MS Risk Blog

Iran’s Economic Instability and Sanctions  

Key Judgments:

• It is highly likely that the increasing sanctions against Iran will result in it deepening its relationships with other hostile nations such as Russia and China, leading to an emerging economic and military axis that challenges Western interests. (High confidence).

• Over the short to medium term, Iran’s economic isolation will likely lead to greater regional instability, with potential long-term impacts on both regional power balances as well as international security. (Moderate confidence).

In a significant escalation of its military cooperation with Russia, Iran has reportedly delivered a shipment of over 200 Fatah-360 short-range ballistic missiles to Moscow. This move, intended to bolster Russia’s depleting missile stockpiles as a result of its ongoing conflict in Ukraine, has resulted in immediate responses from Western powers. As a result, the United States, European Union, and the United Kingdom have imposed a fresh round of sanctions on Tehran.

These sanctions are aimed at disrupting Iran’s military and defence sectors, whilst also tightening restrictions on Iran’s financial institutions. The new sanctions come on top of an already extensive sanctions regime, which has severely restricted Iran’s ability to engage in international trade, access global financial markets, and export its energy resources. This latest round of sanctions will further isolate Iran, cutting off critical supply chains and increasing the pressure on its economy.

The sanctions imposed on Iran over the last two decades have been extensive, targeting nearly all sectors of the Iranian economy, from energy and finance to military and technology. The key sanctions include:

UN and EU Sanctions: Since 2006, the UN Security Council has passed multiple resolutions targeting Iran’s nuclear program, freezing the assets of key Iranian individuals and entities. The European Union has followed suit, imposing a comprehensive embargo on arms sales, freezing assets of individuals linked to Iran’s nuclear activities, and restricting oil imports from Iran.

US Sanctions: The US has led the charge in imposing economic sanctions on Iran. These have included restrictions on Iran’s banking system (particularly its ability to access the SWIFT international payment system), its oil exports, and its access to foreign currency reserves. Sanctions have also targeted individuals and entities tied to Iran’s Revolutionary Guard Corps (IRGC) and missile development programs.

Post-JCPOA Sanctions: Although the Joint Comprehensive Plan of Action (JCPOA) provided temporary sanctions relief in 2015, the US withdrawal from the agreement in 2018 led to the reimposition of sanctions, especially targeting Iran’s oil sector and foreign trade. The Trump administration’s “maximum pressure” campaign further tightened these sanctions, bringing Iran’s economy to its knees in 2019.

The impact of these sanctions has crippled Iran’s economy, with inflation skyrocketing, the value of the Iranian rial plummeting, and unemployment remaining consistently high. Iran’s GDP has shrunk by more than 10% since the reimposition of US sanctions, and the country’s oil exports have fallen from over 2 million barrels per day in 2017 to less than 500,000 barrels per day in 2023. The recent sanctions imposed in response to the missile shipment to Russia are expected to deepen this economic crisis further.

With Iran facing increasing isolation from the West, it is highly likely that it will seek to deepen its economic, military, and political ties with other hostile powers, particularly Russia and China.

The military cooperation between Iran and Russia, which has expanded significantly since 2022, is driven by mutual strategic interests. Russia’s need for military equipment in its conflict with Ukraine has made Iran a key supplier of drones, munitions, and now missiles. In return, Iran has benefited from Russian military technology transfers and geopolitical support, particularly in Syria. The sanctions are likely to further deepen this relationship, with Moscow and Tehran forming a more robust alliance that challenges Western influence in the Middle East and Eurasia.

China, as Iran’s largest trading partner, has also been instrumental in helping Tehran circumvent sanctions. The two countries signed a 25-year strategic cooperation agreement in 2021, which includes significant Chinese investment in Iranian infrastructure and energy projects. As Iran’s access to Western markets becomes increasingly restricted, it will likely seek to increase its economic reliance on China, including expanding oil exports to Chinese markets in spite of Western sanctions.

Together, Russia and China are providing Iran with the ability withstand the economic pressures from Western sanctions. This emerging partnership between the three nations represents a significant challenge to the West, both economically and militarily.

In the short term, the new sanctions will likely result in increased domestic unrest in Iran. Already facing widespread protests over inflation, corruption, and political repression, the Iranian regime will be forced to dedicate resources toward managing internal dissent. This unrest could spill over into the broader region, with Iranian-backed militias in Iraq, Syria, and Lebanon potentially escalating their activities in response to Tehran’s increasing isolation.

Over the medium-to-long term, Iran’s economic struggles are likely to drive more aggressive foreign policy actions. As Iran grows closer to Russia and China, it may increase its support for proxy groups across the region, including Hezbollah in Lebanon and the Houthis in Yemen. This would lead to heightened tensions in the Middle East as Iran seeks to counterbalance its economic losses with military influence, as well as drain the resources of Western powers enforcing the sanctions.

