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Iran's Supreme Leader Ayatollah Ali Khamenei waves before voting in the country's presidential election, in Tehran, Iran July 5, 2024. Office Of The Iranian Supreme Le | Via Reuters

Iran's powerful proxy network across the Middle East is being dealt blow after blow from Israel, which has dramatically escalated fighting with Lebanese militia group Hezbollah and on Friday killed its longtime leader, Hassan Nasrallah in a series of airstrikes on Beirut. Hezbollah is Iran's most important strategic ally, operating as both a militant and political organization that Tehran has funded and nurtured since its inception in 1982 to become what is widely seen as the most heavily armed nonstate group in the world. Beginning with a series of sabotage attacks earlier in September that led to the explosion of thousands of Hezbollah pagers, Israel has gone from disabling massive swathes of the group's communications to taking out its most powerful leader, as well as several other senior commanders. Iran's generals and its supreme leader, Ayatollah Ali Khamenei, have pledged revenge, but their actions and language suggest a more measured response so far. An all-out war between Israel and Iran would be devastating to the entire region, but would be particularly damaging to Iran, whose economy is already in dire condition and whose oil facilities could be particularly vulnerable to attacks. Notably, oil prices — which are typically highly sensitive to threats to supply — are still hovering near $70 a barrel for international benchmark Brent crude, suggesting markets also predict a conservative response from Iran, one of OPEC largest oil producers. "⁠In the last two weeks, Israel's decisive blows to Hezbollah have in essence gutted the crown jewel of Iran's regional proxy network," Behnam ben Taleblu, a senior fellow at the Foundation for Defense of Democracies, told CNBC. "Iran's response options aren't good. If the Islamic Republic gets more directly involved there will be a direct target on its back. To that end, survival beats out revenge, especially in a war of attrition."

Following the assassination of former Hamas leader Ismail Haniyeh in Tehran on July 31, Khamenei vowed a "blood for blood" response, which has so far yet to happen. But the tone following Nasrallah's killing was markedly different — the Iranian leader made clear that it would be up to Hezbollah itself to choose its response. "All the Resistance forces in the region stand with and support Hezbollah," Khamenei said Saturday on the X social media platform. "The Resistance forces will determine the fate of this region with the honorable Hezbollah leading the way."

'Iran has shown restraint'

Iran's economy has suffered from years of crippling Western sanctions, as well as widespread mismanagement and corruption. Prolonged high inflation has eroded purchasing power for Iranians, making basic necessities difficult to afford mid severe depreciation of the Iranian rial. The country of nearly 90 million is in no position to afford a war, regional analysts say. Iran's recently-elected President Masoud Pezeshkian appeared determined to try to turn these tides, in part by expressing his desire to mend relations with the West and restart talks on the JCPOA — or the Iranian nuclear deal — which could theoretically ease sanctions on Tehran in exchange for curbs to its burgeoning nuclear program.

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