Alex Krainer
The
“peace” “negotiations” between Iran and the U.S. seem to have gone
nowhere. The tense ceasefire took hold on 8 April, which President Trump
described as a window of opportunity to finalize a broader agreement,
contingent on Iran fully reopening the Strait of Hormuz. Trump
apparently accepted that Iran’s ten-point proposal was the “workable
basis” for the agreement, but despite this positive development,
disputes, mutual accusations and sabotage have continued apace.
President Trump
On 12 April, direct talks between the American and
Iranian delegations took place in Islamabad, Pakistan. After marathon
21 hours of talks, no breakthrough was announced. The main points of
contention included Iran’s nuclear program, sanctions relief, regional
de-escalation and free navigation through the Hormuz Strait. The Iranian
side blamed the “maximalism” of the U.S. positions for the failure of
the talks.
The fading ceasefire
In
the intervening days, both sides agreed to abide by the ceasefire to
keep the window for diplomacy open and President Trump continued to
maintain that the talks were going well and that a deal was “very
close.” The next round of talks was supposed to take place during the
weekend of 18-20 April in Islamabad again, but it seems that the window
for diplomacy had shut.
This morning, the Iranian government made
it official that there are no current plans to renew negotiations,
again citing the maximalist U.S. demands as well as its violations of
the spirit of the ceasefire. Given that the original ceasefire agreement
expires in another two days (22 April), we could face a renewed
escalation of the conflict. Trump is clearly trying to avoid this by
proposing that the ceasefire be extended another week.
Overall,
the diplomatic maneuvers we saw over the past week only highlighted the
deep distrust between the U.S. and Iran. The ceasefire still appears to
be holding, but without an extension or some form of a workable
framework deal, the conflict could start again and escalate.
Threats and counter-threats
Earlier this month, President Trump has famously threatened to bomb Iran back into stone age where he thinks they belong, and a few days later stated that, “A whole civilization will die tonight, never to be brought back again.”
Thankfully we got a ceasefire instead, but the threats and counter-threats continue. Over the weekend, Trump said that, “if we can’t reach a deal with Iran, we may have to bomb again.”
Like nobody’s ever seen before, of course and true to previous threats,
renewed U.S. bombing will likely target Iran’s energy infrastructure.
Iran
has responded with their own threat: if the U.S. bombs Iran’s energy
infrastructure, they will destroy the energy infrastructure of all the
U.S.-allied nations in the region, including the Yanbu pipeline in Saudi
Arabia, the Fujairah facility in the UAE, which is used to bypass the
Strait of Hormuz, and a complete closure of the Bab el-Mandeb Strait.
The mother of all oil market disruptions
JPMorgan Commodities Research provided this map illustrating exactly what this would entail:
If
fully realized this would create a massive disruption, taking a total
of about 32% of global oil supply offline. About 20% of global crude oil
supply passes through the Strait of Hormuz, but the real impact of its
closure on global oil supply was “only” between 8-12% since some crude
oil could be rerouted through alternative pipelines or other means. All
the same, this has been the single greatest oil supply disruption in
history of oil markets.
Back from the edge of the abyss?
Renewed
hostilities could worsen the situation dramatically, to the point that
it could plunge the global economy into a crisis of unprecedented
proportions that would be impossible to predict and its cascading
long-term impacts difficult to mitigate. Hopefully, the danger of
triggering these events will pull Iran and the U.S. from the edge of the
abyss and pressure them to embrace real compromises and sustainable
solutions to this conflict.
At the moment, we have little reason
to feel optimistic. However, the worst case scenario in the Middle East
could be so devastating, even to some of the most powerful players in
global politics that risking it simply isn’t worth it. The price won’t
only be paid in the energy markets but also in the financial markets.
Many of the world’s largest banks are heavily invested in the Middle
East economies and their collapse could trigger a severe financial
crisis in the West.
How many bailouts?
For
example, we learned yesterday that one of U.S. and Israel’s key allies
in the region, the U.A.E. opened talks with the U.S. about obtaining a
bailout if the war continues and further deteriorates the Emirates’
fiscal position. The UAE’s Central Bank Governor, Khaled Mohamed Balama asked U.S. Treasury Secretary Scott Bessent to help secure a US dollar swap-line from Federal Reserve.
Presumably,
the swap line should support the UAE’s peg to the dollar at about
3.6725 AED per 1 US dollar. However, if the UAE’s economy experiences
sustained headwinds, this peg will be unsustainable and the U.S. will
effectively be bailing out their ally. If hostilities between Iran and
the U.S. continue to fester, similar requests for help could multiply
from other allies, but also from banks and corporations with significant
assets in the region.
This will put President Trump in a very
tough situation to resolve the situation quickly. At the same time, Iran
doesn’t have similar financial and time pressures. If anything, their
position has significantly improved over the past 50 days. This week
could prove critical in defining how the conflict might ultimately be
resolved. At present, it seems that every alternative is possible.