Israel's economy can't survive a long war with Iran - and Trump knows it

Middle East Eye

3 days ago

Iran's recent campaign of strikes against Israel has redrawn the theatre of conflict, shifting away from kinetic warfare alone towards a strategic offensive against the economic and financial infrastructure underpinning Israeli state power.
What began as a retaliatory strike has become a multidimensional assault, aiming not only to inflict immediate costs but also to destabilise the fiscal and logistical foundations of Israel's war economy.
The missile strike targeting the home of Dani Naveh, CEO of the Development Corporation for Israel, commonly known as Israel Bonds, was no coincidence. Naveh is not merely a bureaucratic figurehead - he is the architect of Israel's global bond sales operation.
Since October 2023, his leadership has driven over $5bn in capital inflows from diaspora and institutional buyers, including $1.7bn from US public bodies. These bonds, insulated from secondary markets and sold directly, have become a critical fiscal artery for a state at war.
By striking Naveh, Tehran targeted Israel's debt-raising mechanism at its most vulnerable point: investor confidence.
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In doing so, it signalled to global markets that no Israeli economic or financial node is immune. This is not merely a disruption of personnel - it is an attempt to discredit Israel's entire wartime financial scaffolding.
Simultaneously, Iran's attacks on Tel Aviv's financial district and Haifa's strategic port and refinery infrastructure suggest a doctrine of coherent financial attrition.
The twin strikes - cyber and kinetic - disrupted refinery operations critical to both industrial and civilian energy supply.
Israel, already strained by soaring wartime expenditure, must now contend with fuel bottlenecks and cascading costs across its logistics and production chains.
Maritime chokehold
The most consequential blow to Israel's economy came through the global maritime sector. On 20 June, Maersk, the world's largest container shipping firm, announced the suspension of all vessel calls at Israel's Port of Haifa.
The move, triggered by the risk of further Iranian retaliation, turned threat into market exclusion.
No naval blockade was declared, yet the effect was the same. With insurance premiums on Israeli-bound shipments soaring past one percent of vessel value, Israel's maritime economy entered a de facto embargo.
Shipping giant Maersk's exit from Haifa severed Israel's maritime lifeline, turning threat into a de facto embargo
This disruption dwarfs the earlier Red Sea shipping crisis caused by the Houthi blockade.
The Bab al-Mandab chokepoint merely rerouted cargo. Maersk's exit from Haifa severed it altogether. Haifa is Israel's principal Mediterranean gateway for industrial machinery, pharmaceuticals, and strategic imports.
Without it, the Israeli economy becomes brittle and prone to inflation.
Import costs have increased, and inventory gaps are expected to widen. The government will be forced to subsidise logistics at enormous fiscal cost or rely on substandard shipping firms operating under flag-of-convenience regimes.
Only after the ceasefire brokered by US President Donald Trump was announced did Maersk confirm it would resume vessel calls at the Port of Haifa, reopening both import and export services.
Nonetheless, the pressure during the clash was significant and prevented Israel from ignoring the cost of its war.
Strategic resilience
Iran, in contrast, has spent minimally to achieve maximal disruption. Its missile operations, estimated at $2bn to $3bn, are structured as strategic investments.
The government has preserved macroeconomic stability through tight currency controls, off-market oil diplomacy, and selective austerity.
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By weaponising psychological deterrence, Tehran has achieved what years of sanctions could not: making Israel's financial ecosystem appear unstable, vulnerable, and fundamentally unsustainable.
Iran has long lived under sanctions and siege, and has developed the capacity to endure such conditions for decades.
This has given it a hardened resilience that decisively outmatches Israel's war economy, which is deeply dependent on global capital markets, western political backing, and short-cycle military dominance.
Unlike Israel, which cannot sustain prolonged disruption without risking economic and political breakdown, Iran's system is built for survival through attrition.
Its strategic patience, forged through decades of pressure, gives it a deeper national resolve that threatens to outlast and wear down the Israeli state's ability to finance and justify an extended war.
Fiscal freefall
Israel's economic crisis is not just one of cost but of confidence.
The shekel has depreciated steadily since October 2023. Bond yields are rising. Credit default swaps are pricing in elevated risk. Foreign investment is drying up. Small and medium-sized enterprises are folding. Credit ratings have been downgraded.
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Lost working hours across cities under alert have translated into productivity shocks and tax shortfalls. Unemployment is rising. Public anger is growing.
