Iran's strike
Best case scenario: two more rounds then a ceasefire.
Forecast
The risk of Iranian escalation limits Israel’s ability to continue the war in Gaza. A ceasefire in the coming weeks is more likely than all-out war. A ceasefire is likely to be preceded by another round or two between Israel and Iran.
Executive Summary
We stand by our initial assessment that there is a 50% chance that this turns into a regional and uncontrolled conflict.
The risk of Iranian escalation limits Israel’s ability to continue the war in Gaza. A ceasefire in the coming weeks is more likely than all-out war. A ceasefire is likely to be preceded by another round or two between Israel and Iran.
Israel’s monthly budget deficit in March was 6.2% of GDP, or USD4 billion. The cost of intercepting Iran’s 300 ordnances fired during the night of 13-14 April exceeded USD1.3 billion.
Several days of strikes of this nature would make war prohibitively expensive for Israel.
Israel’s strategy is to draw the US into a war. However, so far, President Biden has refused to be drawn in, while maintaining full support for Israel against Hamas.
The US is pressuring Israel to de-escalate, including in Gaza, to avoid a regional war that the US cannot win, and which would compromise its financial position and its position vis a vis Russia and China.
Israeli claims that 99% of ordnances fired by Iran were intercepted are as credible as Saddam Hussein’s claims to have won 99% of the votes in Iraqi elections.
Iran claims to have attacked Israeli intelligence collection facilities in Jebel al-Sheikh, in the Golan Heights. This is Israel’s primary monitoring station for Middle Eastern skies. The attack there shows that Iran would be able to knock out Israel’s radar infrastructure ahead of a larger attack.
Given past experience in Yemen, Lebanon and Gaza, and Iran’s history of planting bases underground, it should be assumed that Iran can fire hundreds of ordnances daily for at least several weeks at Israel and at US bases in the region in the event of a large-scale conflict.
Analysis
The facts
In response to the 1 April Israeli strike on the Iranian consulate in Damascus – technically an attack on Iranian territory – Iran fired 185 drones, 110 medium range ballistic missiles and 36 cruise missiles at Israeli military facilities.
Missile sirens and alerts were triggered all over Israel, but were clustered in the Negev, close to Dimona (where Israel’s nuclear reaction sits), in the Golan Heights and over the West Bank.
Jordan, the US, the UK, France and Israel participated in intercepting the Iranian missiles, with interceptions over Iraqi, Jordanian, Syrian and Israeli territories.
Iran said that the strike was concluded before there were reports of the first missile hits.
President Biden described the interception of the Iranian drones and missiles as a success, and said that he would not support Israeli retaliation strikes.
For 20 years, there was talk of Israel striking Iran. Instead, it was Iran that struck Israel first.
Gulf Arab states and Türkiye, with the exception of Bahrain and possibly Qatar, have refused to allow the US to use their territory against Iran, signalling the US’ isolation and the partial success of Iran’s strategy of gradually expelling the US from the region.
Iran has committed itself to attacking Israel from its own territories whenever its personnel in the region are attacked. This heralds a new and much riskier regional dynamic.
Israel’s monthly budget deficit in March was 6.2% of GDP, or USD4 billion. The cost of intercepting Iran’s 300 ordnances fired during the night of 13-14 April exceeded USD1.3 billion.
Several weeks of such bombardment would deplete Israel’s air defence capabilities and increase non-payment risks and public debt significantly.
Iran’s economy, on a PPP basis, is more than four times than that of Israel, and it has 80 million people compared to Israel’s 8 million Jews. Israel is no position to fight a war against Iran, especially not without full scale US support.
The claims
Iran claimed to have caused significant damage to Israel’s surveillance base in the Golan Heights. That base oversees SIGINT over most of the region and also has significant radar stations necessary for both detecting incoming missiles and managing Israeli aircraft activities.
