What happened?

On January 2, an Israeli attack on southern Beirut killed Hamas Deputy Leader Saleh al-Arouri.

The following day, two explosions killed over 100 people in Iran. The attacks occurred during the commemoration of top Iranian commander Qassem Soleimani. While no official statements have been made, many locals suspect Israel of being behind the attacks.

How could the situation evolve?

Since October 7, statements from both Iran and Hezbollah have pointed to controlled and limited involvement regarding the war in Gaza. While both have stated that they will not be shy to act defensively, they have been clear to avoid escalatory rhetoric and attacks. The last two days’ attacks significantly increase the provocation of these actors, the risk of wider reaction, and thus regional escalation.

It is highly likely that multilateral closed-door negotiations will emerge to manage the situation. Yet, currently, a scenario of regional escalation is looking slightly more likely than a de-escalation one.

  • De-escalation: One possibility is that Iran and Hezbollah respond still in a controlled manner that allows them to defend and retaliate, but with limited to no civilian casualties in Israel. This would be done while behind closed doors the pressure on Israel for a ceasefire in Gaza would increase via Egypt, Qatar, the US, and Saudi Arabia.
  • Escalation: Another possibility is that, with no prospects for a ceasefire in Gaza, Iran and Hezbollah attack quite strongly into Israel. Hezbollah could attack into the Iron Dome and other military targets, and even Jaffa/Tel Aviv. Houthi attacks in the Red Sea could return more aggressively. FrontierView would still expect US involvement to remain limited; with the US Navy likely positioning in the Red Sea in the guise of securing trade rather than retaliating against Iran. Regardless, this positioning will be highly risky for any potential direct confrontation between the US and Iran.

Signposts to Monitor:

  • Statements from the US: The US will definitely be involved in trying to secure Israel as well as the oil and trade routes in the region. However, FrontierView expects de-escalatory rhetoric from the US, and likely increased pressure on Israel, to prevent further escalation.
  • New statements by Hezbollah and Iran: In a statement immediately after the attacks, Hezbollah’s Hasan Nasrallah emphasized the independence of its organization from Iran and how its decisions will be made based on its Lebanese context. It did underline that there will likely be a response, but that it will be calculated and targeted, and Hezbollah could take its time and not react rashly. All statements underline Hezbollah’s continuation of efforts to prevent a full-blown war and escalation into Lebanon.
  • Hostage negotiations: With the recent events, it is being reported that hostage negotiations have been halted. The ability to return to such negotiations will be an important signpost of de-escalation.

What does this mean for multinationals?

  • Shipping challenges through the Red Sea will remain highly challenging; both in terms of delays and costs.
  • Oil prices will avoid major volatility unless direct oil vessels are hit in the Gulf, which remains unlikely.
  • Recovery of tourism prospects into the Levant and Egypt remains difficult as long as the region stays in the headlines with risk of conflict.
  • While still very unlikely, it should be remembered that Israel has threatened to go after Hamas members in all countries in the region, including Turkiye. Any such attempt by Israel will further increase tensions between the two countries.

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