Capstone believes President Trump will likely pursue targeted pressure through military strikes on Islamic Revolutionary Guard Corps (IRGC) facilities, cyberattacks, or intensified economic sanctions. Energy markets should expect enforcement volatility rather than consistent policy application. Iran will remain uninvestable for Western entities, even under a transition government, given its structural deficiencies.
- Targeted strikes on Iranian nuclear and manufacturing facilities and selective oil sanctions enforcement against Chinese purchasers present the most likely US policy response to mass protests currently taking place throughout Iran.
- Current protests differ from past uprisings in their breadth and economic drivers, but the regime under Supreme Leader Ali Hosseini Khamenei retains significant support and multiple power centers that make a unified opposition takeover unlikely. There is minimal indication that he has lost control of Iran’s security forces.
- US-Iran nuclear negotiations likely are not viable given internal constraints in both countries and an emboldened President Trump following military action against Venezuela.
- Should the regime fall, Iran will likely fall under nationalist authoritarian rule or military government with a civilian facade. Exiled Crown Prince Reza Pahlavi likely does not have a viable path to power given persistent anti-monarchist sentiment and opposition fragmentation. Iran will likely remain uninvestable due to nationwide corruption, lack of transparency, and governance issues, independent of sanctions enforcement concerns.
The combination of economic collapse and military defeat in the 12-day conflict with Israel has eroded the Iranian regime’s ability to provide basic economic and security functions, historically the foundation of its legitimacy, even among non-ideological supporters.
Iranian experts identify several conditions that distinguish the current unrest from previous episodes: Namely, the loss of technocratic elites represents an unprecedented structural weakness, with competent administrators being replaced by ideologically aligned, but less capable, officials. The Tehran water crisis exemplifies this deterioration, with allegations that the IRGC diverted resources to pet industrial projects rather than maintaining critical infrastructure.
However, the regime retains substantial support beyond its clerical core. Millions of Iranians likely prefer the current system to opposition alternatives, whether from economic dependence on regime patronage networks or genuine ideological alignment. The recent diaspora violence in Los Angeles demonstrates that the Iranian opposition remains fractured across monarchist, nationalist, and democratic factions, with unclear capacity to coalesce around a unified alternative.
US Policy Options: Venezuela Playbook Without Regime Change
The Trump administration faces similar calculations to its Venezuela approach: significant pressure short of military intervention. Available options include cyberattacks against regime infrastructure, targeted strikes on IRGC facilities, and degradation of oil production capacity. However, President Trump’s willingness to work with Venezuela’s interim leader, Vice President Delcy Rodriguez, despite criticism from congressional Republicans and reportedly against Secretary of State Marco Rubio’s advice, signals a preference for stability over ideologically pure regime change.
The Iraq experience likely continues to shape administration thinking about unintended consequences of decapitation military strategies, especially given MAGA’s sensitivity to Middle East interference. Pahlavi may be attempting to position himself as a stabilizing transition figure with Trump envoy Steve Witkoff, but we believe not having officially set foot in Iran for decades and lacking any influence over Iran’s security apparatus makes this scenario implausible.
Regime elements allegedly signaled willingness to discuss nuclear constraints through intermediaries in Oman as a tactical measure to forestall US or Israeli military strikes. However, neither side possesses a workable framework for agreement, and Iranian internal dynamics preclude consensus even under optimal conditions. The Supreme Leader, IRGC hardliners, and reformist factions maintain irreconcilable positions on acceptable concessions, particularly regarding uranium enrichment levels, centrifuge capacity, and inspection protocols. Domestic protests further constrain Iranian negotiators from appearing weak to nationalist critics, and even near-term success on the nuclear front‒a highly unlikely possibility‒would not address immediate economic and political concerns of protesters.
The Trump administration has its own divisions, with MAGA elements pushing for a deal in the past and hawkish elements resisting. To the extent that President Trump and his allies are emboldened post the Maduro operation (senior advisers describe President Trump as operating in “full flex” mode), we believe Trump will be disinclined toward extended diplomatic processes. Nuclear negotiations require sustained technical discussions and phased implementation timelines incompatible with the president’s transactional approach and demand for rapid, visible wins.
US Political Dynamics
Early midterm election polling in the US remains inconclusive, but historical patterns suggest that voters support presidential decisiveness without extending approval to legislative candidates from his party—creating midterm vulnerability in suburban districts skeptical of foreign engagement. Republican leadership faces a dilemma, however: Hawks cannot publicly oppose Trump administration policy without alienating his base, but escalation in Iran risks losses if voters perceive distraction from economic and border priorities, potentially constraining how aggressively Republicans push toward regime change versus contained pressure.
End-Game Scenarios
Should the regime fall, we believe three credible transition scenarios merit investor attention, none of which guarantee stability or Western alignment sufficient to create attractive investment conditions:
Pahlavi Restoration: The return of Iranian politician Reza Pahlavi and the establishment of a Western-oriented democracy is the least likely scenario. Iranian society remains deeply divided over the Shah’s legacy and the US role in the 1953 coup and subsequent support for the monarchy. Anti-American sentiment transcends the current regime’s propaganda, and even those who despise the clerical regime are likely not eager for a US-affiliated leader to take over, especially one with no internal power base.