To conclude, the recent shipment of ballistic missiles to Russia and the subsequent fresh sanctions are likely to deepen Iran’s economic crisis, further isolating Tehran from the international community.  In response, Iran is highly likely to deepen its relationships with hostile nations such as Russia and China, leading to an emerging economic and military axis that challenges Western interests. Over the short to medium term, Iran’s economic isolation will likely lead to greater regional instability, with potential long-term impacts on both regional power balances as well as international security.

Continuous Pursuit of Stability in the Middle East: New Diplomatic Efforts for a Ceasefire

The Middle East’s complex situation remains uncertain, with its origins profoundly rooted in the Palestinian conflict. Despite continuous diplomatic interventions and negotiations, the region has yet to achieve lasting peace. Ten months into the conflict, mediators continue to facilitate discussion and secure a ceasefire deal.

The conflict’s impacts extend beyond Gaza and Israel. Countries such as Lebanon and Syria have had incidents with rocket exchanges and airstrikes aggravating regional instability. Meanwhile, Yemen’s Houthis have increased tensions by attacking maritime lines, raising worries about a wider Middle Eastern conflict.

In August, a renewed diplomatic effort was led by the United States, Egypt, and Qatar, aiming to host ceasefire talks in Cairo. US President Joe Biden, Egyptian President Abdel Fattah al-Sisi, and Qatari Emir Sheikh Tamim bin Hamad al-Thani have urged both sides to resume urgent discussions to address outstanding issues and implement a deal without further delay. Key figures, including CIA director Bill Burns, Mossad chief David Barnea, Qatari Prime Minister Sheikh Mohammed bin Jassim Al Thani, and Egyptian intelligence head Abbas Kamel, convened on Thursday 15^th August, to discuss the proposal. The US-backed plan aims to achieve a ceasefire in Gaza and secure the release of Israeli hostages held by Hamas.

Recently, Hamas has called on the United States to exert real pressure on Israel to achieve a Gaza cease-fire agreement, as US Secretary of State Antony Blinken suggests that 90 percent is agreed upon in the proposal meant to bridge the gap between the warring parties.

In addition to Egypt, Qatar, and the U.S., other actors like Iran, Hezbollah, are playing significant roles in either escalating or mediating the conflict. Iran’s influence, notably through Hezbollah and other proxies, continues to complicate ceasefire efforts, as seen with tensions on the Israeli Lebanese border and Iranian threats following key assassinations. Iran’s internal divisions between its president and Supreme Leader regarding responses to Israel further complicated its diplomatic strategy​.

Recent diplomatic efforts have focused on exerting pressure on Iran to curb its influence and refrain from military retaliation, while simultaneously leveraging diplomatic channels to engage with groups like Hamas. The United States, alongside Qatar and Egypt, continues to push for hostage releases and humanitarian access in Gaza. However, ongoing military responses from both sides make the path to a durable ceasefire elusive.

Meanwhile, on the domestic front in early September, protests erupted across several Israeli cities, with critics directing blame towards Prime Minister Netanyahu for the hostages’ deaths. Critics argue that Netanyahu’s refusal to make the necessary concessions has hindered progress toward a cease-fire deal, further intensifying the pressure on his government to reach an agreement.

The urgency to reach a lasting agreement cannot be overstated. This prolonged struggle has claimed countless lives, leaving a devastating impact on families and communities, particularly the most vulnerable members such as children. These talks should not only focus on achieving an immediate ceasefire but also address long-term peace efforts and the necessary support required to rebuild infrastructure in the affected areas. Additionally, the involvement of other regional powers like Lebanon and Iran has compounded the situation’s complexity. Their participation has contributed to escalating tensions and threatens to broaden the conflict beyond the primary stakeholders.

As the humanitarian crisis worsens, and the conflict’s ramifications extend beyond the immediate region, the need for a lasted agreement through diplomacy and constructive communication is more crucial than ever. Expanding the scope of these discussions and addressing post-conflict challenges is critical to securing long-term peace.

Iran’s Nuclear Program: Escalation and Regional Implications  

 Key Judgments:

• It is highly likely that Iran is enriching uranium to near weapons-grade levels (90%), significantly increasing the risk of military conflict with Israel. (High confidence)
• It is unlikely that ongoing diplomatic efforts to revive the JCPOA will succeed in the near term, given the current levels of conflict between Iran and Western powers. (Moderate confidence)
• The potential for a nuclear-armed Iran would almost certainly trigger a regional arms race, with Saudi Arabia and other Gulf States seeking to develop or acquire their own nuclear capabilities. (High confidence)

Recent reports indicate that Iran has made significant strides in its nuclear program, enriching uranium to levels close to 90%, the threshold for weapons-grade material. This development marks a clear escalation in Iran’s nuclear ambitions and is seen as a direct challenge to the international community, particularly Israel. Despite continued diplomatic efforts by Western powers, Iran appears to be leveraging its nuclear advancements to strengthen its position in any future negotiations.

