The collapse of the regime in Iran may be the biggest economic event of the decade

The markets are currently pricing the war in Iran as a significant risk to global growth: a spike in energy prices due to supply disruptions and a risk of developing stagflation, meaning low growth and even recession, combined with rampant inflation.

To illustrate, a protracted conflict that would include the continued closure of the Straits of Hormuz, through which a fifth of the global energy supply passes, could cause damage of approximately 300 billion dollars a year to the global GDP, and jump-start global inflation, for example by 1% in the Eurozone.

The latest American intelligence assessment also ‘contributes’ to the pessimism, according to which the regime in Iran is not in immediate danger of collapse, and there is currently no sign of an organized protest under fire.

We agree with that, but believe that the opportunity for the collapse of the regime, or a significant change in it, may come soon in another way. It is unlikely, in our opinion, to expect the Iranian people to go out in protest during massive bombings. But precisely on the day after the war, public outrage may erupt over the military failure, the destruction of infrastructure, the violent repression and the deepening economic crisis under the shadow of the sanctions, the Iranian rial collapsing to zero value and the water crisis which is expected to worsen.

A further deterioration in the situation could also damage the regime’s ability to finance the repression mechanisms, which would allow the protests to resume under a reduced threat.

A dormant energy giant

The process of the collapse of the regime and its replacement by a pro-Western regime may take more time and progress gradually, but if it does happen, it may become a regional and even global economic turning point, which is not priced in today.

That is, an event that is currently seen as an inflationary threat and depresses growth, may become a global growth engine and a factor that will lead to a sharp drop in energy prices. In our opinion, this is the vision that US President Trump is talking about when he says that the war will pay off financially and that the effects on energy prices are short-term.

The key point is that Iran has vast natural resources that are not properly utilized; It has about 157 billion barrels of proven oil reserves and about 1.2 trillion cubic feet of proven natural gas – about 10% of the oil reserves and 17% of the gas reserves in the world. In the oil field, under sanctions Iran produces about 3.3 million barrels of crude oil per day, most of which are sold at a discount to China. Increasing investments in the development of production and shipping capacity, you will be able to double the amount produced and increase the supply to the western world.

Also in the field of gas, Iran can become a huge exporter. According to Reuters, in 2024 Iran produced about 276 billion cubic meters of gas, but 94% of the amount was consumed within the country, due to the sanctions and a lack of export infrastructure, technology and access to financing.

Iran shares the world’s largest gas reserves with Qatar, but while Qatar has built an LNG (liquefied natural gas) industry in recent decades and turned it into a source of sovereign wealth and geopolitical power, Iran is out of the game. If the Iranian gas economy is opened to investment and development, it can become within a decade a central factor in increasing the supply of gas and lowering its price in the world. According to estimates, increasing the production and export of oil and gas through appropriate investments, may lower energy prices in the world by up to 15%.

The tremendous growth that is embodied

Beyond energy, the opening of a huge economy of 91 million people that suffers from enormous isolation, heavy sanctions and a chronic lack of investment, may become the economic story of the decade.

Today, Iran is harming global growth instead of contributing to it, as a country that invests enormous resources in the development of regional terrorism and forces its neighbors to invest in defense instead of regional development. Regime change and global economic openness will create investment potential of hundreds of billions of dollars, and possibly even beyond, to finance reconstruction, development of new infrastructure and industries, and trade relations.

The figure that best illustrates the size of the unrealized potential is Iran’s GDP, which according to the World Bank was about 475 billion dollars in 2024. For comparison, Turkey, with a similar population, generated a GDP three times higher, of about 1.36 trillion dollars.

Another illustration concerns direct foreign investments in Iran, which in 2024 amounted to only 1.5 billion dollars. This at a time when Turkey attracted about 13 billion dollars, the United Arab Emirates more than 30 billion dollars, and Vietnam more than 36 billion dollars.

In our estimation, the opening of the Iranian economy will, in the medium-long term, fundamentally change the current picture of winners and losers in the war.

The opportunities and threats

Thus, the energy producers, who are currently enjoying the short-term effect of price increases, may suffer a sharp decrease in profitability due to the drop in oil and gas prices.

On the other hand, industrial export, engineering and infrastructure companies, regional logistics players, insurance companies that will ensure increased trade and financial centers, will benefit from the wave of investments and reconstruction.

A significant beneficiary may be Europe, which is in an excellent starting position for expanding trade relations with Iran, which is currently at a meager annual volume of 4.5 billion dollars, as a result of years of sanctions. Europe desperately needs new growth engines, therefore any such move can produce a significant effect. To illustrate, Germany, which has suffered from zero growth in recent years, could, according to estimates, add to its GDP about 0.4% per year, that is, about 15 billion euros, mainly through exports in the fields of paper, plastics, metals and chemicals.

At the same time, Turkey may benefit as a logistical and financial gateway to Iran, and even the Gulf states, which are now suffering a severe blow to their regional standing due to the missile strikes from Iran, may benefit from a renewed economic boom from trade and development in Iran.

The meaning for Israel

For Israel, the clear consequence is a sharp drop in the risk premium and investment encouragement that will be manifested in a sharp appreciation of the shekel, a drop in government bond yields, a significant influx of foreign investments and an improvement in the pricing of risk assets. On the other hand, if Iran reintegrates into the energy market and contributes to a drop in oil and gas prices, regional gas exports from Israel and companies’ profitability will erode.

In the more distant future, the re-emergence of a huge regional market, with an acute need for water, advanced agriculture, medical equipment, smart infrastructures, software, transportation and energy solutions, changes the map of economic opportunities in the Middle East – in areas where Israel has a huge advantage.