Regional instability rises as Israel embarks on prolonged war against Hamas

The unfolding crisis in Israel reveals a rapidly deteriorating security context and threatens to significantly destabilise the broader Eastern Mediterranean region.

Devastating news of the terrorist attack targeting innocent civilians and Israeli military personnel near Gaza on Saturday has prompted widespread international outcry. Meanwhile, a mobilisation of 300,000 Israeli reservists, a public declaration of war against Hamas, and an order to evacuate some 1.1 million people from northern Gaza on Friday all signal that a large-scale ground assault on the enclave is imminent.

Sophisticated Hamas attack shocks Israel

Initial assessments of how the attack was carried out point to a high degree of co-ordination and a militant group becoming increasingly adept at exploiting defensive vulnerabilities on the so-called “iron wall” surrounding Gaza. After launching 3,000 rockets from Gaza towards southern and central parts of Israel, including Jerusalem, over 1,000 Hamas militants staged a simultaneous ground, air (using motorised paragliders), and naval assault, marking the most violent terrorist attack inside Israel since the creation of the Israeli state in 1948. Within Israel, the death toll has risen to 1,200 with more than 2,500 injuries reported. Over 1,000 people have been killed as a result of retaliatory Israeli air strikes on Gaza. Hamas is believed to have taken between 100 and 150 hostages of several nationalities back to Gaza, probably to dissuade a counter-attack and for leverage. Preparing the Israeli population for a “long and difficult” war, Prime Minister Benjamin Netanyahu promised on Monday to attack Hamas “like never before”.

In the months leading up to the assault, Hamas apparently sought to mislead Israel, hinting in internal communications, monitored by Israeli intelligence, that it was less intent on armed struggle and more focused on the economic development of Gaza. During this time, it was in fact recruiting, training, amassing weapons, and planning the attack. A gap was created as the Israeli Defence Forces (IDF) gradually moved personnel away from the Gaza perimeter to the increasingly restive West Bank, thereby diluting defensive capabilities in the south-west. For Hamas, the timing of the attack was designed to be symbolic, marking almost 50 years to the day since the Yom Kippur War, when an Arab coalition carried out an initially successful multi-pronged assault against Israel before being pushed back.

Unquestionably, the Hamas attack had strong geopolitical underpinnings. A US-mediated normalisation of relations between Israel, the UAE, Bahrain, and Morocco since the 2020 Abraham Accords fuelled concern among hardliners that the Palestinian issue was being sidelined. Perhaps the tipping point for Hamas, and Iran by extension, were revelations in September that the US was facilitating talks that would see Saudi Arabia recognise Israel as an independent state in exchange for security guarantees from Washington. From a geopolitical standpoint, a Saudi-Israel normalisation would consolidate a bloc of US-aligned interests in the Middle East, posing a serious challenge to Iran’s regional influence. The prospect of widespread indiscriminate military attacks on Gaza and a spiralling humanitarian crisis will almost certainly imperil any diplomatic progress made since 2020.

Pathways to wider regional escalation

An Israel-Hamas war in Gaza also raises the spectre of a wider escalation in the Middle East, including the possibility of Hezbollah launching a military incursion into northern Israel. Sporadic artillery and rocket exchanges between Hezbollah and Israel since the Hamas attack – Hezbollah launched dozens of rockets targeting three Israeli positions in the contested Mount Dov region on 8 October – illustrate how rapidly the situation on the ground can engulf Lebanon into an open military conflict with Israel. Another escalatory event occurred on 10 October when Israel reported shelling from Syria, attributed to a Palestinian militant group. Israeli forces responded by firing artillery and mortar shells towards Syria. On 12 October, Syria said Israeli forces launched simultaneous missile strikes against airports in Damascus and Aleppo, presumably an attempt to disrupt Iranian supplies to the country.

Meanwhile, the likelihood of prolonged widespread social unrest in Israel, primarily in the occupied West Bank, and neighbouring countries has risen considerably. Intense pro-Palestinian protest activity has been reported near the Lebanon-Israel border and in Jordan, where security forces used tear gas against protesters marching towards the West Bank on Friday. Domestic intelligence services both in Israel and abroad will also need to counter the risk of “lone-wolf” terrorist attacks from pro-Hamas fundamentalists, emboldened by the 7 October attack. Curfews, restrictions on people movements, and increased security patrols are highly probable across Israel, although affecting communities near zones of active hostility more than other places.

For the IDF, the stated objective of eliminating Hamas and rescuing hostages in Gaza is fraught with risks. Even if repeated air strikes have weakened Hamas, moving through the densely populated enclave will leave advancing IDF troops vulnerable to gunfire from above, ambushes, and IED attacks. Below ground, the IDF will need to navigate a maze of tunnels where Hamas militants are likely hiding and keeping at least some of those abducted on 7 October.

Escalating tensions disrupt supply chains and energy flows

A prolonged and possibly expanding conflict in the Middle East carries multi-sector risks. For example, a large-scale Hezbollah intervention in Israel would involve a combination of rocket fire and a ground incursion. Compared to 2006, Hezbollah possesses more advanced, and longer-range missiles, which could be used to target strategic infrastructure. One potential target could be the Port of Haifa, Israel’s largest, handling about 50% of the country’s cargo. Any devastating attack on the port would cause ripple effects on global supply chains.

