The Surprise Victor of the Israel-Iran War

So far, the Middle East truce is holding and oil prices have begun to normalize. An Economist article featured analysis from the Ceasefire Group that studied ceasefires between 1989 and 2020 and found about half were successful, one-third collapsed and the outcome of the remainder were inconclusive. Of Middle East ceasefires, about half failed.

 

I assess the current situation in the Israel-Iran conflict and its implications for investors.
 

 

The Iranian Nuclear Program

A Geopolitics Decanted podcast with Dr. Jeffrey Lewis, professor at Middlebury Institute and a nuclear non-proliferation expert, outlined the issues surrounding the Iranian nuclear program, assessed the possible damage of the bombing campaign and the steps Iran can take to reconstitute its program.

Let’s start with the basics. To make an atomic bomb, you need uranium. Mined uranium is milled and turned into a yellow powder called yellow cake, which is relatively harmless. Less than 1% of yellow cake is fissile material. To make a bomb, you need to enrich the fissile material by converting it into uranium hexafluoride, which is a gas, at a 90% concentration by using a system of centrifuges.

The IAEA reported that Iran has enriched its uranium to the 60% level and it has 400 kilograms of material before the bombing campaign began. Had it wanted to enrich the uranium to the 90% weapons grade level, it would only have to tweak the configuration of its centrifuges. The uranium hexafluoride is then turned into a metal, which is shaped into a sphere suitable for bomb making. Bomb designs used by North Korea and Pakistan date from the 1950s and 1960s are relatively well known.

Iran’s nuclear program is dispersed at several locations. All of the above-ground fuel enrichment plants were destroyed during the initial phases of the Israeli bombing campaign. There were two large underground enrichment halls that were relatively shallow, but it’s difficult to assess their battle damage.

At a minimum, the bombing campaign knocked out all the power. The IAEA believes there was considerable damage to the shallow underground centrifuge facilities.

 

There were also deep underground facilities at Fordow and Isfahan, which were hit by massive American bunker buster bombs. At this point, it’s impossible to assess the damage at those facilities. The 60%-enriched uranium was stored deep underground at Fordow, which was hit by U.S. bunker buster bombs.

However, satellite imagery shows lines of trucks at Fordow before the bombing and the material may have been dispersed. The IAEA reports that Iran had over 600 kilograms of enriched uranium in unknown locations before the bombs started falling. U.S. officials concede they simply don’t know the current location of 400 kilograms of 60%-enriched uranium, which is enough for 10 bombs.

Another centrifuge manufacturing facility is located deep underground at Natanz, and it’s deeper than Fordow. Lewis stated that the American bunker buster bombs can’t reach the underground complex at Natanz and only a nuclear warhead could destroy that facility.

If the Iranian leadership wanted to race to a bomb today, here’s what it needs to do. Assuming that it still possesses the 400 kilograms of 60%-enriched uranium, which is a big if, it would need to enrich it to 90% at the very deep underground Natanz facility. Much depends on whether it still has the centrifuges available, but Lewis claims that even a small facility could enrich it to 90% within one or two months. On the other hand, if Iran had to start from scratch with 5% uranium, the timeline could stretch to a few years. The next step in bomb making is turning the uranium hexafluoride into a metal, but that above-ground plant has been destroyed.

That’s where we are today. Iran has lost key infrastructure, commanders and scientists. Both sides have declared victory. But Iran’s missile, nuclear and proxy potential still stands and the world is in the dark about the country’s capabilities and intentions. Iran Parliament’s National Security Commission approved a bill on suspension of the co-operation with the IAEA, which is the first step to withdrawal from the nuclear non-proliferation treaty. Amidst the differing claims from intelligence agencies and the White House, it’s unclear how much Iran’s nuclear bomb program has been set back.
 

