While the conflict between Israel and Iran has not been a new development, its intensity has increased in recent years, with proxy wars, cyber-attacks, and political maneuvers in the Middle East. Even though Israel and Iran have no direct land border and have never fought a full-scale war, their geopolitical rivalry carries far-reaching implications for the world’s security and economic stability. Despite the conflict taking place in the Middle East, it has far-reaching effects across the globe, particularly in Asia. The nuances of the Israel-Iran conflict have intensified over time, and more importantly, it has resulted in a broader economic impact on Asian businesses.
“The potential for further escalation of the conflict heightens risks and uncertainty and could have significant economic ramifications for the region and beyond,” said Julie Kozack, IMF spokesperson.
The enmity between Israel and Iran must be understood to comprehend the conflict. Prior to the Islamic Revolution of 1979, Iran and Israel historically had good relations. Iran's government became more hardline against Israel after the revolution, which it regards as an illegitimate state on land it considers Palestinian. Since the days of the Cold War, Israel and Iran have taken opposite sides in international conflicts, such as Syria, Lebanon, and Iraq, where Iran has provided support for militant groups like Hezbollah and clashed with Israel's interests.
The conflict has taken a hybrid warfare model in recent times, with cyber-attacks, drone strikes, and proxy warfare overtaking full-scale military operations. Tensions across the whole Middle East have been ratcheted up over tit-for-tat attacks between the two countries on each other’s critical infrastructure.
The scenario has developed into an active and visible confrontation, rather than the current wave of tensions. The conflict has entered its latest phase of drone attacks, naval skirmishes, and strategic assassinations. Both countries have increased their use of artificial intelligence, cyber espionage, and precision warfare against the other’s military and economic capacities.
The fact that Israel and Iran are clashing directly on the ground is worrisome for the region, but the reverberations are global, especially in Asia, where the region is economically and energy-linked to the Middle East.
The conflict between Israel and Iran is seen as an important threat to Asia’s dependence on oil imports, especially from the Gulf region. In the global energy market, Iran is the fourth largest proven oil reserves country. Iran is under extreme international sanctions, yet it nonetheless continues to export oil to countries like China and India.
Any conflict in the Middle East, particularly Iran, could flare into a conflict that could block the Strait of Hormuz, a critical maritime route carrying about 20 percent of the world’s oil supply. But if the conflict escalates into a blockade or Iran retaliates with attacks on the oil tankers through the strait, then the energy supplies to major Asian economies such as China, Japan, South Korea, and India could be terribly hit.
Higher sustained oil prices would have far-reaching economic consequences in Asia. India and China, with their high dependence on Middle Eastern oil, would see their inflation rates accelerate, their economic growth decelerate and the price of goods rise because of an increase in energy prices. If rising fuel costs continue, they could be even more devastating for emerging markets in Southeast Asia, where economic recovery from the COVID-19 pandemic has already been hampered.
Global supply chains are thin as they are, scrambling in the aftermath of the pandemic and the war in Ukraine, and the Israel-Iran standoff also threatens these supply chains. If military activity in the Suez Canal or the Red Sea shores up shipping routes, it could delay the transport of goods from and to Europe or the Middle East to Asia.
Furthermore, Israel, the world's leading technology and cybersecurity hub, is also a key player in business relations with Asian countries, mainly in defense, technology, and healthcare. The business partnerships with Asian firms could be in danger if there is any disruption of Israel's economy or its industries. Moreover, Iranian cyber-attacks against Israeli companies could ripple in ways that will be especially relevant for Israeli companies with subsidiaries or operations in Asia.
Many countries in the region, including those in Asia, are now reassessing how much they spend on defense because of the ongoing conflict. As countries like India, Japan, and South Korea have been pressured to increase their military budgets due to growing concerns about 'energy security' and the potential for regional instability, so too has NATO increasingly played to a domestic audience. For example, India has been modernizing its military capabilities because of escalating regional tensions.
Misallocation to defense can also take government spending away from infrastructure and development projects, thereby undermining long-run economic growth. It could also trigger a rise in the demand for defense technologies and arms from the likes of the U.S. and Russia who sell a large amount of military technology to Asia.
Another major area of concern is cybersecurity. Israel and Iran have been the leading two in cyber warfare, spending big on their cyber capabilities. Iranian hackers have been blamed for attacks on energy companies, financial institutions, and others that hit both Israel and its allies. However, these cyber threats are not confined to the region and could affect Asian businesses.
With growing reliance on digital economies in Asia, especially in tech-heavy areas such as South Korea, Singapore, and India, they are exposed to collateral damage from attacks on either Israel or Iran. In the event of cyber conflict in Asia, financial institutions, manufacturing sectors, and energy firms could become unwitting targets, disrupting their operations and financial losses.
The Israel-Iran conflict is expected to have broader geopolitical implications for Asia. Israel and Iran have deep economic ties with China, for example. As an important part of China’s technology and innovation, Israel is an important partner; as an important source of energy and an important player in China’s Belt and Road Initiative, Iran is also an important partner. As tensions increase, China will find it harder and harder to balance between these two adversaries.
India, however, has a field day on its hands because it has a healthy relationship with both Israel and Iran, which includes defense cooperation. Escalating tensions can push India to recalibrate its foreign policy approach that is to keep its foreign policy autonomous without annoying either party.
The fallout from the Israel-Iran conflict is only going to get worse, and that will continue to affect Asia’s economy. The ongoing tensions between these Middle Eastern powers mean that the changes they will bring will have far-reaching consequences across the Asian continent from energy disruptions to cyber threats. With the conflict having gone on for so long, the region’s businesses have to plan for a volatile future and begin to reassess their energy dependencies, secure their supply chains, and strengthen their cybersecurity measures in response to this long-standing geopolitical conflict.
For Asian governments and businesses, the future will be to steer through the labyrinth of this conflict, preserving their economic interest and regional stability, while tackling the intricate and evolving dynamics that the conflict provides.
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