Overview
Europe faces two core risks from the outbreak of Iran hostilities. First, a freeze of maritime services through the Strait of Hormuz has squeezed energy prices, especially gas, which may accelerate the EU’s declining demand for gas in the long-term and undermine current investments in LNG import infrastructure. Second, US attention and air defense missiles may run low, undermining NATO’s eastern flank and Ukraine’s defense. Russia, enjoying a windfall from its fuel exports, will likely recover from the potential loss of Iran as an energy and arms export market. In the short-term, the conflict will create upside risks for American and European defense firms, which will receive increased signals to scale missile and drone production. Risks for the energy market are mixed and contingent on how long the Strait of Hormuz is unsafe: American energy firms may have an opportunity to increase market share in the short-term, but renewable and nuclear firms may gain more long-term demand.
An Energy Squeeze May Undermine Europe’s LNG Ambitions and Russia Sanctions
Iran’s strategy is to raise the costs of conflict, including through targeted strikes on Gulf energy infrastructure and tankers in the Strait of Hormuz, prompting Western maritime insurers to stop underwriting transit while the conflict is ongoing. This effectively strands one of the world’s most important oil transit routes, where a fifth of global petroleum and 38% of seaborne crude transits for export. Energy market disruptions are magnified for natural gas. QatarEnergy’s Ras Laffan Industrial City—which supplies a fifth of the global liquefied natural gas (LNG)—has ceased operations due to the conflict. Brent crude rose by 6.7% on Monday to $77.74 per barrel, about the same peak reached during the June 12-day war. Meanwhile, the benchmark European gas price closed 39% higher at€44.51 per megawatt-hour.
Global energy companies may enjoy the risk premium of higher prices in the short-term, seeking to lock in new export capacity. However, sustained elevated prices may undermine the viability of gas in Europe in the long-term. The Institute for Energy Economics and Financial Analysis (IEEFA) notes that, since Russia’s full-scale invasion of Ukraine, the EU’s gas demand has declined by roughly 20%, and it may decline a further 20% by 2030 as market forces continue to favor new renewable and nuclear capacity. While US LNG exports to the EU surged fourfold from 21 billion cubic meters (bcm) in 2021 to 81 bcm in 2025, this has largely been to replace Russian pipeline gas, which has declined from 150 bcm in 2021 to 37 bcm in 2025, as opposed to reflecting higher overall gas demand. Indeed, Europe may be wary of creating a new gas dependency on the US, especially on the US after threats to impose tariffs over Greenland. This was especially apparent in January 2026 at a natural gas auction in Greece, which, at the behest of the US, has invested heavily in LNG terminals and regasification units as part of the “Vertical Corridor” toward the Balkans and Ukraine. At that auction, just 48 gigawatt-hours were booked out of 72 megawatt-hours of capacity, or about 0.067%. If gas is too expensive and consumers want alternatives, European governments may look to other energy investments. That would certainly bite at the EU’s commitment to procure $750 billion of US LNG by 2028.
Higher energy prices will also undermine the EU’s Russia sanctions regime. The core innovation behind the regime is the automated oil price cap on seaborne Russian crude, which was decreased from $60 per barrel to $44.10 in February in accordance with keeping Urals crude 15% below market prices. The idea behind the mechanism is to keep seaborne crude on the market but decrease Russian revenues, which has largely worked: Russia earned only €464 million in fossil fuel revenue in January 2026, its lowest since the war, and Urals crude traded at a discount of about $9.85 below the Brent benchmark price. A rapid increase in global energy prices may undermine the price cap’s feasibility, especially since Russia’s shadow fleet now transports about two-thirds of its seaborne crude. Moreover, Russia is poised to benefit from new demand from China, which may scramble to rapidly substitute Iranian seaborne crude if the conflict lasts several weeks. If Russia were to replace all of Iran’s crude exports to China (which averaged 1.38 million barrels per day in 2025), Russian seaborne crude export volume could grow by 43% up to 3.18 million barrels per day. With some market analysts predicting barrels to double in price per unit, Russia could be on the verge of a massive windfall and replenish its sovereign wealth fund.
High energy prices will also undermine the EU’s current negotiations for its 20th Russia sanctions package, which previously envisioned an outright ban on European maritime services for Russian crude and potential targeting of Russia’s LNG exports, which remain exempt and comprise 11.5 bcm of European gas imports in 2025, about a third of Russia’s remaining gas exports to the EU. These measures will become politically difficult to support, given the energy squeeze’s resulting costs to lagging European industrials, prolonging the bloc’s low growth rates. Sovereigntist parties, such as Hungary’s Fidesz, Germany’s AfD, and France’s National Rally, will likely be the beneficiaries of this disruption.
