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Clare Kim: Hi, and welcome to JPMorgan's Making Sense. I'm Clare Kim, the global head of content strategy and production for the commercial and investment bank, and I'm here today with Derek Chollet, the head of the JPMorganChase Center for Geopolitics, to discuss a headline that's been top of mind for many people in recent days, the US-Israel military operation against Iran. There's a lot to unpack, from the regional fallout of the conflict to the ripple effects across the global economy and markets, so let's get started. Derek, thank you so much for joining me today.
Derek Chollet: Great to be here. Thanks for having me.
Clare Kim: Derek, can you start by giving us a brief overview and timeline of what led to the US-Israel military operation against Iran.
Derek Chollet: So I think you have to think of this as not something of just the last week. It's really been something that's, in many ways, been years in the making. Iran, as a result of an exchange between Iran and Israel in 2024, and then again last June, was uniquely vulnerable. Its air defenses were vulnerable. It had very little ability to really understand what was going on in its skies. And so after the June conflict between Israel and Iran, which the United States participated in at the end by taking out Iran's nuclear program, we were telling clients that this was a pause, not peace, that it was very likely, and in fact expected, that the conflict would r- resume at some point. And for the better part of this year, since the beginning of the year, as we've been captivated by Venezuela, and Greenland, and events elsewhere, we've been telling clients, "Keep an eye on Iran, because it is likely the conflict would resume." So whereas the timing mighta been a surprise to some, the fact that it's happening is not a surprise. Now, the scale and scope of it is massive. I mean, I think it, it can not be overstated the magnitude of this operation, the first-even joint US-Israeli military operation, the first truly joint operation in the sense of sharing of intelligence, operational plans, division of labor that the US has conducted in this way really since World War II. We've had other coalition campaigns, but one in which the US was really playing the lead role and doing the lion's share of the work. That's not the case in this operation. And the magnitude of change that we are about to see in terms of an Iran that is at least gonna be weaker, probably more unstable, if not transformed altogether, will the biggest change that the region has seen since 1979, and it's going to be a geopolitical change that could be on par with the collapse of the Soviet Union at the end of the 1980s and early 1990s, just in the sense of the, the second, third, fourth order effects of this change in Iran. There's a lot of uncertainty about which direction this is gonna go of course. I mean, it could get a lot worse. It could get a lot better. I'm happy to talk about where I see the various-
Clare Kim: Yeah.
Derek Chollet: ... pathways.
Clare Kim: Yeah, we'll get there.
Derek Chollet: But I think the magnitude of this is something, over the long term, that will define geopolitics for the rest of our lives.
Clare Kim: So Derek, you've been getting this question from clients and, and partners across the firm. How is this going to end?
Derek Chollet: So when it comes to the military campaign, my assessment is that this, this is gonna go on for some days, perhaps weeks. But it's hard to see it extending too much longer, for a couple reasons. From a US perspective, you have to keep in mind what I call the three Ms, munitions, markets, and midterms.
Clare Kim: Okay.
Derek Chollet: And munitions, starting with that.
Clare Kim: Yeah.
Derek Chollet: This is a math game, and the US has an abundant amount of munitions, missiles and other sorts of ordnance that they're using against the Iranians, but then they're also using to defend Israel, Gulf States. And our partners also have finite munitions. We have a lot, but we don't, we can't do it forever. And it's a numbers game, where the Iranians are, are also have a lot of munitions, and they're trying to use those against the US and, and our partners. All of our strikes are about making that harder to do, taking out launchers, taking out storage sites, taking out the missiles. But in, in the same way the June war ended mainly because both sides had an incentive to stop throwing punches at one another, because of the supplies running low. So I think a similar dynamic could be in effect here, where at some point... And the US has some control over when it defines success, because in some ways (laughs) there's been a lot of rationales given for this campaign, and so there is some flexibility for the US to be able to stand up and say, "Mission accomplished. We've done enough to... We've weakened the regime. We've made it harder for Iran to project its power in the region, so now Iranian people, over to you. And oh by the way, Iranian regime, those of you who are left, if you step outta line, we reserve the right to go back in and smack you, and which we have the capability to do." So I think, uh, there's a lot of flexibility, so, but the munitions is gonna be something that folks are already keeping a close eye on-
Clare Kim: Okay.
