The two-fold underlying fundamental tension between Iran, on the one hand, and the US and key UN Security Council members on the other, over the Iran’s nuclear enrichment programme, combined with its aggressive stance towards Israel, remained essentially unchanged during the course of Q208.

Tensions between Israel and Iran have been fuelled by an Israeli military exercise which was reportedly a dry-run for strike on a Iranian nuclear facilities. This was followed by Iranian testing of missiles capable, according Iranian authorities, of hitting Israeli targets.

While it is not our core scenario, a military conflict in the Gulf would send serious shockwaves across the globe. In a political sense, any attack would destabilise the fragile Middle East, and potentially cause a deep power split in the region between pro-US and pro-Iran governments, which could potentially hamper regional stability in years to come. Furthermore, on an economic level, Iran remains a vital oil and gas producer – the fourth largest in the world for both resources – and any attack on the country would be disastrous for global oil markets.

It remains the most plausible scenario that the nuclear crisis will, in time, be solved through diplomatic channels. Indeed, the US is continuing to favour economic sanctions over military intervention, with Under Secretary of State for Political Affairs Williams Burns recently saying 'we view force as an option that is on the table but a last resort'. The US announced new sanctions on over Iran's nuclear enrichment programme on July 9 – adding to the three UN resolutions against Tehran's nuclear programme and current EU measures – targeting four individuals and four entities for their ties to Tehran's nuclear and missile programmes.

In terms of its defence industry, Iran has the capability to supply its own armed forces, and many other armed groups, with significant amounts of a variety of military hardware. While state investment in the Iranian defence industry remains almost unheard of, given a range of international sanctions, non-state actors do not face the same restrictions. This became apparent in the types of weapons being used by Hizbullah during the recent conflict with Israel.

It should be noted that a major source of risk for Iran is may in fact be internal Iranian politics: Recent months have seen the authorities step up a crackdown against the media in an effort to curb rising discontent over President Mahmoud Ahmadinejad's imprudent economic policies and rampant inflation.

Although prices are continuing to push higher on the back of the global rise in food and energy prices, the government has made only limited moves to address the problem. President Ahmadinejad is now facing increasing opposition over his imprudent spending policies which have themselves fuelled price rises.