On June 13th, Israel launched an unprovoked attack on Iran with the aim to knock out the Islamic State’s perceived nuclear capabilities. Israel’s prime minister, Binyamin Netanyahu, claims that Iran is racing to build a nuclear bomb (never mind that he has been saying this for many years, for example during his address to the 67th session of the UN General Assembly on September 27th, 2012, without providing much evidence). Even if Iran would have nuclear bombs, Netanyahu’s objective seems not only to destroy or delay production of nuclear weapons but also to topple the Iranian leadership and top military echelons (especially the Revolutionary Guard). Timing of the attack is curious as Iran was in talks with the Trump administration to downscale its nuclear ambitions in exchange for sanctions relief, although the talks were reaching a dead end due to the refusal of the U.S. to allow Iran to enrich uranium for civil and research purposes (as was agreed under the 2015 nuclear agreement, which was torpedoed by Trump in 2018). Although at this stage it is unclear whether the U.S. will come to Israel’s aid, Donald Trump clearly sides with the Israeli government, even claiming credit for the attacks.

Nearly there…

By his reckless (in our view, at least) decision Netanyahu has put his country in a difficult position, especially since he explicitly aims for regime removal. Clearly, this only would be an extra incentive for Iran to ramp up the development of a nuclear bomb (amongst geopolitical experts it is widely believed that Israel already has a nuclear capability, which in itself was a reason for Iran to pursue the development of a bomb as an insurance policy). Israel is militarily dominant to Iran (and, thus, can do far greater damage) but without support from the U.S. military, it is very doubtful that Israel can wipe out Iran’s nuclear sites, given that some of these are underground and heavily fortified (e.g. Fordow). Even a MOP (“Massive Ordnance Penetrator”, formerly known as MOAB or Mother Of All Bombs), which only the U.S. airforce is able to detonate, might fail to do the job. It is not clear what Israel would do in that case. A prolonged tit-for-tat missile war might ensue as Israel’s Iron Dome is not impenetrable (Hezbollah, although severely weakened, could possibly assist Iran in this respect). Even though the regime in Iran is not well-liked by its own people, to put it mildly, an uprising from the people against the regime from within (as Netanyahu has suggested) is not very likely given the fragmented opposition in the country and the repressive measures taken by the Revolutionary Guard against anybody who raises his or her head (with or without headscarf). It doesn’t help that Israel itself is not very popular in the region, even more so after the fragrant war crimes against Palestinians in Gaza (although this is more rhetoric as in reality nobody in the region cares about Palestinians). And regime changes are not always for the better or successful (think of Afghanistan, Iraq, Libya).

If the U.S. were to decide to join the “party”, then it is likely that Iran will seek escalation of the conflict by attacking U.S. forces in nearby countries (there are about 40,000 of them) and blocking oil trade via the Strait of Hormuz. Given that Trump is a self-declared peace dove, participating in a war at the cost of a significant number of U.S. casualties could cost him dearly in the mid-terms. In our view, Trump must be 100% certain that he can MOP Iran’s nuclear ambitions before giving the go-ahead. Who is going to give him such assurance; Pete Hegsett? Further, a preventive strike by the U.S. would set a precedent that might be emulated by Trump’s BFFs in Russia and North Korea.

Of course, we do not know how this conflict will evolve. Financially, the war will prove to be very expensive for both sides with Iran’s economy likely to collapse (not much is needed for that) and Israel’s debt pile to grow substantially. Oil prices certainly will go up but this will be, in our view, short-lived (a year or so) and will mainly affect China and oil producers in the Persian Gulf, which will further isolate Iran (and we can not rule out that some neighbours will retaliate). Iran’s support for Russia’s war in Ukraine (production of drones) may be stalled (which is a good thing). Our base case is that Iran eventually will give in if and when the U.S. comes to Israel’s aid, although Mr. Trump’s trademark bullying and unreliable/volatile behaviour will make Iran’s leader, Ayatollah Khamanei, queasy (“yippy” in Trump’s parlance) to get back to the negotiation table. However, Iran does not seem to have credible alternatives. Iran’s red line of uranium enrichment may be a stumbling block but could possibly be addressed by setting up a multilateral facility (maybe as part of Urenco) that supplies Iran and other countries in need of nuclear fuel. Mr. Witkoff, Trump’s golf buddy and special envoy to the Middle East, actually made such proposal.

The direct impact of this crisis may be limited (with regrettably a high number of innocent casualties, that is). Longer-term, we think that this conflict will have dire consequences as other countries in the region (Saudi Arabia, Turkey, UAE) will evaluate whether they still can rely on the U.S. (answer: not as long as Trumpism rules; the Europeans already came to that conclusion) and will consider to develop their own nuclear deterrence capability. The more countries that have nuclear weapons, the more dangerous the region becomes. A rather MOP-ing feeling indeed…