 

The Israeli and U.S. Perspective

From the Israeli and U.S. perspective, the conflict isn’t without cost. The WSJ reported that “Israel’s War on Iran Is Costing Hundreds of Millions of Dollars a Day”:

The biggest single cost are the interceptors needed to blow up incoming Iranian missiles, which alone can amount to between tens of millions to $200 million a day, experts say. Ammunition and aircraft also add to the price tag of the war, as does the unprecedented damage to buildings. Some estimates so far say that rebuilding or repairing damage could cost Israel at least $400 million.

The mounting costs add up to pressure on Israel to wrap up the war quickly.

The U.S. experienced a similar alarming drain in munitions when the Navy tried to wrest maritime control of the Red Sea from the Houthi rebels. According to the Military Times, Acting Chief of Naval Operations Admiral James Kilby acknowledged in testimony before the House Appropriations Committee that the operation has “highlighted the strain on our munitions industrial base”:

“Precision-guided, long-range munitions like Tomahawk, Long Range Anti-Ship Missile, the heavyweight torpedo, all those ammunitions we need to increase production on,” he said. “But I’m also of the mind that we need to look at other vendors. They may not be able to produce the same exact specifications, but they might be able to produce a missile that’s effective, which is more effective than no missile.”

U.S. forces launched over 1,000 strikes from March to May 2025 at the Houthi rebels, who used missiles and low-cost drones to interdict the sea lanes, using an estimated $1 billion in weapons. If the U.S. expends munitions at such a prodigious rate against the lightly armed Houthis, it raises the question of how quickly it would run short in a war with China over Taiwan.

Standard & Poor’s recently warned that an extended war could put Israel’s credit rating at risk of a downgrade: “Developments in the Israel-Iran conflict are testing S&P Global Ratings’ previous assumptions by increasing downside risk including due to the prospect of further escalation. Israel says its stated aim of destroying Iran’s nuclear capability could take at least two weeks, possibly longer… this points to a more protracted campaign than the 2024 retaliatory strikes.”

In other words, the surprise victor of the conflict is the bond market, which is forcing a fiscal discipline framework on the combatants to reduce hostilities. War is expensive, and countries will have to pay if they want to go to war.
 

While the Iranian bond market isn’t easily observable, a Bloomberg podcast with Maciej Wojtal, of AmtelonCapital, an Amsterdam-based fund that specializes in Iranian stocks provides some perspective. Wojtal revealed that Iran is roughly the same size as Turkey in geography and population, but the size of its economy is about one-fifth the size. While the stock market was closed during the period the attacks, he pointed out that market signals were nevertheless available by observing the exchange rate against cryptocurrency stablecoins. Before the attack, one Iranian rial was trading at about 830,000 to the USD. It shot up about 15% to 950,000 after the attack, and returned to 850,000 as the ceasefire took hold.
 

One key unknown is the length of the conflict. It’s unclear what the U.S. policy toward Iran is. On one hand, President Trump has hinted at regime change in his social media posts. On the other hand, he gave the green light to China to buy oil from Iran, which translates into lifting sanctions and helps the regime. He sent out a social media post last Friday suspending plans for sanctions relief after Ayatollah Ali Khamenei issued a defiant message that downplayed the success of the bombing campaign.
 

 

Trump’s desire for regime change in Iran is a difficult proposition. The Iranian opposition is poorly organized and fragmented, and any effort to bring about regime change will result in a protracted conflict. As an example, protests erupted over women’s rights in Iran in 2022, but the authorities clamped down and the protests, which could have been the basis of an anti-government movement, fizzled.
 

What happens next to U.S. policy? If Trump opts for a containment policy, the diversion of military resources to the Middle East from Asia will weaken the deterrence of a Chinese attack on Taiwan. Moreover, it will bloat the budget – and the bond market vigilantes will rebel. Arguably, the market is already signaling its unease with the Treasury market. Foreign sovereign bonds are outperforming Treasuries on a USD-denominated duration-equivalent basis, and the USD is in a downtrend and broke a key support level.