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Insights
May 2025
After coming dangerously close to all-out war in 2024, the Middle East now finds itself on the cusp of several potential gamechangers—developments that, if realized, could fundamentally reshape the region and usher in a new era of stability and prosperity. Seizing this moment demands more than bombs and bravado. For the U.S. to pull off a diplomatic hat trick—(1) neutralizing Iran, (2) advancing regional integration, and (3) setting Palestine on a credible path to statehood—it must secure the enlightened self-interest of transactionally-minded stakeholders and restore confidence in America’s staying power amid growing talk of U.S. troop withdrawals and shrinking foreign assistance. 2025 is a pivotal year for the region as multiple critical issues come to a head. The Trump administration’s country-specific tariffs make headlines, but sector-specific tariffs will have a more lasting impact. These tariffs are likely to stick around due to domestic political and economic hurdles in unwinding them, as well as growing bipartisan consensus that domestic manufacturing in key strategic sectors is necessary for U.S. national security.
Findings
No actor shapes the Middle East’s security environment for the worse more than Iran—its malign behavior is the organizing principle defining alliances, rivalries, and threat perceptions. After a series of bold, high-risk Israeli military actions last year, Tehran now finds itself at its weakest point since the 1979 Islamic Revolution. Its “axis of resistance”—including Hezbollah, Hamas, and other Iranian-aligned militant groups—is reeling. Deterrence has been undermined and air defenses shattered after two failed missile attacks on Israel. New leadership in Syria and Lebanon seem intent on resisting its influence. Russia, once a reliable backer, is focused on Ukraine. At home, the regime faces deepening unrest, a spiraling economy, an energy crisis, and a looming leadership transition. And yet, Iran still holds a powerful card: its nuclear program.
The diplomatic window is cracked open, but likely not for long. Iran’s leadership, fully aware of their exposed position (and working to overcome it), may feel pressure to negotiate—especially with President Trump stating his preference for a deal over “doing the obvious,” while visibly ramping up U.S. military presence into the region. But Iran won’t accept just any deal; demands for zero enrichment that resemble Israel’s preferred “Libya solution” will be rejected. More doable is something that looks like the Obama-era “JCPOA,” perhaps without the detested sunset clauses. Such an agreement would be enough for the Administration to declare victory and move on – as some Administration officials are hinting they are ready to do.
The looming October 18, 2025, expiration of UN sanctions relief adds more urgency. If Iran is still pursuing a bomb by late summer or fall, the UK, France, and Germany are expected to allow for the “snapback” of UN sanctions that include an arms embargo, targeted global asset freezes, travel bans on Iranian leadership, a ban on uranium enrichment and reprocessing, a ban on ballistic missile technology, and authorization for cargo inspections. In response, Iranian officials have said they would consider leaving the Non-Proliferation Treaty (NPT) regime, which would remove virtually all nuclear inspection mechanisms. This tit-for-tat would be lose-lose for all sides. Sanctions relief, on the other hand, as part of any deal would lift Iran’s economy, re-open the country’s access to markets and trade, and allow it to re-capture some market share within the energy sector. One of the hardest issues to reconcile is how to prevent Tehran from using any sanctions relief to refuel its war machine (as happened a decade ago with the JCPOA).
Despite the incentives pushing toward a deal—including, importantly, the Gulf states’ shift toward reproachment over confrontation in service of transforming their economies—miscalculation remains a serious risk. Communication channels are shaky and mutual distrust runs deep. Israel, possibly backed by Iran hawks in the U.S. pushing for “maximum pressure” or “escalate to deescalate,” now sees this as the perfect moment to strike. Iran might double down and sprint for a bomb. Either side could misread the other’s intentions. Escalation, whether by design or mistake, could come fast—and spiral into a wider regional war.
2025 marks five years since the landmark Abraham Accords—a tectonic shift that opened up relationships, travel, trade, and cross-border investment between Israel and several Arab states, and three years since the launch of the Negev Forum, which aimed to deepen these relationships further. While the October 7 attacks and Israel’s military response in Gaza stalled that momentum, it remarkably didn’t stop it, and further normalization isn’t off the table. With the right peace deal—namely one that includes a credible path to Palestinian statehood—the door remains open to reignite regional integration. The ultimate prize: normalization between Saudi Arabia and Israel. Both parties want it and, in late 2024, were closer than ever to a deal, backed by quiet but intensive U.S. diplomacy.
For Riyadh, normalization is not about Israel per se—it’s about business. Vision 2030, Crown Prince Mohammed bin Salman’s sweeping modernization plan, hinges on global economic integration. Powered by the financial engine of its ＄700+ billion sovereign wealth fund (the Public Investment Fund, or PIF), Saudi Arabia is actively repositioning itself from a petrostate to a diversified investment hub, with a focus on:
The speed and scale of the Kingdom’s transition is jaw-dropping. However, for its ambitions to be fully realized, key changes are still needed. Although the economy is rapidly diversifying, many businesses still find it more difficult to operate there than in many of its neighbors. For example, the regulatory environment remains too challenging, which hampers growth. The Kingdom’s complex bureaucracy remains opaque and often arbitrary, which stifles innovation. And the comparative tax regime remains less attractive when compared with many of other Gulf states, which hinders investment.
As Saudi Arabia ramps up, it's not just transforming its own economy—it's recalibrating the region's economic gravity. For smaller Gulf players like the UAE, Qatar, and Bahrain, the challenge is maintaining their first-mover advantage and competitive edge as the Saudi juggernaut hits full stride. In this emerging Middle East 2.0, regional integration isn’t just a peace dividend—it’s a business model. The stakes are high, and the window for U.S. leadership in shaping the economic architecture of the region may not stay open for long. Saudi Arabia’s Vision 2030 will move ahead with or without the United States. President Trump’s May 2025 visit to the region accelerated the momentum toward greater integration, emphasizing the tremendous growth opportunities and potential for U.S. partnerships in the region, pledging a reported ＄2 trillion in investments over the next several years in such areas as defense and cutting-edge technologies.
In a region oversubscribed with tough challenges, this is the hardest to achieve, where progress seems furthest away. A credible, timebound, and irreversible path to Palestinian statehood remains the critical hinge for lasting, long-term regional stability—and for unlocking the full potential of economic integration across the Middle East. The situation in Gaza is tragic, volatile, and unresolved. Hamas is unrepentant and still holds hostages, so the IDF is back on the ground in Gaza and now expanding into the West Bank. But Israel’s endgame remains murky. The Netanyahu government has made clear that Hamas cannot be allowed to govern Gaza again—rightly so—but has yet to present a viable alternative. Without a credible postconflict plan, Gaza risks becoming a long-term quagmire for Israel, draining resources, deepening global isolation, and stalling normalization efforts with Arab states.
A roadmap toward Palestinian statehood— however incremental—would re-energize the Abraham Accords, bolster moderate Arab regimes, and give regional investors and multinationals the confidence they need to commit long-term capital. Without it, normalization risks becoming a glass ceiling: visible, but never fully breakable.
A broader deal could also act to stabilize the Red Sea corridor, vital to global shipping and trade. The current Houthi threat—disrupting one of the world’s busiest maritime chokepoints—won’t be destroyed by airstrikes alone. A political solution, anchored in reduced regional tensions and Palestinian progress, is the only way to ensure lasting stability—and with it, lower shipping insurance costs, more predictable supply chains, and downward pressure on global prices.
