What's behind Iran's surprising restraint in the Israel-Gaza war?

The unfolding scenario in the Gaza war seems to be shifting towards bilateral, regional, and international agreements rather than a broader escalation, despite the severity of the situation on the Lebanon-Israel front. This shift can be attributed to several reasons. First, US President Joe Biden’s administration is employing a "carrot and stick" strategy with Iran and its allies. The stick aspect has deterred Iran from direct involvement in the war with Israel, compelling it to confine its activities within the "rules of engagement" – underscored by the presence of US carrier groups. The carrot part includes various incentives for Tehran, such as the promise of releasing billions of dollars in frozen funds and lifting sanctions in exchange for non-interference in the conflict. Additionally, US allies in Europe and the Middle East have been supportive of incentivising Iran further with the prospect of financial support to aid its economic and national recovery. And then there is the notion of ending Iran's isolation and setting the stage for its inclusion as a critical participant in the future security arrangements of the region. Second, US Secretary of State Antony Blinken and the EU High Representative Josep Borrell issued categorical refusals directed at Israel and its plans for Gaza. These western “vetoes” include rejecting any ideas of forced displacement, warning against the deliberate targeting of Palestinian civilians and rejecting the prospect of Gaza's reoccupation. These firm stances, coupled with the opposition to Israel's efforts to lure Hezbollah into a conflict for the purpose of using the opportunity to neutralise the latter’s rocket arsenal, have prompted Israel to reassess its strategic calculations. The messages conveyed from the West have been unequivocal: we will not get involved. Support from Iran was a major factor in Hamas’s strategic calculus when it launched its unprecedented operations on October 7. It probably sought a regional war involving Iran, not just Arab countries, betting on the unification of "resistance fronts" such as Hezbollah. But both Tehran and Hezbollah disavowed any prior knowledge of its operations on October 7, though some question this. Iran’s supreme leader Ayatollah Ali Khamenei informed Hamas during a meeting this month with Ismail Haniyeh, the head of the movement's political bureau, that Iran would not enter the war. He asked Mr Haniyeh to silence voices calling on such involvement. What is behind this Iranian pragmatism? Hamas's exclusive control over the attack and its timing could be a significant factor. Iran, moreover, probably did not anticipate the swift deployment of US aircraft carriers. Faced with this threat, the Iranian leadership may have decided not to jeopardise Tehran’s nuclear programme, now thought to be in its final stages, from destruction in a military conflict. Second, Iran’s air and missile defence systems are said not to be as effective as previously believed. An all-out confrontation with Israel would risk the exposure of Tehran’s claims to military superiority. Third, engaging in the war could cost Iran one of its most valuable assets – Hezbollah. The Lebanese militant group is a prized deterrent – the first line of defence for threats to Tehran, Hezbollah is a precious card that Tehran does not want to forfeit. It is Iran's only fixed and permanent asset, more robust and resilient than other proxies such as the Houthis in Yemen. Fourth, the temptations of billions in unlocked funds and the lifting of sanctions are not marginal but essential if the Iranian leadership intends to salvage its economy and implement the "renaissance" programme it has formulated, hoping to rally the Iranian people, especially the younger generation, around nationalism. Tehran must realise there is a ticking time bomb in the regime's flank if it does not pay heed to the youth's reactions in the face of oppression, poverty and theocracy. Meanwhile, the neighbouring environment in the Gulf countries offers its youth a future with vision, vitality, and democracy. Fifth, Tehran has decided that it has a unique opportunity with the Gulf countries, some of whom have been engaging in mediation on its behalf and maintain strong trade ties. Iran wants to capitalise on the positive elements of the bilateral agreement between it and Saudi Arabia, brokered by China. Notably, the Arab-Islamic summit in Riyadh this month helped to reassure Iran that a new chapter awaits it, especially regarding co-operation with GCC states. The participation of Iranian President Ebrahim Raisi was of utmost importance, in part because he agreed to a non-escalatory final statement devoid of ideological rhetoric. This statement underscored the pragmatic approach of Arab-Islamic positions towards Palestine and Israel. His speech did not glorify the actions of Hamas on October 7, sending a message that there is unlikely to be a role for the group at the settlement table. The Riyadh summit essentially "repackaged" the Arab Peace Initiative that originated at a summit in Beirut in 2002. All these factors indicate an atmosphere in Iran right now of "realpolitik" over ideological posturing. As it appears today, the fuse of war has been removed between Iran and Israel – a significant achievement for the Biden administration, with substantial contributions from Arab Gulf countries. But what would Tehran do with its proxies if it genuinely decided to revise its ideology to save the regime? How would it justify accepting the financial "carrot" in exchange for a commitment to refrain from military intervention? There is a view that doubts any shift towards pragmatism and political realism in Tehran, considering it a decoy to stall for time and fortify its ideology, proxies and expansionist goals. This view believes the regime will collapse if it alters its logic because its logic is intrinsic to its existence. The other view suggests that the regime's survival necessarily requires adjustments domestically, regionally and internationally. Reform will, in the end, be the basis for saving the regime in Tehran. In this case, the regime would be forced to re-evaluate its proxies and rehabilitate them. For Hezbollah, that might look like transitioning into a "stabilising element" in Lebanon rather than a destabilising force like it is now both at home and abroad. All of this, however, is premature because such huge shifts take a lot of time. And the risk of slipping outside the "rules of engagement" in the current conflict with Israel remains. Crucially, however, right now it seems the regional and international momentum is in favour of containing the conflict by defusing the escalation and actively working towards a broader, sustainable settlement accounting for the strategic positions of all in the region.