An analysis found that the Iran war is causing major setbacks to the Gulf states' strategies to reduce dependence on oil and leap forward as global financial hubs and tourism cities.
On the 10th, the Washington Post (WP) reported, "The Iran war is becoming a major crisis that is testing the long-term economic future of the wealthy Gulf monarchies," adding, "The structural security vulnerabilities and geographic constraints that had darkened the outlook for the region's fossil-fuel economy are now threatening even its emerging industries."
Gulf countries such as the United Arab Emirates (UAE) and Saudi Arabia have long pursued a shift to financial and tourism hubs in preparation for oil depletion. But after Iran, which was hit by U.S. and Israeli airstrikes on Feb. 28, continued retaliatory attacks on neighboring countries hosting U.S. military bases, the image of the Gulf states also took a major hit.
In Dubai, UAE, Dubai International Airport, which served as a "hub airport," was damaged by a drone strike believed to have originated from Iran, and major landmarks such as the Burj Al Arab hotel were also hit. The World Travel and Tourism Council (WTTC) estimated that in the first few weeks of the war, the Gulf region's tourism revenue losses reached $600 million (about 900 billion won) per day. According to the WP, hotels that once bustled with foreign residents and tourists are closing their doors, and restaurants are on the brink of closure.
Financial companies are hesitating to expand operations amid concerns that Gulf offices could become targets of drone attacks. As a result, real estate demand has also fallen, shaking the property market as well. According to the real estate platform Property Finder, after the war broke out, real estate search volume at one point fell 70% from before. Search volume has partly recovered, but transaction volume remains at 60% of the prewar level.
A bigger problem is that even the oil industry, which has supplied the funds needed for the Gulf states' economic diversification, is wobbling. With the Strait of Hormuz—through which one-fifth of the world's oil and gas shipments pass—shut down under the threat of Iranian attacks, affected countries are reconsidering their trade ties with the Gulf states. The global move away from oil is also accelerating.
The UAE and Saudi Arabia have pipelines that can bypass the Strait of Hormuz, but Kuwait, Qatar and Bahrain have no clear alternatives. Bahrain had its major exports halted and saw its sovereign credit rating outlook cut from "stable" to "negative" by Moody's, the international credit rating agency. Andrew Leber, a researcher at the Carnegie Endowment for International Peace, said, "These countries have virtually no escape route," adding, "They are under much greater economic pressure."
Rebecca Patterson, a senior fellow at the Council on Foreign Relations (CFR), a U.S. think tank, analyzed that due to billions of dollars in infrastructure damage, increased security threats from Iran, and reduced oil revenues, funds once allocated to overseas projects are returning home. With oil income down, it means resources must first go to restoring domestic infrastructure damaged by Iran's attacks rather than to investments in economic diversification.
This trend is also affecting foreign corporations. Saudi Arabia last month withdrew a $200 million (about 300 billion won) donation it had pledged to the Metropolitan Opera in New York and plans to halt sponsorship of the LIV Golf tournament. There is also speculation that major technology corporations that have pursued multibillion-dollar data center projects in the Middle East and the United States, relying on Saudi funding, may have to find new investors.
Frederic Schneider, a senior fellow at the Middle East Council on Global Affairs, said, "The official position of these countries is that this economic crisis will recover quickly, as it did during COVID-19," adding, "But structural ruptures that cannot be easily reversed are occurring. Both the oil institutional sector and the non-oil institutional sector are taking heavy hits, with the potential for long-term damage."