Iraq, Kuwait, Bahrain, Qatar, the United Arab Emirates and Saudi Arabia. They are literally built their entire economies on oil and then to diversify to the risk, if you will, they build some of the biggest airliners in the world. And they became a so-called safe haven in the Middle East. But now this war and specifically the blockade of Hormuz are threatening all of it at the same time. And honestly, I don't think people realize yet how unfathomably big this crisis is for the Gulf economies. For example, take Qatar. Its economy depends on oil, and especially natural gas for roughly 42%. And almost all of that has to go through the Strait of Hormuz to de-risk. Though Qatar became an international air travel hub, which means now aviation accounts for a little over 10% of its economy and tourism. For another, roughly 10% of GDP seemed very smart just a few months ago. But now, with both its airspace and the strait close, it means that at least 62% of Qatar's entire economy is in a state of total paralysis. But just for context, Ukraine's economy contracted by roughly 30% in 2022. The US economy contracted for 29% during the Great Depression over the course of four years. But of course, Qatar is not Ukraine. It is one of the wealthiest countries in the world. So a month long shutdown was manageable. So if the war ends in a month. A Goldman Sachs economist has estimated that Qatar's economy will only contract by 14% in 2026. Still, that is a substantially bigger recession than happened during Covid. But of course, like after Covid, Qatar will bounce back from this. No problem. However, the thing is, this conflict, it doesn't look like it's getting any better. In fact, I've read some pretty alarming reports that Gulf states like Qatar depend for 99% of their drinking water on these six desalination plants, which have in Bahrain already been targeted in the war. This means that in a true disaster scenario, the entire country may need to be evacuated. So that raises the question are Gulf economies facing a total collapse? Iran has said it wants U.S. troops out of the Middle East. Could it soon forced Gulf economies to eject U.S. troops simply by choking their economies?

Hey, I'm Yuri, I'm a pizza in economics, and I've spent the last days analyzing all of the Gulf economies and how bad they will be affected by three potential scenarios. Scenario number one, a quick end to the war, either because the US wins are because Iran forces them to push out US troops, the Gulf countries, that is. Then there's scenario number two, a long a war, in which case I've calculated how long the various Gulf economies can survive without export revenue through the Strait of Hormuz. And finally, scenario number three, a disaster scenario in which either the Gulf economies run out of water or population given that some rely for almost 90% on immigrants. So let's get into it with scenario number one. A short war, which is exactly what we have been seeing so far. To understand the damage done so far, we have to look at the two biggest disruptions done to the Gulf countries, which is exactly what we have seen so far a short disruption. But to understand the damage that has already been done, we have to look at the two biggest disruptions that to go of countries have faced. First, there's the stencil of industries that depend on the Strait of Hormuz for exports, such as oil and gas and also manufacturing, plus the effective standstill of air travel and tourism, oil and gas. So far, Bahrain is the least dependent on it, with it accounting for roughly 26% of its economy. Actually, its main diversification strategy has been manufacturing, which now accounts for roughly 15% of its economy. But sadly, that is also mostly for exporting through the Strait of Hormuz. Bahrain is the least dependent on oil and gas, with it accounting for roughly 26% of its economy. Its main diversification strategy, though, has been manufacturing, which now accounts for roughly 15%. But sadly, that is also mostly going through the Strait of Hormuz. Bahrain is also a major tourist destination these days, but that is mostly for local tourists, so that seems to be fine so far. So all in all, I'd say that roughly 41% of its economy is paralyzed right now. Compare that to Kuwait, which depends for 35% on oil and gas, while trade, tourism and manufacturing is relatively small. So I'd say that roughly 38% of its economy is