Persian Chicken

Someone blinked...

Politics have always required a reading the tea-leaves. People and nations are out for number one and in an uncertain world, people play their cards close to their chest. And lie… constantly. This is nothing new. Rarely, though, are the statements of rival sides both have been so detached from objective reality. In this game of Persian Chicken getting a straight answer appears off the table, leaving us reading the signs: and they say someone blinked.

Over the weekend, Iran’s foreign minister threatened to completely close off the Strait of Hormuz, mine all the sea lanes to the gulf and destroy regional water facilities if Donald Trump follows through on his threat to “obliterate” Iran’s energy infrastructure. All of which caused oil to jump up to $114 and global stocks to slide as investors braced for a longer conflict expected to scramble expectations on growth, inflation and profit.

And then the president trump tweeted. The US, he announced, would postpone those strikes on Iranian energy infrastructure for five days citing “productive conversations” with the regime. Iran’s foreign minister, it should be noted, denies that there are any talks afoot.

Regardless, Brent crude futures slid back towards $100, with all three stock indexes jumping on the news. Gold, that favorite end-of-days pocket money, fell 3%. So buy the little lady something nice now that the apocalypse has been averted at least through the weekend.

Who blinked?

It looks like Iran – which was always in an intense, violent sprint to unnerve larger actors into providing the regime with enough cover to make a mad dash to a game-leveling nuclear weapon. It was a gamble, but one that had worked in the past. Four weeks into the current war, the regime’s only hope to increase leverage on Washington is to isolate it politically and win the optics war. Which, given the unprovoked nature of the attack and the fact that all our allies hate us, shouldn’t have been too hard. Save for a glaring miscalculation.

The Islamic Republic’s advantage was always been the assumption that it could simply withstand more pain that the Western administrations. And historically, this was a good bet. The miscalculation was in thinking Trump is terribly vulnerable to pressure from allies. This lead to Iran’s overreach: threatening to close and mine the strait to all traffic and mine the approaches. Last week I asked why Europe and Asian allies would fight a nasty war if they could negotiate? Which was the question that European leaders were weighing, despite NATO chief Mark Rutte’s comments on Face the Nation to the contrary.

In any conflict – whether you’re heading to war or buying a car – it’s a good idea to map you rivals pain-points, provided you stop short of provoking a reaction you can’t control. Unfortunately, there really is no way to know where that line is without crossing it. What Iran did by threatening to blow the whole thing up for everyone was to take negotiations off the table, while at the same time demonstrating that its ballistic missiles could hit London, Berlin or Paris.  And if force is all that’s left, you really do want to rally around the world’s most powerful military – even if you can’t stand the guy running it. So allies that had been sitting on the sidelines have offered to join the security efforts US-led coalition. In about 4o hours the 2,000 or so Marines in the area will be joined by 2,200 more from the USS Truman probably to seize Kharg Island where 90% of Iran’s oil gets loaded for shipment.

What’s Next?

Four weeks into the war, the lively initial shock to energy prices are rippling through the economy, but pricing appears to be focused along supply chains rather than global supply. Iraq and Saudi Arabia are moving oil overland - it’s expensive and inefficient – but it means that even a completely blocked Hormuz remains “leaky.” Chokepoints will redistribute across supply easing prices.

For the geopolitically mined, it also raises an interesting question for the regime in Tehran - can it survive the lack of pressure that a negotiated peace will bring? The Islamic Republic was forged in an eight-year war with Iraq at the moment of its creation, and has spent the rest of its grumpy existence in expeditionary proxy fights with neighbors which gave Iran the credible threat making any strike against it into a regional fight. In desperation, it was goaded into playing that card, and hasn’t got much of a hand left. It has to negotiate if it seeks to survive.

The second order-effects are anyone’s guess. It’s a common misconception that authoritarian systems collapse and fall into revolution as they increased their oppression. In fact, revolutions generally happen when the authoritarian regime offers some modicum of reform. Sensing momentum, revolutionary elements unite and press forward. If some political reform is forced upon a weakened regime, we just might get that popular revolt in Iran.

Although I wouldn’t be too optimistic about the outcome of that fight.