As tensions between Iran, the United States, and Israel escalate and fears grow over disruptions in the Strait of Hormuz, concerns about the global economic and geopolitical fallout are intensifying. In an exclusive interview with Firstpost, Mohammad Reza Farzanegan, Professor of Economics of the Middle East at Philipps-Universität Marburg in Germany and a leading expert on Iran’s political economy, warns that the conflict could have far-reaching consequences beyond the region.
Farzanegan says prolonged disruption in Gulf energy routes could slow global economic growth and hit Asia’s major oil-importing economies the hardest. He also cautions that the war risks expanding into a broader regional confrontation while potentially reshaping Iran’s strategic orientation toward powers such as China and Russia.
Edited Excerpts:
Tensions between the US, Israel, and Iran had been building for a long time, but the conflict escalated on February 28. We are now into the fifth day of the war. How do you assess the current situation?
The current situation is, as you can also see in the news and based on the information we get from Iran—although nowadays it is not easy to obtain direct information due to communication disruptions in Iran—that the resistance against the military invasion by Israel and the USA is continuing.
Iran is not in a position where it would agree to a ceasefire because it believes that stopping the war at this point would mean that the costs of stopping it would exceed the benefits. That would not be the equilibrium they expect from such a decision.
The situation currently involves daily military attacks on infrastructure, military organizations, civil organizations, and institutions representing the Iranian government — official institutions. However, the attacks are not limited to these places.
When we look at Tehran, the damages across different parts of the city — from north to south and east to west — are significant. There is serious concern that these attacks will begin targeting energy infrastructure and other facilities that could take many years to reconstruct. That would result in a major financial loss for Iran.
The costs are also not limited to Iran. As you may have seen in the news, there is an expansion of the conflict across the region. The calculation within the Iranian administration is that if Iran is paying the costs of this war, then others who are directly or indirectly involved in logistics, intelligence, and other forms of assistance to Israeli and American forces should also bear those costs.
That is why we see Iran targeting US military bases across the region. The war, and the expansion of it, does not appear likely to decrease in the short term. Much depends on how strongly the other side insists on continuing this war against Iran, which, by the way, according to international law, has been questioned by many observers globally.
Many are questioning the legality of what they describe as an imposed war on Iran in the middle of negotiations. According to these observers, there is no clear legal basis for it.
This is the picture we currently have in the short term.
The long-term perspective depends heavily on Iran’s ability to finance this resistance. Any resistance requires funding, resources, social resilience, and social unity against what they see as aggression.
Unfortunately, part of this resilience has weakened over the past years and months. I say years because Iran has been under massive sanctions by the United States and the European Union, which has severely limited its ability to finance resistance.
At the same time, we saw during January 2026 protests that the repression of those protests also eroded part of the Iranian government’s social capital within society.
This may also explain why some opposition groups were calling for intervention under the doctrine of “responsibility to protect.”
So we are observing a very complex situation. Multiple factors have made the situation in Iran extremely risky for the region. The spillover effects of this conflict could affect Iran’s neighbors and even countries that are not immediate neighbors.
These effects are already becoming visible and will likely impact the international economy, oil prices, and other sectors very soon.
The US has openly talked about regime change in Iran, especially after the assassination of Ayatollah Ali Khamenei. But looking at the developments so far, do you think Washington is moving away from that objective, or is regime change still the ultimate goal?
I’m not really seeing that they are diverging from that objective. That is the first phase — the change in the regime — and it has been frequently mentioned by Mr Trump, his administration, his foreign minister, and other major members of their party. The ideal situation for them is a change in the political regime.
That does not necessarily mean splitting the territory of Iran from the American perspective — I’m not talking about the Israeli perspective. The Americans are not necessarily preferring a chaotic Iran, because they know that a chaotic Iran with a population of 90 million and many ethnic groups would be a disaster for the region and for all the investments they have in the area.
You can imagine the kind of negative externalities a chaotic Iran would produce for the entire region, creating long-term instability. However, regime change is clearly something they are interested in.
We have also heard reports that the CIA is in contact with Kurdish separatists, potentially to arm and organise them in case of a ground operation. That would be a very dangerous move toward destabilizing the Iranian political system in the hope of achieving regime change.
If you look at previous years, regime change was always on the agenda as one of the objectives behind the international sanctions imposed on Iran. These sanctions were often justified in terms of democratisation, human rights, and similar issues. But at the end of the day, it was quite clear that the sanctions were intended to increase poverty, frustration, and economic misery among the population so that public dissatisfaction would eventually translate into a change in the political system.
