreements elsewhere. Such a purchasing shift would result in loss of market share (and revenue) for Gulf producer countries – a loss of income they would find hard to replace, with a direct impact on their ability to continue to attract investment and therefore their ability to diversify their economies and maintain social cohesion/stability. (It is probably worth noting here that there was an absence of major shift in the oil price rise following the threat to Hormuz – which either indicates that the threat is already priced in (which seems highly unlikely) or that the global oil market is currently over-supplied (a condition likely to get worse as the US ‘drills baby drills’).

How should companies respond - staff

For companies operating in the region, there are some salutary security lessons to learn - and learn quickly.

• Whilst the threat of airborne bombing campaigns appears to have disappeared, the threats to the physical security of staff and offices have probably increased.

• Companies and employees should be conscious of shifts in public attitudes towards Western companies and the potential increase in threat of lone wolf attacks or violent demonstrations etc.

• Companies should therefore review their security stance and the relevance and accuracy of their security briefings. They should consider and review where their staff live (access to the airport, ease of evacuation routes etc).

• Companies should review their Embassy contact points and make sure the Embassy has the contacts details of ex-pat workers.

• Employees should prepare for urgent evacuation, having grab bags ready with passports, water, spare cash and phone chargers etc.

• Families should consider what the trigger points are for their own evacuation – it is far better to leave and regret, than get trapped and regret. And plan and know their evacuation routes – from bitter experience, airspace is relatively easy to close and, once closed, it is often surprisingly hard to re-open: that fact has immediate and concrete implications for the evacuation of families and employees as well as for logistics and supply chains).

What else should companies be thinking about?

Equally, there are commercial implications as well. The increase in military traffic and surveillance in the Gulf may affect shipping and logistics – particularly for goods entering through Jebel Ali/Dubai. It is likely there will be increased Customs checks on ground and sea borders, leading to longer delays and logistical frustrations. If there is an increase in ground traffic across borders (rather than by sea routes), supply bottlenecks may quickly increase (lack of lorries, drivers, and containers as well as limited Border Customs capacity etc). If the object of the land supply is to avoid the tension points of transit through the Straits of Hormuz, companies should be aware of limited logistical capacity in Red Sea Ports (Jeddah Islamic, KAP). Are there other routes that companies could consider for the export of their goods from the Arabian Peninsula?

There is likely to be a slowdown in deployment of capital to projects not deemed critical to state (defence, cybersecurity etc). There is also likely to be a slowdown in the allocation of State attention to major projects and therefore fewer RfPs, with impacts on the attractiveness of continuing to deploy company resource to the Region. Senior political leadership in Gulf States may be less focused on economic and commercial issues and more focused on defence and security. This may lead to the potential diversion of State resources away from civilian infrastructure development to military priorities. There is also likely to be a higher military and security presence in main cities and around critical national infrastructure, including refineries, energy production and water desalination plants, which may make movement in-country more restrictive.

In times of stress, people tend to save more and spend less, so that any slowdown in State expenditure may be reflected in a slowdown in consumer spending across the region. Equally, as investors approach the Region with caution, there is likely to be a slowdown in private sector capital deployment which is likely to impact new as well as existing projects (the latter may see pauses in construction) as companies take a “wait and see” approach.

Finally, it is highly likely that Governments in the Region will take a variety of counter-measures, including increased scrutiny of activities, more police checks, possible check-points on roads and residential areas, limitations on movement. Increased domestic security. Decrease in tolerance. Increase in surveillance. Reduction in personal liberties, which may in turn raise international concerns about human rights compliance (with potential knock-on impact on attractiveness of investments). In extremis, Governments may declare states of emergency, with implications for individuals as well as companies on whom capital controls may be imposed as part of the emergency response.

In conclusion…

In short, whilst the war may have ended with President Trump declaring Peace in Our Time and the rockets, bombs and warplanes have stopped buzzing overhead, this is far from a return to the pre-existing normality. Everything has changed and companies, employees and States must adjust their pre-existing assumptions accordingly.