The International Atomic Energy Agency (IAEA) has faced increasing difficulties in verifying the full scope of Iran’s nuclear activities. Tehran has restricted access to key sites and provided limited cooperation to inspectors. This lack of transparency has heightened concerns about the potential for Iran to rapidly achieve nuclear weapon capability, should it choose to do so. Iran’s actions have drawn sharp responses from regional actors, particularly Israel, which views a nuclear-armed Iran as an existential threat. Israeli officials have repeatedly stated that they will take all necessary measures to prevent Iran from obtaining a nuclear weapon, including military options.

The Gulf States, especially Saudi Arabia and the United Arab Emirates (UAE), have expressed deep concern over the implications of a nuclear-capable Iran. Both countries have significantly increased their defence budgets, focusing on advanced missile defence systems and air force capabilities. Saudi Arabia, in particular, has hinted at pursuing its own nuclear program if Iran’s advancements are not curtailed, raising the likelihood of a regional nuclear arms race.

In the broader geopolitical context, the United States has maintained a dual approach of pursuing diplomatic engagement while simultaneously enforcing economic sanctions. However, the efficacy of these sanctions is increasingly in question, as Iran continues to advance its nuclear program despite the economic pressure. This is no doubt in part due to the relations between Iran and Russia, which has been developing recently due to sales of military equipment as a result of both nations being in conflicts. The Biden administration has also reinforced its military presence in the Persian Gulf, signalling its readiness to respond to any further provocations from Iran. European nations, traditionally seen as mediators in the Iran nuclear talks, have grown increasingly frustrated with the lack of progress. There is growing support within the European Union for reimposing UN sanctions that were lifted under the JCPOA, a move that would further isolate Iran but might also push Tehran closer to full nuclear breakout.

The escalation of Iran’s nuclear program is likely to have profound implications for regional security. A nuclear-armed Iran would almost certainly alter the balance of power in the Middle East, prompting neighbouring countries to seek their own deterrent capabilities. The likelihood of military conflict has also increased. Israel’s policy of pre-emptive strikes, combined with its intelligence and operational capabilities, suggests that it may act unilaterally to prevent Iran from reaching nuclear weapons capability. This is evidenced by their already aggressive strategy on Hamas and Hezbollah, with a possibility of even further escalation in Iraq, Syria, and Yemen in order to challenge all Iranian proxies in the region. Such a conflict could quickly escalate and potentially lead to a broader regional war.

To conclude, the advancement of Iran’s nuclear program represents a significant escalation in regional tensions and poses a critical threat to global security. As diplomatic efforts falter, the risk of military conflict grows, with potentially devastating consequences for the Middle East and beyond. The situation warrants close monitoring as it develops, with attention to both the regional power dynamics and the broader strategic implications for international security.

Ukraine invasion into Russia

Ukraine invasion into Russia

Key Judgement:

• It is highly likely that Ukrainian offensive would damage Russian war capability.
• It is likely that Ukraine offensive is to create breakthrough in Eastern Ukraine, in both strategic and political ground. It is realistically possible this would ultimately lead to takeover of Ukrainian territories
• It is unlikely that Ukrainian forces would be able to advance to major Russian cities in deep Russian territory.

The Ukraine war has been in a protracted stalemate, with both sides struggling to make significant advances in Eastern Ukraine. Due to a shortage of manpower, shells, and resources, Ukraine has faced challenges in breaking through Russian defences, while Russian forces have made only minor gains, capturing a few small Ukrainian towns. For more than a year, both sides was able to conduct simple ariel strikes.

However, the recent Ukrainian offensive in the Kursk region, launched on August 6, 2024, has demonstrated that Ukrainian forces still possess the capability to alter the course of the conflict. Within a few weeks, Ukrainian forces gained control of more than 100 villages and towns and captured more than 600 Russian POWs. This offensive has opened a new front against Russia, potentially creating a buffer zone to protect the Kyiv region from Russian offensives and artillery attacks. Since the withdrawal of Russian forces from northern Ukraine, Russian artillery, drones, and glide bombers have been consistently targeting the Ukrainian capital, striking critical infrastructure and civilian areas.

Strategically, this offensive is designed to force Russian forces in southern and eastern Ukraine to shift their focus to the Kursk region, thereby weakening their defences elsewhere. Ukrainian mechanized forces, with their high mobility, were able to conduct advancement in Kursk, and with established ground in Kursk, Ukrainian forces would be able of continuing their offensive by flanking entrenched Russian positions. To prevent the collapse of the entire Eastern Ukraine frontline, Russia is being forced to redeploy their troops to Kursk. Some Russian forces are being redeployed from Easter Ukraine and other foreign countries. Despite an unexpectedly robust response from Russian forces, the strategic surprise achieved by this offensive is likely to cause significant disruption to Russian military operations.

