Algeria severed diplomatic relations with the United Arab Emirates on 10 September. The Emirati ambassador was called in to the foreign ministry, told he had 48 hours to leave, and from the next morning the country’s airspace was closed to aircraft registered in the UAE, civil and military, with an exemption for commercial flights in and out of Algiers that runs to the end of the year. The measure is a policy signal dressed as an aviation sanction with very limited impacts practically. The ministry’s statement talked about a growing series of provocative and hostile acts, repeated warnings that went unheeded, and the exhaustion of every means of keeping the relationship alive. It did not say what the acts were. Abu Dhabi’s response was to hope the decision would be temporary, and its presidential adviser added that diplomacy should not be hostage to internal congestion, which was a pointed way of saying the problem is in Algiers rather than Abu Dhabi.

Whatever the immediate trigger, and there may not have been a single one, Algeria is joining something rather than starting it. Over the past 9 months Saudi Arabia, Somalia and Sudan have each, in different ways and with different degrees of formality, turned on the Emirati way of doing business in their neighbourhoods. Algeria is the first to go all the way to a diplomatic break, and it is doing so with the largest army in Africa behind it and a gas windfall it did not plan for.

Where the trend comes from

The Emirati approach for most of the past decade has been to treat money and force as one instrument. A port concession, a sovereign fund ticket, a security contract and a militia on retainer are not separate policies, they are one policy, and for a long time that produced a reach far out of proportion to the country’s size. The problem with running a region through proxies is that the states hosting the proxies eventually notice.

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In the second week of April 2026 the UAE demanded full repayment of the $3.45bn it had kept on deposit at Pakistan’s central bank for 7 years, having already shortened the rollover from annual to monthly at the start of the year. Pakistan paid in 3 tranches over 12 days, roughly $450m on 11 April, $2bn on 17 April and $1bn on 23 April. Saudi Arabia covered the hole almost tranche for tranche, $2bn on 15 April explicitly to fill the gap the Emirati withdrawal opened, then a $3bn deposit agreement 2 days later, taking total Saudi deposits to $8bn and converting the existing $5bn from annual rollover to a 3 year term. Four months later, on 7 August, Saudi Arabia, Turkey and Pakistan signed a mutual defence agreement in Mecca. The deposit swap was not the background to that signature. It was the signature, in its original currency.

The alliance has been read as a security story, an Islamic answer to an unreliable American guarantee, a nuclear umbrella over the Gulf, a Turkish bid for leadership of the Muslim world, the first step towards something its admirers call a Muslim NATO. All of that is the surface. Underneath it is a sequence of balance sheet transactions completed before the ink was dry, and what they add up to is a hierarchy of credit and payments with Riyadh at the switch, financed by a creditor that uses finance as a weapon and is at the same time taking the patron’s own market away from it. Along the way they are laying the plumbing of a regional market that its builders will not necessarily live to own.

The reserve floor and the borrowed army

Pakistan’s contribution to the pact is manpower and the nuclear shadow. Its price is a reserve floor. The only Gulf money left on the State Bank’s balance sheet after April is Saudi, and that money now carries a 3 year tenor and an obligation to a state under Iranian and Houthi fire. Islamabad spent the summer trying to soften the dependency the pact created. It sold a $750m 3 year Eurobond in the April window under its renewed global note programme, and then on 2 September a record $3bn dual tranche, $1.75bn at 7.5% for 5.5 years and $1.25bn at 7.9% for 10 years, on an order book of nearly $6bn presented by the finance ministry as a market verdict on 3 years of rebuilt credibility. Two times cover on a frontier sovereign inside an IMF programme is ordinary. A bilateral deposit is cheap until the depositor wants something, and Pakistan is paying 7.9% to reduce how much it owes Riyadh’s goodwill. The ministry’s statement spoke of borrowing better, extending maturities and diversifying funding. The bookrunners were Citi, Deutsche Bank, Emirates NBD, MUFG and Standard Chartered.

The Emirati exit tells the other half of the story. Abu Dhabi pulled during the Iran war, after Pakistan brokered the Hormuz framework and the Pakistani prime minister’s ceasefire message drew open anger in Emirati commentary, with the UAE having absorbed more than 2,800 Iranian missiles and drones. Islamabad called the repayment a routine transaction. What Abu Dhabi was doing was declining to underwrite a security architecture it is not part of. Emirati sovereign money left Pakistan’s balance sheet in April, and by September an Emirati bank was among the bookrunners on the bond that refinanced its own withdrawal. Principal became fee income on one side of the Gulf. Deposits became alliance collateral on the other.

Riyadh is doing this on a balance sheet that would not pass as development finance. The Saudi finance ministry’s own count is a $33.5bn deficit in Q1 and $9.14bn in Q2, $42.6bn for the half against a full year forecast of about $44bn, financed entirely by borrowing with no drawdown of reserves, inside a roughly $58bn programme that also covers $13.9bn of maturities. That is only the sovereign line. Beside it sit a $4bn multi tranche bond from the oil company, $7bn from the wealth fund in May on a $23.8bn book, more than $20bn of Saudi international bonds sold in January alone as companies and banks joined the government at the window, banks issuing offshore because their loans passed their deposits years ago, and a state linked miner borrowing by international syndicate. In the first quarter, corporate issuers raised $34.58bn across the Gulf against $20.46bn from sovereigns, while government related entities showed only $2.65bn in public markets, down -60.9% on the year. Where that borrowing went is visible in the debt office’s May statement, which said 90% of the 2026 programme was already secured with international public issues reduced from plan and the gap met through private channels and local markets. Since the war began, quasi sovereign borrowing has moved from public bonds to private placements and bank syndicates, so the visible issuance figures understate the real number. The debt to GDP ratio the agencies rate is the sovereign line only.

