Iran conflict is escalating - What are the consequences?

As the deadline set by D. Trump approaches, the exchange of fire in the strait is once again intensifying. Both sides appear to be signaling readiness in the face of possible US strikes on Iran’s critical infrastructure. But what if the attack Trump is announcing is merely intended to distract Iran from the real objective?

Many market participants watched the daring evacuation of the downed F-15 pilot. Without going into the details, the most important aspect in the context of the conflict is that, during the evacuation of the second pilot, US forces were able to build a makeshift airstrip in order to establish a temporary base for rescue units. An airfield and a base in the middle of Iran, abandoned and destroyed almost as quickly as they appeared. At the same time, Iranian forces were unable to inflict any personnel losses on the US side. What does this tell us?

It means that the United States does not need to undertake a ground invasion in order to completely destroy Iran’s nuclear program.

The US could carry out a synchronized strike on power plants, depriving tens of millions of people of electricity and water. This would trigger not only a humanitarian disaster, but also a temporary, if not prolonged, collapse of logistics and communications across the country. At the same time, the US could deploy a special forces contingent to the storage site, or sites, of Iran’s fissile materials in order to neutralize them.

The US could attempt to extract 400 to 500 kilograms of highly enriched uranium, while the remaining 8 to 9 tonnes could be deliberately contaminated or diluted in order to make its use far more difficult.

Such an operation would be risky, especially in light of the recent downing of an F-15. Still, it is worth recalling that the US-Israel coalition has already carried out around 13,000 combat missions over Iran, which would imply an effectiveness rate for Iran’s air defenses of roughly 0.007%. Geography, contrary to appearances, does not necessarily work in Iran’s favor here either. A mountainous country is made up of narrow valleys, and each of them can theoretically serve as a fortified point. However, US forces would not be moving along roads. They would be striking from the air. Iran’s narrow valleys and winding, neglected roads mean that the US could use air power to seize a given area and then cut it off from reinforcements. This theory is supported by the intensified Israeli and US strikes on railway and road bridges in recent days.

• The success of such an operation would leave Iran with no cards left to play in negotiations and with a ticking time bomb on its hands. Before industrialization and electrification, the Iranian state was able to sustain between 8 and 12 million people. Today that population exceeds 90 million. The arithmetic here is unforgiving. If there is a scenario in which Iran could be forced to capitulate, this is most likely one of them.
• Failure, however, even if less likely, would amount to one of the greatest reputational defeats for the United States in recent decades. It is difficult to predict how either side would respond, but one can imagine a settlement unfavorable to the US with the remnants of the Iranian government, followed by a gradual normalization of Iran’s relations with Asia and Europe.

Given the duration of the conflict, the scale of the destruction already inflicted on both sides, and the way it could potentially end without any definitive conclusion, one key takeaway emerges. None of the scenarios currently taking shape has a clearly de-escalatory character, and any further rise in hydrocarbon prices now appears to be a question of how strong and how persistent it will be, rather than whether it will persist at all.

This is very bad news for the economy and for the markets.

• The US economy is sending an increasing number of recessionary signals, while Europe’s recent recovery is beginning to lose momentum.
• The previous wave of inflation in 2022 and 2023 was built on the foundation of ultra-low interest rates and the high household savings accumulated during the COVID pandemic. T
• oday, markets and economies no longer have those supports, and the global economy may not be able to withstand a sharp rise in interest rates. This could force governments to take drastic measures aimed at containing inflation. T
• hese may include rationing and price controls, both of which we are already effectively seeing today in many countries across Europe and Asia.

At the same time, government intervention is unlikely to be as demand-supportive this time as it was in 2020 and 2022. Instead, one should expect tools that are far more invasive and selective, which could weigh on corporate margins and profits, especially among companies that still have a long way to go before returning to their pre-COVID trend.

Kamil Szczepański
Junior Financial Markets Analyst