Building Strategic Resilience Amid the Iran War’s Ripple Effects

The war in Iran has reached its first month, with businesses in Mexico already experiencing the economic consequences of this conflict. How can executives respond to this global crisis and capture opportunities? Condoleezza Rice, a former US secretary of state, and Amy Zegart, a professor at Stanford University, propose a four-step framework to deal with political risks:[1] “Understand, analyze, mitigate, and respond.” In this article, we apply that framework, complemented by FrontierView’s practical approach, to help executives make informed decisions to protect their businesses. 

Iran War and Mexico’s Business Climate

First, it is essential to understand how Mexico is being impacted by the crisis in the Middle East. The conflict in Iran — more precisely, the closure of the Strait of Hormuz as well as potential disruptions to the Suez Canal — is driving a global surge in the cost of oil, natural gas, fertilizers, and maritime shipping. While Mexico is less exposed to these price increases than Asia or Europe, it is not immune. 

Another, less direct, transmission channel is interest rates. After a highly inflationary period in 2022-2024, partially caused by the war in Ukraine, central banks across the world were finally controlling inflation and reducing rates. Earlier in the year, rates were expected to continue going down. However, the Iran war changed the landscape. At FrontierView, we anticipated an end-of-year rate of 3% in the United States, whereas now we anticipate 3.75%. This means that relatively high rates will limit CAPEX investment and economic growth. 

In Mexico, Banxico unexpectedly continued with rate cuts, now at 6.75%, but that could compromise its ability to rein in rising inflation and is even raising questions about the bank’s technical credibility. The Iran crisis will continue to intensify Banxico’s dilemma: Face high inflation and lower credibility, or raise rates again and slow down investment.  

The exchange rate experienced a slight depreciation, but so far, it has not dramatically responded to this event, staying slightly above MX$18 to the US dollar. In our base case scenario, the peso  will remain below the MX$19 to the US dollar threshold in 2026; however, if the war intensifies or triggers other tail risk events, the currency will depreciate further.

The Iran war is indirectly strengthening Mexico’s position in the USMCA negotiations. As US relations with other parts of the world deteriorate, Mexico’s geographic proximity, infrastructure connectivity, productive base, and decades of free-trade experience with the United States reinforce its role as a strategic economic partner. In this context, Washington’s need to de-risk its supply chains positions Mexico as one of the most viable alternatives.

 Managing War Disruptions, Future Shocks 

The first step in Rice and Zegart’s political risk analysis framework is to “understand” your organization and the external risks and opportunities it faces. The main objective of this phase is to assess your company’s risk tolerance and align different teams, as risk appetite can vary significantly across departments. At FrontierView, we recommend that executives assign an internal cross-functional “Task Force” to clearly identify your company’s main “values” and “vulnerabilities” emanating from the conflict. For example, by identifying financial “red lines” and benchmarks, as well as determining margin flexibility or pricing power.

In the second step, “analyze,” your Task Force assesses how the external shock — in this case, the Iran conflict — intersects with your operations. After identifying your values and vulnerabilities, it is easier to distill how an external shock will affect your organization. For example, by assessing how specific vulnerabilities would respond under different scenarios, how fast your company will feel this shock, and how this translates into your balance sheet and competitive position.

At FrontierView, we monitor external environments and brainstorm their business implications with executives. We currently have three scenarios for the Iran war. In our base case and most likely scenario, the war lingers through 2026, the Iranian regime survives, and the United States remains involved in the conflict. Under this scenario, the region experiences episodes of escalation and de-escalation, but no deal is reached, and the Strait of Hormuz remains unstable for the rest of the year. Brent oil prices average US$99 per barrel, while fertilizer shortages lead to higher food prices.

A downside and less likely scenario implies a fragmentation of the Iranian regime. This would significantly complicate any peace process, extending disruptions to the global economy. In this scenario, the energy crisis deepens, with Brent oil prices averaging US$124, increased food insecurity, and a contraction in equity markets.  

Our optimistic scenario contemplates a pragmatic deal that gradually de-escalates the war. The Brent oil price averages US$84, and food prices experience only limited pressure. This optimistic scenario would still push up inflation and trigger a modest peso depreciation.

Identifying potential opportunities is a key part of the “analyze” phase. While external disruptions can threaten profitability, demand, and supply chains, they can also create inflection points to strengthen your competitive positioning, launch new products, and improve logistics continuity.

In the third step, “mitigation,” companies’ Task Forces design tactical response mechanisms to protect their businesses. The most evident example amid the Iran crisis is hedging against commodity price and FX volatility. Companies must re-evaluate their commodities and FX hedging strategies. For this, scenario planning is key. The Iran crisis is likely to continue disrupting the global economy and may continue evolving. The value of financial hedging is predictability amid a volatile environment.

At FrontierView, we recommend preparing three scenario-based crisis action plans. These should be tailored by function — finance, sales, and supply chain — each with distinct protocols. Action plans serve as response playbooks to be activated as specific events materialize. For example, “pricing playbooks” can predefine when and by how much to adjust prices under different commodity or oil outcomes.

Finally, Rice and Zegart’s fourth step, “response,” refers to how your company implements the protocols developed in step 3. This step is more like a “crisis management” or “war room” phase. A critical part of this last step is “post-mortem” evaluation. After the event or crisis subsides, teams must reassess what worked and what failed. This evaluation reveals whether the company successfully protected its vulnerabilities or if it was agile enough to capture the unexpected strategic openings that often emerge during a crisis. Evaluating the whole cycle is a critical step, as it will strengthen the institutional knowledge within your organization.

Conclusion

Mexico has enjoyed the blessing of being in a geopolitically stable neighborhood. However, as we have experienced with the pandemic, the Ukraine war, and the ongoing conflict in Iran, geopolitical events eventually impact local markets. This primarily happens via cost volatility, but also through indirect effects, like the re-localization of investment and the seismic restructuring of trade relations. Amid the ongoing conflict in the Middle East, executives who “understand, analyze, mitigate, and respond” will be more successful at protecting their businesses from external disruptions, and more importantly, leverage unexpected opportunities.

[1] Condoleezza Rice and Amy Zegart, Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity (New York: Twelve, Hachette Book Group, 2018)