Implications for Ukraine: Russia Can Afford to Lose Iran
The prospect of a weakened or defeated Iran will impact Russia’s calculus in Ukraine, but it is unlikely to weaken Russia’s defense industrial base. Russia and Iran’s deepened defense industrial partnership in 2022 was largely out of convenience, owed in part to their mutual isolation from the global economy. Near the beginning of Russia’s full-scale invasion of Ukraine, imports of Iranian ammunition, ballistic missiles, and one-way Shahed-136 attack drones complemented Russia’s production capacity, which then focused on refurbishing Soviet equipment. Since then, Russia’s wartime production has transformed, making Iran less essential than it used to be. Russia has localized the production of Shahed drones, producing 30 units of Geran-2 drones per day in 2024. Growth in other system production is notable too: artillery shell production rose from 250,000 152mm rounds in 2022 to 1.3 million in 2024, and 9M723 ballistic missiles production rose from 250 in 2023 to over 700 in 2024. Simply put, Russia will not be significantly impacted by the loss of Iran as a security partner. Since 2021, Russia has spent €3.5 billion on Iranian military equipment, a drop in the bucket for Russia’s €116 billion in military spending in 2025 alone.
More significant to Russia are the risks of stranded contracts. The Russia-Iran defense relationship has flipped since 2022, with Iran serving as one of Russia’s largest foreign defense markets. In July 2025, Iran concluded a €495 million procurement for 500 Russian Verbas, a portable rocket launcher meant to attack low-flying aircraft like helicopters, to be delivered through 2027-2029. Russia may have also concluded a €588 million sale of 48 Su-35 fighter jets in fall 2025, to be delivered over 2026-2028. These sales build on recent transfers of Russian aircraft to Iran, with Tehran reportedly receiving Yak-130 trainer jets since 2023 and six Mi-28 attack helicopters in January 2026, among other items. A weakened or defeated Iran could strand these deals and Iran as a valuable defense export market.
Stranded contracts extend to energy. In July 2022, the National Iranian Oil Company and Gazprom signed a $40 billion agreement to develop offshore oil and gas fields. As part of that deal, Russia agreed to provide pressure enhancements for Iran’s South Pars offshore gas field, which accounts for 75% of Iran’s current gas production but is not producing at capacity. Iran agreed to invest $4 billion alongside Russian companies to develop seven oil fields comprising 6% of Iran’s current output, in addition to a pledge to procure up to 55 bcm of natural gas per year from Russia. At that level, Iran would import about a third of what the EU did in 2021, a year before Russia’s full-scale invasion of Ukraine. However, Iran may be pressured to abandon these early plans after its conflict is over, making Russian investment in a new gas pipeline to Iran unviable.
US engagement in the Middle East may also hold implications for the Russia-Ukraine war. With the US bogged down in the Gulf, American attention is diverted from the Ukraine war, emboldening Russia to stall negotiations further. Moreover, European allies may fear the US’ ability to supply air defense systems to NATO’s eastern flank, and Ukraine would be compromised, especially if ongoing hostilities continue over several weeks. During the June 12-day war, the US is estimated to have used up to a quarter of its THAAD interceptors. As of Q3 2024, the US only produced 42 PAC-3 Patriot missiles and 1,167 HIMARS rockets per month. If the US were to run low on stockpiles in a potentially weeks-long conflict, Europe may have to scramble for alternative suppliers and surge its own production capacity.
The Risks for Europe
The key question is how long this conflict will last. In a scenario like the 12-day war, energy markets may exit the conflict relatively unscathed, and US and allied air defenses remain stocked. However, if the US and Israel are seriously pursuing regime change or a wholesale decimation of its regional power projection capabilities, a weeks- or months-long conflict in the region could totally reorganize energy markets and strain Western air defense stockpiles. This environment would benefit Russia, undermining Ukraine’s defense and potentially accelerating an end to the war in Russia’s favor.
In the short- to medium-term, the US will aim to revamp its defense industrial base. A wartime scale of production is not a future problem—the US is engaged in a contingency now and must rapidly replenish its stockpiles of air defenses, missiles, and drones to maintain a deterrence posture in other theaters, such as Taiwan. The sense of defense urgency for the EU will also accelerate, especially with Iran’s Shahed drone attacks on a British base on Cyprus (an EU member) and France’s decision to reinforce the EU’s Aspides Red Sea naval protection mission with two of its warships. In both the US and European markets, defense firms on both sides of the Atlantic will likely benefit from stronger support and demand signals for new equipment.
On the energy front, the key problem is not yet an oil shortage but rather maritime logistics to transport oil and LNG through the Strait of Hormuz. With OPEC and US plans to increase production, energy markets will likely stabilize once maritime services are restored. In the short term, US energy firms can exploit a risk premium and a market share gap left by Qatar and other Gulf producers. In the medium to long-term, European governments, similar to those in 2022, may favor expanding renewable and nuclear capacity as opposed to long-horizon investments in gas infrastructure that lock in a relatively volatile energy source.
