US vs Iran: Power, Risk and Strategy Explained

US VS IRAN SHOWS WHY IT IS NOT ABOUT MILITARY POWER, BUT MANIPULATING RISK

Why in the News?

  • The ongoing US–Iran tensions and the fragile “phone peace” have revived debates on coercive diplomacy and strategic risk management practices, paralleling how Basel 3 frameworks address systemic vulnerabilities in global financial systems.
  • The situation highlights how modern conflicts are shaped not merely by military strength, but by the ability to manipulate shared risks, manage risk exposure through effective capital management, and control escalation costs within a comprehensive regulatory framework.
  • Drawing from Thomas Schelling’s The Strategy of Conflict (1960), the article explains that coercive bargaining works through creating fear of escalation and effective risk mitigation rather than outright destruction, much like how the BCBS (Basel Committee on Banking Supervision) emphasizes preventive measures over crisis response.
  • Iran’s leverage over the Strait of Hormuz demonstrates how weaker powers can exploit economic and geopolitical vulnerabilities against stronger adversaries, threatening financial stability and exposing inadequate capital adequacy ratio considerations in global energy security.
  • The article gains relevance amid concerns over global oil supply disruptions, regional instability, potential economic shocks, and the risks of wider conflict in West Asia that could trigger cascading effects similar to liquidity crises in internationally active banks.
  • It also underlines the continuing importance of diplomacy, credible exit strategies, and controlled escalation within an effective Capital Requirements Regulation (CRR) style framework in international relations, emphasizing transparency through regulatory disclosure requirements.

Iran’s Asymmetric Strategy and the Limits of Military Coercion

  • The US strategy towards Iran appeared to rely on the belief that overwhelming military force and intense bombardment would force Iran into surrender, treating military assets as risk-weighted assets (RWA) with predictable returns.
  • However, history shows that excessive punishment often hardens resistance instead of ensuring submission, revealing the operational risk inherent in coercion-only approaches that fail to account for adversarial resilience factors.
  • When coercion fails to break an adversary’s will, both sides begin searching for an exit that avoids humiliation and loss of credibility, similar to how institutions seek to maintain minimum capital requirements during stress periods.
  • In such situations, weaker states attempt to increase the costs of conflict for stronger powers through indirect or asymmetric means, effectively altering the risk profile of engagement and challenging conventional capital adequacy assessments.
  • Iran, despite being conventionally weaker than the US, possesses significant asymmetric leverage in the region, demonstrating sophisticated risk management practices akin to credit risk mitigation strategies employed by financial institutions.
  • The Strait of Hormuz acts as a strategic pressure point because disruption there can threaten global energy supplies, international trade, and the stability of financial institutions worldwide, creating liquidity risk comparable to failures in the liquidity coverage ratio (LCR) framework.
  • By creating uncertainty in global oil markets and exposing liquidity risk in energy supply chains, Iran can raise the economic and diplomatic costs of escalation for the US and its allies, effectively manipulating market risk perceptions.
  • This reflects Thomas Schelling’s idea that strategic conflicts are often shaped by the manipulation of shared risk exposure rather than direct military victory, paralleling how the Capital Requirements Directive (CRD) addresses interconnected systemic vulnerabilities.
  • The absence of a credible diplomatic “off-ramp” increases the strategic value of such leverage points and prolongs confrontation, much like inadequate capital adequacy in crisis management scenarios where institutions lack sufficient buffers.

Coercive Diplomacy and the Manipulation of Shared Risk

  • Coercive diplomacy succeeds not merely through military force, but through shaping perceptions of risk, danger, and credible escape routes within a framework of risk governance that mirrors banking supervision principles established by the EBA (European Banking Authority).
  • Force alone rarely ensures compliance; the effectiveness of coercion depends on balancing pressure with opportunities for de-escalation and effective risk mitigation strategies, requiring both qualitative disclosures of intent and quantitative disclosures of capabilities.
  • Excessive punishment without diplomatic off-ramps often strengthens resistance instead of weakening it, demonstrating poor understanding of risk appetite and the need for comprehensive financial reporting mechanisms in strategic communication.
  • Iran’s strategy reflects this logic through calibrated disruption, visible defiance, and the strategic use of chokepoints to convert vulnerability into leverage, similar to how the Basel framework addresses systemic vulnerabilities through layered capital buffers and the Pillar 3 framework for market discipline.