paralyzed and its northern neighbor, Iraq, it depends for about 55%. That's quite a lot on oil and gas for its GDP. And almost all of that was exported through her moose. But now Iraq has just reopened its pipeline to Turkey, and that will help it divert about 20% of its oil at this very important, roughly double the price as before. So for them, I'd say that roughly 33% of their economy is paralyzed, much less than Qatar, which we've already discussed to be at 62%. And now moving on to the big boy in the region, Saudi Arabia. It depends for roughly 34% on oil and gas and 33% on manufacturing and 8% on aviation. And 5% on tourism. However, calculating how much of Saudi Arabia's economy is paralyzed is very difficult for two reasons. First, much of their airspace, tourist areas and many of their ports are actually open. Second, they have a hugely important pipeline which allows them to export about 60 to 70% of their oil. But this is more crucial than they think. Again, because they are currently selling that oil at almost double the price than they were before the war. Finally, there's the UAE, which depends for roughly 24% on oil and gas. But like Saudi Arabia, it has a pipeline that has been estimated to help itself 43% of its oil. And again, because the prices are roughly double than that they were before the war, it means that they roughly have the same revenue from oil as they had before. But much like Bahrain and Saudi Arabia, they have major manufacturing sector, and they also have a lot of mining, unlike these economies. And a lot of this is actually exposed to their biggest port being closed. That's right over here. That being said, the UAE and especially of course Dubai relies heavily on aviation 18% and tourism 11%, which have both mostly been paralyzed. So for these two countries is really anyone's guess. But let's say just for the sake of argument, that the UAE has 20% of its economy being paralyzed and Saudi Arabia ten. Of course, it's more in reality, but both of them are really profiting now from much higher oil prices. But of course, stuff doesn't just go out through the Strait of Hormuz. In fact, the Gulf economies also used the Strait of Hormuz for about 70% of their crucial food and medicine imports. However, after the main imports, ports such as and I hope I'm going to pronounce this correctly, Qasr in Iraq or the port in the city of Kuwait, or the port south of Doha, and especially, most importantly, the port in Dubai known as Jebel Ali, are essentially now shut down. Now they have to rely for these imports on land routes via Jordan and via Saudi Arabia, and finally, of course, via the ports of Fujairah in the UAE. Meanwhile, Qatar has largely started importing via air, which is much more expensive, and the result of all of this, these imports has been long traffic jams at ports not made for such high volumes of goods, and therefore a big spike in the cost of food and medicine imports. But crucially, because many Gulf governments have prohibited supermarkets from price gouging, and because many of them have large food reserves, so far the damage from this has been limited and consumer prices have not gone up by as much as you would have expected. So these are, I think, the main pain points for the Gulf countries so far. All of them are facing far higher import costs for food and medicine, and a chaotic reshuffling of trade routes. Qatar and Kuwait. So Qatar and Kuwait have been hit the hardest so far, while Saudi Arabia and to a lesser extent the UAE have been doing fairly okay so far due to them getting a much higher price for the oil that is still being exported through their pipelines. And therefore, I think it makes sense that Goldman Sachs economist Farouk Snoozer muddled in early March that if the war ends late April, so fairly soon, the 2026 economies of Qatar and Kuwait will contract both by roughly minus 14%. On the other hand, the UAE would only shrink by minus 5% in 2026 and Saudi Arabia by minus 3%. Given what we've seen, I think Bahrain and Iraq will then land somewhere in between these numbers. Now, all of that is very substantial. It is a bigger hit than during Covid. But honestly, me as well as most analysts think that this will be manageable given how rich these countries are. However, will the war actually end late April? That assumption is looking increasingly unlikely, and this brings us to scenario number two a long war.

