Conflicting news flows from both the Trump Administration and Iran continues to cloud the immediate outlook for the conflict now centered on the Strait of Hormuz. At the same time, the fundamentals in the confrontation have not changed from that discussed in earlier notes, and it hence remains the very strong base case that a shallow deal will struck shortly in which first Iran’s agrees to reopen the Strait in return for lasting sanctions relief from the United States, and then some form of negotiated process concerning the Iranian nuclear program commences.
The precise timing remains uncertain, as it likely depends ultimately on – as he said himself – President Trump’s “feeling in his bones”, though as discussed in an earlier note, getting to a deal ahead of or around the summit with Xi Jinping with few other deliverables on May 14-15th is likely to carry some importance with the President.
The basic analytical framework for this conclusion remains unchanged, as the inevitability of a deal is ultimately driven by Donald Trump’s rising political strains at home, and the inability of the Coalition to both military address Iran’s asymmetric retaliation against the Gulf region and the Strait of Hormuz, or foment general regime instability inside Iran. Eventually – and soon – Donald Trump will have to cut the deal to try to avoid very painful potential political outcomes for his party come the November midterms.
Time is not on his side in this conflict, even if the Iranian economy is surely also suffering. This, however, just doesn’t matter so much in the short-term for a regime like in Iran willing and able to gun down thousands of its own citizens to keep control.
A deal of the shallow nature described above will make the launching of this conflict a strategic mistake by Donald Trump, as it will leave an admittedly economically damaged Iran with more financial resources available, a latent deterrence from being able to close the Strait also in the future, and quite likely also a higher degree of internal regime cohesion.
This is a bad political and strategic outcome for President Trump, as well as for Israeli Prime Minister Benjamin Netanyahu also facing Israeli voters in the coming months. A far more damaging evaluation of this war, however, emerges from the recent reports in the Washington Post about how Iran managed to strike far more U.S. military installations in the Gulf region than previously announced, and how the CIA assesses that Iran even after five weeks of all out bombing retains 70 to 75 percent of its pre-war missile stock and mobile launchers.
The latter is an assessment, so surrounded by a high degree of uncertainty, and we know little about Iran’s capacity to produce more missiles in the future. Yet, the picture that emerges is one of the U.S. armed forces – despite a $1trillion dollar and rising budget – being incapable of protecting its regional installations – though fortunately to a very large extent the lives of service personnel – against Iranian strikes, and unable to solve arguably its most pressing military task in the conflict in degrading Iran’s missile launching capability.
This outcome would – if validated – represent not just political and strategic failure in this war of choice, but also to a potentially high degree an outright military failure.
This will at a minimum inform all future U.S. presidents (and Israeli prime ministers) about the true prospects of success when striking Iran militarily, and will presumably raise the future threshold for taking such decisions, or serve to keep future strikes at a far lower and more precision targeted scope. Recalling the longer-term fiscal challenges facing the United States, more fundamental questions about the utilization of America’s defense budget though seem both politically likely and warranted.
With events in Iran hence seemingly somewhat range-bound in both time and scale, it is become far more important for investors and observers with exposure to and an interest in current geopolitical issues to pay close attention to ongoing events in Ukraine, where the fighting remains intense, but slowly tilting in Ukraine’s favor.
When these developments begin to affect the decision making of Vladimir Putin and could potentially lead to actually meaningful peace negotiations remains is uncertain. Following Russia’s fiscal gains from the war in Iran, necessary changes in Russia’s negotiating position look unlikely in the near-term (e.g. in 2026), but increasingly inevitable come 2027.
As highlighted by Ukraine’s ability to directly threaten Russia’s May 9th Victory Parade in Moscow’s Red Square – the pinnacle of Muscovy projections of military power since the end of World War 2 – it is now Kyiv that has the initiative in the strategic drone and missile war over BOTH Russia and Ukraine. While Russian strikes on Ukraine continues, the Ukrainian “cost efficient interception rates” of both drones and slower moving missiles are rising again to about 90 percent (much lower for ballistic missiles), and it is Ukrainian long-range drones and missiles that are expanding their target range across now all of Western Russia. Increased deployment of AI targeting assisted drones by Ukraine is also expanding in the rear – 20-150km behind the frontline – targeting Russian air defenses, logistics and command posts.
This development is the direct outcome of recent Ukrainian technological innovation with the help of a number of Western companies, and the scaling up of the production of Ukrainian designed drones across a number of allied European countries – it is in other words likely to continue to scale up in the months ahead.
The result has been the well published attacks on Russia energy infrastructure, but arguably more importantly an increasing total stalemate on the frontline, where earlier incremental Russian territorial gains have now – despite accelerating manpower losses of ~35,000/month – slowed even more (figure 1).
Figure 1 Russian Net Territorial Gains in Ukraine January 2024 – April 2026, km2/month
Source: BlackBird Group
Care must be taken in assuming that rising Russian military losses, fewer territorial gains in Ukraine, and rising economic infrastructure damage inside Russia will immediately sway the thinking of President Putin, given that his political (and plausibly physical) life is closely associated with successful outcome of the war he launched against Ukraine, and that simply keeping the war going may be both easier and less risky for him in the near term than voluntarily trying to end it.
Yet, with European financial and military support for Ukraine unwavering going forward, and Ukraine gaining the military initiative back from Russia, the futility of the war may eventually begin to weigh on even the notoriously submissive Russia society and its self-interested economic elite. Rising Russian domestic repression and information control certainly suggests concerns about domestic political stability are rising in the Kremlin. As noted also in earlier notes, Ukraine will not lose this war, and it looks increasingly likely that Kyiv is slowly gaining the military upper hand, too, so as to be able to end it mostly on its terms.
A scenario in which Ukraine gradually gains the militarily upper hand against Russia, but Putin resists ending the war, leads to an unpredictable geopolitical situation, as the source of uncertainty in this war shifts from asking “what happens to Ukraine?” to asking “what happens to Russia?”. Ukraine gaining the ability to end the conflict on more favorable terms is unambiguously a positive outcome for Kyiv and all of Europe, and likely to amount to a general positive sentiment shock that could unleash a decline in regional savings rate and associated higher household consumption and economic growth in the following number of quarters.
As uncertainty shifts to Russia and its commodity supplies and large nuclear arsenal in this scenario, however, global geopolitical risks may not – as in Europe – decline. This makes the current trajectory of the war in Ukraine an increasingly likely positive shock to Europe, but one with an uncertain and possible elevated global geopolitical risk impact.
Jacob
