Proxy war makes perfect sense for Israel. Tel Aviv to weaken Tehran’s financial networks now

A ceasefire is unlikely until Israel significantly weakens Iran's proxies and all Israeli hostages are returned. Until then, the conflict will likely escalate before tensions subside.

Smoke billows following Israeli strikes over Beirut's southern suburbs, amid ongoing hostilities between Hezbollah and Israeli forces, as seen from Sin El Fil, Lebanon, September 28, 2024 | Reuters

The recent elimination of Hezbollah’s leader, Hassan Nasrallah, by Israel has generated a wave of speculation about the broader implications for the Middle East, especially the ongoing conflict between Israel and Iran. Despite fears of a direct confrontation between Tel Aviv and Tehran and even the possibility of a third world war, such concerns appear exaggerated. Currently, the conflict in the region primarily involves Israel, supported by the US, and Iran’s network of regional proxies, supported by its allies like Russia.

Although a full-scale war is unlikely, the interconnection between various theatres is once again evident. It highlights that modern conflicts are not isolated events. The movement of weapons and financial support for proxy groups extends far beyond mere diplomatic gestures and public statements, revealing deeper, more complex networks at play.

Iran’s proxy-network

Tehran’s reliance on proxies has been a key strategy for wielding its influence since the 1979 revolution.

This network of proxies spans several countries, including Lebanon, Palestine, Yemen, Syria, and Iraq. These groups offer Iran a level of deniability and flexibility, allowing it to exert influence in the region without engaging directly in open conflict. This strategy has been a long-standing challenge to the US and explains why Washington supports Israel’s actions against them. 

The conflict will likely be escalated but confined to proxy battles and limited military escalations. Why is that?

Israel’s overarching goal in this conflict is not to destroy the Iranian state but to weaken Iran’s proxy network, namely—Hezbollah, Hamas, and the Houthis. Hezbollah, a Shia militia, presents itself as a political party in Lebanon. Hamas is a Sunni group that claims to be a political party and also operates as a militia in Gaza. The Houthis have destabilised Yemen for years and continue to do so in the Red Sea. All represent significant obstacles to normalisation of the Middle East where among others, several Indian interests are at stake.

The interconnectedness of theatres becomes clear as these groups have received significant backing from Russia, another global power with a history of leveraging proxies. Russia’s support for Iran’s proxies, such as Hezbollah, mirrors its own strategy of using groups like the Wagner Group to advance its interests abroad. 

Meanwhile, India has been feeling the impact of these developments. The Red Sea, an essential maritime route for Indian trade, has become a zone of perpetual uncertainty as the Houthis have targeted non-Chinese and non-Russian vessels. Consequently, Indian ships have had to reroute around the Cape of Good Hope, leading to a 200 per cent rise in shipping and insurance costs. Moreover, fluctuations in oil prices remain a concern for India, even though it no longer relies on Iranian oil. 

With strategic interests in Chabahar port and the International North-South Transport Corridor (INSTC), India is carefully watching how the situation evolves. Operational impediments to the India-Middle East-Europe Economic Corridor (IMEC) are here to stay as well, upending India’s multi-aligned connectivity aspirations at large.

Desirable vs. achievable

Despite these tensions, it’s important to differentiate between what is desirable and what is achievable in this conflict. While no side wants an all-out war, and neither has the capability to sustain one, there is still the potential for limited military exchanges. Iran, for example, is likely drawing lessons from Russia’s prolonged struggle in Ukraine, where Moscow’s invasion—initially planned as a quick victory—has turned into a costly and protracted conflict with sluggish development in land battles despite a full force projection by Moscow. 

Iran has been a key supporter of Russia in this war, providing military assistance, mainly Shahed drones. Russian experience in Ukraine has likely given Tehran a clear view of the heavy costs associated with a drawn-out conflict, especially in terms of economic, financial, and military exhaustion—a systemic decapitation. Worse, these shock waves could result in far greater damage to Iran’s Islamic regime stemming from internal power struggles and strategic shifts. 