That translation can take different forms. Sometimes the political establishment can change through democratic elections, but we know that this is not very realistic in many Middle Eastern countries. Another pathway could be large-scale protests, anti-government demonstrations, rising risks of terrorism, or in the worst case even civil war.
Sanctions were meant to achieve such outcomes without the use of military force. Military intervention requires deploying large amounts of equipment and resources. It is costly and could lead to casualties among one’s own troops, which is politically expensive for an administration like Trump’s.
Therefore, imposing economic pain through sanctions was seen as a more convenient strategy. However, sanctions did not succeed in the case of Iran. Otherwise, there would have been no need for military intervention in a country already under heavy sanctions.
This is a clear example of the long-term failure of sanctions. In Iran’s case, it is evident that sanctions did not work. Unfortunately, we now see a situation where war has been imposed on the country.
I believe the ultimate objective remains regime change. Such a change could happen without dividing Iran’s territory—it could keep the country intact as it is today. That is probably what the Americans are interested in.
However, it is not entirely clear what the agenda of Israel is. A significantly weakened Iran is certainly in Israel’s interest. It is also unclear whether Israel is alone in this view or how other neighboring countries—particularly those in the southern Persian Gulf—see the situation. Some of them might consider a strong Iran to be a threat or risk.
To what extent they also desire such an outcome is not entirely clear. But we do know that what Israel is looking for is not necessarily the same as what the Americans want in this conflict, and there are differences between their approaches.
Still, as before, regime change appears to remain an objective they would like to achieve.
However, the question is whether it can be achieved by killing civilians. Past experiences suggest that when a country like Iran comes under direct external military attack, the “rally around the flag” effect becomes very strong among the population.
I believe that any meaningful change will have to come from within Iran itself and not in the short term. It will take time. It will require substantial efforts, patience, and institutionalized reforms. That would be the best outcome for everyone—both for those living in Iran and for the wider region—because change coming from within would avoid the much higher human and economic costs that external intervention could impose, not only on Iran but on the entire region.
One major fallout of this war is the economic impact. Iran has threatened to attack any ship passing through the Strait of Hormuz, effectively shutting one of the world’s most critical oil routes. How do you assess the economic fallout of this conflict, especially given its potential impact on the global economy?
Focusing on the Middle Eastern countries, the effects are already very clear. Both oil exporters and oil importers in the region are being affected.
For oil exporters, the challenge is obvious. Other GCC countries rely on these waterways to export their oil to international markets. Iran has the capability to close the Strait of Hormuz and has effectively done so. There may be exceptions—for example, some Chinese shipments might still pass through for political reasons—but most others are now facing serious risks.
The assumption that oil markets would not react strongly to Iranian actions has proven unrealistic. Oil prices are already rising. Earlier predictions suggested that Saudi Arabia might compensate for any supply shortfall by increasing production. However, Iran’s direct attacks on energy facilities, terminals, and other infrastructure that are critical to regional supply have changed those assumptions. The earlier expectations no longer hold.
Iran appears to be trying to increase the cost of the war by forcing others to bear part of that cost as well. In that sense, oil markets are extremely sensitive to developments, and the situation could worsen in the coming days and weeks.
For Middle Eastern countries that are not major oil exporters, the consequences are also negative. Many of these economies rely heavily on remittances from workers employed in the oil-rich GCC states. If you look at countries such as Egypt, Yemen, Lebanon, Morocco, and other North African nations, a large portion of their foreign exchange earnings comes from labor migration to Gulf economies.
Workers from these countries—as well as from India and East Asian nations—send remittances back home. If the economies of the Gulf countries weaken due to the conflict, remittances will decline. That will create a chain reaction affecting many economies, regardless of whether they are oil exporters or importers.
Another major consequence is the sharp increase in investment risk across the region. It does not even require large-scale physical destruction in GCC countries. A few drone or missile attacks on airports, ports, or energy facilities are enough to significantly increase the perception of risk.
We know that many of these economies depend heavily on international investment and tourism. If investors and tourists begin to perceive the region as unstable, the flow of investment and tourism could slow dramatically. Even the general sense of insecurity is enough to discourage capital inflows.
From the Iranian perspective, the calculation appears to be to increase pressure on other countries and on the United States to stop the war. Countries such as Saudi Arabia, Qatar, and the UAE have leverage with Washington. If the economic costs rise for them as well, they may be pushed to exert more pressure on US policy.