Derek Chollet: ... that you have to watch. Markets. The consensus seems to be if this is a short campaign, m- markets can kind of absorb the blow. It's gonna be fine, that there's some turbulence, some up and down, but no lasting damage.
Clare Kim: Mm-hmm.
Derek Chollet: But as this goes on, you will expect to see more market impacts, which are gonna change the calculus inside the United States and elsewhere about whether this is working or not, 'cause the costs are gonna grow.
Clare Kim: Mm-hmm.
Derek Chollet: Okay? So keep an eye on that. Again, the consensus seems to be a couple weeks, this'll be fine, but beyond that, real market impacts. And then midterms, which is really about politics. In the Un- in the United States, the support for the, the campaign thus far is pretty tenuous, right? There's a lot of questions about what's going on. I think that can hold for a while, particularly if things seem to be improving a bit on the ground. Iranian a- counterattacks seem to be abating. There's more visible signs of success on the ground in terms of the campaign against Iran. Perhaps you're seeing the Iranian people rise up in a way. So that could help the politics a bit, but I think short of that, I expect the political support for this to become even more tenuous over time, particularly if you see more concerns about munitions and more concerns about market impacts. Which then, to me, leads me to think that within a week's time, maybe two weeks' time, if this is still going on, there's a lot more talk of winding it down. Moreover 'cause it's not just our considerations. We may have... We have more munitions than anybody else. But our Gulf partners don't, and the country that has been the most attacked thus far by Iran is the UAE. By hundreds and hundreds of missiles and drones, the UAE has been the targeted more than the Israelis have, and they don't have infinite supply. So at some point, they're gonna start running out and feel vulnerable.
Clare Kim: Mm-hmm.
Derek Chollet: And be asking, you know, "Can we start to wind this down and declare mission accomplished and move on to the next thing?" So for that reason, I still project this is a days, at most weeks campaign, and then we're on to the next phase about what the future of Iran looks like.
Clare Kim: Right. Okay. And we can have that conversation then.
Derek Chollet: Yes.
Clare Kim: Yeah. So you classify this as an operation, a military operation. Can you, uh, sorta paint a picture for us? How different is this from the invasion in Iraq?
Derek Chollet: Well, it's very different in the sense of this is primarily being done by through the air. This is a Naval and Air Force operation. There are no US ground troops involved. There are no US, uh, or Israeli military troops involved. There might be some Israelis on the ground for all we know, but they're, this is, this is not Iraq. This is not, uh, we, we're gonna have a massive invasion of troops. We have seen in the past, I mean going back to Kosovo in 1999 or Libya in 2011, air campaigns-
Clare Kim: Mm-hmm.
Derek Chollet: ... that have been quite extensive, that have been trying to achieve multiple goals, but one of them to weaken a regime and bring about regime change. And one thing we've learned through history is it's very hard to bring about regime change through the air alone. So it could be that... Uh, I think that the plan is, is that they're gonna weaken the regime sufficiently, but then as the US administration has said, it's gonna be over then to the Iranian people to take over once that regime is less able to oppress the people, to take over. The challenge, however, is that what air power can do not to nothing about is guns. And right now, the regime has all the guns. And so if this moves into sort of on-the-ground regime change in terms of the Iranian people rising up, as they did in January-
Clare Kim: Right.
Derek Chollet: What we saw in January was a r- was a significant protest against the Iranian government, and the Iranian government doing what it knows how to do best, which is slaughter its people, and there were thousands of Iranians killed at the hands of the regime's security forces. So that's a danger here, and so another analogy I think of is 1991, after the Gulf War with Saddam, the people of Iraq, many of the people of Iraq started to stand up against Saddam. The US had conducted a vigorous air campaign and ground campaign to get Saddam out of Kuwait. People rose up and then those, a lot of those folks were slaughtered by Saddam in April of 1991. So that's something we have to be watchful for.