Nationalist Authoritarian: A Putin-style government replacing clerical rule with secular nationalism represents a plausible outcome. Such a government would maintain an anti-American orientation while eliminating religious ideology as the primary organizing principle. The IRGC or other military factions could transition from theocratic to nationalist legitimacy, especially given their dominance of the Iranian economy, similar to Russian President Vladimir Putin’s oligarchic control of his nation’s industries.
Military Rule with Civilian Facade: A Pakistan-style outcome with military control behind nominal civilian leadership also could be a possible outcome. This would preserve institutional continuity while providing international legitimacy through democratic forms. We already saw hints of potential military defections during the 12-day war between Israel and Iran, with various commanders allegedly posturing to take over the government.
Investor Caveats
Similar to Venezuela, international energy companies would face significant operational and legal obstacles in a post-regime scenario, despite Iranian crude quality and production capacity. While numerous international conglomerates maintain offices in Tehran and the oil sector would welcome foreign technical expertise, particularly from Japanese and European firms with existing offices in Iran, Iran’s financial and legal systems present structural barriers independent of sanctions risks.
The 2016-2018 period following the Joint Comprehensive Plan of Action demonstrates these challenges. International companies declined Iranian entreaties to reenter the market not only because of sanctions reimposition risk but also from fundamental concerns about banking transparency, contract enforcement mechanisms, and pervasive corruption. Foreign energy majors require predictable legal frameworks, transparent financial systems, and reliable contract sanctity, conditions that did not materialize even during the brief sanctions relief window.
These institutional deficiencies would persist under a transition government absent comprehensive legal and financial sector reform. Companies evaluating Iranian opportunities should anticipate extended timelines for establishing bankable project structures regardless of regime composition or sanctions status. The Trump administration would have to consider how to prevent Russian and Chinese entities from gaining ground.
Oil and Gas Market Implications
Iranian oil exports have been operating at near-peak levels since the Trump administration declined to enforce sanctions against Chinese purchasers post airstrikes last summer. US producers, Canadian oil sands operators, and OPEC members face concerns about full Iranian production returning to global markets, particularly as Venezuelan barrels simultaneously increase supply and when global prices are already below $60 per barrel. We believe this timing creates curious alignment between US energy sector interests and those advocating for stronger sanctions against Iran, complicating the Trump administration’s competing objectives of lowering consumer fuel prices before the midterm elections while economically pressuring the Iranian regime.
China could be a major factor in this equation. Enforcing sanctions against Chinese products is the most direct means to deprive the Iranian regime of revenue and satisfy domestic political constituencies, particularly congressional Republicans, pro-Israel groups, and US energy producers. However, we believe this approach conflicts with broader China relationship management, as Beijing depends significantly on Iranian supply for refinery operations and energy security, and its oil supply arrangements with Venezuela will likely be off the table going forward.
Iran is home to the world’s second-largest natural gas reserves, but it consumes virtually all its domestic production for power generation and industrial use. Any future government will have strong incentive to maintain or increase gas production to sustain electricity generation and avoid the infrastructure collapse that plagued the previous regime.
The recent 25% tariff that President Trump announced on entities doing business with Iran, which ostensibly includes oil purchases, could represent a middle-ground approach: maintaining sanctions and revenue pressure on Tehran while avoiding full enforcement that would force conflict with China. This announcement likely represents symbolic posturing rather than actionable policy and we believe meaningful tariff implementation on China remains unlikely.
Energy markets should anticipate continued volatility in enforcement posture rather than consistent policy application, with Iranian export levels fluctuating based on domestic US political dynamics and China negotiations rather than strategic Iran policy coherence.
Israel’s Posture: Watch and Wait
Israeli Prime Minister Benjamin Netanyahu faces domestic pressure to capitalize on Iranian weakness and address Iran’s persistent missile threat, but he appears inclined toward caution. The Netanyahu government will likely monitor protests in Iran before committing to significant military action, intervening only if Iran appears ready to launch ballistic missiles at Israeli territory or if a clear opportunity emerges to eliminate regime leadership with minimal risk. Joint US-Israeli operations remain possible but are contingent on circumstances rather than opportunistic regime change.
What’s Next
We anticipate targeted military strikes, most probably cruise missile attacks on IRGC facilities or regime infrastructure, calibrated to demonstrate US resolve without triggering broader conflict or committing ground forces. These actions aim to support protesters and weaken regime capacity while avoiding Iraq-style occupation scenarios that President Trump explicitly seeks to prevent. We further expect President Trump to intensify economic pressure as protests in Iran continue, likely through increased sanctions enforcement against Chinese purchases of Iranian crude to create immediate fiscal stress on the regime.
Read more from Daniel:
Data Centers’ Collision Course with the Ballot Box
What Comes Next After the US Strikes on Iran?
Trump, Iran, and the GOP’s Foreign Policy Crossroads