Iran also claimed to have caused significant damage to Nevatim Air Base. The base hosts Israel’s F-35I Adir jets, the most advanced of the Israeli Air Force. The base also hosts a tanker aerial refuelling squadron, the operation of which would be necessary for Israel to conduct long range strikes, including against Iran.
Iran claims that it gave 72 hours’ notice to regional countries, telling them than an attack on Israel was imminent.
Israel claimed that it and its allies shot down 99% of incoming Iranian ordinances.
Our assumptions
Israel still has no viable strategy to defeat Hamas without risking regional escalation. An attack on Rafah would make escalation more likely again.
Iran wants to expel the US from the region, but through a gradual process.
When Israel struck the Iranian consulate in Damascus, it wanted an Iranian reaction.
Iran is not seeking full escalation against Israel, but wants merely to deter Israel and force it to end the war in Gaza. It believes it can destroy Israel with a thousand cuts without risking all-out war.
Iran, however, accepts the risk of full-scale war, and believes it is prepared for it.
Iran’s strike against the most important Israeli air base and radar station was intended to demonstrate its capabilities. It caused significant damage and likely enabled deterrence.
The US does not want to fight Iran directly, given that such a war would be fought in Iraq, Syria, Yemen and Lebanon as well as Iran, and would be far more costly than Iraq and Afghanistan combined.
A US Iran war would destabilise energy markets, increase the US debt massively, stress US internal cohesion and weaken the US vis a vis Russia and China. The latter two countries would back Iran fully with materiel, intelligence, political cover and media.
The US does not want Israel defeated, but it can restrain it whenever it needs to.
If Israel could have struck Iran’s nuclear programme, it would have done so, as it did against Iraq and Syria’s nuclear programmes.
Israel realises that it has been losing strategically for 20 years. All it has gained since the Iraq invasion was normalisation with the UAE and Bahrain. By contrast, Iran has gained control of most of Lebanon, Iraq, Syria and the heavily populated areas of Yemen.
Israel therefore has a greater need to escalate than Iran, in the hope that a US strike would set Iran back.
That in turn makes it likely that Israel will retaliate against Iran’s strike, including by testing Iran’s new commitment to retaliate against Israel killing Iranian commanders using its own territories.
Iran and its proxies do not fight using shock and awe tactics. Rather, they escalate gradually and opportunistically, holding most of their military capabilities in reserve, out of fear of its being detected and struck from the air.
This is confirmed by how the Houthi managed to increase their rate of attacks at will in the Red Sea, even after numerous US airstrikes, and how Hezbollah in Lebanon has been gradually demonstrating new capabilities after months of fighting, intended to maintain its ability to deter Israel.
We therefore assume that Iran used a small fraction of its capabilities, and that it can continue to fire several hundred missiles and drones daily for at least several weeks.
We also assume that the US and Israel know that, in any conflict with Iran, the latter would have full Chinese and Russian backing, including via the Caspian Sea and Afghanistan, both of which are only minimally vulnerable to US interception.
We assume that Israel is severely exaggerating the success of interception operations. 99% is simply not a credible claim, in our view.
Escalation Scenarios
This strike is over, with Iran and the US saying they do not want matters to expand. Now, it is up to Israel’s assessment of its ability to influence the US and the US’ willingness to follow Israel’s lead. The question also depends on whether Israel is ready for a ceasefire in Gaza.
If Israel strikes Iran, the response will mirror the Red Sea crisis but from the air. Israel will almost certainly utterly fail to destroy Iranian missile capabilities and nuclear capabilities. Iran will respond with multiple attacks per week involving hundreds of drone and missile strikes, overwhelming Israeli air defences and making Israel’s fiscal position less tenable. The aim will be to impose a ceasefire.
If the US steps in and strikes Iran, Iran will almost certainly use more advanced strike packages than that seen on 13/14 February, and would target US bases throughout the region. The US would have to send in multiple aircraft carriers. We would expect at least one to be sunk. Furthermore, strikes from Iraq, Syria, Lebanon and Yemen would intensify, and Hezbollah would attempt a naval blockade on Israel.
