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Money spent on defense industry has potential to disrupt macro balances in possible Iran-Israel war

21 April 2024 08:30 (UTC+04:00)
Money spent on defense industry has potential to disrupt macro balances in possible Iran-Israel war
Qabil Ashirov
Qabil Ashirov
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Tension in the Middle East is increasing day by day. Following Iran's missile and drone attacks on Israel, Tel Aviv struck back at the facilities in Iran. As usual, Israel did not comment on the issue, some foreign media outlets claimed that similar attacks could be in Iraq and Syria. In other words, the region looks like a keg of powder that could explode at any moment. However, taking into account that the Middle East is the main source of fossil fuels in the world, needless to say, any possible war will impact the economy not only the countries in the region but the whole world.

Regarding this issue, a correspondent of Azernews learned the opinion of the MUSIAD board member and former banker, Ünsal Sözbir. The expert noted that it is observed that geopolitical risks are increasing day by day with a new agenda. He said that certain parameters are examined to understand how financial markets perceive these risks and how they react.

"Before the possible negativities that may arise from the Iran-Israel conflict, it would be useful to look at the one-month development of the VIX index, which shows the volatility in the US commodity markets, one of the most important indicators showing the risk perception in the USA in general and China in particular.

There has been an increase of up to 50% in risk perception since April 1, 2024, when Israel's attack on its military elements in Syria began. When we look at this indicator, also called the fear index, in the long term, it cannot be said that there is a serious increase in risk perception yet," Ünsal Sözbir said.

He pointed out that another indicator is the development in Gold prices. He noted that after a long time, we have entered a period in which records were broken in Gold Ounce prices. He said that when we look at gold prices, especially in major centers around the world. The fact that banks are constantly buying gold and that the country's reserves are directed to actual gold reserves instead of politically risky reserves such as the US Dollar indicates an increased risk perception.

"The warming of the region will primarily affect countries that have trade relations with the entire region, such as Turkiye. The money spent on the defense industry has the potential to disrupt macro balances in the long term, first in warring countries and then in all countries in the region. Deteriorating relations and uncertainties give signs that will reduce the macroeconomic growth of the region.

Of course it will have an impact on inflation. Although the upward trend in oil prices seems to be in favor of oil-exporting countries, it is a factor that will increase costs in general. The most concrete example of this is the decrease in the use of the Suez Canal, which shows that freight prices and the general level of prices will continue to increase, in other words, inflation in the region will continue to increase. While increasing costs in countries like Türkiye will trigger inflation, they will also affect the growth of the economy. On the other hand, it will also have consequences such as the postponement of projects such as the Development Path, which are developed together by the countries of the region and which may be in favor of each country as a whole," the Former Banker emphasized.

As for fossil fuels, he noted that even though there is an upward trend in oil prices, the embargo. The increase in supply in countries such as Russia, Iran and Saudi Arabia, one of the most important producing countries, will balance these price increases.

"This balance will be an important holding element for countries that will be negatively affected by the increase in oil prices.

A similar balance exists in natural gas. Although the recent decrease in LNG shipments through the Suez Canal has affected prices, there are no strong signals yet that this will be a radical increase," the former banker Ünsal Sözbir concluded.

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Qabil Ashirov is AzerNews’ staff journalist, follow him on Twitter: @g_Ashirov

Follow us on Twitter @AzerNewsAz

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