The maritime industry has already been impacted, with the sudden closure of the Port of Ashkelon and the Ashkelon oil terminal, about 10km from the border with the Gaza Strip, on 9 October. Hamas attacked Ashkelon after warning civilians to leave before 1700 local time on 10 October with rocket fire. Diversion of shipping cargo is also likely, with some vessels remaining at or being re-routed to other nearby ports (i.e. the Port of Limassol). An accompanying scenario will be increased congestion on maritime lanes in the Eastern Mediterranean over the coming days and weeks, elevating the chances of supply chain bottlenecks.

While no pipelines are located near the Gaza Strip, the suspension of production at the Chevron-operated Tamar gas field on 9 October signifies that Israeli authorities assessed it may be vulnerable to aerial attacks from Gaza. On 10 October, Chevron said that it halted natural gas exports through the East Mediterranean Gas (EMG) undersea pipeline, which runs from Ashkelon to El-Arish, Egypt. The 90km-long EMG pipeline is the main link between the Leviathan offshore gas field and Egypt. Gas exports from Leviathan to Egypt have been slightly reduced as Israeli authorities are focused on supplying the domestic market. Exports have been re-routed through the FAJR pipeline, linking Jordan and Egypt. A prolonged closure of the Tamar field and decreased gas flows from Leviathan will weaken Egypt’s ability to export LNG, carrying a downstream impact as it deprives the EU of LNG supplies just before the high-demand season.

Israel is not a major crude oil producer; hence a base case scenario would see higher oil price volatility in the immediate term. However, given high sensitivity to a physical disruption in supply, any escalation involving Iran would inevitably see a sharp price increase. A worst-case scenario involving Israeli airstrikes against Iran would provoke an Iranian response targeting the critical Strait of Hormuz oil route. Moreover, evidence of direct Iranian involvement in the Hamas attack may lead the US to tighten sanctions on Iranian oil exports. Both outcomes would cause oil prices to trend upwards, exceeding the $100 per barrel mark.

The mobilisation of Israeli reservists will pose an operational challenge for businesses across industries, including technology, due to labour shortfalls and an uncertain period of absence for many workers. Sectors such as manufacturing and the pharmaceutical industry may also experience declining production levels, narrowing export volumes.

Impact on Cyprus

The deployment of a US carrier strike group featuring the USS Gerald R. Ford, the US navy’s most advanced aircraft carrier, to the Eastern Mediterranean is meant as both a demonstration of force and serve as a warning against any state actor (i.e. Iran) considering to intervene. A highly militarised zone of engagement and two-way, high-intensity attacks involving missiles or drones means that there is a low but possible chance of an accidental hit on Cyprus. There is of course a precedent for this when a stray S-200 anti-air missile hit Turkish-occupied Vouno, about 20km northeast of Nicosia on 1 July 2019. The incident occurred during an Israeli air strike against Syria and associated Syrian air defence activity. Another type of spillover event affecting nearby countries, including Cyprus, could be a rocket or drone strike on chemical or nuclear infrastructure in Israel, which would trigger a large-scale, uncontrolled, and catastrophic release of toxic or radioactive material into the atmosphere. However, strong safeguards on critical energy facilities and robust Israeli anti-air defence capabilities, combined with the high mutual costs involved from such action, make this type of incident highly improbable.

Due to its proximity and benign security environment, Cyprus has emerged as a safe haven for Israeli citizens fleeing the upsurge in violence. The Cypriot government decision to maintain air links has facilitated the arrival of Israeli nationals in large numbers since Saturday. The current context, coupled with an already growing community in the island, means that security services in Cyprus must take the threat of a potential terrorist attack targeting Israeli nationals seriously. Cyprus has proved remarkably resilient from conflicts in the Middle East in the past, although this should not be cause for complacency.

In recent years, Cyprus has benefited by growing interest from Israeli investors and companies establishing a presence in the country. This trend will probably continue although investment decisions on major projects may be paused until the situation becomes more predictable at home. Meanwhile, an uptick in demand for rental accommodation, and to a lesser extent, properties for sale in Cyprus should be reasonably expected over the coming weeks, sustaining high prices.

Any effort to try and quantify the impact on the Cypriot tourism industry would be premature at this juncture, and in many ways, this will depend on the trajectory of the conflict. Despite becoming an increasingly popular destination for tourism from Israel (76,130 Israeli tourists travelled to Cyprus in August 2023), for many Israelis the urgency of addressing a major security threat and a challenging economic climate due to a likely protracted conflict will understandably depress appetite for foreign leisure travel. In any event, Cyprus-Israel relations are expected to remain strong, as demonstrated by the 11 October statement by Israel’s Ambassador to Cyprus, Oren Anolik, thanking the people of Cyprus for their support.

A turning point for the region

The 7 October attack and its enduring aftermath marks a catalysing moment in the history of the Middle East. More broadly, the regional outlook will depend on multiple factors, including whether the IDF succeeds to remove Hamas from power in the Gaza Strip and at what cost. Tragically, it seems all but certain now that we are witnessing a new cycle of violence in the Israeli–Palestinian conflict, possibly of unmatched intensity.

Stephanos Chaillou, political analyst specialising on Europe and founder of EastMed Macro, a geopolitical risk advisory firm