Given the imbalances in capabilities, an Iran weakened by decades of sanctions and isolation will lose the kinetic conflict. But the US and Israel’s ability to win the strategic war is uncertain. As former US defence secretary James N Mattis understood: “In war, the enemy gets a vote”.
The problem is the lack of clear objectives. The Trump administration has offered a confusing and ever-changing kaleidoscope of aims. Israel’s goal is chaos and disarray to further its regional, territorial and hegemonic ambitions. The conflict is, in reality, a distraction for two leaders from major domestic and personal issues.
Unable to militarily match its opponents, Iran’s focus is on inflicting economic and commercial damage. Even war now is financial rather than human. The object is to harm Gulf and Western citizens, focusing on their wealth and comfort with little tolerance for risk or pain.
First, the US is incurring costs of around $1-2 billion a day. Congress has been asked for $50 billion in immediate emergency funding. The overall cost could reach $210 billion, depending on the conflict’s trajectory. Given the public debt of $39 trillion, it will strain the American government’s finances. The damage to Iran and the global economy will push this number higher.
Second, Iran has targeted the Strait of Hormuz along with Saudi Arabian and Qatari energy facilities. It may seek to limit transit through the Bab-el-Mandeb. Oil and gas prices as well as shipping and insurance costs have risen sharply with the potential for further increases. The effectiveness of US proposals to provide escorts remains uncertain. A return to normality soon is unlikely as the risk of new hostilities remains.
The availability and cost of energy will have far-reaching effects on electricity, fertiliser, shipping, chemicals, mining and manufacturing. Semiconductor supply chains, refining and industrial chemicals and extractive industries will be quickly affected. An interruption to desalination, a major source of water for the Gulf, would not be trivial.
Third, the economic impact on the Middle East is substantial. The curtailment of civilian air traffic has exposed a vulnerability. Every day, over 300,000 people transit through Dubai, Abu Dhabi and Doha. These cities act as key links between Asia, Africa, Europe, the Americas and Oceania. This will affect both people’s movements and cargo, interfering with supply chains. After the invasion of Ukraine, the closure of Russian and Ukrainian airspace to European carriers limits re-routing options. The effects on airfares, freight costs and choices remain unknown. Even after the war ends, the threat of future interruptions will likely change behaviour.
The Gulf’s standing as a business and financial hub will be tarnished, perhaps irretrievably. The illusion of liberal and lucrative centres for commercial activities has been shattered. Rebuilding reputations will be difficult unless the underlying geopolitical tensions are resolved—a Herculean task.
The flight of expatriates and migrant labour from affected countries is another issue. They are critical to Gulf economies because of their small local populations. As workers return home, remittances from migrant labour will also be affected. Outbound remittances from the Gulf totalled over $120 billion in 2022. The impact will be felt by originating countries, mainly in Asia and Africa, placing strains on domestic employment and services.
Finally, the contraction in Gulf economies will affect global capital flows. These economies rely on energy, transport, logistics, finance and tourism. The petrostates may be asked to pay for the war. US President Donald Trump, consistent with his recent behaviour, will expect to be paid for ‘protecting’ them from ‘evil’ Tehran. In the long term, they will have to increase defence spending. Some, such as Saudi Arabia, may need to acquire nuclear capabilities. This represents a significant claim on income, especially when countries like Saudi Arabia already face fiscal pressures. Gulf administrations are now reviewing investment portfolios because of cash flow pressures and reassessing their strategic relationships. The flow of funds into the West from regional investors—including sovereign wealth funds—will dwindle and probably reverse.
If the war remains contained, these pressures will lead to a global slowdown. As is obvious, the more protracted and widespread the war, the greater the impact. It will result in a large diversion of resources that were already underway for defence. As beleaguered Iran switched to asymmetric warfare such as terrorist attacks against the West, more domestic security spending as after 9/11 will be required.
Countries not directly involved in the conflict will face rising costs from war refugees and returning migrant workers. If there is any humanity and compassion left in the world, they will also have to share the costs of repairing the humanitarian catastrophe that they have actively or passively allowed.
Inflation pressures will increase to an uncertain extent. This will hit lower-income groups as essential goods and services will be worst affected and governments will scale back social programmes, prioritising weapons. Short- and long-term interest rates will diverge. The tension between rising prices and a slowing economy means that central banks face Hobson’s choice between the bad and the terrible. Long-term interest rates may rise to accommodate higher budget deficits and the change in capital flows. Bond rates in the US, the UK and Europe have drifted higher, with investment implications.
In currency markets, the Pavlovian drift to the US as a safe haven will reverse as familiar concerns about America and the weaponisation of the dollar intensify. Equities, which have ignored anything factual for decades, are now buying defence-related industries and commodities. Investment in AI, whatever its actual merits, is being justified on the new grounds that it is essential for warfare. Purveyors will use the conflict cynically to raise funds. Volatility will be high, especially in commodities and bonds.
If the war continues and spreads, a world conflagration is possible. It would precipitate an unprecedented financial reckoning. Given existing economic excesses and other challenges, like climate change and resource scarcity, it would be difficult to contain.
History will not judge this war kindly. As former US defence secretary Donald Rumsfeld put it: “Those who made the decisions with imperfect knowledge will be judged in hindsight by those with considerably more information at their disposal and time for reflection.”
Satyajit Das | Former banker and author of A Banquet of Consequences
(Views are personal)