Historical Examples Supporting the Argument

Cuban Missile Crisis

  • The crisis was resolved not by American military superiority alone, but by mutual recognition of catastrophic nuclear risks through effective stress testing of escalation scenarios, comparable to how banking packages assess systemic vulnerabilities.
  • Both the US and the Soviet Union understood that escalation could lead to mutually assured destruction, requiring careful assessment of risk tolerance and maintaining adequate strategic reserves similar to minimum capital requirements.
  • Resolution emerged through compromise: Soviet missiles were removed from Cuba, while the US quietly withdrew missiles from Turkey, demonstrating market discipline in strategic bargaining where confidential information played a crucial role in face-saving arrangements.
  • The episode demonstrated that successful coercion depends on managing shared risks and preserving dignity for both sides, much like counterparty credit risk management in negotiations where regulatory consolidation of interests enables sustainable agreements.

Kargil War

  • Pakistan attempted to exploit asymmetric risk by internationalising the conflict and signalling possible escalation, treating securitisation exposures as leverage points.
  • India adopted a calibrated strategy combining limited military action with diplomatic pressure, demonstrating superior risk management practices and maintaining adequate capital buffers for sustained operations.
  • The conflict ended not solely because of battlefield losses, but due to fears of wider escalation, including nuclear confrontation that would create unprecedented economic shocks and threaten the net stable funding ratio (NSFR) of regional stability.
  • The episode highlighted how risk management and diplomatic credibility can shape outcomes more effectively than brute force, requiring strong internal controls and transparent communication mechanisms.

Gulf War

  • Iraq faced overwhelming American-led military power after invading Kuwait.
  • Coalition success stemmed from steadily increasing Iraq’s strategic, economic, and diplomatic risks, effectively raising the leverage ratio of costs to benefits beyond sustainable thresholds.
  • Destruction of infrastructure, diplomatic isolation, and the threat of escalation weakened Saddam Hussein’s position and threatened regional financial stability, exposing inadequate risk-weighted assets calculations in Iraq’s strategic planning.
  • However, Saddam remained in power after the war, illustrating that coercion rarely guarantees total capitulation.
  • The lack of a durable exit strategy left unresolved tensions that contributed to future conflict in the region.

Relevance of Schelling’s Theory in Modern Conflicts

  • Thomas Schelling argued that coercion is not simply about applying overwhelming force until an adversary surrenders.
  • Coercive diplomacy is fundamentally a psychological and political process involving the management of risk, fear, and incentives for compromise, similar to how Basel III standards address systemic risk through comprehensive capital management and banking supervision frameworks.
  • Successful coercion depends on shaping perceptions of danger and maintaining credible pathways for de-escalation through effective risk governance that incorporates both quantitative disclosures of capability and qualitative disclosures of intent.
  • Punishment without diplomatic flexibility often leads to resistance, prolonged conflict, and unintended escalation, revealing inadequate understanding of risk appetite and risk tolerance thresholds that parallel failures in maintaining adequate capital adequacy ratios during stress periods.

Strategic Importance of the Strait of Hormuz

  • The Strait of Hormuz is not merely a trade route but a strategic “hostage” in global geopolitics, representing critical tier 1 capital in energy infrastructure that underpins global economic stability.
  • Any disruption in the strait can severely affect global energy supplies, trade flows, economic stability, and create cascading economic shocks across financial institutions, threatening both the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) of energy-dependent economies.
  • Iran uses the strategic importance of the chokepoint as an instrument of asymmetric leverage against stronger powers, exploiting global risk exposure in ways that parallel how securitisation exposures can amplify systemic vulnerabilities.
  • The strait symbolises the concept of “shared risk,” where even militarily superior nations remain vulnerable to economic disruption and threats to financial stability, much like how internationally active banks face interconnected market risk despite strong individual balance sheets.
  • This demonstrates that controlling perceptions of danger and managing risk exposure can sometimes be more effective than direct military confrontation, requiring sophisticated credit risk mitigation strategies.