The government's response - raising the value-added tax, slashing social spending, and issuing more domestic debt - is not a recovery plan. It is fiscal triage.
Education, health, and public infrastructure spending are being cannibalised to fund ongoing military operations. The long-term costs will outlast the war. Human capital is eroding. Capital and human flight is intensifying. Trust in the state's economic management is faltering.
And now, for the first time in half a century, Israel has issued an international plea not for arms, but for cash.
Tel Aviv has formally requested that Gulf states, Germany, Britain, and France contribute economic aid to sustain its wartime footing. This is not strategic outreach - it is an admission of exhaustion.
The war is no longer financially containable within Israeli borders. This appeal also lays bare an uncomfortable contradiction: a state that celebrated economic self-reliance has become dependent on external infusion just to remain solvent.
This is not fiscal resilience - it is financial collapse in slow motion.
Opportunistic gambit
Iran's strategy has delivered its most significant result yet - not the destruction of Israeli military assets, but the destabilisation of its war-financing apparatus.
The strikes have triggered a wider unravelling of shipping corridors, bond markets, investor sentiment, and public confidence. Israel is not just fighting on seven military fronts. It is now fighting for economic survival.
The Iranian attack on Israel has paradoxically helped Prime Minister Benjamin Netanyahu deflect mounting domestic criticism by reframing the conflict as an existential national struggle rather than a political liability.
Trump's recent moves reflect not strategic generosity but an opportunistic gambit to reassert American influence across the Middle East
However, the limited success of the US strike on Iran's nuclear facility on 22 June underscores that this is not a war of quick victories, but one of attrition, where strategic resolve will ultimately determine the outcome.
The ceasefire that concluded the latest round of hostilities between Iran and Israel does not signify resolution, but recalibration.
In the vacuum of mutual exhaustion, the US, under Trump, has seized the opportunity to reposition itself not merely as an arbiter but as the architect of the post-conflict regional order.
Trump's recent moves reflect not strategic generosity but an opportunistic gambit, capitalising on Iran's strategic gains and Israel's fiscal exhaustion to reassert American influence across the Middle East by reshaping infrastructure, economic dependencies, and political alignments.
A pivotal development preceding the escalation was Iran's inauguration of a direct railway link to China, reducing shipping times to approximately 15 days.
More significantly, it facilitates transactions beyond the reach of dollar-based financial systems and sanctions enforcement.
By embedding itself within China's Belt and Road Initiative, Iran signalled a deliberate move to reorient its economic future away from the western-led order.
The subsequent joint US-Israeli strikes against Iranian infrastructure suggest that this infrastructural pivot - rather than nuclear enrichment alone - was partially perceived as a primary threat.
American designs
Following the ceasefire, the US has adopted a transactional approach to contain further Iranian gains.
The Trump administration's decision to allow Chinese refiners to resume purchases of Iranian oil, since revoked, reflects a calculated use of selective relief to slow Iran's strategic deepening with China.
This is not a concession but an attempt to draw Iran into financial arrangements governed by US institutions, thereby preserving a degree of control over its liquidity and trade exposure.
In parallel, the US has intensified its use of multilateral finance as a strategic tool against Iran.
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The World Bank's electricity grant to Syria, although framed as a development initiative, serves to weaken Iran's influence over the future of Syria. Similar efforts are underway in Lebanon, targeting Hezbollah's parallel service networks.
These moves are designed to stabilise the architecture underpinning the Abraham Accords.
With Israel facing fiscal strain and declining deterrence credibility, regional calm is crucial to preserving economic integration with Gulf states and protecting the viability of projects like the India-Middle East-Europe Economic Corridor.
Iran's capacity to disrupt shipping lanes and energy flows has underscored the fragility of these initiatives.
In sum, the US is pursuing a strategy of infrastructural counterweight and institutional encirclement. It seeks to neutralise Iran's strategic momentum not through escalation, but through selective accommodation, economic instruments, and containment.
This approach marks a shift from military dominance to structural influence, aimed at managing, rather than resolving, the contradictions of the current regional order.
Through initiatives like the Abraham Shield plan, the US hopes to transform Israel's wartime momentum into a durable order anchored in strategic deterrence, economic integration and political normalisation.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.