The kingdom is nonetheless doubling its exposure to Pakistan and extending duration, buying a deterrent it cannot build at home with balance sheet capacity borrowed from the same desks that priced the Pakistan bond. Riyadh borrows in dollars, deposits in dollars in Karachi, and Pakistan uses the floor those deposits create to borrow at 7.9% from investors who are pricing the Saudi backstop. Saudi debt capacity becomes Pakistani creditworthiness and Pakistani manpower becomes Saudi deterrence. The Persian language press saw the circuit before the English one did, under a headline about Riyadh spreading the table so that Islamabad and Ankara could eat its petrodollars.

Turkey and the price of an industrial leg

Turkey’s contribution to the pact is a defence industry it cannot afford to upgrade. On 5 September a presidential decree put the 2 Bosphorus bridges, 8 motorways and 2 ring roads into a 30 year operating rights transfer, sellable as a single package or in separate groups, with completion targeted by the end of 2031, ownership staying with the state, and the Treasury guaranteeing the foreign loans that operators will use to fund roughly 80% of the concession. The opposition puts the package’s 2025 net profit at $600m and the foregone 30 year take near $18bn. The 2012 tender that produced a $5.7bn bid was cancelled by the president as too low, with a stated real value of at least $7bn. This year’s figures start lower, and the option to slice the assets into groups is there to bring the ticket size down to what sovereign funds and infrastructure consortia will pay. The next day the 2027 to 2029 medium term programme announced a 229% rise in defence industry spending, beside social housing at +150%, a projected lira path from roughly 47 to 69 per dollar, a -32% devaluation, inflation falling from 28.4% to 9%, and a current account deficit narrowing to 1.6% of GDP, with the programme assuming elections in 2028 while the vice president left an earlier date to parliament’s discretion. The programme created a chapter on economic security and resilience for the first time, with reducing external dependence in critical areas as its purpose.

A state does not triple the subsidy line to an industry that already makes its own engines. It does so for one whose airframes fly on American turbines and whose import bill rises every time its currency falls, which the same document projects it will. A Qatari flagship channel broadcast a 40 minute case for Turkish defence sovereignty 2 days before the programme was published, and the case concedes the point at every technical layer. The industry’s founding firms were created after the 1975 American embargo through offset clauses in the 1983 fighter deal that obliged Western vendors to produce locally and transfer technology. The general manager of the aerospace company says the West agreed to the principle and did not expect Turkey to get this far. The engine chief says a fifth generation engine is not a 3 to 5 year project, that single crystal turbine blades are made by 4 or 5 countries, and that some of the special materials for Turkey’s own engines were developed abroad. A Turkish researcher names propulsion as the remaining weakness and confirms that the country has been forced back into negotiating re-entry to the fifth generation fighter programme it was expelled from. A Pakistani interviewee names licensing as the first weakness and confirms that the attack helicopter sale to Pakistan, signed in 2018, remains undelivered because of the original American engine maker’s concerns, then explains why Pakistan partners with Ankara at all, access to technology built to NATO and European standards.

The most important detail is the last one. In February 2026, a model of Turkey’s fifth generation fighter was displayed in Riyadh with a Saudi flag on its tail, the Turkish president said Saudi partnership was possible at any moment, the manufacturer said negotiations were advanced, and Washington asked Riyadh to clarify its participation. That is the flagship industrial project of the Mecca pact, a fighter that cannot fly without an American engine, being co-financed by a Saudi state that borrows from American export credit, with the co-financing itself requiring American clearance. Turkey runs a structural external deficit financed by hot money and European bank lines, its 2018 and 2021 currency collapses were credit stops, its core defence firms are owned by an armed forces foundation with the state distributing the work, and the one entrepreneurial exception is family owned by the president’s in-laws. Its Islam is a legitimacy layer over a nationalist project that has never fought for anyone but itself. The bridges pay for the subsidy, the devaluation eats the subsidy, and the engine the subsidy is meant to replace is still built in Ohio. Doha’s documentary is the marketing for an investment it made a decade ago, which Riyadh is now paying to maintain.

Rails, gold and the payment hierarchy

Since the spring, Saudi banks have been directed to treat settlements bound for the UAE as they treat transfers to jurisdictions flagged for laundering and terror finance risk. Nobody has produced the circular. The bankers describing it are unnamed and the regulator’s answer was that there are no country specific restrictions, only risk based measures applied consistently. What can be observed is the effect. Since mid May, transfers from Saudi accounts to Dubai have been held for a week and bounced, refused with a bare transaction failed or returned without explanation, across several currencies. Settlements that cleared in hours now take 3 to 10 business days. Firms reroute through Bahrain and European correspondents. A $25.7bn bilateral trade relationship, the largest in the Arab world, is being put through enhanced due diligence by one side, 2 years after the UAE left the international grey list. Layer the Iran war on top. Abu Dhabi suspended all trade and financial transactions with Iran under US pressure while Riyadh enacted no sanctions of its own, so the two Gulf financial centres now run divergent compliance regimes against each other and against Tehran at once. The corridor that closed is the one where Saudi private wealth leaks fastest. Some Saudi clients have asked their Dubai suppliers to relocate.

In the same window, Riyadh opened a different corridor. On 29 August, in Jeddah, Sudan’s state minister for finance announced that an electronic payment system running through Saudi banking apps was close to launch, built with Sudan’s digital transformation ministry to carry the collections and remittances of the largest Sudanese diaspora anywhere out of the informal networks of Riyadh and Jeddah and off the parallel exchange rate. The stated reason was that the gap between the official and parallel rates, compliance restrictions that closed banking windows, and unreliable apps had pushed most of that money into hawala. It is an announcement rather than a launch, but it sits on things that have been signed. A state to state coordination council on 17 August with 10 files on the table. A card processing and network sponsorship agreement for the Saudi Sudanese Bank in January. A June business forum in Riyadh convened specifically to fix transfer problems. A state gold refinery that told Khartoum at the January minerals forum it was ready to buy Sudanese bullion immediately, followed in February by an exploration and mine development agreement with the army backed minerals ministry for Red Sea State. The baseline being displaced is $1.97bn of official Sudanese gold shipments to the UAE in 2024, before Port Sudan severed ties with Abu Dhabi over its role in the war. Sudan joined the Saudi-led maritime alliance announced on 30 July.

