The U.S.-Israel-Iran war has placed the Gulf Cooperation Council (GCC) states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) — under growing economic pressure, though the nature and severity of this pressure vary considerably across the six states. These states now face a significant challenge. They must gauge the immediate impact of the conflict and assess their capacity to sustain economic stability under the strain of an open-ended war.  

The GCC states face a structural trade-off between a continued dependence on hydrocarbon revenues and the strategic ambition to diversify sources of income, pursued in part through sovereign wealth funds (SWFs). Prior to the war, fiscal positions across GCC states ranged from strong fiscal surpluses in Qatar and the UAE to fiscal deficits in Saudi Arabia and Bahrain, with each state’s ability to absorb short-term shocks shaped in part by the liquidity of its foreign-exchange reserves.  

Even where surpluses exist, they can mask deeper structural vulnerabilities, particularly for states whose economic models continue to rely heavily on hydrocarbon revenues. How they navigate this trade-off will shape the Gulf’s economic trajectory long after the war ends.  

The U.S.-Israel-Iran war highlighted how modern warfare can directly target supply chains, the investment climate, and the confidence of global markets, all of which are preconditions for the success of any economic transformation agenda. Regardless of the magnitude of their reserves, the Gulf states will remain susceptible to instability whenever the region faces a war or other external shocks. 

Geography as a Source of Economic Vulnerability 

In the case of the GCC states, their geographic location renders their economies especially vulnerable to any regional war. As Iran did during the recent war, strategic maritime corridors vital to the global economy, such as the Strait of Hormuz, through which around 25 % of the world’s seaborne oil trade passes, the Arabian Sea, and the Red Sea, may serve as instruments of geopolitical leverage. The disruption of navigation through these passages has triggered an increase in shipping insurance premiums and a disruption of trade flows, with a direct impact on oil exports and the import traffic upon which the region’s states rely to secure essential supplies.  

The impact of these disruptions has varied considerably across GCC states. Saudi Arabia and the UAE have been able to partially bypass these disruptions through relying on alternative routes, including the East-West Pipeline to the Red Sea port of Yanbu for Saudi Arabia, and the Abu Dhabi Crude Oil Pipeline (ADCOP) in the UAE, but even together, these routes are not able to compensate for the volumes that normally transit the Strait of Hormuz, while maritime trade of other commodities, including fertilizer, aluminum, and sulfur, remains disrupted. In contrast, Bahrain, Kuwait, Qatar, and Oman have no bypass infrastructure and rely on the Strait of Hormuz for the delivery of most of their oil exports. Bahrain, Kuwait, and Qatar have all sustained significant infrastructure damage from Iranian strikes. Oman has been largely spared, likely owing to its diplomatic role. Among the GCC states, Qatar’s Ras Laffan complex sustained extensive damage to LNG and gas-to-liquid facilities, reducing its LNG export capacity by 17% at an estimated cost of about $20 billion, with repairs projected to take up to five years. These physical disruptions to export and import routes have also contributed to perceptions of risk among foreign investors. 

An Investment Climate Under Strain 

In mid-2025, the Economist Intelligence Unit (EUI) forecast that foreign direct investment (FDI) in the Gulf would grow in the medium term. The number of FDI projects in the GCC reached 1,973 in 2024, up from 1,929 in 2023, while investor interest continued into 2025, albeit not homogeneously across Gulf states, with projects such as Saudi Arabia’s NEOM struggling to attract foreign investors. The region’s exposure to active conflict may undermine GCC states’ efforts to continue attracting FDI, which has become a central pillar of their economic visions, particularly for the national plans of Saudi Arabia, the UAE, and Qatar. Global capital tends to become more cautious when geopolitical risk rises. This potential flight of capital, or even the reluctance of investors to commit to long-term projects, could pose a challenge to Gulf governments, who must finance their security and defense needs, protect the home front, and compensate for a decline in foreign investments in their development projects.  

The Role of Sovereign Wealth Funds  

The majority of GCC states invested in fixed-income securities such as U.S. government bonds through their SWFs in the 1990s, which afforded them a degree of liquidity. Since the 2000s, they have increasingly shifted their investment strategies toward more development-oriented assets, including private equity, infrastructure projects, real estate, and direct corporate stakes, reducing the share of their SWF holdings that can be quickly liquidated in a crisis. 