China is another important factor. China has made significant investments in the region and has strong economic interests there. For Beijing, escalating conflict and violence in the Middle East is clearly not good news. That may encourage China to become more active diplomatically in pushing for an end to the war.
As I mentioned earlier, many observers argue that this war lacks a clear legal basis. From their perspective, there has been no convincing legal justification presented to the public for launching a war against Iran in the middle of negotiations, especially when Iran had indicated it was ready to reduce aspects of its nuclear activities.
Interestingly, the justification for the war is also somewhat contradictory. President Trump previously claimed that Iran’s nuclear facilities had already been destroyed, yet the current war is being justified on the grounds that those facilities are still active.
In any case, the economic and financial costs of this conflict will be enormous. And that is not even considering the human cost—brain drain, migration, displacement of people, and environmental damage.
For example, damage to oil fields and energy infrastructure could severely harm the environment in the Persian Gulf and the wider region. Burning oil facilities and energy installations could have long-term environmental consequences.
Considering all these factors, the sooner this war ends with a sustainable solution, the better it will be for everyone—both in the region and globally.
Even European countries should be very concerned. This situation is very different from Syria. Iran has a population of around 90 million people. If instability escalates, large waves of refugees could move toward Europe or neighboring regions.
We already know how sensitive the political situation in Europe is regarding migration and refugees, especially with the rise of right-wing political parties. For all these reasons, it is in the interest of everyone involved to move toward a ceasefire and establish a sustainable peace.
There are multiple projections about oil prices right now. Some analysts say crude could reach $150 or even $200 per barrel if the conflict escalates. Do you see oil prices rising to those levels?
I cannot say that. I cannot predict the oil market or oil prices. As you know, oil prices are a function of many different factors.
One element, for example, has been the control of Venezuelan oil, which has reduced some concerns on the American side. But how much oil prices will increase—which they are already doing—and whether they will reach the levels you mentioned depends largely on the scale and expansion of the conflict and how long it lasts.
Another factor is the availability of alternative suppliers. As I said earlier, if the Strait of Hormuz is successfully closed by the Iranian military for a prolonged period, that would definitely result in a more severe supply deficit.
Other energy suppliers also matter. For example, Russia is already under sanctions from Europe and several other countries. Because of those sanctions, it may not be easy for Russian supplies to fully compensate for any deficit in the global market—unless Europe decides to partially lift those sanctions. There have been some discussions and speculation about this on social media and other platforms.
So predicting oil prices in such circumstances is extremely difficult. What we can do is only speculate about the factors that could push prices higher.
These include the availability of alternative oil supplies and how effectively Iranian military forces might disrupt those supplies—especially those coming from Saudi Arabia and other GCC oil exporters in the Persian Gulf.
Countries like India, China, Japan, and South Korea depend heavily on oil shipments through the Strait of Hormuz. Would it be fair to say that Asian economies could become the biggest casualties if the disruption continues?
Yes, these countries depend heavily on imported oil from the Persian Gulf, especially China. Any disruption in supply and higher energy prices will damage their economies.
Higher oil and energy prices reduce economic growth. If economic growth slows in these countries, the consequences will be felt globally. For example, when China’s economic growth declines, many other economies that are directly or indirectly linked to China are also affected.
So your assumption is not wrong. These countries will also indirectly pay the cost of this war.
As I mentioned earlier, once a war begins, the costs are not limited to the direct targets of the conflict. In a globalized economy, almost everyone eventually suffers the consequences.
Of course, there are some sectors that may benefit, such as the military industry and weapons manufacturers. They may emerge as the winners of such conflicts. But ordinary people—those who had nothing to do with the decisions that led to the war—are the ones who ultimately feel its economic cost.
People experience this most directly when they go to fill fuel in their cars and see the price of gasoline rising. Even if someone is not following the war in the Middle East, they will feel its effects through higher energy prices—whether they live in Berlin, Hamburg, or elsewhere in Europe.
In a globalized economy, it is almost impossible to isolate yourself from the consequences of a war in such an important energy region. The Strait of Hormuz is one of the most critical chokepoints in global energy trade.
In the past, the idea that Iran could close the Strait of Hormuz was mostly theoretical. It was considered a last resort. But now we see that it has been used very early in the conflict because of the severity of the risks that Iran believes it faces.
