The Future of Gulf Investments

The United States-Israel war on Iran, launched by cult leader, convicted felon, and failed President Donald Trump, is threatening the world economy. Immediately after the start of the war, Iran closed the Strait of Hormuz, through which approximately 20% of the world's oil flows. It was not a surprise then that the world faced an immediate oil shortage. It was also not that surprising that there was also a natural gas shortage, given the significant amounts of natural gas produced in the Gulf. Perhaps more surprising, however, were shortages of helium and fertilizer. We are already seeing the results of most of these shortages. The price of gasoline has risen by a dollar or more a gallon since the war was launched, and some countries have had to restrict the use of natural gas. The fertilizer shortage will be reflected in increased prices of fertilizer from other sources or lower crop yields where farmers can't afford the higher prices. In either case, the result will be more expensive food or even shortages. While a negative impact on party balloons might be a negligible outcome of shortages of helium, more important effects will be felt in the semiconductor industry, for which helium is important. However, there is another potential shortage that is getting less attention but, ultimately, may turn out to be more important to the U.S. economy. That is a possible capital — as in investment money — shortage. Gulf countries, facing tremendous disruptions to their domestic economies, are not likely to be as free-spending with their investment dollars abroad, including in the U.S., as a result of the war.

Long ago, I was taught about the "petrol dollar." This was the circulation of dollars accumulated by Gulf Arab states by selling petroleum back into the U.S. economy through weapons purchases. That simplistic state of affairs did not last long, however, and petro dollars eventually found their way into untold numbers of other investments. Petrol dollars are everywhere in our economy now. This is especially true since Trump took office for his second term. Trump's son-in-law, Jared Kushner, set up an investment fund almost immediately after the end of Trump's first term. A year ago, Kushner's firm, Affinity Partners, had assets under management of $4.8 billion, mostly from Gulf sources. Trump himself has had close financial ties to Gulf states. A fund tied to the United Arab Emirates purchased a 49% stake in Trump's World Liberty Financial. Trump has been relying on promises from the Gulf states to invest in the U.S. as a key to improving the U.S. economy. Deutsche Welle described Gulf commitments:

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.

Beyond the Trump family, Gulf investments have been widespread. As the Prospect reports:

It is almost impossible to name a consequential business transaction in this millennium that didn’t have some Gulf state sovereign wealth fund involved. They are heavily intertwined with the banking industry, media and communications, and most recently artificial intelligence. The Paramount–Warner Bros. deal wouldn’t have happened without equity stakes from the Persian Gulf.

Moreover, not only have the Gulf states invested in the U.S., but they have invited investment in their own countries from U.S. companies. This has been especially true in the artificial intelligence industry, which the Gulf states have hoped to dominate. The "Rest of World" Substack recently addressed this topic and wrote:

Over the past two years, a remarkable convergence has taken shape between the Gulf and the global artificial intelligence industry. The numbers alone are staggering: Microsoft committed $15 billion to the UAE by 2029; Amazon pledged $5 billion for an AI hub in Riyadh; Nvidia partnered with Saudi Arabia’s state-backed Humain to supply up to 600,000 graphics processing units; OpenAI, Oracle, and Abu Dhabi’s G42 announced Stargate UAE, a planned 5-gigawatt campus in Abu Dhabi that would be the largest AI facility outside the U.S.

All of these investments could be threatened by the current war. Amazon already suffered attacks on three of its data centers in the region. Each day the war continues means additional revenue losses due to an inability to export from the Gulf. It is not just petroleum products that are disrupted. The lucrative tourist market has been upended. Formula One cancelled the Grands Prix in Saudi Arabia and Bahrain. Gulf airports, which have become important travel hubs, have been bombed. Gulf economies are being battered from multiple directions. With less money going into sovereign investment funds, less money will naturally go out.

Deutsche Welle reported on the possible ramifications of the financial disruptions taking place in the Gulf, writing:

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.

