Iran vs Israel: What will be the economic impact of the conflict?

The global community has been apprehensive in the aftermath of Iran’s retaliation to Israel’s attack on its consulate in Damascus (Syria) on April 1, 2024. While most western countries criticised Iran’s retaliation, China and India called for “restraint” and “de-escalation.” Russia also expressed its concern at the attack. 

April 1 attack 

Seven people including two generals of the Islamic Revolutionary Guards Corps (IRGC) were killed in the April 1 attack by Israel. On April 13, 2024 Iran launched drone and fire missile raids, but there are no reports of significant damage. Iran has said that any further retaliation from Israel will evoke a much stronger response from Tehran. 

On April 10, 2024, Iran’s religious leader Ayatollah Khamenei had tweeted: “Israel must be punished.”

It would be pertinent to point out that while categorically sticking to its stand that it will retaliate, Tehran did lay a precondition that it would not go ahead with the attack if there was a ceasefire in Gaza. The US has also been calling for restraint and does not want the current Israel-Iran conflict to escalate. 

Before Iran’s retaliatory strikes on April 13, 2024, Washington had urged China and Gulf nations to urge Iran not to indulge in any action which could result in tensions in the region. Washington, while cautioning Iran has categorically stated, that it will support Israel. US President Joe Biden has reiterated his ‘ironclad’ support for Israel. While the US has categorically stated that it stood by Israel – in the aftermath of Iran’s strikes – there are concerns in the US that a disproportionate response by Israel could lead to serious escalation between Israel and Iran – something which is totally avoidable. 

Iran’s views regarding escalation?

There has been no one view in Iran regarding its response to Israel. While some had argued that Tehran should exercise restraint others were in favour of retaliation. The broad consensus in Iran has been a limited response which sends a strong message to Israel. Former Iranian Deputy Foreign Minister believes that Iran should retaliate in a calibrated manner. 

"Should choose the least costly and at the same time most profitable option to respond to Israel”

Iran’s economic challenges 

Even those who back retaliation by Iran clearly understand that escalation of conflict would take a further toll on the country’s economy. Due to international sanctions, ever since the US pulled out of the Iran nuclear deal/JCPOA and the imposition of sanctions and the Covid-19 pandemic, Iran’s economy has taken a serious hit. Iran’s inflation rate has witnessed a steady rise, reaching a whopping 50 per cent, while its currency has steadily dipped. 

In the aftermath of Iran’s retaliatory attack, on April 13, 2024, the Iranian Rial was pegged at 6,60,000 against the US dollar (this was an all time low for the Rial).

Global economic impact 

Any conflagration could have an impact well beyond Iran and the Middle East. 

First: Iran had threatened to block the Hormuz Strait. Between January and September 2023, over 20.5 million barrels per day (bpd) passed through the Strait of Hormuz. If the crude oil prices touch over $100 per barrel the economies of countries, including India, which are dependent upon imports for their crude oil needs will be impacted. India’s Current Account Deficit (CAD) could go up significantly if the price of crude oil rises. Rising oil prices will also lead to inflationary pressures.

Second: Flying time and airfares from India to Europe are likely to increase since several carriers have stated that they will not be using Iranian airspace. 

Third: Iran due to its strategic location has become an important part of the International North South Transit Corridor (INSTC) – a 7,200 kilometres multi mode network which will enhance India’s connectivity to Central Asia, Russia and Europe. India has also invested in Phase 1 of the strategically located Chabahar Port project, which is part of the INSTC. In 2022-2023, trade between India and Russia, via INSTC, witnessed a rise.
 
Fourth: instability in the Middle East is likely to impact Gulf countries – especially UAE and Saudi Arabia – which have been seeking to harness their geographic location for promoting their long term economic vision. Ties between Gulf nations and Israel could also witness a downward spiral if tensions continue.

In conclusion, the reverberations of Iran-Israel tensions are likely to be felt well beyond the Middle East in the coming days. In an interconnected world, it is tough for any country to insulate itself from complex geopolitical challenges.

The author is a policy analyst and faculty member at the Jindal School of International Affairs, OP Jindal Global University, Sonipat.

(Disclaimer: The views expressed above are the author's own and do not reflect those of DNA.)