Shadow Leverage Issue 4: Iran’s Nuclear Programme

Negotiations between Washington and Tehran are entering an increasingly complex strategic juncture, with most of the 60-day timeframe established under the "Islamabad Truce" having elapsed without a decisive agreement. This has been accompanied by renewed hostilities and the Strait of Hormuz once again closing to international shipping.   These developments on the ground coincide with intensive international diplomatic efforts to contain the repercussions of an open military conflict that has clearly weighed on regional and global economic growth.   At the heart of this negotiating landscape is the conspicuous absence of the regional proxy issue from both the draft preliminary agreement and the current talks. Rather than signalling that the issue has been sidelined, this absence raises fundamental questions about the future of the complex network that has for decades formed a central pillar of Iran's deterrence doctrine.   Current political dynamics suggest the proxy issue is no longer a secondary matter that can be deferred or ignored. Instead, it has become a structural fault line that cuts across each side's conception of security and stability, as well as the limits of any viable settlement.   Its exclusion from the initial formulations reflects a clear recognition of how difficult it would be to incorporate the issue without directly confronting red lines at the intersection of Iran's deterrence doctrine, the US vision of regional security, and Israel's efforts to translate military pressure into irreversible negotiating gains.   The dilemma takes on even greater significance in light of recent macroeconomic analyses indicating that the costs of proxy involvement have extended well beyond direct military losses, striking at the heart of the global economy. Proxy-related operations along critical maritime corridors, particularly in the Red Sea, have severely disrupted supply chains and inflicted tens of billions of dollars in losses on international trade through unprecedented surges in shipping and insurance costs. They have also created unconventional threats to the security of digital infrastructure, most notably subsea fibre-optic cable networks.   Security experts emphasise that the structural attrition the Axis of Resistance suffered during the intense confrontations of 2024 and 2025 prompted Tehran's leadership to reassess its tactics and instruments, but not to abandon them.   The crisis stems from a fundamental divergence in the actors' perspectives. Iran regards its network of proxies as a forward line of defence and an integral component of its national security, integrating these groups with its missile and drone capabilities. Washington and Tel Aviv, backed by regional powers, by contrast, view dismantling and disarming these groups as a mandatory precondition for any new regional security architecture.   This reality places the proxy issue at a critical intersection between three complex levels: Iran's pursuit of strategic depth for its defence; US efforts to neutralise sources of asymmetric threat; and regional and international concerns that link market stability and freedom of navigation to ending the activities of these groups around maritime chokepoints and in the Eastern Mediterranean. Any settlement that fails to define the place and functions of these proxies would therefore amount to little more than a fragile truce vulnerable to rapid erosion.   This section examines the divergent perspectives of the key actors on the regional proxy crisis. It assesses how these competing positions may clash or converge behind closed doors at the negotiating table. The paper asks a central question: will these discussions translate into strategic trade-offs that underpin a comprehensive and sustainable settlement, or will divergence between the parties' red lines reduce the anticipated agreement to little more than a temporary tactical freeze before an even more violent round of conflict?   This issue was written on August 2, 2026

Iran's missile programme and drone arsenal constitute one of the Middle East's principal security determinants. Before the outbreak of military hostilities in February 2026, Iran possessed the region's largest stockpile of ballistic missiles. Estimates varied, placing its inventory at between 2,500 and 6,000 long-range missiles capable of striking deep inside Israel at speeds approaching 17,000 kilometres per hour. This coincided with Tehran consolidating its position as a leading developer of drones, particularly the various Shahed models, the Karrar series, and the latest Kaman variant unveiled in January 2026.   The strategic significance of these capabilities became evident during the war, when they became a top priority for U.S. and Israeli strikes. Production facilities, storage sites, and launch platforms were targeted in an effort to degrade Iran's deterrent capabilities and neutralise the threat they posed to Israel. This military escalation was consistent with the pre-war U.S. position, which had signalled its intention to prevent Tehran from acquiring ballistic missiles and stressed the need to incorporate this issue into the nuclear negotiations. In practice, this was reflected in the simultaneous targeting of the infrastructure underpinning both the missile and nuclear programmes.   However, the launch of the negotiation process introduced a new strategic dimension to the issue through the Islamabad Memorandum. Contrary to expectations that Iran's military capabilities would be incorporated into the initial agreement, both the missile and drone programmes were excluded from the preliminary understanding.   The Trump administration subsequently announced a departure from its previous position, stating that it was not seeking to prevent Tehran from rebuilding its missile capabilities, citing Iran's sovereign right to self-defence. This shift reflects a strategic trade-off based on temporarily overlooking the missile programme in exchange for containing the nuclear programme and restricting the funding of armed groups across the region.   This exclusion is not merely a procedural feature of the negotiations. Rather, it raises fundamental questions about the trajectory of the sixty-day transitional period and the strategy each party is likely to pursue thereafter. This situation requires an assessment that goes beyond measuring battlefield losses to understand how these capabilities have evolved from mere weapons systems into a fundamental pillar of the regional balance of power, imposing themselves on regional strategic calculations.   This issue was written on July 2, 2026

