It is just over one year since the start of the Israel-Hamas conflict on 7 October 2023. The geopolitical situation in the Middle East remains highly precarious. Israel is conducting intense military operations in Lebanon and is in a standoff with Iran following a ballistic missile attack by Tehran on Israel’s territory on 1 October and Israel’s retaliation on 26 October.
- Iran is expected to respond to Israel’s 26 October attack, continuing the retaliatory rounds between the two regional arch-rivals. This escalatory cycle will have global ramifications.
- The escalation in the Middle East will have security implications internationally. Iran will likely seek to target Israel and its allies asymmetrically and potentially directly, and unrest will continue to take place in response to developments in Lebanon and Gaza.
- While the fear of disruption to energy markets has been averted for now, given the nature of Israel’s attack on Iran, volatility in global financial markets is likely to continue in light of the cycle of escalation.
- The broader geopolitical consequences of the ongoing conflict will be far-reaching, particularly as Western countries increasingly lose credibility as global leaders due to their perceived one-sided military support of Israel.
Escalation
A cycle of retaliatory violence between Iran and Israel is expected to continue after Israel targeted around 20 military sites across Iran on 26 October. On the same day, Iran called the Israeli strikes “an escalating action”. On 27 October, Iran’s president stressed that while the country does not seek war, it will certainly respond to Israel's latest aggression.
A further attack by Iran is likely to lead to a spiral of tit-for-tat strikes between the two countries, especially if this is conducted directly by Iran rather than asymmetrically through the armed groups it supports across the region. Ahead of the US presidential election on 5 November, the US administration will try to find a balanced approach towards Israel.
On the one hand, this will mean highlighting military and diplomatic support. This is likely to include sharing intelligence and assuring continued military defensive support against further Iranian attacks.
On the other hand, the US will also remain intent on avoiding all-out war between Israel and Iran for three reasons. First, such a war would mean further financial strains on the US defence and aid budget. Second, an all-out war would push up global oil prices ahead of the election. Third, and most importantly, a further escalation could drag the US deeper into the conflict militarily.
The global impacts of the recent escalation will depend on the next steps by Iran and Israel. Companies should monitor five areas in the coming days and weeks: security, global market reaction, unrest, sanctions and geopolitics.
Security
Security threats to government assets associated with Iran, Israel and the US are elevated. There have been several incidents targeting Israeli diplomatic facilities worldwide in 2024 – including a reported shooting in Stockholm (Sweden) on 1 October and explosions near the Israeli embassy in Copenhagen (Denmark) on 2 and 7 October. In the Middle East, Iran-backed militant groups will have increased intent to target Israeli and US assets, particularly in Syria, Iraq, Lebanon, Jordan and Egypt.
The escalation in the Middle East will increase the intent of Iran and Islamist extremist groups to conduct attacks in other regions. Iran may choose to escalate asymmetrically or even directly by planning further attacks against Israeli and, though this is less likely for the time being, against US interests. Since late 2023, the US, Sweden and Brazil have accused Iran of planning violent attacks. Islamist extremists, meanwhile, continue to have elevated intent to carry out attacks in solidarity with Palestinians, which could further increase in response to civilian casualties in Lebanon.
Global market reaction
Iran’s attack on 1 October drove a sharp increase – more than 10% – in global oil prices. This was due to the possibility of Israeli strikes targeting Iran’s oil exports – which, however, did not materialise.
An actual reduction in Iran’s exports – estimated at around 1.5 million barrels per day – would increase prices and market volatility. However, global oil markets overall are well-supplied due to rising production in the US and slowing demand growth in China, limiting the likelihood of a major, prolonged price spike.
The conflict is also driving demand for “safe haven” assets, including the US dollar, which – if sustained – will contribute to inflationary pressures on imported inputs and goods in many economies, particularly where they are denominated in US dollars. Some markets have seen improvements, with increased weapons sales giving the US military industry a boost, and a growing demand for gold as a stable store of value positively impacting the global gold market.
Unrest
Anti-Israel protests and activism are likely to increase in the coming weeks in response to Israeli airstrikes and ground operations in Lebanon. Seerist data show regular social unrest worldwide linked to the Gaza conflict since late 2023.
Protests related to developments in Lebanon have been reported in Australia, France, Brazil, Iraq, Sweden, Finland, Jordan and Pakistan. Companies previously targeted for actual or purported links to Israel are likely to face renewed scrutiny, which could include direct protests, boycott campaigns and negative publicity.
Sanctions
Further US and international sanctions targeting Iran are almost certain. Iran’s attacks will likely prompt the US to increase its enforcement of so-called secondary sanctions and expand its targeting of companies and governments transacting with Iran.
In particular, the US will consider strengthening sanctions against shipping, logistics and financial companies that facilitate Iranian oil exports. The US is also likely to target companies linked to Iran’s military, especially those involved in technology and weapons transfers. The EU will likely focus on sanctioning entities and individuals linked to the Iranian attack on Israel on 1 October.
Neither the US nor the EU is likely to impose sanctions on Israel for its military operations in Lebanon or Gaza. However, both maintain and will continue to expand targeted sanctions against Israeli individuals and entities involved in violence against Palestinians in the West Bank (Palestinian Territories).
Geopolitics
The escalating conflict is undermining international institutions and contributing to geopolitical fragmentation. Netanyahu authorised the strike that killed the leader of the Lebanese Shia movement Hizbullah, Hassan Nasrallah, while in New York (United States) for the UN General Assembly, and he did so even as US and French officials were attempting to broker a ceasefire in Lebanon. Meanwhile, Israel’s Foreign Minister Israel Katz on 2 October said Israel was prohibiting UN Secretary General Antonio Guterres from entering Israel as he had not “unequivocally” condemned Iran’s missile attack on Israel.
Increasing escalation between Iran and Israel will likely push Russia and Iran closer, especially should new Western sanctions against Iran take effect. A regional war in the Middle East is unlikely to be in the interest of the Kremlin as it would very likely weaken Iran’s ability to support Russia in Ukraine and potentially impact Russia’s Khmeimim air base in Latakia (Syria).
Although China will continue to urge Iran and Israel to refrain from war, Beijing’s influence is likely to remain limited. Amid domestic economic challenges, China favours stances aimed at preventing a conflict that would threaten its energy security.
On 1 October, the US, UK and France stated that they aided in Israel’s defence against the Iranian missile attack. France and the UK will continue to provide Israel with defensive support, but like the US, both countries will also call for Israeli restraint, particularly in its Lebanon operations.
The US, meanwhile, is viewed throughout the Global South (and in Europe) as the primary enabler of Israel’s military operations in Gaza and Lebanon. External Western powers will continue to call for restraint while seeking to avoid being drawn into a direct Israel-Iran conflict – especially since Iran’s warning on 2 October that any “third party supporting Israel” would face potential retaliation.