Similarly, the Financial Times addressed the ramifications of the war on Gulf investments, writing:

A Gulf official said it could have an impact on anything from investment pledges to foreign states or companies, sports sponsorships, contracts with businesses and investors, or sales of holdings.

“A number of Gulf countries have begun an internal review to determine whether force majeure clauses can be invoked in current contracts, while also reviewing current and future investment commitments in order to alleviate some of the anticipated economic strain from the current war,” the official said. “Especially if the war and related expenses continue at the same pace.”

If the Gulf states redirect investment dollars meant for the United States or decrease such investments in the future, the impact will be significant. Politico had a recent article highlighting this, which reported:

“What has really freaked people out is that the Gulf Arabs have warned that they’re a couple weeks away from having to repatriate tens of billions of dollars in investments from the United States,” said one of those people. “When these guys do that, it is going to be immensely destabilizing and contradictory to the president’s investment goals.”

“The Middle East is essentially closed,” said a top executive at an asset management firm that’s received significant backing from the Gulf, also granted anonymity to speak candidly. Companies will be looking “outside of the Middle East for capital in the short run.”

Politico also quoted Mohamed El-Erian, a professor at the Wharton School and chief economic adviser at Allianz, as saying:

“Over the short term, their relationship with the rest of the world is going to change,” he added. “They’re going to slow the deployment of whatever capital they’ve committed to, and they will slow any new commitments.”

The other side of the coin, of course, is that increased defense expenditures are likely to benefit U.S. arms manufacturers. But if this takes away from other U.S. investments, the overall impact could still be negative. Gulf countries may even lose faith in expensive U.S. weapons systems and look for alternatives. Several Gulf countries either have already signed contracts with Ukraine or are in the process of doing so for drone defense systems. They could conceivably take a look at Chinese air defense systems.

I'll step outside of my area of expertise for a second and speculate that the A.I. industry in the U.S. could be in particular trouble. I believe that there is already an A.I. bubble that is impossible to sustain. Without a constant influx of new investment, I think the bubble will pop. Gulf money may well be what is keeping things afloat now and, if that money goes away, I would expect a crisis in the industry. A.I. stocks have been keeping the stock market above water. If they crash, there goes our economy.

Of course, a lot depends on where things go from here with regard to the war. If Trump declares victory in the near future and stops the war, the Gulf states will be in a very poor position. The Iranian regime is, if anything, even more radical than it was before the war, and now the Strait of Hormuz has been weaponized. Instead of investing in the U.S., Gulf states may be paying tolls to Iran. If, on the other hand, Trump carries through with threats to destroy Iranian civilian infrastructure, the Iranians will likely retaliate against power plants and desalination facilities in the Gulf countries. If both sides engage in a scorched earth strategy, the cost of rebuilding will exponentially increase, and money for U.S. investment will become even more scarce. A ground war will simply extend the fighting and have its own associated costs. Frankly, there doesn't seem to be a good outcome as far as the Gulf states are concerned.

The fact that this war is increasingly likely to leave the Gulf states considerably worse off than they were before it may well have its own ramifications. The governments may decide to punish the U.S. and withhold investments even when they do have the money for it. In that case, you can kiss our economy goodbye. There are already some signs of animosity in the Gulf resulting from the U.S. actions. The Financial Times article quoted above also included the following:

Khalaf al-Habtoor, a prominent Emirati businessman, reflected Gulf frustrations about being dragged into a war triggered by the US and Israel in a social media post addressed to Trump.

“A direct question: Who gave you the authority to drag our region into a war with #Iran? And on what basis did you make this dangerous decision?” he said on X. “Did you calculate the collateral damage before pulling the trigger?”

The stock market opened up today, though it is heading downward as I write this. It makes no sense to me that anyone would see an upside in the market given the circumstances that I have just described. We have declining employment, increasing inflation, shortages of critical commodities, and a likely loss of Gulf investment. All of that, and we have no idea what will happen with regard to the war. It could last another two weeks, six more months, or even longer. Trump, who can't explain why he started the war, certainly can't tell us how he will end it.