Israel will move 'very carefully' to avoid regional war

According to an NBC report, Israel's potential response to Iran's air attack may be "imminent." Eurasia Group Chair Cliff Kupchan joins The Morning Brief to discuss what Israeli retaliation may look like.

Kupchan signals that Israel will be "very careful" as it is under pressure from the Biden administration not to trigger a regional war. However, Kupchan believes that Israel must respond in order to "trim down this new Iranian bravado" and demonstrate that such attacks cannot continue. The nation may target Iranian allies in Syria-aligned militias "one level down," so Iran will not be forced to shoot back.

Though Kupchan characterizes Biden and Netanyahu's relationship as strained, he says that the conflict with Iran has "reset" the relationship, with the US coming to Israel's aid. Overall, Kupchan calls the present moment a "real risky" one: he explains that Israel and Iran's tensions are overlapping with Israel's determination to push Hezbollah back from the northern front, and adds that the War on Gaza isn't over.

"We are on a structurally escalatory path," the Eurasia Group chair states, noting that if the Strait of Hormuz comes into play, oil prices could surge and shipping lanes in the Red Sea could also be affected. He characterizes these potential developments as a "risk" to the market.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This article was written by Gabriel Roy.

Video Transcript

SEANA SMITH: Well, tensions are switching to another story that we are closely watching here. Tensions mounting in the Middle East. Israel's potential response to Iran launching hundreds of drones and missiles may be, quote, imminent. This is according to the latest reports out from NBC.

Here with more, we want to bring in Cliff Kupchan. He is Eurasia Group's Chairman. Here to discuss the latest that we're seeing, Cliff. Over the last 24 hours, there has been reports coming out that Israel's response is likely imminent. What do you think that response is going to look like?

CLIFF KUPCHAN: I think they're going to be careful, really careful. They're under a huge amount of pressure from the Biden administration. Not to trigger a big regional war, big escalation. So I think they'll probably hit Iranian allies in Syria, aligned militias, shoot one level down so that Iran isn't forced to shoot back. And we get into an escalatory spiral. That's my best judgment.

BRAD SMITH: You know, what does this mean in terms of the relationship between the US and Israel as well, Cliff? I mean, the US and Israel is one thing long storied relationship. But then President Biden and Benjamin Netanyahu, that in itself has been a much hairier situation that they've had to navigate.

CLIFF KUPCHAN: So Biden and Netanyahu just don't like each other to begin with. Secondly, they really disagree on Israel's approach to protecting Palestinian civilians. I think what we got, though, interestingly is a real reset over the last since Saturday in US-Israel relations. When Israel was so attacked, the US came to their aid. And I think that the relationship is much better now than it was three days ago.

SEANA SMITH: Cliff, do you think Israel has to do something? Do they need to respond?

CLIFF KUPCHAN: Yeah, they absolutely got to respond.

SEANA SMITH: Why?

CLIFF KUPCHAN: So Iran changed the game with what they did. They re-established deterrence on the Iranian side. They made it clear to the world, which is really kind of breathtaking, that they're unwilling to use military force on a large scale against Israel from Iran.

And let's just all keep in mind. We got really lucky on Saturday, that one of those 300 projectiles including a large number of ballistic missiles didn't kill thousands of Israelis. We got really lucky.

So, Israel, I think has got to shoot back to trim down this new Iranian bravado to send a response. You just can't keep doing that. Or you run a big risk.

SEANA SMITH: Cliff, how slippery is this slope then to a real escalation and the fact that we could see a widening war play out in the Middle East?

CLIFF KUPCHAN: It's a real risky time. We have this whole new dimension now of Israel Iran tension. Overlapping that is Israel's real determination and desire to do something on the border with Lebanon, the so-called northern front, move Hezbollah back behind a river away from the front. And on top of that, the fundamental cause of all this the war in Gaza.

I don't think it's nearly over. I think it's going to be with us most of this year. Israel is going to do Rafah where there's four battalions of-- 4,000 plus Hamas troops that can still fight. So we are on a structurally escalatory path which I think anybody in the markets on just really smell the coffee and be aware of.

BRAD SMITH: Does this structurally escalatory path significantly change international trade and relations on that front and have broader impacts to certain GDP structures that we've become accustomed to as well, if you see certain trade partners, decide to move away from doing business with certain countries?

CLIFF KUPCHAN: Well, there are two-- I don't think there's going to be a big war in the Middle East. But if we say that there's a what 15%, 20%, 25% bigger number, that we're playing with huge tail risks at this point. And I think any market participant is going to be very, very aware of those.

If the Strait of Hormuz, if that key international waterway for oil comes into play, and it's on the verge of coming into play, then oil prices now are going to dwarf what we could potentially face. That's the first risk.

The second risk is that shipping lanes from the Red Sea to a number of straits around the world will come under more pressure. So there are a number of ways now that I think moving forward in 2024. The Middle East is going to be a real source of interest and risk for markets.

BRAD SMITH: Cliff Kupchan who is the Eurasia Group Chairman. Thank you so much for taking the time here with us today. Really appreciate it.

CLIFF KUPCHAN: Thank you, sir. Bye-bye.