But while Qatar, Bahrain and Kuwait's economies may depend on the Strait of Hormuz for less than or about half their GDP, their export revenues depend on it. For a whopping 95%. On the other hand, Iraq's northern pipeline now means that it has about an exposure of 80% when it comes to export revenues. Meanwhile, again, Saudi Arabia and the UAE are difficult to estimate, but thanks to their pipelines and the increased price of oil, especially if there is a long war, for simplicity, I will assume that the Saudis only take a 20% hit and the UAE takes a 30% hit to their export to revenues. But I feel a lot, honestly, that would cause an immediate currency collapse for 90% of economies around the world, especially if they lose 95% of their export revenue. But as you can see here, the Gulf currencies look surprisingly stable. For example, the Saudi Riyadh is nice and tied to the U.S. dollar. The Kuwaiti dinar is very stable and the Emirati dirham is also extremely stable. It may not look very stable like this, but if you look at these numbers over here, it's just tiny, tiny, tiny movements. These currencies are absolutely fine. So why is that the case? Well, it's because they are extremely wealthy. Everybody knows that. But how wealthy? Let's go back to our map. Let's go from north to south. Iraq has the smallest, a wealth fund estimated at roughly $6 billion worth. It's tiny, but a central bank. A war chest is actually pretty full at roughly 800 billion USD. Next, let's go to their small southern neighbor, Kuwait. Their wealth fund is absolutely massive, with $1 trillion in assets. However, its central bank only has half of what Iraq has at 54 billion. Meanwhile, Qatar has about $550 billion in its wealth fund and about 72 on top of that in reserves. Now, compared to that, Bahrain looks very poor indeed, with only 17 billion in its wealth fund and just 4 billion in central bank reserves. Saudi Arabia, the giant, is surprisingly not the richest country. It's famous wealth funds. The piss has an estimated 1 trillion, so still way, way more than Bahrain. In its assets. And then the central bank has about 500 billion in reserves. And next the UAE is surprisingly richer. It has about 2 trillion in all of its wealth funds combined, and then about 227 billion in the central bank reserves. But of course, me drawing these numbers on the screen by themselves, they are meaningless, right? Just big numbers. Bahrain may look poorer, but it also has a much smaller population than, for example, Saudi Arabia. So it doesn't need to import as much. So what we need to do now is to put all of that together and calculate how many years each Gulf country can keep importing stuff while exporting way less, and in some cases, almost nothing. And this simple exercise will actually reveal why Gulf currencies look as stable as ever. That is, even if we assume, conservatively, that only 40% of their oil funds can be sold fairly easily without absolutely crashing global markets. We will find that Saudi Arabia can survive actually forever, thanks to its pipeline. Hyper exposed Kuwait also quite surprisingly so 95% less export revenue. It can still survive a whopping ten years based on its massive wealth fund, which is almost as big as that of Saudi Arabia, which is of course, much bigger. Qatar also very wealthy. No more exports almost can survive for almost eight years just based on its massive wealth. Similarly, the UAE can hold out for about seven and a half years despite the destruction of Dubai's entire business model thanks to its wealth and, of course, its pipeline and alternative harbors. Over here. Iraq can hold out almost for two years, mostly thanks to now its pipeline to Turkey and its big central bank of artists. And it's only really Bahrain that looks very vulnerable, being able to survive only for a seven months due to its reliance on Hormuz and relatively small wealth funds. But honestly, Bahrain is so small that Saudi Arabia could simply bail it out if need it.

Unless, of course, you can goes truly scorched earth on the Gulf, bringing us to scenario number three a disastrous war. Total war in this scenario, Iran tries to break Gulf economies export capacities by bombing their pipelines, which is, of course possible. And on top of that, they could really bomb the alternative ports that the UAE has, which are fairly close to Iran. Now, in that case, the UAE may become just as blocked as Qatar, but because it is less wealthy per person, it would now be able to survive for a little under two years. On the other hand, thanks to its red seaports all across the coast over there, Saudi Arabia, even if it no longer has its pipeline, it would still have some export capacity left 20%, roughly allowing it to hold out for about five and a half years purely on their massive wealth. That is still quite a long time. So okay, now Iran again escalates bombing major population centers. This exposes yet another big weakness in the Gulf economies, namely their massive, massive reliance on immigrants. Specifically, the UAE consists of about 88% immigrants. The Da also 88% immigrants. Roughly Kuwait's 70% immigrants. Still, Bahrain 50 3 a.m. running out of space to draw on. But you get the point. And Saudi Arabia way less 41% immigrants. Iraq. It does have immigrants, but these are mostly Syrian refugees which are less