Iran’s main stock market index fell 3% on Saturday, reflecting concerns about escalating conflict with Israel that may result in a prolonged and potentially devastating war. Investors are anxious that increased fighting with Israel would have repercussions on vital Iranian sectors like energy, manufacturing, and services.

Growing tensions are partially a result of the assassination of Hamas leader Ismail Haniyeh in Tehran, for which Iran blamed Israel. Israel has not commented publicly on the attack.

In a recent statement, a spokesperson for Iran’s Foreign Ministry said that Iran does not seek regional escalation but that Israel “must be punished to prevent further instability.” Hossein Taeb, an adviser to the Iranian Revolutionary Guards chief commander, said revenge for Haniyeh’s assassination would be “unpredictable and surprising.”

On Monday, Iran issued a flight notice to pilots in central, western, and northwestern Iran, warning of dangers in the area, potentially portending an imminent attack.

Iran finds itself in a complicated strategic position, faced with avoiding escalation and economic fallout while retaliating for Haniyeh’s assassination.

Dr. Mazen Alougili, a professor of international relations at the University of Jordan, said that Iran would have to use a different tactic than it did in April when it sent hundreds of drones and missiles at Israel in retaliation for Israel’s attack on an Iranian Consulate in Damascus. Israel and its allies managed to shoot down nearly all the incoming weapons in that attack.

“I expect Iran to try to target an Israeli asset abroad, using something like an explosive drone, or maybe a small attack with specialized forces,” Alougili told The Media Line. “Something with a destruction equivalent to the explosion that killed Haniyeh and that ideally the Iranians could ‘neither confirm nor deny,’ but would be the main suspect like they believe Israel to have done.”

While current headlines about Iran focus on the conflict with Israel, internal protests against the Iranian regime continue to shake the country.

According to the Foundation for Defense of Democracies, at least 878 such demonstrations have taken place so far in 2024. Alougili said that Iran may try to use Haniyeh’s killing to justify violence against internal critics.

“What matters to the Iranian government is to say they’ve done something regarding what happened to Haniyeh,” he said. “I expect the Iranians to try to attack Israeli assets abroad, but they will also crack down internally, as they believe Israel placed the explosion that killed Haniyeh with the support of Iranians.”

A reaction of this sort could allow Iran to save face without provoking further Israeli retaliation, Alougili said.

US Secretary of Defense Llyod Austin said that the US “will certainly help defend Israel” against any Iranian attacks.

Geopolitical expert Alexander Portnoy told The Media Line that the situation remained volatile despite reports of Iranian intent to avoid a full-scale war. He said that the general public was unaware of Iran and Hezbollah’s immense military capacity.

Israel and its allies had the upper hand technologically, Portnoy said. “Still, this advantage doesn’t guarantee absolute success, since the human factor, combined with advanced technologies and sophisticated strategy, can dictate the final result,” he explained, warning against underestimating Iran and Hezbollah.

Portnoy said that Israeli military doctrine dictated that a fight on enemy soil was preferable to one on the homefront. That doctrine may lead Israel to preemptively strike Iran if it anticipates a particularly destructive Iranian attack.

“Israel has a bank of strategic targets in Iran and is able to make this analysis,” he said. “However, Israel should take into account that the volume of the initial preemptive action combined with the corresponding suppression of enemy air defenses could be reduced by the surviving Iranian air defenses.”

Local markets in Israel have also been affected by the looming escalation.

On Sunday, the Tel Aviv Technology Index experienced a 4% drop, and Israel’s 10-year bond yield fell 18 basis points to 4.756%. The possibility of an Iranian attack signifies the opening of another front, which would have serious economic consequences.

Mauro Seiner, an experienced private financial consultant in Israel, described the dip in the Israeli market on Sunday as “a passing thing.”

“The Israeli economy is heavily dependent on the global economy as an exporter of technology, so this could impact the Israeli economy much more. If the global economy is healthy, the impacts of current war expenditures will be minimized,” he told The Media Line.

That analysis is based on his conviction that Iran will not engage in direct war with Israel.

“If Israel loses the war, economic concerns become secondary to survival issues,” Seiner said.

An escalating conflict will also have severe consequences for Lebanon, including economically. Even before the war, the World Bank described Lebanon as a country facing a “protracted crisis.”

A full-blown economic crisis in Lebanon began in 2019, leading to political, social, and health crises as well. Lebanon’s poverty levels have tripled over the past decade, with 44% of the total population in poverty and galloping inequality between citizens.

The country’s economy is rapidly dollarizing, leaving those who earn in Lebanese pounds rather than dollars exposed to escalating inflation. As Lebanon prepares for an entrenched war throughout the country, it’s the poorest citizens who are expected to be hurt most.

More than 96,000 people in Lebanon have been displaced as a result of war between Hezbollah and Israel, and 60,000 are in hard-to-access areas, adding to the strain on Lebanon’s institutions and infrastructure.

Across the border, about 60,000 Israelis have been evacuated from their homes in northern Israel as a result of the conflict. “The war has further worsened the already unstable situation” in Lebanon, Boaz Shapira, a researcher at the northern Israel-based Alma Research Center, told The Media Line.

He said the conflict had impeded Lebanon’s attempt to implement economic reforms. These reforms are a prerequisite for receiving many types of international aid, which will be all the more needed if Lebanon faces more intense conflict with Israel.

“In case of an all-out war, all of the economic sectors in Lebanon will probably sustain massive damage that would take a lot of money and time to fix,” he said.

The precarious economic situation and low standard of living in Lebanon is a boon for Hezbollah, Shapira said. “Hezbollah, being a well-funded organization, benefits from this situation as it is able to provide for people, radicalize them, and recruit them,” he explained.