Eurasia Group | Escalation of Iran crisis will create increasing risk to markets

Escalation of Iran crisis will create increasing risk to markets

10 January 2007

Eurasia Group is pleased to release the first year-ahead outlook in our series of "Top 7 political risks for 2007," in which analysts from the Middle East & Africa practice consider diplomatic tensions over Iran's nuclear ambitions and the implications of the escalating crisis for markets.

"Fundamentally incompatible positions between the US and Israel on one hand and Tehran on the other regarding Iran's nuclear program will slowly but steadily increase stress during 2007," write analysts. According to the outlook, "Iran is likely to maintain its current, aggressive nuclear policy. President Mahmoud Ahmadinejad, Supreme Leader Ali Khamenei and the vast majority of Iranian elites remain committed to obtaining an indigenous fuel cycle. Tehran's goal is probably to attain 'strategic ambiguity.'"

Analysts note that "Iran's geopolitical resurgence and its ambitions to be the leading Shia nation will increase tensions with both the US and with Sunni Arab governments. This self-confidence could result in the destabilization of the Middle East (for example, by provoking a proxy war with Saudi Arabia in Iraq) and will augment tensions regarding the nuclear crisis during 2007."

Hopes that Iranian domestic politics could derail, or at least impede, policies resulting in such tensions "are probably overblown" according to the outlook. But sanctions will have some effect on Iran's economy and leaders.

Additionally, several market risks will be in play during 2007. Should Iran and Saudi Arabia engage in a proxy war in Iraq, analysts believe "Tehran will become more likely to play the oil card" and "upward pressure on oil prices is probable."

Eurasia Group predicts that military action is probable in late 2008 and analysts note several key signposts for the escalation of this crisis. These include "Israeli threat perceptions, the level of unity among Iranian elites regarding the nuclear issue, the possible resurgence of the reform movement, Iran's true "pain threshold" and the pace at which Iran's program advances, which could be slower than experts now expect."

The Top 7 Political Risks: 
1. Iran 
2. Nigeria 
3. Iraq 
4. Turkey 
5. Russia 
6. China 
7. Afghanistan/Pakistan