Today, Gulf SWFs are estimated at between $4 trillion to $6 trillion and represent more than 40% of global SWF assets. The scale of these funds varies considerably across the GCC (Figure 1). The UAE’s combined SWF assets are estimated at approximately $1.95 trillion, equivalent to over 300% of GDP, while Kuwait’s Investment Authority stands at an estimated 578% of GDP (Figure 1). Over recent decades, these SWFs strengthened Gulf states’ economic resilience and sovereign creditworthiness and afforded them a degree of fiscal flexibility unavailable to many advanced economies.  

Central to this flexibility is their role as a robust credit buffer that enables governments to borrow from global markets on acceptable terms even under the most adverse circumstances. For instance, recent UAE–U.S. discussions on a potential dollar swap line, to act as a “financial lifeline” during times of crisis, occurred in a context of strong sovereign balance sheets, where large sovereign wealth fund holdings reinforced financial credibility. This underscores the role of SWFs as potential financial safety nets, strengthening market confidence without requiring immediate asset liquidation. Yet, the request for this swap line by the UAE suggests that the total funds valuation may overstate the immediately accessible buffer available to GCC governments under stress, as even a state with combined SWF assets exceeding 300% of GDP (Figure 1) may face short-term liquidity constraints. At the same time, the UAE case shows that even substantial SWF holdings cannot fully substitute for liquid, immediately accessible financing in moments of crisis.  

The Limits of Sovereign Wealth as a Crisis Buffer 

The pressure to rely on these SWFs in times of crisis, either by drawing on more liquid public-market assets, where available (for example, in Kuwait, Qatar, or Oman) or by using their creditworthiness to finance deficits and mounting defense expenditures, risks shifting part of their focus away from long-term development, potentially delaying these states’ transition to a post-oil economy. This pressure was already building up even before the war. Saudi Arabia, the GCC’s largest economy, was already running a fiscal deficit of –2.02% of GDP in 2023 (Figure 2), with the IMF estimating that it would reach –4.88% of GDP by 2026, suggesting that even the region’s most resource-rich states faced fiscal pressures entering the war. Saudi Arabia’s fiscal position is further complicated by the substantial borrowing undertaken by PIF and state-owned companies such as Aramco, whose bond issuances do not appear in official debt figures but would ultimately fall on the state in a crisis. 

These fiscal pressures are further illustrated by the range of fiscal breakeven oil prices across GCC states (Figure 3), which range from around $44/bbl for Qatar to around $137/bbl for Bahrain based on IMF projections for 2025. However, these figures understate the full fiscal exposure of some states, as conventional fiscal breakeven estimates tend to exclude off-budget spending. The gap can be significant: Bloomberg Economics estimated a PIF-inclusive fiscal breakeven of $113 per barrel for Saudi Arabia in 2025 compared to a projected IMF breakeven of $92.3 (Figure 3), reflecting PIF’s domestic commitments to the state’s Vision 2030.  

Kuwait’s experience during the 1990-91 Gulf War is instructive in this regard, as the government drew down approximately $17 billion from its SWF to sustain war operations and maintain state functions under conditions of occupation. Kuwait faced significant deficits between 1990 and 1995, driven by a collapse in oil revenues, war spending, and reconstruction, which were financed by its Future Generations Fund. As a result, the fund, an intergenerational saving platform managed by the Kuwait Investment Authority, lost almost $30 billion of its prewar investment portfolio.  

While today’s GCC states face different constraints given the increasingly illiquid nature of their SWF holdings, the Kuwait experience remains relevant: as public resources are redirected toward security and defense spending, the trajectory of economic diversification slows and the role of the state as the primary economic actor is reinforced, thereby marginalizing the private sector. The recent war is likely to reshape decisions about public spending priorities in parts of the GCC, and to increase spending on defense and militarization. Saudi Arabia, in particular, had made sustained efforts to reduce military expenditure as a share of GDP in line with Vision 2030’s emphasis on economic diversification, a trend the war is likely to reverse. 

Militarization and Domestic Economic Development 

The indigenization of military industries and the development of an advanced domestic defense sector present an opportunity for transforming Gulf states’ economies. The Gulf states, notably Saudi Arabia, the UAE, Qatar, and Kuwait, have recognized that reliance on imports to meet defense needs creates substantial security and economic exposure during war. The scale of that reliance is considerable: Qatar, Saudi Arabia, Kuwait, the UAE, and Bahrain collectively accounted for 20% of global arms imports in 2020-24 based on data from SIPRI, with Qatar, Saudi Arabia, and Kuwait ranking among the world’s top ten importers. Across the GCC countries covered by the SIPRI data, the United States supplied between 42% and 97% of major arms imports, a supply-chain concentration that under conditions of active regional conflict introduces its own category of strategic vulnerability. 