Rafah serves as a key potential future trigger for more escalation, as Hezbollah and Iran do not want Israel to destroy Hamas infrastructure there. A ceasefire would end the ongoing Israeli-Iranian escalation.
Strategic Impact
We anticipate two or three additional rounds of Iranian – Israeli escalation, including Israel testing Iran’s threat to attack Israel whenever it strikes Iranians in the region, and Iran responding.
Iran’s aim will be to force Israel to back down in Gaza.
If Israel’s government does not change, it will likely escalate against Palestinians in the West Bank and Jerusalem, making further rounds between Hamas and its regional allies and Israel more likely.
Iran’s strike reflects a permanent shift in the balance of power in the Middle East. It is historic in the following ways:
It is the largest drone strike ever recorded.
It is the first time Israel required US aid before hostilities had even begun – four external states were required to intercept the strike.
It is the first time a Muslim state attacked Israel and suffered no immediate retaliation.
It is the first time Israel seeks to minimise the damage it suffered, rather than exaggerate it and use it to justify severe and expansive retaliation.
Egypt refused to help intercept Iranian weapons. This reflects its growing autonomy from the US.
Jordan, by contrast, did help intercept the missiles and drones. Jordan’s only purpose to exist as a state is to safeguard Israel’s flank – there is no other reason for that territory to be independent, rather than be divided between Saudi Arabia, Syria and Iraq.
Jordan’s actions in support of Israel are likely to inflame protests, and risk turning them from anti-Israel to anti-monarchy, or at least anti King Abdullah. In 2021, King Abdullah arrested his half-brother, former crown prince Hamzah, for allegedly attempting to destabilise the regime by taking a hardline position against corruption and mismanagement. He is an available replacement for King Abdullah who the armed forces could rally behind.
The US is unwilling to back Israel against Iran, meaning that Gulf Arab states will have every interest in drawing closer to Iran. Saudi Arabia and the Gulf Arab states will move even farther from the West, given that it is clear that Iran can strike US bases and energy infrastructure anywhere in the region.
China has likely taken note of how Iran acted and the rate at which it could deplete interceptor missiles that were fired from ships, aircraft and land systems, and would apply these lessons against Taiwan.
The US’ refusal to escalate and its increasing pressure on Israel to agree a ceasefire set the stage for Israel being defeated in this war, in that it will fail in its declared political objectives of freeing the captives and ending Hamas.
Iran is on its way not only to become the leader of the region, but also to becoming a global power.
Commercial Impact
Baseline assumption:
We anticipate two or three additional rounds of Iranian – Israeli escalation, including Israel testing Iran’s commitment to respond to attacks on its personnel anywhere in the region.
Each of these rounds will involve airspace closures, increased risks to Israeli shipping and ports, greater risks to civilian airlines, and risks to energy infrastructure in Israel and Iran.
Each of these rounds can turn uncontrolled if the US does not conduct itself extremely skilfully. That is why we stand by our baseline assumption that there is a 50% chance of this turning into an uncontrolled regional war.
If the Iran-Israel escalation ends now without a Gaza ceasefire:
The risk of a Lebanon-Israel war will continue to increase. Such a war would decimate Lebanese infrastructure and inflict severe damage on Israel.
Hezbollah will expand its targeting of Israel, with a growing likelihood of an operation aimed at capturing villages along the Lebanon-Israel border intended to impose a road blockade on the Golan.
The risk of destabilising unrest in Jordan will increase, with a severe risk of attacks on property owned by individuals suspected of collaborating with Israel, or owned by Western companies strongly identified with Israel.
Risk to shipping in the Eastern Mediterranean is growing, as Hezbollah becomes more likely to attack Israeli ships and ports.
Israel’s debt will grow at a manageable rate.
An attack on Rafah would very likely lead to Hezbollah escalating significantly against Israel to try to prevent Israel from concentrating enough forces to succeed.