Politically, this offensive could represent a significant victory for Ukraine. Currently, the most pressing threat to Ukraine’s survival is not Russian military action but shifting international support. The ongoing war in the Gaza Strip and the rise of far-right parties in the European Parliament have dampened public opinion in Western countries, making continued support for Ukraine increasingly expensive and politically challenging. The perceived failure of previous Ukrainian offensives has further complicated the effort to maintain Western support.

Another critical factor in Ukrainian diplomacy is the upcoming U.S. presidential election. The foreign policy of former President Trump, who is a candidate, is difficult to predict, but a new Trump administration would likely reverse many of the current U.S. foreign policies, including support for Ukraine. President Biden’s administration has been a key factor in Ukraine’s ability to resist Russian aggression, providing humanitarian aid, military equipment, and imposing sanctions on Russia.

However, President Biden’s declining political standing, exacerbated by his performance in recent debates and the failed assassination attempt on Trump, led to Biden’s withdrawal from the election. Vice President Kamala Harris has since become the Democratic candidate, and her candidacy has shifted the political landscape. Both candidate is still in very tight competition, making it very difficult to predict the result of the election. The success of the ongoing Ukrainian offensive is likely aimed at influencing U.S. public opinion, demonstrating Ukraine’s resilience and capability in the face of Russian aggression.

And lastly, President Putin’s persona as the great defender of Russian people have been significantly damaged since the Ukrainian success in Kursk region. Although the tightly controlled Russian society is not showing any significant agitation, the fact that Ukrainian forcer are able to hold ground in Russian territory for more than a month can have a significant long-term effect on Russian public opinion.

The Ukrainian offensive in Kursk could open new opportunities for Ukraine, both militarily and diplomatically. While it is unlikely that Ukraine can maintain a permanent occupation of Russian territories due to military and diplomatic constraints, the operation could destabilize Russian forces and morale. The primary objective appears to be securing continued U.S. and Western support and creating a breakthrough in occupied Ukrainian territories. This offensive may prove pivotal in altering the course of the conflict and sustaining international backing for Ukraine.

Israel’s double strikes: A Spark for Regional Conflict

Two high-profile killings in Beirut and Tehran have highlighted Israel’s military capability, with the potential to change Middle Eastern relations. The killings of Hamas leader Ismail Haniyeh and Hezbollah commander Faud Shukur has prompted strong reactions from regional players and could further escalate tensions in the region.

On Wednesday 31^st July, a strike in Tehran killed Ismail Haniyeh, a political leader for Hamas, who was visiting Iran for the presidential inauguration. Haniyeh’s death followed the assassination of Faud Shukur in Beirut, allegedly carried out by Israel in retaliation for a Hezbollah attack that resulted in the deaths of twelve children in the Israeli-controlled Golan Heights town of Majdal Shams.

The Israeli message for the attack in Beirut is that this was their promised response to the Majdal Shams strike, and they are not interested in engaging in a more deadly war with Hezbollah. According to Lebanon’s Ministry of Health, the attack in Beirut claimed the lives of at least five civilians, including two children and three women, and injured 74 others in the surrounding area. Hezbollah has not yet confirmed Shukur’s death.

Israel has claimed responsibility for Shukur’s assassination, identifying him as the mastermind behind the deadly rocket attack in the Golan Heights. The United States also holds Shukur accountable for the 1983 bombing of a Marine Corps barracks in Lebanon, which led to the deaths of 241 American service members.

On the other hand, Israel has yet to confirm its involvement in Haniyeh’s death. However, a photo of Haniyeh with the word “Eliminated” written appeared on the Government Press Office’s Facebook page. The message, which was later deleted without explanation, did not expressly say Israel carried out the hit, but did state that the Hamas official “was killed in a precise strike in Tehran.”

Following these strikes it increases significantly the danger of expansion of the conflict. Hezbollah will certainly respond to the killing of Shukr, but so will Iran for its attack on its soil whose leader Ayatollah Ali Khamenei has already promised revenge. Iran may launch a small-scale strike to demonstrate that “we will not tolerate attacks on our soil,” but nothing that could escalate into something larger.

On the Lebanese front, the U.S has worked hard to maintain a delicate balance among Hezbollah and Isael. However, this strike on Lebanese soil has the potential to disturb the status quo and provoke a strong reaction. In recent weeks, we have witnessed more tension between the boards, increasing the prospect of a strong response from Hezbollah. Furthermore, Turkish President Recep Tayyip Erdogan has threatened to interfere if Israel enters Lebanon, pledging to send troops, adding yet another party to the tensions.