What has Happened:

• As we anticipated in our most recent ATW, tensions with Iranian-backed proxy forces (and risks to shipping) in the region have significantly increased.
• Last evening, it was reported that the Iranian warship Alborz entered the Red Sea through the Bab-el-Mandeb Strait.
• On Sunday, U.S. Navy helicopters from the USS Eisenhower Carrier Strike Group fired on Houthi rebels (in self-defense) who were attempting to board a Maersk cargo ship off Yemen, killing 10 fighters and destroying 3 boats.
• Operation Prosperity Guardian, led by the U.S. Navy (including nine other nations) was launched on December 19^th in response to Houthi attacks on commercial shipping in the region.
• In the past month, the Pentagon reported that the Houthis hijacked one container ship and launched over 100 drone and ballistic missile attacks, targeting 10 merchant vessels.
• In addition, last week, an Israeli air strike outside of Damascus killed a senior commander in Iran’s Revolutionary Guard Corps (IRGC) and Israel has been retaliating for the increasing attacks by Iranian-backed Lebanese Hezbollah forces.
• In addition, yesterday Hamas reported that senior leader Saleh al-Arouri was killed in an Israeli attack in Beirut.

Why it Matters:

“The warship is at best a token presence by Iran in the Red Sea. They can leverage this in their information campaign for domestic audiences (that are interested) and for their network of proxies. It definitely creates an opportunity for miscalculation on a larger scale. It is unknown if the Iranian ship will just pass through the region or seek to sustain a presence. The Iranian Navy has a history of aggressive behavior in the Persian Gulf, but it is unknown how they will act so far from home. Now that the U.S. has struck several Houthi ships, I would expect similar aggressive actions, but the administration appears to remain constrained on any actions in Yemen proper given the KSA concerns of strikes against their infrastructure. Moreover, the KSA and the northern Yemeni government were in talks as of late December with the Houthis on a potential ceasefire. I’ve not seen any recent reporting since 23 December on those discussions.

Another key issue is commercial traffic costs. On 27 December, Maersk was positioned to start routing their ships back through the Red Sea. Given the recent attacks, Maersk has halted Red Sea shipping. Broader economic costs will be paid by those who continue to travel the Red Sea as well as by those who will now re-route around the Cape of Good Hope. Egypt will also suffer revenue losses from traffic drops in the Suez Canal given that approximately 12% of global maritime traffic transits the Suez.

The Houthis remain undeterred and the presence of an Iranian warship, albeit a token one, may embolden the Houthis in the near-term regardless of any ceasefire talks with the KSA.” – General Robert Ashley

“I agree with General Ashley. One key component is what Rules of Engagement (ROE) the U.S. will be under in the Red Sea against an Iranian ship. President Reagan was very aggressive against Iranian ships & gun boats during the encounters back then. Former Secretary of Defense Mattis was also aggressive in Syria when push came to shove. If the Biden administration is aggressive, that will send an entirely different signal than if they are tentative. At the end of the day, it boils down to ROE.

The second order impact is the cost of insurance to commercial shipping. The option to use alternative routes has serious cost/time impacts, and the escalating insurance costs for shipping companies trying to transit the troubled waters is also a problem. It will be interesting to see how this impacts inflation and the market. I still have not read anything about how adjacent nations are reacting to potential escalation in the Red Sea (Israel, Egypt, Sudan, Eritrea, Djibouti).” – General Mastin Robeson

“General Ashley has it right, and the opportunity for miscalculation will grow. Of note, the Iranians already have a network of spy ships/boats (Economist) that can advise the Houthis of potential targets. They are likely fed a continuous stream of targeting information. An Iranian warship might augment or protect these eyes/ears in the waterway. Creating a threat to Israeli cargoes flowing through the port of Eilat (Israel’s only Red Sea port) would not have any significant economic impact, but could put Iran in a position to signal, antagonize, or threaten. It is also probably useful to note that over 60% of Chinese goods shipped to Europe pass through the Suez Canal, and that Chinese ships account for around 10% of the Suez’s annual traffic volume (dated statistics, but probably still close). Finally, the Saudis have attempted to “firewall” peace negotiations with the Houthis to resolve their longstanding issues. An Iranian warship might antagonize the situation further, disrupting Saudi efforts. Further disruption of Saudi peace initiatives (of any flavor) would favor Iran.” – General Michael Groen

“Iran’s strategy is to be a major player in the Middle East and diminish U.S. influence. The situation has strategic implications for both the U.S. and Iranian interests. The U.S. defined its mission as protecting international shipping while international shippers are increasingly diverting ships from the Red Sea. A key foreign policy objective in the National Security Strategy is to increase U.S. global leadership through building relationships with allies and partners. The Houthi attacks present an opportunity for the U.S. to lead the international community, but it is also an opportunity for Iran to challenge U.S. strength and will and its ability to gain coalition support.

The Biden administration is challenged with wanting to control the situation through de-escalation and hoping that the Houthis will back off. Iran and the Houthis want a confrontation and see the naval task force as ineffective. Iran’s and the Houthis’ objective is to put pressure on the U.S. and Israel to stop the IDF’s offensive in Gaza. The situation (if handled incorrectly by the international task force that is primarily made up of western countries) could embolden actions by China in the South China Sea and Russia in the Black Sea, Mediterranean Sea, or Baltic Sea.

The U.S. attacks on the Houthi boats were in self-defense, however, they are an escalation from shooting down drones and missiles. The U.S. Navy must defend itself through standard rules of engagement and establish deterrence. The ROE should include attacks on Houthi infrastructure where the boats and missiles originate. In the past, the U.S. attacked the Houthis with Tomahawk cruise missiles. Iran’s positioning of a warship in the Red Sea adds to the intensity of the situation as Iran operates in the gray zone by not stating its intentions. The ship’s purpose may be to provide the Houthis with surveillance, intelligence, targeting support, and command & control.

A challenge for the U.S. is that most Arab countries are unwilling to join the U.S.-led task force and some western countries are unwilling to put themselves under U.S. operational control. The Saudis would like the Houthi war in Yemen to end and fear any escalation.” – General Robert Walsh

“The U.S. wants to influence Israel to act with increasing and measurable restraint. However, Netanyahu’s and Biden’s (as well as much of the world’s) time horizons for a de-escalation of the fight in Gaza are simply not aligned. The U.S. would no doubt prefer to minimally disrupt the Houthis capacity to influence shipping in the Red Sea through the Bab-el-Mandeb and into the Gulf of Aden without expanding their military efforts against Iran directly. To date, that strategy is working. It now is at risk with the presence of an Iranian warship in the vicinity of the Bab-el-Mandeb. Iran’s strategic objective is clear: it wants Hamas to go to ground now in order to survive, give the IDF a reason to depart Gaza without a full “mission accomplished,” and to accelerate the global narrative of Israel’s overreach. Diplomacy only works with linkage and with Iran, the linkage is force. The U.S. must continue all efforts to punish Iran through its proxies. This will take time and an expansion of the conflict is avoidable.” – General Spider Marks