So the Sudan circuit closes at every node. Diaspora dollars come in through Saudi apps. Gold goes out through a Saudi state refinery instead of the Dubai souk. Port Sudan’s security sits inside a Saudi maritime framework. Arms come in through Pakistan when Riyadh signs the cheque, and here the record is less flattering to Riyadh. Two Pakistani packages were on the table at the turn of the year, a $4bn plus deal for the eastern Libyan command signed in Benghazi in December, 16 fighters, 12 trainers, land and naval equipment over 30 months, and a $1.5bn deal for the Sudanese army described as effectively finalised in January, with Saudi Arabia financing both and the weapons to be split between the two. In March at least 5 Pakistani cargo flights unloaded at Benghazi, described by Arab and Western officials as Saudi money used to pull the Libyan command away from the UAE, on condition that it shut the southeastern corridor feeding the Rapid Support Forces. The condition was not met. Sudanese intelligence had counted 52 cargo flights into eastern and southern Libya in October alone, satellite tracking logged more than 600 Abu Dhabi to al Kufra flights in 6 months, and a convoy of more than 800 armed vehicles left al Kufra for Darfur in November. In January, the Libyan command’s son moved a regiment to the tri border while Riyadh and Cairo were demanding he stop, and Egyptian aircraft struck a convoy coming out of Libya. In April Riyadh withdrew its financing for the Sudan deal and asked for it to be terminated. The Saudi money went to a man whose family’s assets sit in the Emirates and bought no change in his behaviour, while the funding for the one deal that would have directly rearmed Riyadh’s own ally in Sudan was pulled. A conflict economy Abu Dhabi built, gold out through Dubai and weapons in through Chad and Libya, is being rebuilt as a Saudi one. The refinery is the chokepoint, because whoever refines the gold decides whose gold is legal. The arms channel is where borrowed money has so far bought least.

Then, in early September, a Saudi-founded payments processor bought the regional operations of the largest US technology group’s payment arm for north of $100m, creating an entity expected to clear more than SAR150bn a year, roughly $40bn, the largest payments infrastructure provider in the region, and giving Saudi ownership of the gateway through which a large share of Egyptian and Emirati online commerce settles. Read with the Dubai squeeze and the Sudan rail, the pattern is not restriction but acquisition of the switch. Control the gateway and you do not need to block the payment. You see it, price it and route it. The same central bank closed one corridor and opened another in the same quarter, and clean access to the Saudi payment system is becoming the currency of Gulf alignment.

That is the material form an Islamic regional market would have to take before it could be anything else. Every previous attempt at one failed at the point of settlement. Iran’s project had the ideology and the willingness to die and could not build a currency or a clearing system that did not route through the thing it was fighting. The plumbing is now being laid by states that have no ideology at all, and it is being paid for with conventional debt, because that is what Western books will take at size in a war. Gulf bond issuance rose 33% in the first half of 2026 to $86.4bn. Sukuk fell -25% to $30.5bn.

Syria as the test case

The pact’s first prospective recruit is the state with the least to offer. Saudi Arabia and Qatar cleared Damascus’s World Bank arrears, Riyadh brokered the new Syrian president’s meeting with the American president in May 2025, a Damascus investment forum ran to roughly $4bn, and in February the Saudi development fund committed $2bn for 2 Aleppo airports inside a package spanning aviation, energy, telecoms and a joint low cost airline. Turkey is building a 200,000 strong Syrian army staffed by Islamist commanders. On 20 August, in Islamabad, the Syrian foreign minister said Damascus was considering joining or cooperating with the Mecca agreement, and on 31 August the Turkish foreign minister declared the alliance open to any regional state, with a secretariat in Riyadh and a Pakistani secretary general. On 6 September the American president said on his own platform that Syria bypassing Hormuz was great, referring to a corridor now moving Iraqi crude by truck to Syrian ports.

Syria has no reserves, no banking access worth the name and a reconstruction bill in the hundreds of billions. Saudi money in Damascus buys a state at the bottom of the market, with Turkey supplying the coercive apparatus, the Pakistan template applied to a country that cannot offer even a deposit floor in return, only a border with Israel, a corridor to Turkey and a leader who owes his legitimacy entirely to whoever paid for the lifting of sanctions. Egypt, which has an army, a canal and more than 100 million people, sat out. Syria, which has debt and geography, is invited. The alliance is not selecting for capability. It is selecting for dependence.

It is also where the region’s ideological question will be answered. The Syrian president’s lineage is the Salafi jihadi one, not the Brotherhood’s, but his trajectory belongs to the only Islamic school that has taken an armed movement into actual government of territory and held it, the school Hamas built in Gaza over 17 years under siege and that he reproduced in Idlib and then scaled to Damascus. Riyadh spent 2007 to 2023 treating that model as the thing to be destroyed. It is now bankrolling its state form in Damascus while its television channel airs recordings it says are Brotherhood plans for a post Sisi government in Cairo, and while a Paris joint statement in the same week welcomed the American brokered disarmament of Hamas. Nobody in Riyadh experiences this as a contradiction. The line is not between Islamist and non Islamist. It is between Islamists Riyadh owns and Islamists it does not, and it believes Damascus has been bought, which is the thing Hamas refused.

The choice has already been forced on the new state twice. The coastal killings of Alawites and the killings of Druze in the south in 2025 were the sectarian path, and they were exactly what Israel’s strategy needed, proof that Damascus is a Sunni sectarian regime from which minorities require Israeli protection. Every time the Syrian state behaves sectarian it builds the corridor for that strategy. Every time it behaves as a government of the whole, it removes the minority pretext and threatens Riyadh’s ownership at once. Both Riyadh and Tel Aviv can live with a sectarian Damascus. Neither can tolerate a unitarian one. The coastal killings were in March, Suwayda in July. Which of the two Syria becomes by 2027 is the open question, and I would not bet on it either way.

