Iran: Escalation still unlikely as US-Iran tensions rise but conflict can impact wider region

Event

In the last few weeks tensions between the US and Iran have risen significantly as US officials launched a series of warnings of ‘escalatory actions’ by Iran. This led the US to deploy an aircraft carrier group to the Persian gulf, order the departure of all non-essential staff from its US embassy in Iraq and issue multiple warnings of a swift response in the event of an Iranian attack. At the same time the United Arab Emirates announces that four oil tankers have been sabotaged in the Gulf of Oman near Fujairah emirate. This follows Iran’s announcement that it would stop respecting the limits of the nuclear agreement, as it is faced with the impact of US sanctions. The further escalation of US-Iranian tensions started already in April 2019 when the US listed the Islamic Revolutionary Guard Corpse (IRGC) as a terrorist organisation. Additionally, the US president imposed new sanctions on the Iranian metals exports last week and announced that no new waivers for the import of Iranian oil will be granted.

Impact

Ever since the US left the nuclear agreement in May 2018, tensions between the US and Iran have been rising. The recent developments bring this one step further. Nevertheless, an escalation of the conflict is not expected. Iran will not engage in a direct confrontation with the US or any of its regional allies and the US is expected to resort mainly to economic and political pressure instead of launching a first attack. At the same time the risk of an ‘accidental’ conflict remains. The tensions are driven by the US increasing both political and economic pressure on Iran, which is strongly impacting the Iranian economy. With the US sanctions being reimplemented, the IMF currently projects the Iranian economy to further shrink by 6% in 2019, coming from a recession of almost 4% in 2018. Additionally the Iranian real has depreciated significantly since the sanctions were reintroduced which pushed up inflation to 51% at the end of 2018. Public finances are also expected to deteriorate as oil revenue reduces, which is expected to result in a public deficit of 4% of GDP in 2019. The longer the sanctions remain in place, the larger the impact is expected to be. Domestically, Rouhani is left with little policy options to reduce the impact of the sanctions on the Iranian population. This is complicating his position as he faces more and more opposition of hardliners in the country who had been opposing the nuclear agreement since its signing.

The rising tensions can potentially impact the situation in Iraq, as this is the only country in the region where both the US and Iran have a military presence and political influence. Iran is present in the country through its ideological influence by the Shi’a community, through its influence on the Popular Mobilisation Forces active in the country (which are militias that were created to fight IS and are now part of the regular Iraqi military) and thirdly Iraq still relies on Iran for part of its energy requirements. This is a thorn in the side of the US which they try to stop by no longer granting sanction waivers to import Iranian oil and gas. While Iran could use its presence in the country to retaliate to the US measures, this is still very unlikely as the US response in this case is likely to be strong as they have indicated. More likely would be the tensions creating a political gridlock in Iraq. Nevertheless there are multiple important voices in Iraq such as the most prominent Shi’a cleric al-Sistani calling for non-interference of foreign forces in Iraq. More likely is that Iran would increase its support for the Houthi rebels in Yemen that could occasionally launch small-scale attacks against Saudi Arabia such as the recent drone attack on two oil pumping stations, but the impact of these attacks is expected to be limited.

The recent tensions are evidence of the strong geopolitical tensions that continue to mark the Middle East and that will clearly continue to do so in the coming years. Iran is unlikely to stop its missile programme or drop support for proxies in Yemen, Iraq, Syria and Lebanon. However, those are the prime demands of the US administration and they’re fiercely opposed by Saudi Arabia with whom Iran is struggling for regional dominance. So while an escalation is currently not expected, tensions are also not expected to ease in the coming months and will continue to be a risk driver in the Middle East in the future.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com