From the Iranian perspective, this is an existential war for the political establishment. If Iran cannot involve other countries in the conflict or impose economic costs on them, it will have little leverage to pressure the United States to stop the war.
Ultimately, the war will likely end only when the US administration decides that it should end. We saw something similar in June 2025 when Israel attacked Iran, and the ceasefire eventually came after pressure from President Trump.
From the Iranian perspective, the goal is to create enough pressure so that the US administration concludes that continuing the war will not achieve its objective of regime change and may instead create domestic political risks for the administration itself.
That could be the moment when we finally see an end to this bloody war.
President Donald Trump has said that the US Navy could escort commercial vessels through the Strait of Hormuz to protect them from potential Iranian attacks. Do you think this could reassure markets and reduce concerns about disruptions in the Strait?
Not at all. In fact, I think that is exactly what the Iranian military forces may be waiting for.
As long as Iran’s ballistic missile capabilities remain operational, escorting vessels with the US Navy could actually make them easier targets for Iranian forces. In that sense, Iran might even be waiting for such a scenario.
Therefore, I would not see this as a real relief for other countries that rely on the Strait of Hormuz.
If the United States believed this was an effective solution, it probably would have implemented it much earlier. They were not waiting for such discussions to begin now.
That suggests the US is also aware of the significant challenges involved in trying to secure oil shipments through the Strait of Hormuz under these conditions.
As long as Iran retains the capability to strike in that area, escorting ships through the Strait would remain extremely risky. I would not say it is impossible for the US to attempt it, but it would certainly carry substantial risks.
Given Iran’s economic vulnerabilities and years of sanctions, can it realistically sustain a prolonged confrontation with the United States and Israel if the conflict escalates further?
If we are looking at the long-term perspective for the country and the costs it would impose on future generations, that is a serious concern. However, in the short and medium term, Iran can still allocate more resources to sustain the war effort.
But that would come at a cost. Other sectors such as education and healthcare would become underfunded. It is important to remember that sanctions had already weakened these sectors even before the war began.
So it would create a very large opportunity cost for Iran to be involved in this war—an unnecessary war not only from the Iranian perspective but also from the global perspective, and even from the American perspective.
Financially, Iran can manage in the short term, but this would come at the expense of welfare losses for the Iranian population.
For that reason, Iran appears to believe that other countries in the region should also bear some of the costs of this conflict. If the economic burden spreads across the region, those countries might also push for ending the war as quickly as possible.
That is one reason why the conflict has gradually taken on a more regional dimension.
At the same time, resources are not unlimited, especially when Iran is confronting two powerful actors—the United States and Israel. These countries have far greater financial, technological, military, and political resources, along with significant international support, particularly from Western countries.
There are also other countries providing logistical support to these operations.
So based on a simple calculation of resources, it would be very difficult for Iran to sustain such a conflict in the long term. Short-term resistance is possible, but it comes with a major opportunity cost and significant welfare losses for Iran.
However, from the perspective of the Iranian establishment, this war is seen as existential. Because of that perception, they may be willing to bear these costs for now without focusing too much on the long-term consequences.
Those long-term costs will likely fall on future generations, who will have to rebuild the economy and reconstruct the country after the destruction.
So the short answer to your question is yes—it is feasible for Iran to continue this war in the short term. But in the long term, its options will become much more limited.
If tensions escalate further, could this conflict trigger the biggest global energy shock since the 1973 oil crisis?
Well, yes and no—maybe.
Yes, in the sense that we are witnessing a war imposed on a country of Iran’s size in a region that is central to global energy markets. The conflict has already taken on regional dimensions, partly because Iran has the military capability—especially its ballistic missile capacity—to expand the war across the region. Iran invested heavily in these capabilities after the Iran-Iraq War, realizing that they were essential for its defense strategy.
From that perspective, the shock to energy markets could be significant.
However, the global economy today is very different from what it was during the 1973 oil crisis. Over the decades, economies have become more efficient in their use of energy. Alternative energy sources have also expanded. Renewable energy—such as wind and solar—has grown significantly, especially in Western countries.
Because of this, global dependence on fossil fuels may be somewhat lower compared to the period you mentioned. That could increase the resilience of the global economy to some extent.
Many things have changed. On one side, the shock could still be significant in terms of disruptions to energy supply and increased risks to energy infrastructure and investment.
On the other side, energy consumers and importing countries have also adapted. Energy efficiency has improved, the energy intensity of production has declined, and investments in renewable energy have increased—especially after the Russia–Ukraine war.
