؟Will world economy pay price for violating Islamabad agreement

The violation of numerous clauses of the Islamabad memorandum of understanding by the United States and Iran’s decision to halt shipping through the Strait of Hormuz is not merely the end of a political agreement; it is an event that could once again turn “geopolitical risk” into one of the most critical variables affecting the global economy, according to IRNA.

Less than a month after the understanding between Iran and the US led to a relative reduction in military tensions in the region and raised hopes for the return of diplomacy, Donald Trump’s statements declaring the agreement over, and his country’s terrorist army’s three-phase attacks on parts of Iranian territory, have once again pushed the region’s political and economic equations into a new phase. Although the full dimensions of this new adventurism remain unclear to political and military observers, from the perspective of economists and market actors, the return of “uncertainty” to the region can in itself have significant economic consequences, as serious as a security crisis.

Global financial markets have always reacted to geopolitical developments more swiftly than governments. Investors, without waiting for official decisions, reflect potential future risks in asset prices. That is why, only hours after the US president’s remarks about the end of the agreement, traders’ attention turned again to the Persian Gulf, the Strait of Hormuz, and the global energy market – areas that, over the decades, have become the most significant focus of global economic concern whenever political tensions have escalated.

Of course, over the past three months, although the disputes between Tehran and Washington had not completely ended, the existence of a relative understanding had removed some geopolitical risks from the markets. This had contributed to relative stability in oil prices, reduced anxiety among economic actors, and calmer financial markets. Now, however, with this understanding being called into question, conditions have shifted once more.

Why are markets more worried than politicians?

The global economy is more dependent than ever on the free flow of energy. Although many countries have tried to reduce their oil dependency in recent years, oil and gas remain the main pillars of the world economy. Any threat to energy transit routes immediately manifests itself in oil prices, transportation costs, insurance rates, stock markets, and even inflation rates across countries.

From this perspective, the end of the US-Iran understanding is not just a political dispute; it is a signal that can change the expectations of economic actors. Economic experience has shown that markets suffer more from the prospect of war and prolonged uncertainty than from actual conflict. When an investor sees an unclear future, they halt new projects, banks become more cautious in lending, and international companies postpone investment decisions. That is why many analysts believe that although the end of the agreement does not necessarily mean the start of military confrontation, it could inject a new wave of uncertainty into the global economy – a wave whose effects will extend far beyond the borders of Iran and the US.

Strait of Hormuz: Beating heart of energy market

Among all economic variables, perhaps no issue draws as much attention from global markets as the security of the Strait of Hormuz. This strategic waterway carries a significant portion of the world’s crude oil and liquefied natural gas, and any disruption to its security directly impacts the energy market. Therefore, the Washington Post, in a report examining recent developments, described the Strait of Hormuz as still the main axis of the crisis, writing that any insecurity along this route could subject the global energy market to a fresh shock. According to the newspaper, as tensions escalated, Brent crude prices rose by more than five percent, and concerns over energy supply disruptions intensified once again.

The newspaper also referred to a warning from the Secretary-General of the International Maritime Organization, which called on shipping companies to exercise more caution in transiting the Strait of Hormuz until safe passage is guaranteed. Although we have not yet seen a widespread halt in maritime transport, such warnings are typically enough to raise ship insurance premiums and increase cargo transport costs.

In the global economy, transportation costs are not merely a number on shipping companies’ balance sheets; they are a factor that ultimately passes through to consumer goods, raw materials, industrial products, and even food prices. For this reason, any increase in risk in the Persian Gulf can set off a chain of cost increases across the world economy.

The Washington Post, in its continuing report, described the collapse of the agreement as a significant setback for Trump, because he had presented the initial deal as a step toward preventing the expansion of war and stabilizing the security of the Strait of Hormuz. In the newspaper’s view, not only has the goal of safely reopening this strategic waterway now become ambiguous, but nuclear negotiations and talks on sanctions relief have also fallen into an uncertain state.

The report also points to the differing narratives from Tehran and Washington regarding the negotiation process. Trump claims that after reaching preliminary agreements, Iran denied the negotiation terms in its public positions, thereby undermining mutual trust. Conversely, Iranian officials hold the US responsible for escalating the crisis and believe that Washington’s recent actions have eliminated the basis for continuing the understanding.