Clare Kim: Sure. So you mentioned the political landscape that has gotten to this point, and sort of that altitude that it hit earlier this year, last week, the death of Iran's supreme leader.
Derek Chollet: Yep.
Clare Kim: How does that change the situation inside Iran and across the region, and much more broadly if you pull that out, what should we expect in terms of leadership from-
Derek Chollet: Sure.
Clare Kim: ... from Europe and, and abroad?
Derek Chollet: So the magnitude of the death of the supreme leader cannot be overstated, because he, he's only the second supreme leader of the Islamic Republic since 1979. He was the world's longest serving dictator. He'd been in power since 1989. Uh, he had been... There's been a long discussion about his leaving office because of age. I mean, he was 86 years old and in, in, ear, ill health, so something else we were anticipating was this change in leadership, that came in a perhaps unexpected way, but we know that sooner rather than later, there would be a different leader of Iran. But going back further, he's the second supreme leader in the history of the Islamic Republic. He's the fourth monarch-like figure in Iran in a century. So these transitions are pretty rare inside Iran. So what comes next? It's really anybody's guess at this point. I mean, there is a question of whether the regime holds onto power, the clerical regime stays in charge, whether there's some kind of internal struggle between the security services and the c- and the clerics, whether the opposition in fact rises up. These are the unknowns that we are confronting, which is why I believe that the most likely outcome is an Iran of chronic instability moving forward, in which the, the, the future of Iran is not quickly resolved. The question for us, for Iran's neighbors, for the United States, for investors (laughs) is does that Iranian instability remain something that is more like an implosion and it keeps Iran preoccupied, but basically does not metastasize outside of Iran, or is it more of an explosion?
Clare Kim: Mm-hmm.
Derek Chollet: And the ramifications of that instability in Iran spread, in the same way that we saw the meltdown in Syria 10 years ago, or Libya 15 years ago, metastasize and destabilize countries around it, and create refugee flows, and all sorts of other problems. That's the great unknown is, is if Iran remains unstable, as I think it will for some time, what is the magnitude of that instability and the ramifications of it?
Clare Kim: Yeah. And we'll get to sort of the ripple effects for the markets and how they'll likely react and sort of the base outcomes there. But in your report to clients that you sent out this week, you placed the likely of regime collapse, or what you call irreversible degradation, at 65%. Can you talk about how you arrived at that number and what indicators would lead you to revise that base case?
Derek Chollet: So th- the Islamic Republic will never be the same. It is going to come out of this campaign, whenever it ends, and I'm happy to talk about how I think it could end-
Clare Kim: Mm-hmm.
Derek Chollet: Uh, it's gonna come out weaker, and I do not foresee Iran being able to reconstitute the kind of capability it had prewar, even as diminished as that was, anytime soon. The Israelis, the United States, our Gulf partners are not gonna allow Iran to present the same threat in the region that it presented a week ago.
Clare Kim: Mm-hmm.
Derek Chollet: So by definition, the regime is gonna be weaker, and much of the air campaign, the targeting has been conducted to weaken the ability of the regime to project power in the region and oppress its people at home.
Clare Kim: Mm-hmm.
Derek Chollet: So taking out key facilities, key noes of command and control, key capabilities throughout the country to weaken the regime. Now, obviously the goal, the overall goal, as stated by Israel and the United States, is to, for that military action to enable a different kind of regime to take charge. Yet to be seen whether that's gonna be possible. But we know that the regime will be weaker. I think that as we learn more about the targeting, as we learn more and we see what's happening on the ground, and the impacts, and whether there's fissures within the regime, and whether the people of Iran start to rise up, that's gonna cause the percentages to go up in terms of regime collapse or further weakening of the regime. The things we'll be watching to watch that percent go down of likelihood is if the regime maintains its consolidation, which right now, it has remained fairly unified. We've not seen much evidence of breakdown within the regime. Or if they're seen as, as basically on the defensive when it comes to the internal struggle within Iran, as the people of Iran rise up, if they do, to try to have more of a voice in the future of their own lives.
