The Islamic Republic under Existential Pressure: the Risks of Continued Escalation Without Off-Ramps

In Brief

• The current US-Israeli military campaign represents a fundamental break from previous conflicts.

• Securing Western Hemisphere reserves (almost 25% of global proven reserves) before the Iran offensive indicates contingency planning for a prolonged crisis.

• Iran established independent operational commands alongside formal military hierarchy. Middle-ranking officers have structural incentives to escalate, removing usual brakes on Iranian response.

• Previous Iranian responses were calibrated to avoid escalation; existential threat eliminates the need for this restraint.

Key Takeaways for Investors

• Elevated tail risks to global energy markets, financial stability, and supply chains with limited de-escalation visibility.

• Unlike previous conflicts with Iran, this scenario is more likely to extend to years.

• Energy disruption is the baseline risk: Iran cannot defeat the US and Israel militarily but can completely disrupt regional energy supplies. Existential stakes remove previous restraint.

For the past few days, the US and Israeli militaries have been bombing Iran under the pretense of regime change. This current coordinated campaign has fundamentally altered the previously established calculus.

Beyond the inherent unsustainability and illegitimacy of any externally driven regime change – as well as its broader economic and geopolitical repercussions – the actions of the US and Israel are fundamentally different from previous confrontations: this is an existential confrontation for the Iranian regime. The implications extend far beyond conventional security concerns: disruptions in supply chains, financial markets, and international relations are inevitable in a scenario where the Islamic Republic has nothing to lose.

1. Strategic economic groundwork for Iran: Venezuela

The American operation in Venezuela, conducted approximately two months before the Iran campaign, presents itself as a potentially coordinated strategy. Rather than viewing these as unrelated events, the common energy-centric role of these countries suggests they are part of an integrated American approach to energy geoeconomics. 

The rationale is straightforward: the Middle East remains central to global energy security, particularly for Asian and European markets. An extended regional conflict – especially one involving Iranian retaliation through disruption of energy supplies – could destabilize global oil markets for years. By consolidating control over most of the Western Hemisphere energy reserves first, the US mitigated this risk. Combined, the US, Canada, and Venezuela represent almost 25% of the world’s proven oil reserves. Securing Venezuelan alignment with American interests before destabilizing the Middle East provided insurance and leverage in the context of a  prolonged energy market disruption.

Additionally, Gulf monarchies, despite historical tensions with Iran, had actively advocated for restraint regarding Middle Eastern intervention, fearing regional destabilization would harm their own interests. By securing Venezuelan compliance with US energy policy, Washington eliminated the Gulf states' primary leverage point in such negotiations – their ability to suggest alternative energy supplies outside American control.

2. Domestic reality: Iran’s overstated fragility

Since cost of living protests erupted in a context where there is general disapproval of the extremist regime, demonstrations, whether domestically or abroad, were very thoroughly documented by the mainstream media. However, the assessments made often conflated visible urban unrest with systemic institutional collapse.

The Islamic Republic demonstrates several markers of institutional durability:

• a stratified military and security apparatus that extends beyond the formal command structure;

• ideological coherence among core constituencies within the Revolutionary Guards and large sections of the population;

• demonstrated capacity for resource mobilization despite sanctions. 

Rather than a fragile regime on the verge of collapse, the Iranian state is institutionally resilient, though politically contested. These are elements the regime is capitalising on.

3. The one move to avoid in any geopolitical manoeuvers

The most consequential shift created by the current campaign lies in the transformation of a political conflict into one where institutional survival is at stake. This change has operational consequences that distinguish the current moment from previous Israeli or American bombing campaigns.

In preparation for anticipated strikes, Iranian strategic doctrine has emphasized command decentralization: the establishment of independent operational chains alongside conventional military hierarchies, ensuring that the elimination of senior command cannot paralyze the armed forces. Middle-ranking military officers, particularly those embedded in the Revolutionary Guards, now face structurally different incentives than in previous conflicts – the strategic relative restraint used by high command to avoid escalation in previous confrontations could be absent.

Indeed, the current environment eliminates the basis for any restraint. Historically, Israeli and American military campaigns were answered with calibrated, 'face-saving' responses: limited strikes designed to demonstrate resolve without provoking escalation. Today, the regime's existence is at stake – there is incentive to pursue conflict relentlessly rather than accept negotiated limitations. 

The current situation illustrates a critical principle: the conversion of conflicts into existential ones eliminates all off-ramps that limite escalation. When a state faces termination rather than political change, all calculations fundamentally shift – not just the intensity of response, but its duration. Iran's inability to defeat the US or Israel militarily does not eliminate the global economy's vulnerability to sustained disruption, available to a regime fighting for survival in one of the most critical regions of the world. Absent a negotiated settlement that preserves regime continuity, this confrontation will extend far beyond the weeks-long precedent set by previous confrontations.

This is an evolving situation and very recent developments may not be reflected in this article.