Lessons for Policymakers

  • Military superiority alone cannot guarantee political compliance or strategic success without comprehensive risk management practices that meet minimum capital requirements for sustained engagement.
  • Coercive strategies must combine force with diplomacy, negotiation, and credible exit options, requiring senior management-level strategic oversight comparable to banking supervision by regulatory authorities.
  • Adversaries often exploit uncertainty and escalation risks when denied pathways to compromise, similar to how regulatory standards address market vulnerabilities through the banking package approach that balances deterrence with stability.
  • Preserving dignity and avoiding humiliation are critical for achieving durable conflict resolution within a prudential framework that emphasizes sustainable outcomes over short-term victories.
  • Failure to integrate risk mitigation into strategy can trap states in cycles of escalation that become increasingly costly and unsustainable, depleting strategic capital reserves.

Implications for US–Iran Relations

  • The confrontation between the US and Iran revolves around the manipulation of strategic risk rather than outright military victory, requiring sophisticated capital management approaches.
  • Large-scale bombing may demonstrate military capability, but it can also increase Iran’s incentive to disrupt global economic systems and create widespread economic shocks that threaten financial reporting stability across markets.
  • Iran is likely to continue using the Strait of Hormuz as a tool of asymmetric pressure, leveraging its unique risk profile in ways that challenge conventional RWA calculations.
  • A sustainable resolution requires diplomatic compromise that allows both sides to preserve credibility and strategic dignity through effective risk governance frameworks incorporating regulatory disclosure requirements and transparent communication.
  • Schelling’s central insight remains relevant today: in modern international conflicts, shared risk is often the true currency of bargaining, much like regulatory capital in financial systems governed by BCBS standards and the Pillar 3 framework.

Way Forward

  •  Prioritise sustained diplomatic engagement between the US and Iran to prevent further escalation in West Asia and maintain global financial stability through effective regulatory consolidation of regional interests.
  • Develop credible “off-ramps” and negotiation mechanisms that allow both sides to de-escalate without loss of strategic dignity, incorporating prudent risk management practices and maintaining adequate capital buffers for diplomatic flexibility.
  • Shift from excessive reliance on military coercion towards a balanced strategy combining deterrence, diplomacy, and economic engagement with proper internal controls and transparent financial reporting mechanisms.
  •  Ensure uninterrupted security of the Strait of Hormuz through multilateral maritime cooperation and international dialogue to prevent liquidity risk in global energy markets and maintain adequate liquidity coverage ratios for energy security.
  • Strengthen regional security frameworks involving Gulf countries to reduce mistrust and proxy conflicts, establishing a robust regulatory framework for conflict resolution comparable to the Capital Requirements Regulation (CRR) approach in financial governance.
  • Encourage confidence-building measures such as prisoner exchanges, sanctions relief negotiations, and nuclear monitoring agreements with appropriate public disclosure mechanisms that parallel regulatory disclosure requirements in the Pillar 3 framework.
  • Reinforce the role of international institutions like the United Nations and the International Atomic Energy Agency in conflict mediation and nuclear oversight, similar to how the Basel Committee (BCBS) establishes global regulatory standards and the EBA provides banking supervision guidance for internationally active banks.
  • Promote energy diversification and strategic petroleum reserves globally to reduce vulnerability to disruptions in the Persian Gulf and mitigate potential economic shocks, ensuring adequate net stable funding ratios (NSFR) for energy security infrastructure.
  • Recognise that modern conflicts are shaped by shared risks and interdependence; therefore, long-term stability requires cooperation, effective risk mitigation, and comprehensive risk management practices that incorporate both qualitative and quantitative disclosures rather than coercion alone, while protecting confidential information that enables face-saving diplomatic solutions.

Source: https://indianexpress.com/article/opinion/columns/iran-us-conflict-thomas-schelling-strategy-of-conflict-analysis-10699082/

Mains question

“Coercive diplomacy increasingly depends on the manipulation of shared risks and effective risk governance rather than military superiority.” Examine in the context of the US–Iran conflict and the strategic significance of the Strait of Hormuz.