Markets Aren’t Expecting Another Iranian Attack

Guild Investment Management  |

iStockphoto, Adventtr

A little more than a week ago, the Defense Intelligence Agency released an updated comprehensive report on Iranian conventional and unconventional military capabilities. The report notes:

“Since 2016, [Iran’s Supreme Leader, Ayatollah] Khamenei and other senior leaders have suggested that Iran be more proactive in defending its territory and interests abroad… Iran’s ‘way of war’ emphasizes the need to avoid or deter conventional conflict while advancing its security objectives in the region, particularly through propaganda, psychological warfare, and proxy operations. Iran’s deterrence is largely based on three core capabilities: ballistic missiles capable of long-range strikes, naval forces capable of threatening navigation in the Persian Gulf and Strait of Hormuz, and unconventional operations using partners and proxies…

Recently, the regime has had another outbreak of protests, similar to those that erupted in 2009 after a contested presidential election. The DIA report notes:

“Since the 1979 revolution, the regime has regularly cracked down on dissent to maintain political stability. Iranian political and ethnic opposition groups are largely localized and lack unity, posing little threat to the regime. Iran’s internal stability continues to be threatened by a growing schism between the country’s leaders, dominated by military and clerical elites, and the common people. The past 40 years have seen a growth in income inequality, increased [Revolutionary Guard] political influence and control of key economic sectors, sustained sectarian and ethnic tension, violent suppression of dissent and reformists, persistent gender inequality, and tension stemming from the military’s involvement in regional conflicts.

“In 2009, after the disputed reelection of conservative President Mahmoud Ahmadinejad, a loosely organized opposition called the Green Movement emerged with large-scale protests demanding democratic reforms. The demonstrations marked the country’s most significant unrest since the revolution. Bolstered by the Internet, hundreds of thousands of protesters turned out across the country. The government responded by ordering security services to crack down, which resulted in dozens of deaths, hundreds of arrests, restricted access to social media, and the closure of several newspapers. The regime quelled the unrest and nearly eliminated the Green Movement. Between December 2017 and January 2018, small incidents of civil disobedience converged into widespread public protests, the largest unrest Iran has faced since 2009. Some protestors challenged Iran’s foreign policy—including its involvement in regional conflict and support to proxy groups—but most focused on economic and social issues. Elected in 2013, President Ruhani promised increased financial benefits and economic growth, but these have not translated into an improved standard of living for everyday Iranians. While oil output had risen before the re-imposition of U.S. sanctions, significant economic growth did not follow, and domestic prices for both food and fuel increased.”

The withdrawal of the United States from the nuclear deal that had been negotiated by the Obama administration, and the re-imposition of stringent U.S. economic sanctions, has placed great economic and financial pressure on the Iranian regime, resulting in a recession, hyperinflation, and the descent of much of Iran’s middle class into near penury.

Recently, and with only light coverage from global media, there was another outbreak of widespread protests in Iran, sparked by the cash-strapped government’s decision to ratchet back gasoline subsidies and ration fuel. Refined petroleum products have long enjoyed substantial subsidies from the Iranian government — a tradition that long predates the 1979 Islamic Revolution that brought the current regime to power. Thus, the reduction of those subsidies, under the current situation of economic duress, has met with mass protests, which as usual the government succeeded in quelling only with harsh repression — at least 100 civilians are reported dead, and much of the country’s internet and wireless communications were shut down. In spite of that shutdown, ordinary Iranians succeeded in showing the rest of the world what was going on through social media posts.

The regime’s reduction of fuel subsidies, the subsequent mass protests, and the violence with which they have been suppressed are all indications of the severity of the regime’s economic duress.

As the DIA noted, the regime prefers to act through proxies and through unconventional means, including regional militias, drones, and ballistic missiles.

The Reach of Iranian Ballistic Missiles
Source: Defense Intelligence Agency

Click to enlarge

Regional Iranian Proxies For Unconventional Warfare
Source: Defense Intelligence Agency

Click to enlarge

It is these unconventional assets that were responsible for the attacks on Saudi oil facilities in Abqaiq in September. Those attacks were shrugged off by markets; but at the time, we observed:

“The attacks may not have been highly damaging or disrupting, but they have highlighted risks that oil markets have evidently not fully priced in — not unknown risks, just currently unpriced ones.

  • First, in spite of the rise of U.S. oil production, Saudi is still the world’s key swing producer — and Saudi production has significant bottlenecks, including the Abqaiq processing facility that was struck in the attack.
  • Second, a war with Iran has been feared for so many decades that most observers have become complacent about the risk. Still, Iran maintains deep ties with regional asymmetrical militias that are capable of either conducting proxy attacks on Iran’s behalf, or of distracting attention from activity that covertly originated from Iran itself. (Intelligence seems to suggest that the latter is what happened on Saturday.) In short, while a regional war involving Iran remains unlikely, Iran can still have a significant and destabilizing regional influence.
  • Third, technology (drones, cyber warfare, etc.) means that destructive asymmetrical attacks can more easily be launched by non-state actors (though often with covert state backing). Those attacks will increase in sophistication and efficacy as the technological means become cheaper and more accessible.”

A few days ago, General Kenneth F. McKenzie, the head of Central Command (the “unified combatant command” that coordinates the activities of the U.S. military branches in the Middle East) said in an interview that he expects further Iranian attacks aimed at the disruption of oil production and shipping:

“My judgment is that they will attack again… It’s the trajectory and the direction that they’re on. The attack on the oil fields in Saudi was stunning in the depth of its audaciousness… Iran is under extreme pressure.”

Iran’s behavior represents a form of geopolitical extortion. The message clearly is that unless the world gives them cash — through the easing of sanctions or through other channels — further, and potentially more drastic, disruptive actions are threatened. In keeping with the regime’s longstanding strategic orientation, these actions will not be conventional, but will be executed by Iran’s regional proxies, using drone or missile technology like that used in the September attacks.

The worrisome aspect of this risk is its severity. If the September attacks, as “audacious” as they were according to General McKenzie, did not achieve the desired result, what action will the Iranian regime deem necessary to secure relief from the economic and internal political pressures now bearing down on it?

Investment implications: Neither global equity markets nor global oil markets have priced in the rising risk of further Persian Gulf disruption caused by Iran’s proxies, or covert Iranian attacks via drones or missiles. With the September attacks on Saudi oil production having failed to produce the desired outcome, and rising pressure from domestic revolt against economic austerity, there is a risk that the Iranian regime may resort to more drastic actions in an attempt to secure relief from tightening sanctions.


Equities Contributor: Guild Investment Management

Source: Equities News

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