affected by this crisis. So yeah, if the war escalates, a lot of these could be leaving, going back home, often to South Asia crashing or Britain crashing. The Gulf economies. However, from a pure war economy perspective, the upside would then be that the Gulf economies would need a lot fewer imports, meaning that they could hold out quite a bit longer. So if the war truly escalates, it may not be in Iran's best interest to actually bomb all of these population centers and send the immigrants home. Honestly, the only real existential weakness that I see right now are the water desalination plants, especially Qatar, Bahrain, Kuwait and the UAE rely on more than half roughly for their entire water supply on the Asian plants, which is this red bar. So these are sitting ducks. And for drinking water, it's even worse. 99% of Qatar's drinking water comes from these plants, 90% in Bahrain. And while in Saudi Arabia it is way less. I'm still betting that you will see a humanitarian disaster if Iran destroys them all. Entire cities would have to be evacuated. It would be terrible. Yet again, this could then also mean that the immigrants go home while the native population are evacuated. Yet then again, this could also mean that the immigrants will go home while the native population will be evacuated to further inland Saudi Arabia. From there, they could regroup. And because their central bank wealth and wealth funds will be unaffected. After all, these are global. On top of that, the foundation of their economy is their massive oil wealth. It will all still be there on the ground. A lot of that infrastructure then there will be lost. Of course, now could be rebuilt once the Iranian regime is out. So honestly, even in a complete disaster scenario, the Gulf countries look more resilient than I initially thought.

So in conclusion, yes, the Gulf economies are exceptionally exposed. If this war continues, we could see an economic destruction on a truly gigantic scale. All the economic diversification efforts of Dubai, Qatar, Bahrain, all what they've worked for for years, even decades, it is now truly all at risk. And given their dependance on desalination plants for water, we could even see a major humanitarian disaster if the war escalates. However, honestly, in a true all out war scenario, the Gulf economies are less likely to collapse than I thought. When I first started my analysis and found out how much they depended on the Strait of Hormuz. It's like if you hear that your friend just lost his job and half his wealth. Of course, your first reaction might be that you think that he is ruined until you find out he still has half of his Ferrari collection left. I think that analogy kind of sums it up for me. Those are the Gulf states. That being said, these guys have worked for years and years to become a global safe haven, and that status is now truly under threat. Dubai's entire business model looks very shaky indeed. And what will happen to Saudi Arabia's ultra expensive megaprojects like the line? Even in our optimistic scenario, the Gulf states are still facing a major recession, and it may take years for them to recover. But perhaps even worse, if they are forced to start selling their wealth. And if many poor South Asian immigrants are forced to leave the Gulf states and go back home, who is really in trouble? That's right. Poor and indebted countries like Egypt, Jordan, Pakistan and Bangladesh. But I have to do a follow up analysis on that soon. So let me know if you want to see that. Finally, there is, of course, Iran itself, which has many of the same vulnerabilities that the Gulf has its oil also has to go through the Strait of Hormuz, and it's all concentrated on a single island. And it also relies a lot on water desalination plants all across its ghosts. And very crucially, it does not have the same financial buffers that the Gulf countries do. So to get a better sense of that, I highly recommend you check out the excellent analysis by our advertising sponsor, The Economist. Specifically, I urge you to read this analysis on how Iran is still making lots of money from its oil exports through the Strait of Hormuz. And on this analysis on how not just the US. Also, Iran still risks overplaying its hand by dragging the war out longer. And then to better understand the ultimate doom scenario, I recommend you read their take on why, in the current Gulf War, water may prove as decisive as oil, which goes into why Iran is vulnerable as well as these article show, The Economist delivers insights to let you see the bigger picture and think for yourself. This is why I have almost always relied on their analysis for my research, and it's why I highly recommend you subscribe to The Economist, which I'm excited to say has agreed to give a special 35% discount exclusively for money and macro viewers. Whether you want daily journalism in the Economist app, or you are like me and prefer to catch up on the global economy during the weekend with a nice cup of coffee and the paper edition, you'll always stay on top of the latest global developments and support journalism that values factual information, integrity and an independent point of view. So don't miss out! Click the link in the description or top comment below, or head over to economist.com/money Macro to claim your exclusive 35% discount today.