Russia fears another loss in Middle East from Iran's conflict with Israel

Russia faces potential losses in the Middle East due to the escalating conflict between Iran and Israel, despite initially hoping for benefits such as increased oil prices and a distraction from the war in Ukraine. Analysts suggest that Russia's inability to prevent Israeli strikes on Iran, a strategic partner, highlights the limitations of their relationship and raises concerns about losing another key ally in the region, similar to the recent deposition of Bashar al-Assad in Syria. With significant geopolitical shifts occurring, Russia's strategic positioning and influence in the Middle East are increasingly at risk.

Analysis

The escalating conflict between Israel and Iran, marked by Israel's Operation Rising Lion, presents a complex and increasingly negative outlook for Russia, despite initial perceived benefits. While Russian media initially highlighted potential positives such as a rise in global oil prices boosting state coffers and the diversion of global attention from the war in Ukraine (as exemplified by a Moskovsky Komsomolets headline, "Kyiv has been forgotten"), alongside the prospect of Russia positioning itself as a key mediator, the prolonged nature of the conflict reveals substantial risks. Political analyst Andrei Kortunov, writing in Kommersant, emphasized that the escalation carries "serious risks and potential costs for Moscow." A critical point is Russia's apparent inability to prevent significant Israeli strikes on Iran, a nation with which Russia signed a "comprehensive strategic partnership" only five months prior involving President Vladimir Putin and President Masoud Pezeshkian. Although this agreement is not a mutual defense pact, Russian Foreign Minister Sergei Lavrov had previously highlighted its focus on "strengthening of co-ordination in the interests of peace and security on the regional and global levels." This situation, viewed alongside the recent deposition of Syrian leader Bashar al-Assad—a key Russian ally offered asylum in Russia—intensifies Moscow's concerns about potentially losing another strategic partner in Iran and seeing its regional influence diminish. The upcoming St. Petersburg International Economic Forum, an event Russia will likely use to demonstrate its resilience against international isolation, will occur against this backdrop of significant geopolitical shifts.

Key Decisions for Investors

• Investors should closely monitor developments in the Middle East for signs of further erosion in Russia's influence, which could impact regional stability and sentiment towards assets exposed to Russian foreign policy.
• Re-evaluate exposure to energy markets, considering that any short-term oil price benefits for Russia may be overshadowed by the long-term strategic costs and instabilities arising from its weakened position among key allies.
• Observe Russia's messaging and international participation at the St. Petersburg International Economic Forum for indications of its success or failure in countering isolation and maintaining economic partnerships amidst these geopolitical challenges.
• Consider potential contagion effects on other regions or markets where Russia has strategic interests, as its demonstrated limitations in supporting allies could embolden adversaries or destabilize existing arrangements.