The sums invested in different countries around the world by oil-rich Gulf states are astronomical.

Sovereign wealth funds belonging to countries like Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and other Gulf countries manage around $5 trillion (€4.35 trillion) worth of investments.

“The global impact of the Gulf countries is not limited to oil,” Majed al-Ansari, the spokesperson for Qatar’s foreign ministry told journalists during an online panel hosted by the Middle East Council on Global affairs on Tuesday morning. “This region is a hub of the international economy and if it decides to focus on its defense and to start pulling investments and to stop its [economic] engagement with the international community, the effect will be felt in every household in the world.” 

Over the past few years, Gulf states’ money has been spent in a wide variety of places. One of the most recent examples saw Gulf sovereign wealth funds supporting a bid by American entertainment company Paramount to take over competitor Warner Brothers.

Last year, after US President Donald Trump visited the Middle East, he returned with multi-trillion-dollar investment pledges from Saudi Arabia, the UAE and Qatar.

During the last decade Gulf states have also spent around $100 billion (€87 billion) in Africa on projects to enhance food security and to obtain critical minerals as well as on energy transition projects.

They have also put billions into what experts describe as “bailout diplomacy” in their own region.

This is defined “as the practice of disbursing large packages of financial or in-kind assistance to bail out states facing financial or economic crises,” experts wrote in a 2023 research paper on the topic. It has included help to stabilize Egypt’s economy as well as financing reconstruction and aid in Syria, Lebanon and Gaza.

Stalled exports and instability

But due to the Iran war, those investment policies could soon change.

The war, which started when the US and Israel attacked Iran in late February, has seen most Gulf states cut back on the production and shipping of oil and gas, sales of which make up the majority of their national income. Iran accuses Gulf states of playing a role in the US-Israel war and has targeted oil infrastructure and airports, in addition to US military bases, in many of them. Iran has also blocked an all-important hydrocarbon shipping route, the Strait of Hormuz.

As a result, financial advisory firm Oxford Economics concluded in a mid-March briefing, that altogether Gulf states’ national income would only grow by 2.6% this year — that’s 1.8% lower than originally predicted.

Some countries will be worse affected by the war than others, the researchers pointed out. This is because Oman and Saudi Arabia still have alternative ways of getting their oil out and may eventually even benefit from rising oil prices. But Bahrain, Kuwait and Qatar don’t have those alternatives. 

Gulf countries have been trying to diversify away from their oil-based economies, and the Iran war has seriously set these plans back too. It has impacted tourism, real estate and the digital sector in the region, and caused local stock exchanges to tumble.

As Frederic Schneider, a senior fellow at the Middle East Council, wrote last week, “videos of explosions in Dubai, Doha and Manama… have pierced the Gulf’s carefully cultivated image of security.”

Tourism sector experts say airspace closures, especially during the holiday season of Ramadan, could lead to a loss of as much as $56 billion in visitor spending. 

What will happen to Gulf investments next?

“It is still too early to be able to say with any certainty how the Gulf economies will be affected by the conflict,” says Tim Callen, a visiting fellow at the Arab Gulf States Institute, or AGSI, in Washington and expert on Gulf state economies. “It will certainly be negative in the short term, but longer-term impact will depend on the length of the conflict and what the situation is in the region when it ends.”

Most of the Gulf’s sovereign wealth funds are healthy, he continued in an email to DW: “So I don’t think at this stage the war will have a big impact on overseas investment strategies. But again this may change the longer the conflict goes on, and the bigger the impact on the domestic economy.”

Gulf states being targeted by Iran are also likely to have some different spending priorities after fighting finishes, observers suggest.

In a weekly briefing, Lebanese financial consultancy Nasser Saidi and Associates argued that these could include “greater investment in resilience infrastructure such as strategic food reserves or alternative export pipelines [and] higher government spending for reconstruction, defense and security.”

“There will be an effect,” Qatari foreign ministry spokesperson al-Ansari confirmed. “Because of the economic hardship that we’ll be facing as a result of the war, because of the [reduction in trust in the stability of] the Gulf, we will be quite busy — rebuilding, increasing our defense posture, and dealing with the immediate regional crisis.”

It could also be that sovereign wealth funds are called on to support domestic economies somehow, Rachel Ziemba, a non-resident fellow at the Gulf International Forum who runs her own geo-political risk advisory firm, suggested on her Substack page last week. That might mean, for instance, by helping to keep empty hotels in business.

Reassessing promises to Trump

This week Britain’s Financial Times newspaper quoted an anonymous source saying that three of the larger Gulf states were reviewing proposed investments in the US because of the financial strain of the war.

Last year, after Trump’s visit, the UAE agreed to invest $1.4 trillion there, Qatar said it would spend $1.2 trillion and the Saudis agreed to deals worth $600 billion, including a $142 billion arms package touted as the largest such deal in history.

But the AGSI’s Callen doesn’t believe such a review is likely. He points out that increased defense spending, something a country like Saudi Arabia is likely to want, would actually “be consistent with the Saudi commitment to spend and invest more in the US.”

Ziemba also notes that at least some of those pledges to the Trump administration “were more signals of intent” anyway.

Near-term impacts are fairly clear, Callen says, and there’s likely to be lower-then-expected growth in the medium term too because the region will be seen as riskier. Long-term impacts remain uncertain though. 

“Investment across the board will be affected,” Callen concludes. “The question is by how much and over what period. And this will depend on how the war ends. If the risk of future conflict and disruption remains, then it could be permanently affected.”

Edited by: Carla Bleiker