(Bloomberg) -- Wall Street giants have been flocking to the Middle East for a slice of the region’s vast oil wealth, but escalating tensions between Iran and Israel are throwing up new uncertainties.
In recent years, the United Arab Emirates and Saudi Arabia have pushed for regional peace and spent billions from their vast oil revenues to expand their economies. They’ve become more important than ever to the world of finance and business, using a $3 trillion pile of sovereign wealth to bankroll global deals and attract the biggest hedge funds and banks.
But the hubs of Abu Dhabi, Doha, Riyadh and Dubai sit just across the Strait of Hormuz from Iran, which last week attacked Israel with nearly 200 missiles. Images on social media showed the glow that lit up the Gulf’s night sky as the missiles took off.
That was one of the starkest reminders yet of the risks facing these cities. While they’ve remained insulated from the war between Israel and Hamas that began last year, governments are now contending with a conflict drawing closer to their shores.
As long-time allies of Washington, several Gulf countries are home to American military bases. While the region has seen conflict previously, for the most part this played out through Iran-backed proxies in Yemen, Lebanon, Syria and Iraq. Now — amid pledges from Israeli officials of a ‘significant’ response to Iran’s attack — there’s the threat of a direct war that could drag in the US.
The rise in hostilities is likely to impact business sentiment and make investors think twice about putting money into the Middle East, according to Anna Jacobs, who is a senior analyst at the International Crisis Group.
“The UAE and others have done very well economically and have insulated themselves quite well over many years amid the ebbs and flows of tension between Israel and Iran, between the US and Iran, between Saudi Arabia and the Houthis,” she said. “However, now we’re in a different moment and this is unprecedented in many ways. The business community is quite aware of that.”
Saudi Arabia, United Arab Emirates and Oman have stated publicly that they wouldn’t allow their airbases and airspace to be used in a conflict, according to Mohammed Baharoon, director general at Dubai-based think tank B’huth. But governments are still assessing risks to see what could go wrong, he said.
To be sure, business executives and diplomats familiar with the region said they haven’t seen signs of foreign firms cancelling visits, stalling expansion plans or pulling out money. Many within the region continue to hope Arab Gulf states will remain insulated, although concerns and questions from bankers and others overseas are rising, they said.
While the UAE has sometimes benefited from money inflows during prior crises, the trajectory of the current war has been harder to predict. Some regional stock markets fell in early October, reflecting those worries.
Last month, analysts from HSBC pointed to some of these concerns surrounding Saudi Arabia and the UAE. “In both markets, we love the structural story, but a combination of heightened geopolitical risk and low oil prices is creating near-term headwinds,” they said.
Besides Gaza, Israel is waging a ground and air offensive across its northern border in Lebanon to combat Hezbollah, which is supported by Iran and designated as a terrorist organization by the US. Iran said its missile attack against Israel was a response to the assassination of Hamas leader Ismail Haniyeh in Tehran and the killing of Hezbollah’s chief Hassan Nasrallah.
Spillover
“We’re constantly talking about the risks of spillover but I wonder whether we actually haven’t crossed that bridge,” said Nickolay Mladenov, director general of the Abu-Dhabi based Anwar Gargash Diplomatic Academy, which also includes a state-linked think tank. “The biggest risk today is so many points at which small escalations can lead to bigger conflicts that it’s difficult to predict which might get out of control and lead to a huge spillover.”
The US has military bases in Qatar, Kuwait, UAE and Bahrain as well as some sites in Saudi Arabia and other countries, according to an analysis by the Council on Foreign Relations. After Iran’s strike, its president met with Gulf officials, including Saudi Arabia’s foreign minister, who said his country intends “to turn the page on differences” between the former rivals, according to an Iranian read out.
Saudi Arabia and the UAE moved to reestablish diplomatic ties with Iran recently after years of tensions that played out through regional proxies. China helped broker a deal between Riyadh and Tehran, while UAE mended ties with Iran post attacks on oil tankers off the country’s coast.
If Israel attacks major economic infrastructure and oil facilities in Iran, there are concerns that groups aligned with Tehran could hit critical energy infrastructure in US allies like Saudi Arabia or the UAE, International Crisis Group’s Jacobs said.
Financial Centers
In recent years, Saudi Arabia and the UAE have sought to distance themselves from regional rivalries and conflict. Luring investors to back their development plans required stability, which governments have looked to achieve, helping their economies thrive.
Dubai’s real estate market has been a beneficiary of foreign capital that’s pushed property prices near records. Nearby Abu Dhabi has also drawn a cadre of hedge funds, venture capital firms, crypto companies and investment heavyweights.
Saudi Arabia, meanwhile, has embarked on a development drive that will cost trillions of dollars. Large projects in the capital Riyadh and on the Red Sea have been commissioned to help lure tourists.
But already after Iran’s strike against Israel last week, airlines connecting Europe with the Middle East and South Asia were forced to fly a more circuitous path, with many avoiding the airspace of Iran, Iraq and Jordan.
“Any one following this would have a hard time saying with any confidence how it will all shake out and what will happen next,” Jacobs said.
--With assistance from Matthew Martin and Dinesh Nair.
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