That conflict pushed many Western countries to rethink their dependence on fossil fuels and energy supplies from geopolitically sensitive regions.
So all these factors need to be considered when assessing whether the current shock could be comparable to the one experienced during the 1973 crisis.
Finally, looking ahead, how do you see this conflict evolving? Do you expect any de-escalation, or is the situation likely to intensify further?
It largely depends on what the United States plans to do next in Iran.
If the reports we are hearing—that the CIA is in contact with separatist groups in Iran—are accurate and if there is a serious effort to mobilize opposition forces and ethnic minorities against the Iranian government in an organized way, then the situation could evolve into a completely different scenario.
That could potentially turn Iran into something similar to what we have seen in Syria or Libya. Such an outcome would not be in the interest of the Middle East at all. It would introduce long-term instability into the region and create a very different picture for the coming months and years.
We already have real examples of such situations in the region—in Iraq, Libya, Syria, and Afghanistan. If something similar were to happen in Iran, it would likely be the worst possible scenario not only for Iran but for the entire region. It could lead to refugee crises, economic disruptions, and prolonged instability.
On the other hand, if the war ends and we see a more moderate leadership emerge in Iran—one that is willing to open up society and pursue reforms—that would create a very different future for both Iran and the region.
However, I am not very optimistic that Iran will move in that direction, given the experiences it is going through right now.
If the current political system remains intact and regime change does not occur, the Iranian authorities will likely reassess their defense and military strategies. Issues such as nuclear capability could become even more urgent from their perspective after experiencing this level of destruction.
We may also see Iran deepen its strategic alignment with countries such as China and Russia and rely more heavily on them in multiple areas.
At the same time, the prospects for domestic reform could weaken. Sanctions had already weakened Iran’s middle class, and this war is likely to damage it even further. The middle class is often the social group that drives reforms, so weakening it reduces the likelihood of meaningful reform in the future.
In that sense, I am not very optimistic about reformist forces becoming stronger after this conflict.
The worst-case scenario for Iran would be a civil war. Iran is a multi-ethnic country, and under certain circumstances, ethnic tensions could become a serious issue.
As long as there is a strong central government controlling the borders and maintaining order, these tensions remain contained. But if external actors begin supporting, funding, or arming ethnic opposition groups while military attacks are ongoing, the risk of internal conflict becomes very real rather than theoretical.
If that happens, Iran could be locked into many years of violence and instability. Such a situation would halt the country’s development and destabilise the entire region.
Of course, in such a scenario Iran might no longer be seen as a strategic threat to Israel. But the key question is what the United States ultimately wants from Iran. The objectives of the United States and Israel may not necessarily be the same when it comes to the future of Iran.
What do you think Israel ultimately wants from this conflict with Iran?
Israel is not necessarily interested in a strong Iran. By “strong,” I mean a country with significant military, economic, and political power and strong regional influence. As long as Iran has not normalized its relationship with Israel, such strength is seen as a threat.
Even during the Pahlavi era before the Iranian Revolution, when Iran had relations with Israel, there was still competition between the two countries. For example, when the Shah sought advanced weapons technology from the United States, Israeli officials were not particularly happy with that close military collaboration.
For Israel, maintaining military hegemony in the region is extremely important. Any force that challenges that dominance is seen as a potential risk or threat.
From that perspective, a significantly weakened Iran—regardless of the cost paid by the Iranian population—might be seen as preferable. Israel may prefer an Iran that is weakened and controllable, a country that could be restrained whenever necessary.
However, the perspective of other major powers may be different. Countries like the United States, China, and other large economic actors generally prefer a stable Middle East. Stability allows them to invest in the region, secure energy supplies, and expand economic cooperation.
Today we are also talking about large investments in areas such as artificial intelligence and advanced technologies. The Gulf region, with its relatively cheap energy, strong financial resources, and skilled workforce, has become attractive for such investments.
President Trump, for example, visited the region recently to discuss major AI investments. But these kinds of investments require stability. You cannot build large technological or economic projects when airports, ports, or industrial facilities are under attack.
For that reason, stability in the region is extremely important for many global economic actors.
For them, a stable Middle East with a relatively cooperative or Western-friendly government in Iran—and with Iran’s territorial integrity preserved—may be the preferred outcome.
However, some of the signals we see in the media do not necessarily point clearly in that direction. So for now, we have to wait and see how the situation develops.
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