The US Mecca credit lifelines

The Mecca alliance has one creditor and the creditor is a sovereign, not a bank. In July the Saudi wealth fund signed a framework for up to $15bn of US export credit for its portfolio companies to buy US origin goods, alongside $6bn and $3.5bn from the World Bank’s private arms, $24.5bn in all, the fund stating that the US is its largest market and that it has procured $65bn from American suppliers since 2017. That is tied credit. Washington lends Riyadh money on condition that Riyadh spends it on American exports, and the World Bank guarantees the rest. Add the November 2025 strategic defence agreement with major non NATO ally status, the civil nuclear framework signed in August, and the 4 September approval of $5bn of extended range glide bombs plus $750m of tank engines, on top of roughly $2bn of guided rockets weeks earlier, described by the State Department as airborne defence capability. Nobody defends a refinery with a glide bomb dropped from 70km out. Washington is selling Riyadh the means to strike Iranian and Houthi launch sites itself, wrapping it in defensive language, and clearing it a month after the nuclear framework and 3 weeks after the American president welcomed the pact on his own platform as a big, bold, important first step.

An Iranian parliamentarian called the pact begging security from others, and the foreign ministry said Tehran had been informed of it more or less in advance. Both are consistent with what the pact is. Riyadh could tell Tehran because the text names no adversary and the obligation is deniable. The munitions are not deniable. The US does not want to fight Iran. It is financing Muslim states to hold the line against Iran for their own regime survival, and it pays them in 3 currencies. Time, because the nuclear and fighter files stretch across years of deliverables. Paper, because export credit and the bond desks finance the purchases and the deficits. Political cover, because ally status and presidential endorsement let a subcontract be presented as sovereignty.

The credit is conditional and the conditions are enforced, which is where the usual objection to everything above runs out. The objection is that a state with 250 billion barrels and a dollar peg can carry debt past 100% of GDP for decades, that the West has run the deficits it calls unsustainable for 50 years, that every previous prediction of the lifeline ending has been wrong on timing because creditors need borrowers as collateral holders and Treasury buyers. All true, and beside the point, because the creditor here does not behave like a bank. The lifeline is a policy instrument switched on and off by political test. Iran, Russia, Syria and Sudan have had it switched off. Turkey was sanctioned for a radar purchase. The UAE spent 2 years on the grey list, and its neighbour has now privately re-imposed the same regime. Egypt and China were both under secondary sanctions threat for Iranian financial links in the week the Chinese president landed in Cairo. The Saudi fund’s $15bn is tied to buying American goods. Pakistan’s deposits come with a defence obligation. The Mecca bloc is a coalition of states that have agreed to be sanctionable by the same capital.

The barrel is the deeper threat to Riyadh. Saudi market power was never the reserves but the swing barrel, the ability to add or withhold supply through Hormuz on a phone call and set the marginal price. The strait has been effectively closed since 28 February apart from 2 reopenings that collapsed, transits as of this weekend are running at 6 to 10 a day against a baseline near 85, and the role of clearing the market has passed to the Atlantic basin, American exports above all, while Saudi production sat behind a chokepoint it could only partly bypass through the pipeline to the Red Sea. Asian refiners have re-plumbed for Atlantic crude, and re-plumbing is sticky. In the same months the US captured the Venezuelan president in a January operation and installed a government that has now handed Washington control of 17 fields holding 65bn barrels, a fifth of the largest reserves on earth, with a 35% American government stake in the operating vehicle and oversight of sales described by the energy secretary as indefinite. The deal is flaunted openly as a warning to Canada and a blow to Russia. Washington is repackaging the dollar to oil under direct physical control, Western Hemisphere barrels that transit no Middle Eastern chokepoint, and it has spent a year demonstrating that Gulf barrels do, with Tehran’s missiles as the instrument that made the Gulf gate unreliable. When the strait reopens Riyadh returns as a supplier that needs volume to service a deficit and a quasi sovereign debt stack, not as a swing producer that can afford to withhold. It does not need to be fought. It can be walked to the table by its own financialisation, asset by asset, until the only reliable gate to oil is an American one. Caracas is meanwhile weighing whether to leave the cartel it helped found in 1960.

The excluded and the tacit

Egypt sat through 4 preparatory meetings, signed nothing, and received the Chinese president 3 weeks later on his first visit in a decade, 25 agreements, a third phase of the Suez Canal industrial zone that already holds 200 companies and $4bn, Egypt’s national plan formally aligned with Belt and Road, and a speech telling the region’s states to oppose external interference and build their own security order. This is the business Cairo has run since Camp David, being paid not to act. $35bn from Abu Dhabi for a stretch of coast. IMF and European programmes for existing. Gulf deposits rolled for a decade for not collapsing. Two islands handed to Riyadh for cash. Sinai kept sealed and the Gaza gate managed for whoever pays the gate fee. In every case Egypt sold geography and consent and in no case did it fight, build or commit a soldier. It attended the Mecca meetings to discover the price and did not sign because a mutual defence clause is work. Its patron then put the phrase post Sisi into Egyptian prime time on a Saudi owned channel, in the form of recordings a veteran broadcaster of political leaks says show the Brotherhood planning a transitional government and constitution, framed so the regime cannot object. A Saudi commentator replied that this was the Emirati playbook, justifying intervention and arming militias under the pretext of fighting the Brotherhood. Riyadh is doing Cairo’s succession management for it and, in the same act, reminding a rentier that the rent has terms. The broadcast went out on 5 September. The Chinese president had left Cairo 3 days earlier.