Clare Kim: Let's turn to sort of that short-term impact for people and businesses, so what changes do you think we're gonna notice in the near term? You know, with airport closures that are ongoing, energy prices, insurance costs, trade routes, right? So-
Derek Chollet: So all of those, we are, we're already living with it, right?
Clare Kim: Mm-hmm.
Derek Chollet: And there's a question of how long that goes, right? How long can the airspace, uh, around these key transportation nodes in Dubai, and Abu Dhabi, and Doha, how long can those remain closed or very, very limited? What are the impacts of some of the Iranian counterattacks? I mean, so f- They are going after energy infrastructure. So far, they have not been terribly successful in try- in doing lasting damage to that energy infrastructure, but they've certainly delayed it or certainly interrupted it, so we see LNG being shut down coming out of Qatar, for example, which will have significant market impacts. Most of our colleagues at JPMorgan Research, on energy markets, say that there's enough supply, particularly of crude oil, on the market that this could go on for the better part of three weeks and things should be okay in terms of energy prices. We've seen Brent crude go up into the mid-80s now, and that was more or less expected. What our colleagues (laughs) warn, though, is that if this goes on much beyond three weeks, then you're gonna start to see big spikes, and you could see something that goes into the, you know, 115, $120 of barrel range. And that will have market impacts all around the world. But we're also seeing already how some countries are more affected than others. The United States might be relatively resilient from these energy impacts, but for example Korea has been going through a pretty tumultuous market in the last few days because of their reliance, particularly on LNG from the Gulf, that they're no longer getting. So it's still early days, but I think the r- the short-term disruption is profound, and it's hard to see that improving in a dramatic way as long as the confrontation is underway. All that said, I remain, in the medium to long term, pretty bullish on the region, because, uh, again, I come at this of if you think of all of the change that the Middle East has seen-
Clare Kim: Yeah.
Derek Chollet: ... in the last decade, in terms of investment, and becoming a transportation, financial, tourism, AI hub of the world, all the changes in Saudi, UAE, and Qatar, the dramatic change we've seen in that part of the world, the one country that has been doing the most to undermine that has been Iran.
Clare Kim: Okay.
Derek Chollet: Right? If you think there are two types of people in the Middle East, this is grossly oversimplifying, but two types. There's builders and there's destroyers. And so much of what we've seen in the region has been backed by builders, and Iran has been principally a destroyer. That regime has not been about trying to build a better Middle East for all. It's been about principally destroying Israel and d- and destroying (laughs) the United States. So if that regime changes fun- outright or is at least weakened, that changes the security dynamic in the region, for the better I think, which then enables the kind of change we've been seeing over the medium to long term, even though we're gonna have a lot of short-term disruption.
Clare Kim: Yeah. And then let's actually play that out for a little bit, just, you know, looking beyond, into the macro through this year for the broader economy and for markets, the scenarios that could play out, right? You, you touched on them earlier, and we're looking at sort of the short-term possibilities, h- like the here and now, but how drastically does this change the 2026 outlook for markets for our econ calls?
Derek Chollet: So th- thus far, I don't think it changes it much, because, uh, th- we're still in that short-term window-
Clare Kim: Okay.
Derek Chollet: ... where there's a lot of disruption for sure, but I don't think anything's happened yet, as we speak today-
Clare Kim: Mm-hmm.
Derek Chollet: ... (laughs) and I think in this mi- this is changing minute by minute, but as we speak at this moment, that is a lasting disruption, in a negative way. I do think that as I said earlier, an Iran that's less able to export instability is net, net good for the region over the medium to long term, even if this short-term turbulence is upon us. But the question is, you know, obviously Iran starts to, uh, score some successes against energy infrastructure in the Gulf, right? They get lucky and they take out... Uh, you know, there's a mass casualty event of some kind, you know? They, they hit something that, where a lot of people are, are killed. Or, Iran, in the aftermath of all this, starts to unravel or spin out of control in a way, like a Syria or like a Libya, where the conflict or the instability metastasizes throughout the region. From where I see things today, given the geography of Iran, given where it sits on the map-
Clare Kim: Yeah.