The Strait of Hormuz is no longer merely a disputed maritime passage, nor simply a recurring flashpoint between Iran and the United States. It has instead evolved into a central arena for testing the meaning of sovereignty in the region. While Washington continues to regard the strait as an international waterway governed by the principle of freedom of navigation, Iran’s Islamic Revolutionary Guard Corps treats it as a sovereign zone under its direct administration, subject to military rules imposed through effective ground control. Accordingly, the core of the crisis no longer centres on the question, "Is the strait open or closed?" Rather, the more consequential question has become: what is the future of the strait in light of the ongoing negotiations?   Recent developments, particularly following the Islamic Revolutionary Guard Corps’s threat to close the Strait of Hormuz in response to what it described as violations of the terms of the memorandum of understanding, especially about the Lebanese file just days after the memorandum was signed, reveal that the issue has not been resolved but has instead grown more complex. The memorandum treated the strait as a technical issue that could be managed through arrangements governing passage and transit to prevent friction. The Islamic Revolutionary Guard Corps, by contrast, approached it as a symbol of sovereignty, power, and the right to set the rules. This divergence rendered the understanding itself incapable of resolving the underlying dispute, because the disagreement between the two sides lies not in procedural details, but in who holds the authority to determine those procedures in the first place.   Although the United States and Iran agreed to reopen the Strait of Hormuz immediately after signing the preliminary agreement, this does not necessarily mean that maritime traffic will return to pre-war levels. Implementing this provision presents complex challenges related to the mechanism for reactivating the shipping corridor, the arrangements required to resume vessel traffic, and the restrictions that may persist during the sixty days allocated to negotiate the final agreement. These challenges are further compounded by the dispute over which party will assume responsibility for regulating and managing maritime traffic through the strait. Taken together, these obstacles suggest that reopening the strait may prove one of the most complex aspects of the agreement, particularly given the ongoing divergence between the American and Iranian visions for the future control of this strategic waterway.   The crisis surrounding the Strait of Hormuz, therefore, cannot be understood merely as a dispute over borders or the passage of ships; it is fundamentally a crisis of authority: the authority to set the rules, to impose exceptions, and to exercise the final say in determining whether this waterway remains open, closed, or conditionally accessible. For this reason, the question of the strait should no longer be viewed as a secondary file within the broader Iran–United States conflict. Rather, it should be recognised as one of the most consequential issues shaping and redefining the very concept of sovereignty, both within Iran itself and in the evolving structure of relations between regional and international powers.

The US economy experienced a rapid macroeconomic shift marked by rising prices and slowing growth following the implementation of a 27% weighted average applied tariff rate. This policy shift triggered stagflationary indicators by mid-2026, with real GDP growth decelerating to 1.5% in the second quarter and inflation rising to an annualized 5.1%. Concurrently, monthly job creation plummeted from an average of 125,100 in 2025 to a forecasted 34,600 to 55,200 in 2026. The trade environment also underwent structural changes, most notably in agriculture, where the United States permanently lost 7.94 percentage points of the Chinese agricultural import market, largely replaced by Brazil.   At the sectoral level, agriculture and manufacturing saw divergent outcomes that masked deeper financial vulnerabilities. The agricultural sector transitioned heavily from market-earned income to federal transfers, with government direct payments surging to $44.3 billion in 2026, comprising roughly 25% to 30% of total net farm income. Despite these government bailouts, total farm sector debt reached a record $624.7 billion, accompanied by rising family farm bankruptcies. Meanwhile, the manufacturing sector saw a modest 1.93% increase in its industrial production index between March 2025 and July 2026, yet manufacturing employment actually contracted by 0.43% during the exact same period.   The long-term fiscal trajectory of the United States points toward unprecedented debt levels, driven by simultaneous revenue constraints and expanded deficit spending. Recent tax legislation is projected to add $4.7 trillion to the national deficit over a decade. Consequently, federal debt held by the public is projected to eclipse the historic 1946 World War II peak of 106%, reaching 108% of GDP by 2030 and climbing to 175% by 2056. Over this extended horizon, net interest payments are forecast to become the largest single line item in the federal budget, while the United States' projected share of global output on a purchasing-power basis declines from 20.42% to 13.88%.    This publication was written in August 2026

