Iran: Likelihood of Further Escalation

Published on January 3, 2020

On the heels of the precision strike on Baghdad International Airport personally authorized by US President Donald Trump last night that killed Major-General Qasem Soleimani, Iran’s Revolutionary Guard Corps Quds Force commander, Secretary of State Mike Pompeo tried to assure world that the US does not seek war with Iran and urged a de-escalation of the tensions that had been spiraling in Iraq over the last weeks. That came even as Pompeo quickly claimed full US responsibility and justification for the targeted killing and warned that Washington would be prepared for any retaliation from Iran.

*** We believe it is a certainty that Iran will, as threatened, retaliate against the targeted assassination of Soleimani, leading to a high chance of a further military response in turn from the United States. That US response, we believe, will be critical to whether the confrontation with Iran escalates into wider regional tensions, with more lasting market consequences. ***

*** Depending on the extent and location of the likely Iranian retaliation, the US response could very likely come in the form of crippling US strikes on Iran’s oil fields in the southwestern province of Khuzestan, a hotbed already of unrest bordering southern Iraq, and home to a military installation that some sources suspect was the launch site for the missile attacks in September on Saudi Arabia’s Abqaiq oil complex. Indeed, while market speculation over energy infrastructure risk is mainly around threats to the Straits of Hormuz or Saudi oilfields, the real strike to oil infrastructure – a course of action recommended by Trump confidante Senator Lindsey Graham – may come from Washington. ***

Soleimani Death Ensures Retaliation

** Soleimani has been described in the press since last night as a major military commander in the region, and as arguably the second most powerful man in Iran after Supreme Leader Ayatollah Ali Khamenei. But there are some that would maintain he was in fact the most powerful man in Iran.

** During the tenure of President Mahmoud Ahmadinejad, from 2005-2013, Ahmadinejad vastly expanded the power of the IRGC as a direct and open counterweight, at the time, to Khamenei himself. While those tensions with the Supreme Leader abated with the succession of Hassan Rouhani to the presidency, the power of the IRGC did not.

** As such, even while Soleimani was not the IRGC’s titular head — that position is held by Hossein Salami — the killing of its most well-known field commander will be seen to represent not only an attack on the Islamic Regime writ large, but also a potential existential hit on the power base of the Pasdaran, as the IRGC are known domestically. And that will not go unanswered.

** Indeed, while press reports today seem, strangely, to have latched onto the moniker “revered” to describe Soleimani, within Iran that descriptor for the one military leader most responsible for Tehran’s increasingly costly and highly unpopular international adventurism in Syria is questionable, to say the least. Feared may be a more apt term for the one-time small-town construction worker from Kerman, including by the embattled President Rouhani himself, reeling from US sanctions, and openly blamed by the Guards for the government’s incompetence and soft approach in handling the economy and foreign pressure.

** So even while some divisions will likely emerge in Tehran over the scope of response to the killing of Soleimani, the IRGC itself will be doubly incentivized to react strongly and has the means to do so.

Location and Timing to the Iranian retaliation

** The exact timing and nature of Iran’s response is unknowable, but could take one of many forms speculated by military and intelligence analysts – in rough order of severity a direct hit on the US naval station in Bahrain, the US air base in Qatar, US shipping assets in the Gulf (the IRGC has its own parallel naval corps that is not answerable to the Iranian Navy), US bases in Iraq or Afghanistan, a rocket attack into Israel or Saudi Arabia, on to non-military responses such as cyber-attacks – the list goes on.

** For our bet, the first battle line is likely to be in the already deeply divided and unstable Iraq, especially given the likelihood that the US intelligence that fingered Soleimani and the head of Iraq’s Iranian backed Kataib Hezbollah, Abu Mahdi al Muhandis, as they landed in Baghdad Airport came with the help of Iraqi assets on the ground.

** But as opposed to the attack last September on Saudi Arabia’s Abqaiq oil-processing plant that was claimed, implausibly, by Yemen’s Houthis, retaliation from Iran, even if as is likely carried out by proxies such as Hezbollah in Lebanon, or the Shi’a militia in Iraq, will this time lack any veiled deniability that could be used as a cover to avoid an escalating counter strike from the US.

** As to timing, Tehran has announced three days of mourning for Soleimani, so an immediate lack of response, in our opinion, may not signal an all clear as it will be sure to be interpreted by markets. Rather, it may be prudent to hearken as well to the 40-day mourning period typical in the Shi’a faith, a bloody cycle that marked the escalating demonstrations that toppled the Shah of Iran in 1978-79.

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