Kuwait shows where the richest balance sheet in the Gulf ends up. It launched the sale of a 49% leasehold in its 13 crude pipelines days before the February strikes and closed it under fire in July, $16bn from 3 North American infrastructure funds, $7.85bn upfront, 20.5 years of volume based tariffs paid by the state to a vehicle it half owns, the same structure the Saudi, Emirati and Bahraini oil companies used before it, so the Gulf’s export arteries now sit with the same handful of funds. In August its sovereign wealth fund borrowed $4.25bn from 14 banks on the treasury’s behalf. On 1 September a decree ended a 50 year ban and let the treasury borrow from the same fund, capped annually at the fund’s average 5 year return and in total at 10% of a net asset value the agencies put near $750bn, with the loans booked as assets and the agencies calling the conversion credit positive. A $1tn savings vehicle has become a pass through, borrowing from banks and lending to the state, after a fiscal year in which the deficit went from 2.1% of GDP to 15% and the government raised roughly 27% of GDP in debt, with parliament suspended since May 2024 and unable to object. The only previous draw on the fund was in 1990, to pay for the American war that liberated Kuwait. The second is to pay for the American war on Iran that closed Kuwait’s export route. Kuwait also signed a training and border protocol with Pakistan on 27 August containing no collective clause, and held its first joint defence committee with India the same week.

Bahrain sits at 152.4% of GDP with a negative ratings outlook, needed a $5.4bn Emirati swap line, and still saw central bank reserves fall -56% in a month to $1.5bn, a record low, which is why it was the first Gulf sovereign to issue after the war began. The UAE, with about $300bn of reserves and $2.5tn of sovereign wealth, was discussing a dollar swap line with Washington in May because the wealth is earmarked and the reserves are not liquid enough for a closed strait. Abu Dhabi still prices 10 year paper at 18 basis points over Treasuries, and Abu Dhabi, Qatar and Kuwait placed $7bn privately while public markets were shut. The region’s creditor needed a creditor.

Qatar joined nothing, and the reason is geological. The North Field is South Pars. Qatar’s gas sits in the same reservoir as Iran’s and its export terminal is 200km from Bushehr, so a Qatari signature on an alliance built to fight Persia would be a signature on Ras Laffan. Iran hit Ras Laffan anyway, targeting any Gulf plant with an American shareholding. Two trains are gone, 17% of output is out with repairs of up to 5 years, the economy is projected at -8.6% for 2026, the steepest contraction in the Gulf, department budgets are cut by up to 30% and overseas aid by roughly 85%, and the wealth fund is being pulled home as it was during the 2017 blockade. Doha’s entire regional model was surplus converted into influence, and the surplus is what Iran destroyed. Its analysts float a Gulf core security network backed by the US and Europe, which is the pre-2017 formula rebranded and a way of staying out of Mecca while sounding supportive. Israel bombed Doha in September 2025 and nobody defended it, which is what produced the Saudi Pakistani agreement in the first place, so Qatar already knows what alliances are worth. Its money is in the pact by proxy in any case. Doha financed Turkey’s bases, balance of payments and defence industry for a decade, and the Turkish base outside the capital has been there for most of it.

The tacit tier is the alliance’s actual structure. The text does not name Iran, Islamabad insists it is purely defensive, and Pakistani analysts even argue Tehran should read it as an opportunity. An alliance that does not name its adversary can enrol states that share a reservoir, a border or a shipping lane with that adversary, because membership does not automatically make them a target. So the signatories carry the obligation. The protocol tier buys the service without the clause, Kuwait, Syria in prospect, Bangladesh by invitation. The reservoir tier participates by tripwire. Turkey’s base sits in Doha, Pakistani troops and a fighter squadron sit in Saudi Arabia, Pakistani trainers will sit in Kuwait. If Iran hits Qatar and Turkish soldiers die, the Mecca clause fires without Qatar ever having signed anything, which is the point of the base. Tehran’s retaliation doctrine already prices tripwires as membership. The non signatories finance the signatories’ capacity while retaining the right to deny they are at war, and Ras Laffan is the evidence that Iran will not honour a distinction they refuse to make themselves.

The counter axis and the powers that do not lend

The Israeli press drew the opposing map before anyone else. Its coverage frames the pact as a real change in the regional security architecture, circles Pakistan’s nuclear status and missile range, and answers with a dramatic acceleration of the land corridor linking India, the UAE and Israel, which is the India Middle East Europe corridor repackaged as a counter alliance. The Israeli prime minister had already announced a Hexagon alliance days before the war, Israel, Greece, Cyprus, India and the Abraham Accords states. Two published charters now exist, one signed in Mecca and one announced in Jerusalem, and the Gulf is distributed between them by which one it is paying for. Abu Dhabi, out of Mecca and out of the Saudi payment system, is the money of the second. Morocco is its Maghreb node, financed by the UAE’s 2023 strategic partnership and the Atlantic initiative, normalised with Israel, and holding the coercive migration leverage over Spain and the EU that gives the axis a valve on Europe’s southern border. Riyadh has no equivalent west of Libya, where its money has already shown it does not buy the Libyan command.

The counter axis has the same structural problem as the bloc it opposes, and the same one that finished Iran. Israel’s project has done to itself what Shia Iran’s did. Gaza, Lebanon and Syria exposed it as elimination rather than settlement, the Accords stopped expanding at exactly that point, and Israel now does what Tehran did when its ideology stopped travelling. It builds a minorities order, Druze in the south, Kurds in the north east, Alawite remnants on the coast, Maronites, Azerbaijan on Iran’s flank, every client chosen precisely because it cannot merge with the majority around it. That is Hezbollah and the Hashd with the flags changed. A minority state that can only project through minorities hits the ceiling that stopped Iran, with worse odds, since Iran had 90 million people and a contiguous land base and Israel has 7 million and a corridor it needs Abu Dhabi and Delhi to finance. India, for its part, is a capital importer running on Gulf remittances, Gulf oil and Western portfolio flows, for which the corridor is a lifeline rather than an instrument. What it brings to the axis is demand, labour and a majoritarian anchor the minorities order lacks everywhere else.