Even prior to the war, Saudi Arabia aimed to localize 50% of its military spending by the end of the decade as part of its Vision 2030, with localization of military spending reaching 24.89% in 2024. The current war is reinforcing GCC states’ strategic reorientation toward integrating military expenditure into the domestic economic cycle through government-led defense-manufacturing entities that meet armed forces’ requirements. This reorientation seeks to convert the cost of war and deterrence from a financial drain into a source of economic investment that stimulates innovation, generates employment, and facilitates the transfer of advanced technological capabilities to local industries.  

The outbreak of a regional conflict has intensified pressure on Gulf states to hasten this industrial transformation, with the war’s strain on international defense supply chains expected to deepen the push toward military localization more broadly. Programs targeting critical technologies such as air-defense systems, unmanned aerial vehicles, and electronic-warfare capabilities are among those most likely to be indigenized. This path represents an opportunity to build a high-value-added industrial sector that can link scientific research to industrial applications. However, the transition faces significant barriers. Defense industrialization requires long development timelines, sustained capital investment, and access to advanced technologies, all of which are difficult to secure during a war due to supply chain disruptions. Another barrier is the absence of capital‑intensive manufacturing sectors (steel, metals, heavy machining, etc.) needed to feed into the defense industry’s production network. While European start-ups are in discussion with some Gulf states regarding the supply of defense technology, constraints on technology transfer, particularly from the U.S., predate the war. 

If Gulf states succeed in managing this transition, the war could act as a catalyst for the establishment of military-industrial complexes that serve as the foundation of a robust technological economy, one that reduces external dependence, but they must ensure that this transition does not crowd out other critical investments in human capital and diversification.  

Institutional Resilience and Crisis Adaptation 

Over the past decade, GCC states have accumulated considerable institutional experience in managing turbulent crises. From successive collapses in oil prices to the repercussions of the COVID-19 pandemic on supply chains, and to global disruptions triggered by international conflicts, including the Russia-Ukraine war, Gulf economic administrations have demonstrated a strong capacity for rapid adaptation. Foreign exchange reserves, a key liquidity buffer, stood at $463.87 billion in Saudi Arabia, $237.93 billion in the UAE, and $53.99 billion in Qatar as of 2024, sufficient to cover approximately 15 months of imports in Saudi Arabia, 7 months in Qatar, and 9 months in Kuwait, all well above the standard IMF adequacy threshold of 3 months as of 2024 (Figure 4). Among the GCC states, Bahrain is particularly vulnerable to a prolonged disruption of export revenues or external financing, as its reserves cover only one month of imports (Figure 4). Highly flexible fiscal and monetary policies have been activated, major government institutions have been restructured, and investment portfolios have been professionally diversified both geographically and sectorally to mitigate risk.  

This institutional maturity and the continuous modernization of economic decision-making mechanisms provide Gulf states with a strategic advantage, enabling them to protect themselves from financial collapse or economic paralysis. Gulf central banks today possess advanced analytical and interventionist tools, as illustrated by the UAE Central Bank’s deployment of a liquidity resilience package for the banking sector at the outbreak of the current conflict, and ministries of finance have the flexibility to adjust tax policies and rationalize expenditure while maintaining essential services. Consequently, Gulf states may not emerge from the war with the same economic structure with which they entered it, but they will not necessarily emerge from it significantly weakened.  

Resilience at What Cost?  

The question posed by the U.S.-Israel-Iran war and its repercussions is not whether the Gulf economy will survive the war, but in what form and at what cost—IMF projections from April 2026 show positive growth for Saudi Arabia (+3.1%), the UAE (+3.1%), and Oman (+3.5%), while Bahrain, Kuwait and Qatar face contractions, reflecting uneven exposure to Hormuz-dependent export routes and infrastructure damage. GCC states also enter the post-conflict period with uneven fiscal health, with Bahrain carrying gross government debt of 152.4% of GDP (Figure 2), a position that constrains its fiscal recovery options in ways that Saudi Arabia or Kuwait, with debt levels below 35% of GDP, do not face.   

Beneath this unevenness lies a common strategic question that all six GCC states now face because of the war: Will the region witness the emergence of a more diversified and autonomous economy, underpinned by innovation, domestic industries, and capable human resources? Or will it revert to a militarized-rentier economy, more heavily dependent on oil surpluses and relying on the creditworthiness of SWF assets to finance its survival? The answer to these complex questions will determine whether this war is a temporary developmental setback or a turning point that redraws the economic and political paths of the Gulf.