The war in Iran: a war of economic strain

Translated by Mariateresa Tauro

It had already been in the air for some time. The President’s increasingly aggressive public statements, his intimidating social media posts and the massive deployment of US military forces in the Persian Gulf region were already a sign of what was to come. On 28th February, President Trump gave the “green light to Epic Fury”, thereby launching a joint operation in support of Israel against the Islamic Republic of Iran.

The special operation, which involved heavy bombing of Iran’s main logistics hubs, led, within a few hours, to the killing of the Supreme Leader, Ali Khamenei, the country’s political and spiritual leader. Tehran’s immediate military response hit severely not only Israel, but also the countries in the region that host US military bases and are historic allies of the superpower across the Atlantic.

The cost of military equipment

Just a few days after the war began, the conflict had already spread far beyond Iran’s borders, militarily involving more than ten countries in the Gulf and having an economic impact all over the world. Tehran, in fact, responded swiftly to the coordinated US air strike by launching swarms of drones against military and civilian infrastructure in Qatar, Bahrain, Kuwait, the United Arab Emirates and Saudi Arabia. In less than 36 hours from the start of the conflict, it is estimated that around 800 missiles (an arsenal of between 2,500 and 3,500 units) and around 1,000 drones (an arsenal of between 30,000 and 80,000 units) were launched from Iran; a small proportion, having evaded defence systems, struck civilian targets and strategic infrastructure, causing civilian casualties and significant economic damage.

The strategy adopted by Tehran is based on a doctrine of ‘asymmetric warfare’ that aims to maximise the economic damage inflicted on aggressors whilst minimising its own expenditure on military equipment. Iran mainly uses drones, most of which are manufactured domestically at a cost of just a few thousand dollars, launching them in massive swarms against the defence systems deployed by the Gulf states, which use missiles costing hundreds of thousands of dollars to intercept them. The result of this strategy is a certainly unbalanced situation: to shoot down a $20,000 Iranian drone, ground-based defences use interceptor missiles that can cost millions of dollars each.

A heavy toll for Washington

If Iran’s strategy is to inflict the greatest possible economic damage on its aggressors, the figures in the US budget suggest that it is working. According to what Kent Smetters, director of the Penn Wharton Budget Model (PWBM), declared in an interview with Fortune, total spending in Washington could reach $210 billion. In fact, Smetters estimates the cost of the military assets currently deployed and the additional supplies required for the operation to be between 40 and 95 billion dollars, putting the direct economic impact on taxpayers at 65 billion dollars and also pointing out that “if the war lasts more than two months, then this figure will rise”.

In addition to the costs directly associated with the military equipment used in the operation, one must also take into account the further economic losses that will inevitably affect the states involved in the conflict. According to Smetters, this figure ranges from $50 billion to over $200 billion, with a realistic estimate of around $115 billion for the United States alone. This latest estimate also takes into account the significant economic fluctuations in the energy markets and the disruption to trade and financial balances that typically follow the outbreak of a prolonged conflict in the Middle East.

The economic damage is being felt all over the world

Washington’s economic situation, however, is not the only one that appears to be causing concern in the wake of this new conflict in the Middle East. In fact, Tehran’s armed response, directed at US military bases hit severely, in the whole Gulf region, fuel depots and energy infrastructure – such as the Ras Tanura refinery in Saudi Arabia – as well as civilian infrastructure, including the airports in Dubai and Doha, which are among the world’s busiest air traffic hubs. These attacks have already forced airports in the conflict zone to delay or divert most flights, causing billions of dollars’ worth of damage. There is a real risk for Europe that damage to refineries and gas storage facilities in the Gulf region could trigger a sharp rise in energy and fuel costs, leading to soaring prices for consumer goods and utility bills.

Furthermore, it should be mentioned that Iran also exercises military control over the Strait of Hormuz, through which ships pass carrying an average of 20 million barrels of oil and around a fifth of the world’s liquefied natural gas (LNG) every day, most of which is destined for Asian markets. A complete closure of this chokepoint – which Tehran has already threatened to implement – risks triggering a global economic shock, the repercussions of which we are already experiencing and which are difficult to quantify precisely.

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