China is inside the pact’s hardware and outside its finance. Every Pakistani fighter offered to Libya or Sudan is a Chinese Pakistani airframe, Pakistan’s reserve floor beneath the Saudi deposits is Chinese rollovers and the economic corridor, and its first instrument on the road back to market was a Panda bond. The alliance’s military layer is Chinese, its financing layer is American, French and German, and Riyadh sits between them buying American kit on American credit while its ally flies Chinese jets. The Chinese president’s Cairo speech about a regional security framework built by regional states is a bid against both Mecca and the corridor, and Egypt’s empty chair in Mecca and full table in Cairo is where that bid landed. China is not a creditor of the region in the sense that matters here. Its money in Egypt is a fraction of the Gulf’s.

Russia is the supplier on every side and the financier of none. It backs the Sudanese army for a Port Sudan naval base while its Africa corps flew materiel to the Rapid Support Forces out of al Kufra through the Libyan command’s territory, it is the Libyan command’s other patron beside Abu Dhabi, and the Syrian president has negotiated with Moscow over its bases on the coast. Moscow’s function is to make sure no faction in Libya, Sudan or Syria can be fully captured by any Gulf patron, which is why Saudi money into Benghazi bought so little. Britain appears in this story as plumbing. London desks ran the Pakistan book, the disclaimers on Pakistan’s own announcement are drafted under British financial law, Saudi and quasi sovereign dollar paper prices in London, and Turkey’s newest fighter is a British built one, 20 airframes signed in October 2025 with Riyadh negotiating its own tranche.

Ideology and the end of subsidy

Nobody in this architecture can win a war. Every state in it is armed by someone else, financed by someone else, and can be stopped by a creditor’s decision or an engine supplier’s licence. Israel cannot finish Gaza after 3 years or Iran after 6 months and runs on American resupply and Gulf and Indian money. Iran cannot project past its proxies and sells discounted crude to a China that buys oil and sends almost nothing back. Saudi, Turkey and Pakistan are on Western credit and American or Chinese platforms. Egypt collects. When every belligerent needs a patron to fight, war becomes attrition, and attrition is decided by which patron tires first. On the question of who can win, the answer since October 2023 is the same as before it.

What changed is not the balance of power but the cost of holding it in place. Before October 2023 the regional order cost almost nothing to maintain. Gaza was contained for a few hundred million a year, Iran was sanctioned and static, the Gulf paid for its own security out of surpluses. Three years later the same order costs Israel a wartime economy and its ideational base, costs Washington carrier groups, an air war and the direct financing of a Saudi bloc, costs Riyadh a deficit and a debt stack past 100% of GDP once the quasi sovereigns are counted, costs Abu Dhabi 2,800 missiles and a rift with its neighbour, costs Tehran its network and its currency, and leaves $236.6bn of Gulf sovereign maturities and $254.8bn of corporate maturities falling due by 2030. The status quo is the same. The price of it has gone from trivial to unpayable, and it is all being paid in debt drawn on the same source. Put the actors on that ledger rather than the military one and ask who can be stopped by a creditor.

The ideological map explains why. The Arab regimes’ export product for 40 years was Sunni sectarianism, a doctrine whose political function was to make Muslims fight each other so that ruling families never had to fight anyone. Iran’s product was the Shia mirror of it, built for the same purpose. When the first came home through al Qaeda and the Islamic State, both channelled through Gulf and Turkish networks into Syria and Iraq to fight the second, the same regimes rebranded and sold moderate Islam instead, a state owned version of the religion whose only content is obedience. They ran both sides of the sectarian war and then sold the cure. Iran did not fail because it is Shia. It failed because it turned a universal claim into a sectarian project, and once it did, its reach stopped at the sect and its enemies could contain it by pointing at the sect. It survived through the people willing to die and was steered into the ground by the people who wanted a normal state, 30 years of selling survival for dollar access in deals that were torn up, until the radicals who kept the state alive inherited an apparatus whose real priority had become dollar access through Hormuz. The Mecca bloc is walking into the same trap from the other direction. A Saudi led alliance financed by the West and blessed by Washington will be sold as Sunni deterrence against Persia, which makes it Sunni sectarianism with a defence clause, and by the same logic it inherits Iran’s ceiling. It can only lead its own sect, and it will be used, as Riyadh’s doctrine always was, to make Muslims fight Muslims while the patron watches. Riyadh, Ankara and Islamabad are the nationalists of Iran’s story. They have adopted the survivor’s posture, the alliance, the deterrent, the defiance, while running the loser’s strategy, buying survival with the creditor’s money. Behind both sectarianisms stands the one force with no sect, no state and no patron, which every regime in the region has spent 45 years funding sectarians to prevent, and the Mecca alliance is the newest and most expensive of those preventions.

Rome and Persia bled each other for 26 years, 602 to 628. Persia took Jerusalem and Egypt, the emperor won it all back, and both empires came out bankrupt, plague ridden and unable to garrison a frontier they had for a century subcontracted to Arab client kingdoms, the Ghassanids for Rome and the Lakhmids for Persia, paid in subsidies and titles to fight each other’s Arabs. Then both defaulted on the arrangement. Persia abolished its Arab kingdom in 602 and within a few years the tribes beat a Persian army for the first time. The emperor, broke after the war, stopped paying the Ghassanid subsidy around 630 with the line that he could barely pay his own soldiers. Six years later Yarmouk and Qadisiyyah fell in the same year, and within 15 the Persian empire did not exist and Rome had lost everything south of the Taurus. The Arabs did not win because the empires were weak. They won because they had a model of government that could take territory and hold it without imperial subsidy, which neither client kingdom had. The clients were mercenaries and vanished. The governing order stayed, and it did not build the administration it inherited. It took the Roman and Persian diwans and put its own name on the coins.