The Al Habtoor Research Centre (AHRC) presents a groundbreaking, equation-based assessment analysing the direct and indirect social and economic resource costs of the 110-day conflict that began on February 28, 2026. Utilising an advanced conflict economics framework—including the Stiglitz-Bilmes convention and counterfactual synthetic controls—this research delivers an unprecedented, exclusive analysis of the financial burdens borne by the belligerents and the wider global economy. The headline finding is one of profound asymmetry, proving that recovery capacity, rather than the size of the initial kinetic blow, dictates the medium-term cost of modern warfare. The largest financial burden fell on the global economy, specifically non-belligerent, bystander oil-importing nations, totalling an estimated $1.41 trillion by 2030. Triggered by the 110-day closure of the Strait of Hormuz, this true burden lies in unproduced global output rather than the temporary oil-price spike, which ultimately nets to zero globally. Among the combatants, Iran absorbed an existential, structural blow equivalent to roughly 81% of its pre-war output, costing $305 billion by 2030, or $720 billion on a purchasing-power parity (PPP) basis. Locked out of international capital markets, its output gap fails to close by the end of the decade, triggering a step down to a permanently lower economic path. In contrast, the United States faces a heavily back-loaded bill ranging from $200 billion to $1.1 trillion by 2030. While structurally insulated from the immediate oil shock due to its net energy exporter status, this massive range in projections depends on whether standard cash-budgeting or full multi-decade liabilities—such as veteran care, war-debt interest, and budget ratchets—are present-valued. Meanwhile, Israel sustained a sharp but recoverable macroeconomic shock of $135 billion by 2030, equal to roughly a quarter of a single year's GDP. Advanced air defense mitigated physical destruction, concentrating the cost instead on reserve mobilisation, interception economics, and a transient output gap. Ultimately, this exclusive analysis details how the poorest bystander nations subsidised the conflict's macro cost, marking the 2026 war as one of the most economically disruptive events of the century.

The Middle East has undergone profound shifts in its security and geopolitical landscape following the major events that began on 7 October 2023 and continued to unfold through 2026. At the heart of these shifts lies a fundamental transformation in Israeli military doctrine. For many years, Israel relied on rapid pre-emptive strikes and advanced technologies to sustain remote defence without requiring permanent control over new territory. However, the unprecedented breaches of its borders have fundamentally altered this strategy. Israel has now moved towards direct physical control over parts of Arab territory and has begun constructing a broad, contiguous belt of buffer zones extending from the Gaza Strip in the south and southern Lebanon in the north to the Syrian Golan Heights.   Historically, buffer zones were understood as demilitarised and relatively calm spaces designed to separate conflicting parties and prevent direct friction. Israel, however, has fundamentally redefined this concept, transforming such zones into instruments of absolute security control. Through this approach, it seeks to create fortified military spaces that provide strategic depth, eliminate cross-border threats and tunnels, and push the battlefield entirely away from its cities and population centres.   Despite the clarity of these objectives, this approach places Israeli military planners in a genuine dilemma. The permanent deployment of large infantry and armoured forces within hostile and volatile areas threatens to turn these belts—intended to serve as secure zones—into arenas of sustained and costly military attrition. Against this backdrop, this analysis raises a central and fundamental question: do these border strips constitute a genuine security buffer capable of ensuring Israel’s long-term survival and security, or have they already become a trap that steadily drains its capabilities day after day?