Opinion: When giants clash — How the Iran-Israel war could reshape Southeast Asia’s strategic calculus
By Abbi Kanthasamy
Edge Online, 13 Jun 2025, 09:08 pm
On the night of June 12, 2025, the Middle East caught fire again. Israeli warplanes tore through Iranian skies, targeting nuclear facilities, missile sites and the upper echelons of Iran’s military command. Tehran seethed, vowing retribution. Washington — a different Washington under a very different president — publicly distanced itself, while nervously repositioning its naval assets.
And across Southeast Asia, policymakers and markets alike held their breath.
At first glance, a spiralling conflict between Iran and Israel might feel far removed from Kuala Lumpur’s trading floors, Jakarta’s security briefings, or Singapore’s port terminals. But distance is no insulation in a hyperconnected world.
This war is not just about uranium enrichment and missile strikes — it is a test of global fault lines, energy choke points, great power rivalry, and economic resilience. And Southeast Asia, caught in the crosswinds of all of it, needs to brace itself.
The strait equation: Hormuz and Malacca interlinked
Iran’s most potent retaliatory tool is economic: the threat to close the Strait of Hormuz. Roughly 20% of the world’s oil passes through that narrow waterway, including the lifeblood of Asia’s major economies.
Should Iran deploy mines, fast-attack boats, or simply heighten the risk calculus for commercial vessels, global shipping rates will spike, insurance premiums will soar, and energy prices will lurch into volatility.
This sends shockwaves across Asia — but especially through Southeast Asia, where the Strait of Malacca, the region’s own maritime chokepoint, forms the crucial transit corridor for Middle Eastern crude heading to East Asia.
Disruption in Hormuz quickly means more congestion in Malacca. Maritime patrols would need to intensify, and nations like Malaysia, Indonesia, and Singapore may find themselves under pressure — from both the US and China — to align strategically in what was once neutral terrain.
Crude reality: A fragile energy ecosystem
For net importers like Malaysia and Thailand, a prolonged disruption of Middle East oil flows will have real inflationary consequences.
Fuel subsidies will come under strain. Government budgets — already stretched from post-pandemic rebuilding — may be forced into unpopular recalibrations. And for Indonesia and Vietnam, the secondary shock comes via their exposure to global commodity price movements.
Moreover, China’s heavy reliance on Iranian oil — and its close economic ties with Gulf nations — complicates the regional balance.
Any attempt by the US to economically isolate Iran further, especially if it demands Asean nations tighten their enforcement of secondary sanctions, could divide a region still struggling to find a common foreign policy voice.
Arms, alliances, and Asean’s strategic tightrope
A more aggressive Iran will likely turn to proxy retaliation: missiles from Iraq, cyberattacks, Houthi piracy in the Red Sea.
But the bigger risk is that a direct US military involvement — should Iran hit American bases or rush toward nuclear breakout — will convert a regional war into a global confrontation. And that drags Southeast Asia deeper into strategic ambiguity.
The United States will expect friends to act like allies. Already, US logistics routes run through Singapore, while air defence systems and surveillance nodes are being expanded in the Philippines. Yet, China—viewing a weakened Iran as a strategic loss—may accelerate military cooperation and Belt & Road entrenchment across the region.
Asean’s famous neutrality, codified in countless communiqués, is ill-equipped for a world split not by ideology, but by supply chains and satellite orbits.
If the conflict endures, expect an arms race in the region, as nations hedge against the rising tide of global insecurity. Countries like Vietnam and Indonesia will deepen defence partnerships with Japan, Australia, or even India.
Meanwhile, smaller states may become bargaining chips, rather than players.
Market panic and the dollar dilemma
The ringgit, rupiah, and baht are already under pressure from capital outflows.
War jitters will exacerbate this, especially as investors retreat to the US dollar and gold. Central banks in Southeast Asia will face difficult decisions: raise interest rates to defend currencies, or allow depreciation and risk imported inflation.
Worse, if the US economy overheats due to wartime spending — and the Federal Reserve raises rates — emerging Asian economies could be facing a double blow: higher debt servicing costs and fewer foreign inflows. The 1997 ghosts aren’t back, but their shadows grow longer.
Silicon, cyber and shadow wars
There’s another layer of the conflict that is harder to quantify but just as consequential: cyber security and tech supply chains.
Iran and Israel have long fought shadow wars via code — attacks on infrastructure, banking systems, and power grids. Should that escalate, critical semiconductor hubs like Malaysia and Taiwan may find themselves caught in the crossfire.
Southeast Asia, a growing node in the electronics and digital economy, is alarmingly underprepared for a full-scale cyber-conflict between nation states. The region’s patchwork regulations, soft infrastructure, and uneven cyber defence capacity make it a ripe target — not just for state actors, but for criminal syndicates exploiting the fog of war.
What comes next?
The irony is that this war, while fought thousands of miles away, might do more to reshape the architecture of Southeast Asia than any Asean summit ever has.
Energy policy, port security, foreign reserves management, and even food imports (especially from affected regions like Türkiye or Egypt) will all be revisited through the lens of this war.
If Iran indeed makes a sprint toward nuclear breakout, the rules of the game change permanently. And a possible Trump-led US administration may not have the appetite — or allies — to restrain itself. In such a scenario, the entire Indo-Pacific becomes a stage for unpredictable fallout.
The quiet test for Malaysian leadership
For Malaysia specifically, this is a moment of quiet reckoning.
Our long-standing balancing act between the West, China, and the Muslim world will be tested in subtle but significant ways. Public opinion may demand solidarity with Palestine and Iran, while strategic realities nudge us toward cautious alignment with Western security architecture.
The real test will be not in rhetoric, but in procurement decisions, foreign exchange strategies, and how we position our ports, digital infrastructure and fintech frameworks for resilience.
The Iran–Israel war might look like someone else’s fight. But like all wars between giants, the tremors run deep — and the fault lines crack far from the battlefield.
Abbi Kanthasamy (www.abbiphotography.com) is a Canadian entrepreneur, photographer, and writer.
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