This is also true for Israel where its most expensive military war has led to little political solution so far.

What lies ahead?

There are four key assessments to consider regarding the current and future state of the conflict in the Middle East:

First, Israel is expected to continue targeting Iran’s network of proxies, known as the “axis of resistance”. Eliminating top leaders like Nasrallah might buy Israel some time, but new leaders will eventually emerge taking the place of those killed. Thus, Israel’s broader strategy will likely focus on choking the financial and logistical support that sustains these terror groups. This could involve targeting their sources of arms and financing, as Israel has already done by bombing Russian bases in Syria, where Hezbollah weapons were reportedly stored.

Sanctioned cryptocurrency platforms like Garantex, which have been used to fund these proxies, could become key targets in this broader effort to weaken Iran’s allies. Not many know that Garantex Europe, originally established in Estonia in 2019, was founded by two Russians—tech expert Stanislav Drugalev and politician Sergey Mendeleev.

Israel’s crackdown on these will eventually align with US interests in the short term. 

Cryptocurrencies surged in popularity because of a lack of regulation. Regulators were still adjusting to this emerging technology, allowing platforms like Garantex to operate with minimal oversight. Garantex carved out a niche by facilitating the conversion of rubles into other currencies, a service that became increasingly valuable as sanctions on Russian banks and Moscow’s own capital controls, imposed after the invasion of Ukraine, made such conversions more difficult. 

Additionally, Garantex enabled foreign transfers using cryptocurrencies, which, while transparent through blockchain technology, still allow the identities of the involved parties to remain concealed. It is noteworthy that Garantex was sanctioned by the Washington-based Office of Foreign Assets Control (OFAC) in 2022 for its role in laundering illicit cryptocurrency. 

The same Garantex blockchain networks have been found to finance militias such as Hamas and Hezbollah. Israel has blocked close to 200 crypto accounts tied to funding Hamas. Reports also show that almost half of the suspected service providers dealing with terror-affiliated wallets have also transacted with Garantex. To weaken Hezbollah, Israel is likely to target Garantex, especially as more and more Russian weapons are unearthed in Hezbollah inventories.  

In all such actions, Israel is likely to get support from the US and increase pressure on Russia. However, as stated earlier, it is unlikely that it will bring Israel into direct confrontation with Russia and will likely operate in the proxy sphere. Diplomatic solace notwithstanding, these actions will collectively weaken Iran, its proxies and its allies—an outcome that will be welcomed by others in the region, even if not officially. 

Third, there has been much discussion about the possibility of Israel directly attacking Iran’s oil and nuclear facilities, which seems unlikely for several reasons. While some oil infrastructure could be targeted as a show of strength, completely disrupting Iran’s oil production would cause global economic instability. Additionally, Israel has no interest in alienating other oil-producing nations like Saudi Arabia, which also views Iran’s proxy network as a threat. Regarding nuclear sites, Israel would need strong US support to carry out any significant strikes, and the Biden administration is reluctant.

Finally, a ceasefire might only be expected once Israel achieves a sufficient level of incapacitation of Iran’s proxies, specifically Hezbollah, Hamas, and the Houthis, and when all Israeli hostages are returned. Until then, the conflict is likely to escalate further before tensions begin to subside.

The Middle East conflict is likely to continue as a proxy war, with Israel focusing on weakening Iran’s allies, and occasional show of strength regardless. 

The situation remains precarious, but neither side appears willing or able to escalate the conflict into a full-fledged war, keeping the region on edge but avoiding a catastrophic outcome.

Achieving a permanent solution would require addressing the underlying issues, such as de-radicalisation and a two-state solution. However, things seem far from being resolved in the near future and do represent a collective failure of sorts at establishing lasting peace in the Middle East. 

The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.

(Edited by Ratan Priya)