Derek Chollet: ... given that the country's... You know, there's... It's bordered by water on one side and then Pakistan, Turkmenistan, Afghanistan, Turkey, Azerbaijan. I don't see the vectors for refugee flows right now. I don't see... I mean, it could be a unstable Iran, but if that instability stays within Iran, it should not have broader effects. Also 'cause Iran has not been particularly well connected to the global economy-
Clare Kim: Mm-hmm.
Derek Chollet: ... in recent years, right? So the ripple effects of Iranian instability, if that is remains contained, should not be that profound. But that of course... You know, we could be wrong, and that could change, and you could see an Iran fully melt down, Iran becoming like a Syria where it becomes a competition for influence by countries in the region, the United States, Israel, and everyone sorta backing their factions on the ground. That could be a recipe for longer-term instability. We haven't seen that yet.
Clare Kim: So, it's still too early to talk about obtaining stability for the region. But let's say Iran eventually stabilizes, right? And-
Derek Chollet: Yeah.
Clare Kim: ... reengages with the global markets. What does that mean for perhaps opportunities or just, uh, outcomes for the Middle East and the broader economy?
Derek Chollet: So I think this is an area... It's the upside scenario, that particular in a moment of war, it's very hard to sometimes think about, given all the uncertainty and the unknowns out there. But yeah, you kinda have to th- think of this. Iran, prior to 1979 and the Islamic Revolution, was one of the closest energy partners of the United States. It was one of the closest defense partners of the United States. It was a partner of Israel's. Now, it was a very different Middle East then of course. I mean, the Persian Gulf was not what it is today in terms of UAE, Saudi, Qatar. But in Iran, given that 90 million people, well educated, vibrant, innovative population, a country that sits in an important part of the world with abundant natural resources. So an Iran that comes in from the cold could be very beneficial (laughs) for the United States, for Israel, for Gulf partners as well. An Iran that is not, its principal motive is not to undermine those around it, or, or assert its influence in a way that's making regimes weaker throughout the region, but an Iran that's, that wants to be part of a, of a, of a solution, right? That, that's, that's very interesting. I mean, it changes energy markets. It changes the political puzzle. I mean, the defining piece of the Middle East, really in the last 50 years, has been Iran's role in working against trends in the region or trying to influence trends in a negative way by propping up proxy groups and trying to take advantage of instability elsewhere for its own interests. None of that has really served the people of Iran, which is why you see the people of Iran so angry and, and rising up, because they, they are looking at a country that's spent billions and billions of dollars propping up proxy groups throughout the region that don't, aren't about improving the lives of everyday Iranians or building a nuclear weapons program that isn't about improving the lives of everyday Iranians, and they're angry about that. That's in part why they're rising up. So I do think we need to, obviously first and foremost, remain vigilant about the downside risk all the time. Keep an eye on, on the upside potential here, because I do think it's profound over the medium to long term.
Clare Kim: Okay. I think that is a good place for us to wrap up. We'll leave it there.
Derek Chollet: Always good to end on a positive note.
Clare Kim: And for sure-
Derek Chollet: (laughs)
Clare Kim: L- l- for sure-
Derek Chollet: Particularly in this moments.
Clare Kim: Especially-
Derek Chollet: Right.
Clare Kim: Yeah, especially-
Derek Chollet: Yeah.
Clare Kim: ... this week. Um, I know you're getting in front of clients, you're meeting with many functions across the firm, so, and, you know, obviously so many folks are, are tuning in to all the reports that you continue to publish, so-
Derek Chollet: And we'll continue to put stuff out.
Clare Kim: Of course.
Derek Chollet: Yeah.
Clare Kim: Yeah. So thank you for joining and continuing to share your insights.
Derek Chollet: Sure. Thanks.
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