Iran and Trump Incentives
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To understand how different parties will react, seek to understand their incentives. This will often tell you how the future will unfold.
USA: Publicly, Trump has said they won’t make a deal without Iran’s unconditional surrender, and has floated the idea of sending ground troops in. He has used the feared words, “For as long as it takes”. But of course, Trump does not always mean what he says.
Despite hardline overtures, Trump has always been against prolonged combat, particularly with a fast-approaching midterm election which he appears to be losing. An extended battle with Iran is undesirable because it threatens higher inflation (key issue for consumers), a weak global image (he already failed on Russia diplomacy and needs a win), mixed messaging on objectives (voters despise “forever wars”), and congressional challenges against his war powers.
In Venezuela, despite kidnapping Maduro, the same regime largely remains in power today. It’s a “head of the hydra” situation. But as long as the regime provides the US with oil, Trump appears to be satisfied. Therefore, a minimal change of leadership in Iran may be enough for him, even if cosmetic.
Put simply, Trump wants a quick resolution with minimal American casualties. He cares more about the appearance of change than actual substance. This mirrors his M.O. of tariff threats back in April, which were also posturing.
Iran: During previous negotiations, the regime’s demands were irreconcilable, so now they are bombing neighbors in the hopes of forcing concessions. Striking Gulf assets and Hormuz tankers hurts US allies/economy; Iran is hoping the costs are high enough that partners like Saudi or China pressure the US to negotiate.
The US and Israel together have hit more than a thousand Iranian targets in two days. For all intents and purposes, Iran’s war capabilities have been neutered. They hold the world’s oil supplies hostage, but there’s little else they can do. A lot of bark, no bite.
But the Iranian regime is vast, with sprawling layers of religious authority and armed branches. Removing Khamenei only accelerated his looming death; it did little to unseat the deeply embedded institutions that support the regime. Even as the US mows down newly-replaced leaders, the armed forces will not just go away. This means lasting regime change is unlikely — unfortunate news for Trump and Iranian citizens.
Fortunately, the regime is not looking to destroy the world. They merely want self-preservation. Like any dictatorship, they seek to retain control over policy, military, proxies (e.g. Houthis, Hezbollah), and their population. Ideally, sanctions relief as well. And they will likely give up nuclear arms to get it.
Therefore, Iran’s strategy is pretty clear: accelerate attacks to exert max pressure on Trump to end the war. Despite the bombings, Iran wants to settle. This is an existential moment for a regime that has already suffered a heavy blow. Diplomacy is the only way out.
Our prediction: similar to Venezeula, a “new” leader will emerge in Iran, one linked to the old regime. He will negotiate a ceasefire, give up nukes, and reopen Hormuz. Trump gets his "win” but the repression in and around Iran will remain the same. After all, Hamas and Hezbollah have survived far more devastating assaults than this.
The Gulf states are somewhat at odds with US interests. Saudi Arabia and Israel want lasting regime change in Iran, but Trump wants cosmetic change and a swift ending. So even if the US declares truce, Gulf leaders may continue attacks against Iran.
That said, Gulf states also have a strong incentive to end the conflict quickly. In addition to oil exports being an economic lifeline, the war also damages tourism/investment interest (e.g. Dubai) and invites proxy attacks. This is anathema to the monarchies’ stability.
China deserves a mention here as they are Iran’s biggest supporter/financier. They have been relatively restrained in their reaction to the US’ attack. Instead, they urged both sides to stop fighting.
While China is economically aligned with Iran and get much of their oil through Hormuz, their policy is to not get involved with external conflict, especially one that is spearheaded by the US. This is similar to their response to the Russia/Ukraine war, despite Russia being a perceived ally. Ultimately, they prioritize power projection on Asia and not the Middle East.
Conclusion: For Trump, the best outcome would be one similar to Venezuela, i.e. striking a deal with whoever replaces Khamenei. The deal would likely involve nuclear disarmament plus some oil concessions. Trump and his voter base have no interest in a drawn out conflict as American casualties are already mounting. So Trump will have to abandon earlier calls for regime change. For this reason, we think a conclusion to the conflict is on the near horizon.
How will this affect oil prices and stock markets? Continue reading at MktContext.com...
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