That is the structure described in every section above. An exhausted hegemon that will not fight the Persians itself, financing Muslim frontier clients with paper and titles to do it and calling it partnership, while it moves its own oil supply to gates it controls. The clients are Ghassanids with export credit. The difference so far is that Riyadh and Islamabad are still being paid, and the lesson of 630 is what happens when they are not. The subsidy will not end because the arithmetic runs out. It will end because the creditor is disciplining someone, or because the creditor is committed elsewhere, and everyone on this map has been placed on the same creditor, so it will end for all of them on the same day. When it does, the question of who actually holds territory without a patron gets answered in the field, and the rails, refineries and clearing systems being laid now by states with no ideology will belong to whoever has one. The Mecca alliance is a patronage system in which the patron pays upfront with borrowed money for loyalty it has not received, under a creditor that is taking the patron’s market from it, building a regional market for someone else. The last time this region asked who holds ground when the subsidy stops, the answer was Yarmouk.

Less than a month after the Saudi crown prince, the Turkish president and the Pakistani prime minister stood in Mecca on 7 August 2026 and signed a treaty declaring that an armed attack on any one of them is an attack on all three, the pact has a name, an address and a division of labour. On 31 August the foreign ministers, defence ministers and chiefs of staff of the three states met in Istanbul for the first session of the Strategic Political and Defence Committee created under the treaty, adopted Mecca Defence Alliance as its official title, agreed a permanent secretariat in Riyadh and gave Pakistan the first secretary general post for a 3 year term. The joint statement committed the three to strengthening their armed forces through joint activities, defence industry cooperation and the joint development and production of military technology, and described a structure built to expand.

Most coverage filed both the treaty and its institutional follow up under security. That is a category error. The Mecca Defence Alliance is not primarily a security story. It is the moment a commercial empire acquired a borrowed army, and the clearest signal yet that the Middle East has entered a phase best understood as a collision of emerging capitalist empires.

Over the past 50 years these states became rich. Unevenly, with brutal internal inequality, but rich in the aggregate, sitting on accumulated capital that must now be recycled, grown and defended. For decades the recycling circuit ran through the West. Petrodollars went into US Treasuries, London property, European banks and American arms contracts, and the surplus came back as protection. That circuit is degrading. Europe is stagnant and cannot absorb the volumes. The US weaponises finance, extracts tribute and no longer behaves like a reliable custodian of anyone else’s savings. When the external outlet narrows, surplus capital does what it has always done. It builds itself a hinterland. What looks like regional chaos is competing accumulation regimes each trying to construct one, on overlapping territory, at the same time.

Too much capital, nowhere to go

Each emerging project runs on a different mix of assets, and none holds the full kit. Iran stakes two claims at once, custodianship of regional Shiism and the memory of Persian empire. The second claim is written into the water itself. Hormuz carries the name of Sasanian kings, and when Tehran shut the strait in March it was asserting inheritance as much as leverage, a statement that the waterway between the plateau and the peninsula answers to Persia.

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On 24 August the rial crossed 2 million to the dollar on Tehran’s open market, 203,000 tomans by mid-afternoon and up 114% in 12 months. The same day the US Treasury launched Operation Economic Outcast, nearly 60 new designations, secondary sanctions extended to gold, digital assets, technology, aviation and shipping, and a warning that no country still buying from Tehran sits beyond its reach. The UAE had halted all trade and financial transactions with Iran the week before. The 60 day memorandum signed in Islamabad had expired on 17 August with the blockade back, the oil waiver revoked and no frozen funds released. And parliament’s security commission had just approved a bill charging service fees to every ship transiting Hormuz and barring the vessels of any state that has frozen Iranian assets. Six months into this war the commentary is still about lanes, mines, toll booths and who owns the water.

However, the fee bill should not be read as maritime policy. It is monetary policy. The rial has no backing left. Oil exports are almost zero, gold is the one reserve Tehran has been building and gold is now sanctionable, the dollar is closed and the yuan is a currency of discounts, not liquidity. So the state has done what a state with a collapsing currency and no reserve asset does. It has tethered the rial to the one asset no bombing campaign can remove, its geography. The Saudi riyal holds because it is structurally tied to dollar oil. The rial is now structurally tied to the claim that nothing moves through 21 miles of water without Tehran’s consent. Hormuz is a geopolitical reserve for a currency that has none, and a trust booster for a society that needs to believe the state still has something to fight with and for.

The real fight is at the currency level, and the regime cannot explain exchange rate arbitrage and general licences to a public earning $83 a month. So it tells them the war is about the strait. In reality, it is about access to dollars and to shipping lanes, and Iran has now lost both.

Financial damage can be arbitraged. Physical damage cannot

Since 1988 every sanctions regime has been a financial siege around a physical plant that kept working, and Iran survived by turning the siege into a business. The multiple exchange rate was the core of it. The state imported at a preferential rate, the market sold at the free rate, and the networks that controlled allocation, most of them tied to the Revolutionary Guards and their foundations, captured the spread. Rice imported at 28,500 tomans to the dollar was meant to reach households at 60,000 tomans a kilo and reached them at 150,000. Officially there was no dual rate. De facto the dual rate was the sanctions economy, and households paid the premium for the state’s survival, which is why the base wage has fallen from $232 a month a decade ago to $83, below the $10 a day line that marks risk of hunger. The preferential rate was abolished on 4 January and replaced with ration vouchers that now buy a third of what they did. The spread simply moved. The central bank’s transfer rate is 157,200 tomans against 203,000 on the street, a 29% gap that is still somebody’s margin.

What the war added is damage no exchange rate can absorb. The 18 March strike on Asaluyeh took out roughly 100 million cubic metres a day of processing at a field that supplies 73% of national gas, feeds 65% of petrochemicals and fuels around 60% of the power fleet. The utilities complex at Mahshahr that fed gas, electricity and industrial water to more than 50 downstream plants was knocked out on 4 April, a 2 year rebuild by the oil ministry’s own estimate. Khuzestan Steel shut and Isfahan’s mills were hit, removing about half of a 32 million tonne industry. Replacement cost is put at $91 billion, total damage at $144 billion or roughly 40% of pre-war GDP, and the government’s own preliminary figure is $270 billion, about 90% of this year’s GDP, with reconstruction measured in decades. The IMF has output at -5.4% this year with inflation at 68.9%. The central bank’s own August print shows point to point inflation at 84.4% and goods inflation at 121.5%.

