Iran Conflict: Global Fallout, Currency Risks & a New Era of State Capitalism

A Shifting Global Order: Oil, Currency Volatility, and the Fallout from Conflict in Iran

The escalating conflict between Israel, the United States, and Iran, which began with surprise airstrikes on February 28, 2026, is sending ripples across the globe, exacerbating existing economic vulnerabilities and triggering a complex interplay of geopolitical risks. Beyond the immediate devastation within Iran and the region, the war’s impact is being felt in currency markets, energy prices, and the potential for widespread political instability, particularly in developing economies already grappling with inflation and debt. As analyst Mihir Sharma notes, the crisis isn’t simply about oil; it’s about a fundamental shift in the global economic landscape and the re-emergence of state-driven capital.

Oil Prices and the Currency Squeeze

The most immediate consequence of the conflict is the surge in oil prices. The strikes on Kharg Island, a critical Iranian oil export hub, and the threat of further disruption to shipping through the Strait of Hormuz, have fueled anxieties about supply. According to CNN reporting on March 14, 2026, Iran’s military warned it could target ports and docks in the United Arab Emirates in retaliation for the US strike on Kharg Island, further escalating tensions. This has led to a significant increase in the cost of crude, impacting nations reliant on imports.

Though, the impact extends beyond the direct cost of oil. Sharma highlights a crucial mechanism: the dollar’s dominance in oil transactions. As countries are forced to spend more dollars to purchase the same amount of oil, their currencies weaken. This devaluation effectively reduces purchasing power, making imports more expensive and exacerbating inflationary pressures. For example, the Indian rupee recently hit a record low of 90 to the dollar, diminishing the affordability of goods from abroad, including essential commodities like oil. This currency depreciation isn’t merely an economic statistic; it directly impacts the daily lives of citizens, reducing their ability to afford basic necessities.

Subsidies and the Specter of IMF Intervention

Many governments attempt to shield their populations from volatile fuel prices through subsidies. However, these subsidies come at a significant fiscal cost. As oil prices climb, the financial burden on governments increases, straining budgets and potentially leading to debt crises. Sharma points to the historical precedent in India, where sustained periods of high oil prices have triggered economic turmoil and, in some cases, political upheaval. The 1970s OPEC oil shock, the 1990s crisis following Iraq’s invasion of Kuwait, and the period around 2015 all saw India grapple with economic instability linked to oil prices. The potential for similar scenarios to unfold in other developing nations is a major concern.

unsustainable subsidy costs can force governments to seek assistance from institutions like the International Monetary Fund (IMF). IMF intervention often comes with stringent austerity measures, further exacerbating economic hardship and potentially fueling social unrest. This creates a dangerous cycle of crisis, intervention, and further instability.

Beyond Oil: The Movement of People and Elite Flight

Even as oil prices are a primary concern, Sharma emphasizes the importance of monitoring currency fluctuations and the potential for population displacement. Although large-scale evacuations haven’t yet occurred, the possibility remains. The near collapse of the Syrian regime in the past led to a massive refugee crisis that profoundly impacted European politics, and a similar scenario, though hopefully avoidable, could unfold in the Gulf region.

Beyond mass migration, there’s similarly the potential for a flight of capital and elites. Dubai and other Gulf states have long been seen as safe havens for wealth and investment. However, the current conflict is challenging that perception. Sharma suggests that the promise of a politically and economically stable environment, detached from regional turbulence, has been “punctured.” While the Gulf states will likely retain their economic power, the attractiveness of these locations as safe havens may diminish, leading to a shift in capital flows.

A New Era of State-Driven Capital and Asymmetric Power

The conflict in Iran is also revealing a broader shift in the global economic order. Sharma argues that the era of pure financial capital is waning, and we are witnessing the resurgence of state-driven capital, a model pioneered by China. This involves governments directly controlling investments and using economic leverage to achieve political objectives. This contrasts with the traditional model, where capital ostensibly dictates policy.

This shift has significant implications for the relationship between nations. The United States, with its unique position as a global superpower, wields considerable economic and military power. Sharma points out the asymmetric nature of this relationship, noting that the US can “blow up” other countries with relative impunity, while facing limited repercussions. He highlights the fact that many countries, including India, effectively finance US military actions by investing in US Treasury bonds. This creates a situation where global savings are used to fund US deficit spending, which is then used to project power abroad.

The Spread of Instability and the Erosion of International Norms

The conflict in Iran isn’t occurring in isolation. It’s part of a broader trend of increasing global instability, marked by a proliferation of conflicts and a weakening of international norms. As Sharma notes, there’s a growing willingness among nations to use force to settle disputes, without regard for international law or established protocols. The conflict along Iran’s eastern border with Pakistan, where Pakistan has declared war on the Taliban, is a prime example of this trend.

the rise of proxy conflicts, such as the ongoing civil war in Sudan, demonstrates a fragmentation of the international order. These conflicts often involve external actors with competing interests, further complicating efforts to achieve peace and stability. The current situation, Sharma suggests, represents a departure from the post-Cold War era, where the US played a dominant role in maintaining global order.

What Happens Next? A Landscape of Crisis Management

Looking ahead, the immediate priority for policymakers in the Global South is crisis management. Strategic planning has largely been replaced by reactive measures, as governments struggle to cope with the fallout from the conflict. Businesses are hoarding dollars, delaying investments, and seeking to secure alternative supply chains. Governments are attempting to secure discounted oil supplies and brace for potential economic shocks.

However, a more fundamental shift is underway. The conflict in Iran is accelerating the fragmentation of the global economic order and the re-emergence of state-driven capital. The long-term consequences of this shift remain uncertain, but it’s clear that the world is entering a more volatile and unpredictable era. The reliance on prayer, as Sharma wryly observes, underscores the lack of concrete strategies and the profound sense of vulnerability felt by many nations in the face of these escalating global challenges. Sign up for daily updates on global affairs.

CNN’s ongoing coverage provides a timeline of events and analysis of the conflict’s progression. Al Jazeera’s reporting details the intensified attacks across the Gulf region and their impact on neighboring countries. Further context on the history of US-Iran relations can be found on Wikipedia’s page on the 2026 Iran War, though it should be noted this is a rapidly evolving situation.