Global economy faces three scenarios

In the current situation, rather than awaiting a new war, the global economy is assessing three different scenarios – each of which could alter the course of global markets in the coming months.
The first scenario is a return of both parties to the negotiating table; although Trump’s recent remarks have inflamed the political atmosphere and his military actions have exacerbated the crisis, to the extent that the recent Muscat talks have led nowhere and failed to meet either side’s expectations. In this scenario, after a period of volatility, markets would gradually regain calm, and oil prices would correct part of their recent increase.

The second scenario is the continuation of the current state – sustained but controlled tensions, leading neither to an agreement nor to direct war. Many analysts consider this scenario more likely. In that case, the global economy would face chronic but manageable risk: energy prices would remain above the average of recent months, maritime transport costs would rise, and international companies would invest more cautiously in the region.

The third scenario is a return to military conflict – although still assessed as less probable than the other two, it has generated the greatest anxiety in global markets. Should such a situation occur, the first markets to react would be oil, gold, currency, and maritime shipping, followed by a fresh wave of inflation that could engulf many of the world’s economies.

Naval blockade, Hormuz, and return of chronic risk to global economy

Alongside concerns over the future of diplomacy, some media reports suggest a possible shift in Washington’s approach toward Iran. CNN, citing Israeli sources, reported that the Trump administration may, instead of moving toward a full-scale war, adopt a policy of “maximum naval blockade” against Iran – which, if implemented, could intensify pressure on regional trade and maritime transport.

In the view of economists, such an approach, even without direct war, could have far-reaching economic consequences. Because restricting maritime traffic or increasing transport risk in the Persian Gulf directly affects global trade costs and energy prices. Accordingly, following the third round of attacks by the US terrorist army on Iranian territory, based on a statement issued early Sunday by the Islamic Revolutionary Guard Corps, due to illegal foreign interference, the Strait of Hormuz is closed until further notice and until the end of US interventions in the region, and no vessel will be allowed to transit.

On this basis, we must reiterate economists’ warnings that a sharp reduction in shipping traffic and stoppages in the Strait of Hormuz will undoubtedly deliver a fresh blow to the energy market – a market that, in recent years, from the COVID-19 pandemic to the Ukraine war and geopolitical crises, has repeatedly faced supply disruptions.

In such circumstances, the markets’ primary concern is not only a potential decline in oil supply but also rising tanker insurance costs, extended shipping routes, and disruptions to global supply chains. Past crises have shown that even a limited reduction in vessel traffic through strategic waterways can have significant effects on energy and commodity prices. The International Monetary Fund, in its latest assessment, has warned that the global oil market will likely not return in the short term to the conditions prevailing before the military actions against Iran, and that continued tensions could turn higher energy prices into a lasting reality.

If this forecast materializes, the global economy will face consequences beyond higher oil prices; because costlier oil means higher production costs, intensified inflationary pressures, slower interest-rate cuts by central banks, and ultimately reduced economic growth in many countries. Meanwhile, the US website Axios, citing American officials, claimed that the current conflict has become an open-ended battle over one of the world’s most critical energy chokepoints, with no clear horizon. The report stressed that the intensification of tensions could last days, weeks, or even months, making uncertainty the most important variable affecting global markets.

Economists believe that in such an environment, even if a full-scale war does not break out, prolonged uncertainty can be as costly as a military conflict. Investors postpone decisions amid ambiguity, companies halt new projects, and financial markets face greater volatility. For this reason, some analysts hold that the main risk confronting the global economy is not a short-term war but rather entering a long period of instability in the Persian Gulf and the Strait of Hormuz – a situation that could affect the energy market, global trade, and the international growth outlook for months.

The end of the understanding between Iran and the US is not merely the conclusion of a political agreement; it is an event that could once again turn “geopolitical risk” into one of the most significant variables influencing the global economy. Rising oil prices, higher maritime transport costs, supply-chain pressures, increased inflationary expectations, and greater investor caution will be the first consequences of such a situation. For Iran’s economy, the most important threat is not only mounting external pressures but also the possibility of returning inflationary expectations and declining confidence among economic actors. In these conditions, policymakers’ success depends more than ever on their ability to maintain macroeconomic stability, manage markets, and prevent a political crisis from turning into an economic one.