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Which countries will lose the most if tensions reignite around Iran?
It is not yet clear whether the conflict between Israel and Iran is really at an end, warned many analysts after the US announced a ceasefire on Tuesday.
On Wednesday morning, the truce appeared to be holding after earlier violations, although investors kept their eyes on the region — with oil prices remaining high.
Reignited tension in the region could push up these prices further, leaving China and Europe vulnerable to supply disruptions — good news for Russia.
'The biggest losers would be continental Europe and China, both heavily reliant on imported energy and lacking domestic buffers,' said Professor Guido Cozzi, chair of macroeconomics at the University of St. Gallen, before the ceasefire was announced. 'They would face rising costs, slower growth, and heightened inflation without any upside.'
But peace in Iran, along with the countries in the Persian Gulf, is key for the entire global economy as the region produces one-third of the world's oil.
Iran alone provides 10% of China's imported oil and largely controls the critical Strait of Hormuz waterway, through which one-fifth of the world's oil passes.
Iran's economy and its key trading partners
Iran's Gross Domestic Product (GDP) was worth a little over $400 billion (€345bn) in 2023, according to the World Bank, making up 0.38% of global GDP.
While this total may not seem significant, the country is an important player when it comes to energy supplies.
Iran sources a large amount of its income from oil, and the country was the fourth-largest crude oil producer in OPEC, the organisation uniting the biggest oil-producing and oil-dependent countries, in 2023. It was also the third-largest natural gas producer in the world in 2022, according to the US Energy Information Administration (EIA).
Despite Western sanctions on Iran, some linked to its nuclear programme, Tehran has been working on securing its global trade position.
Iran's main trading partners include China, Russia, Turkey, India, Pakistan and its close neighbours, including Iraq and the UAE.
According to Chris Weafer, chief executive of macro-advisory, a Eurasia-Gulf based business consultancy: '60% of the value of exports is oil and about 12% is chemicals and plastics, 8% is iron and ores and 5% is fertilisers.'
Oil exports are largely going to China, amounting to 'approximately 1.7 million barrels per day,' Weafer told Euronews Business.
China's crude oil imports are estimated to amount to more than 11 million barrels per day, according to the EIA. The federal agency also notes that Western sanctions against Iran should officially stop China from importing Iranian oil. Despite this, crude oil cargos from Iran are often relabelled as if they were from Malaysia, they noted.
'Any major disruption of Iranian oil supplies would leave China scrambling to find replacements,' said Gaurav Ganguly, chief European economist at Moody's Analytics. He added that Iran is also a major exporter of liquefied petroleum gas (LPG) to China, which is essential for the plastics industry. 'This leaves China vulnerable on multiple fronts,' he said.
If China's economy staggers, the global ecosystem does so too. The country's domestic consumption provides the largest market for many Western companies, and its manufacturing is essential to the global economy.
However, Iran's main trading partners are working on diversifying their sources of energy, hoping to find themselves less vulnerable in times of crisis in the Middle East.
'China will continue to increase its reliance on energy from Russia and Central Asia to reduce its vulnerability linked to instability and American intervention in the Middle East,' said Matt Gertken, BCA Research's chief geopolitical strategist. He added that 'India will also turn to Russia and increase imports from the Americas — and eventually resume imports from the Middle East, including Iran.'
Trade is increasing with Eurasian countries, including Russia
China's increasing reliance on Eurasian supplies is not the only benefit for countries like Russia. Iran itself has increased trade with countries in Eurasia.
'Earlier this year Iran formally signed a free trade agreement with the Eurasian Economic Union (EaEU),' Weafer said, adding that trade with the member states, (Belarus, Russia, Armenia, Kazakhstan and Kyrgyzstan) has been growing steadily for years. There are more plans to expand it with regards to fruits, seeds, vegetables and some manufactured goods, he said.
The trade with Central Asia and Russia has also grown because of expanding rail networks across Central Asia and the Caucasus. This has allowed Iran to start diversifying its trade mix away from oil and gas dependency to expand its trade partnerships.
It also allows countries in Central Asia, such as Uzbekistan, to access a Gulf port, a quicker entry point to world markets.
'This should continue unless the rail and port infrastructure are targeted and damaged,' added Weafer.
Russia would be in a particularly favourable situation should the global oil flow be disrupted, he said. 'The world market will need every barrel of Russian oil and every ton of Russian LNG it can get.'
What are the implications for Europe?
Russia could even see European demand increase slightly if there is a major shock to the oil and gas market, according to experts.
As Europe is also dependent on the natural gas from the Gulf region, 'Europe faces a new source of energy supply insecurity on top of the breakup with Russia over the Ukraine war,' said Matt Gertken, BCA Research's chief geopolitical strategist, before the ceasefire was announced.
It is possible that the EU will 'reduce the stringency of sanctions enforcement on Russia by incrementally accepting more Russian natural gas, albeit not to pre-war levels', he added.
If the crisis reignites around Iran, pushing oil and gas prices up again, Europe could also increase energy imports from the Americas, a less controversial solution than sourcing fuel from Russia.
'The most immediate impact on Europe will be a rise in inflation,' said Gaurav Ganguly, chief European economist at Moody's Analytics. A sustained rise in energy prices could 'erode already fragile confidence in Europe, and central banks would be more likely to raise interest rates'.
Other implications on the global and regional economy
Globally, a rise in energy prices directly affects industries including logistics and transport sectors. This would trickle down to other businesses, making their operations more expensive. Eventually, consumers would feel the impact by seeing the cost of energy and other goods and services rise. Unemployment may also tick up if businesses are forced to cut back on hiring due to high costs.
And it is not just oil and gas markets that would feel the strain. The UAE port of Jebel Ali is one of the busiest in the world and a key hub connecting Asia, Europe and Africa.
'Supply chains could come under pressure, and shipping costs would rise if vessels are forced to find alternatives,' Ganguly said.
The aviation sector in the region also faces pressure from prolonged disruptions, longer flight times and a loss of passenger volume. Tourism, which provides more than 11% of the region's GDP, according to the Statistical Centre for the Cooperation Council for the Arab Countries of the Gulf, might also be affected.
If the Gulf region is exposed to an extended crisis, it could also hit the property sector, which could trigger a broader economic decline. If this is coupled with a slower flow of foreign direct investment into the region, that poses a further threat to the region's economy.
'In short, there is a lot to lose,' Ganguly said.
