The Israel-Palestine War.
Five scenarios to plan for.
Welcome to this week’s edition of Not in Dispatches, in which we explore five potential trajectories for the Israel-Palestine conflict and their business impacts.
There is no shortage of opinion on the crisis in Israel and Palestine. Experts offer wildly different, sometimes equally compelling, predictions. Many, if not most people have strong views (as several of you have told us this week). And the situation is so in flux with multiple variables that could affect future developments.
These are all factors that make scenario analysis, which we wrote about two weeks ago, an especially useful tool for firms. Ask one expert and you will receive one opinion. But hinging strategy on one view, even if it turns out to be right, is not strategic; hence President Biden tasking his national security advisors to conduct “contingency planning for any and all escalation scenarios”.
We think businesses and investors should do the same. Below are five scenarios worth planning for. And here is an accompanying slide deck overview.
Scenario 1 – Retaliatory Strike.
At a minimum Israel, as appears imminent, deploys ground troops and keeps bombarding Gaza’s military infrastructure. The primacy objective? To dismantle Hamas and achieve deterrence, as well as retribution, while avoiding getting bogged down or the conflict escalating. Intense fighting might continue for a month or so with Israel withdrawing as soon as possible.
Regional powers and the international community, recognising the potential for broader conflict, calls for restraint and attempts to mediate. This could open up the possibility for a ceasefire or even peace talks. But inflamed tensions and angry citizens on both sides mean any temporary cessation of hostilities would succumb to the same fate of the long cycle of failed accords.
The immediate aftermath for Gaza would be a blend of economic and humanitarian crises.
Already, bombings have left 300,000 Palestinians homeless. Israel’s robust economy would face temporary setbacks (shekel depreciation and reduced trade and investment flows) but will bounce back. Oil prices would remain volatile, as they have the past week. Middle Eastern economies would face uncertainty and see firms disengaging until the conflict is resolved – already, Swiss bank UBS has banned business travel across the region and others will no doubt follow.
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Scenario 2 – Occupation of Gaza.
Israel could opt for a more enduring strategy: a long-term occupation of Gaza. The underlying rationale? Only an occupation would allow Israel to fully root out Hamas, achieve regime change and provide lasting security.
Any occupation would likely be protracted and bloody. Both sides would sustain significant losses in blood, treasure and reputation. Israel, despite superior conventional military power, would face determined Palestinians waging guerilla war on home turf. Fighting would lead to massive civilian casualties and even greater hardship. And the longer and more severe any occupation, the greater the chances Israel’s other enemies will join the fray.
The business impacts of an occupation would be greater than those arising from a more limited intervention. All the potential business-friendly outcomes from the nearly-concluded Saudi-Israeli normalisation of relations would evaporate before they have appeared. And the case made by countries like Saudi Arabia and the UAE that the region is conducive for business would be hard to maintain.
Scenario 3 – A war on multiple fronts.
The war could expand beyond Gaza in multiple ways. An opportunistic Hezbollah, funded, emboldened and encouraged by Iran, may attack from the north. Israeli settlers could launch attacks in the West Bank. Foreign fighters could join the fray. A war front with Syria could open up. And tensions in Jerusalem, already boiling over, could explode.
An attack from Hezbollah, which is much stronger than Hamas but also has more to lose, would be much more challenging for Israel and could take the war to Lebanon. The US and its allies would likely provide significantly more military assistance to Israel, provoking reactions from Iran. And countries supporting Israel could find themselves as targets for terrorists – as occurred after the wars in Iraq and Syria.
Business impacts would be global and severe. Oil prices would become extremely volatile. Trade routes, including through the Suez Canal and the Strait of Hormuz, could become more dangerous. Insurance premiums, financial market volatility, and inflationary pressures would rise. All of which would raise business costs and hit consumers, including far from the Middle East.
With the brevity of a media digest, but the depth of an intelligence assessment, Daily Assessment goes beyond the news to outline the implications.
Scenario 4 – Israeli-Iranian war.
Most concerning, the covert conflict between Israel and Iran could become overt.
Iran, angered by Israeli actions in Gaza and needing to prove its mettle – particularly as its supreme leader ages and its young, restive population chafes at its theocratic strictures – might escalate its support for proxies (Hezbollah in Lebanon, the Assad regime in Syria, Shia militias in Iraq or the Huthis in Yemen, not to mention Hamas in Gaza). It might also step up confrontations in the Strait of Hormuz, or launch cyber attacks against Israel.
Israel, deciding to attack its perceived “root of the problem”, might target Iran’s nuclear facilities or military assets, as it has already done in Syria.
Restraint might prevail, however. Israel would risk fighting an unwinnable war. Iran would risk drawing in the US. And regional powers (Saudi Arabia, Egypt, Jordan, and Russia) would pressure both to avoid escalation. The US deploying an aircraft carrier group to the region was not to deter Hamas, or even Hezbollah, but Iran.
A direct Israel-Iran conflict would throw the Middle East into chaos. The large number of weapons in Lebanon aimed at Israel could be activated. Arab leaders would come under public pressure to become militarily involved. Multiple fronts in the ‘new cold war’ could open. There would be few winners, except perhaps Moscow. And Western involvement could not be ruled out: it took much less to invade Iraq in 2003.
And the business impacts would be extreme. Security, operational and supply chain risks would increase. Potential maritime trade disruptions could occur (e.g. if Iran were to close the Strait of Hormuz, the chokepoint for nearly a third of seaborne oil, or Israel suspended more offshore LNG production). And oil and gas prices (whose futures rose 4% and 14% respectively this week) would soar, each with global inflationary effects.
Scenario 5 – Peaceful resolution.
After a week of war, peace appears far fetched, but a cessation of hostilities may occur more quickly than most anticipate.
Israel and Hamas may become exhausted. Local politics may pressure leaders to find an end to bloodshed. The international community may offer at least temporary solutions. Regional powers, like Iran, may exercise restraint and ultimately consider they have larger interests in avoiding escalation. A truce, even if not a long-term peace plan, may serve everyone’s interests after some time.
But for now, this looks unlikely. Emotions are running too high for diplomacy. Hamas has demonstrated by its actions that it is not interested in peace. Whatever little trust that existed between Israel and Hamas has been destroyed. And the situation is too volatile for mediation. Calls by Palestinian sympathisers for Israel to not respond militarily are unrealistic.
Naturally, restoration of peace would be best for business. But any peace after the biggest attack on Israel in history would be fragile – and certainly not long-term, with any ‘two-state solution’ set back for many years. Israel would remain on high alert and terrorism risks would remain elevated. Plus, there would always be the risk of major conflict erupting once again.
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How can firms respond?
With the situation in flux and with no ‘good’ scenarios, businesses and investors should pay attention to the key drivers of potential escalation, especially the evolving military dynamics and stances of regional powers.
Beyond monitoring – easily done through Geopolitical Dispatch’s Daily Assessment and our new weekly LinkedIn summary – firms should apply these scenarios to their own circumstances and assess how they may impact their strategy, operations, revenues, customer base, supply chains, and overall risk exposure.
Better to hope for the best and plan for the worst than be caught unawares.
And if there’s one lesson that can be drawn from these tragic events, it’s that unexpected shocks can and do happen.
With so much tragedy having already occurred and more likely to come, our hearts go out to everyone affected. This has been a difficult week and we hope for a swift and peaceful resolution.
Best,
Michael, Cameron, Damien, Yuen Yi, Andrea, and Kim.