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On 2 March 2026, 3 days into the war between the US, Israel and Iran, drones struck Ras Tanura, the largest refinery in Saudi Arabia. The physical damage was minor. The strategic damage was not. Propane and butane exports halted for weeks, product flows were rerouted to the Red Sea, and the kingdom’s defence ministry claimed nearly 900 aerial threats downed between 3 March and 5 April alone. Projectiles hit the SAMREF refinery at Yanbu, struck the US embassy compound in Riyadh, and destroyed American aircraft on the ground at Prince Sultan Air Base, killing 2 US service members and wounding 29. When the April ceasefire collapsed into renewed fighting in July, the Houthis declared a blockade of Saudi oil in the Red Sea, hit the Jazan refinery, and put a drone into Abqaiq, the single most important oil processing facility on earth.

Nonetheless, through all of this, the American security umbrella functioned as a supplier, not a guarantor. Washington sold interceptors, stationed assets, absorbed casualties on Saudi soil, and still could not stop the kingdom’s core rent-generating infrastructure from becoming a target. The lesson Riyadh drew in 2019, when Abqaiq burned and Washington shrugged, was confirmed at scale in 2026. Estrangement is the wrong word if it implies rupture. What has happened is a repricing. Riyadh has concluded that the US is a vendor of security inputs, not an underwriter of Saudi survival, and it has restructured its alliance behaviour accordingly.

The New Architecture

The new doctrine has three layers. The first is geopolitical: Riyadh is assembling state partners that can provide manpower, platforms, air defence, drones, intelligence and technical support without leaving Saudi survival priced by Washington alone. The second is religious and civilisational: the Mecca framework wraps Turkish, Pakistani and potentially wider Muslim military participation in an Islamic legitimacy structure that only Saudi Arabia can credibly host. The third is global and commercial: Red Sea security turns Saudi vulnerability into a problem for world trade, energy supply and insurance markets, not merely for the kingdom itself.

That third layer is essential. The new security architecture is being built around routes as much as around enemies. Hormuz, Bab al-Mandeb, the Red Sea, Yanbu, Jazan, Suez and the proposed India-Middle East-Europe corridor are now part of the same strategic map. The point is not simply to defend Saudi territory. It is to protect the routes through which oil, gas, containers, data, capital and future corridor rents are supposed to move. Vision 2030’s logistics state cannot function if the kingdom is trapped between an Iranian-controlled Hormuz and a Houthi-threatened Red Sea.

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On 28 July the US signed its first federal funding agreement for a project inside Western Sahara, a 5.7 million dollar feasibility grant for a green hydrogen and ammonia complex at Laayoune whose first phase carries a 4.5 billion dollar price tag. On 30 July the fence at Ceuta opened and somewhere between 60,000 and 80,000 people walked, swam and were driven into a city of 83,000. At least 111 died. Within 24 hours 48,300 had been sent back, and by 3 August roughly 70,000 were on Moroccan soil again.

A border that could not stop 2,582 arrivals over six months stopped 70,000 in a weekend. Gendarmes opened gates. Lorries unloaded at the fence line. Moroccan intelligence officers were caught on Spanish cameras timing response intervals and mapping sensor gaps. The evidence suggests this was a state operation and Rabat ran it because the King’s new patrons wanted Spain hurt and were willing to pay for the work.

Spain said no twice

On 4 March Madrid formally refused US forces the use of Rota and Morón for the war on Iran and shut its airspace to American aircraft flying the campaign. Rota holds 2,800 American personnel, 5 destroyers, an airfield and 3 piers, and is currently absorbing 400 million dollars of US investment to take a sixth destroyer. It is the hinge between the Atlantic, the Mediterranean and everything east of Suez, and for the first time it was closed to the fleet it exists to serve.

A week later, on 11 March, Spain formally removed its ambassador to Israel, 6 months after recalling her. That followed the recognition of Palestine in 2024, a total arms embargo in September 2025, a ban on ships carrying fuel for the Israeli military from Spanish ports, a ban on settlement imports and 150 million euros committed to Gaza. By April the Israeli prime minister was accusing Spain of waging diplomatic war and had expelled Spanish personnel from the ceasefire coordination centre. So within 8 days Spain denied Washington a war and denied Israel a European alibi and neither had a lever on Madrid directly so they used Morocco instead.

Washington uses Morocco

Morocco is trying to influence the Strait of Gibraltar which has grown in importance after the blockades of the Red Sea and the Strait of Hormuz. What Washington lost on 4 March was an anchorage not access, and what it has spent the year building is Morocco’s ability to pressure Spain so that it will never refuse US demands.

A memorandum on critical minerals signed on 4 February covers offshore seabed deposits along the Atlantic coast, waters overlapping both Western Saharan claims and the zones Spain projects from the Canaries. A 2026 to 2036 defence roadmap followed, with a drone centre of excellence, access to Link-16 tactical networks and expanded joint exercises, framed throughout around Morocco’s position on the strait. Active arms sales cases now stand at 8.545 billion dollars. A dossier on the status of Ceuta and Melilla, favourable to Rabat, began circulating in the White House in the weeks after the bases were refused.

On 8 July the US president used a NATO summit to order trade with Spain cut off. On 15 July the House passed its appropriations bill 217 to 209 carrying 40 million dollars for Morocco, and the committee report stated that Ceuta and Melilla sit in Moroccan territory and backed diplomatic engagement on their future status. No chamber of Congress had ever questioned the Spanishness of the enclaves. On 28 July, 5.7 million dollars landed in Laayoune for a hydrogen complex whose first phase runs to 4.5 billion, opening a territory that had been treated as uninvestable since 1975. Underneath all of it, a bipartisan bill to designate the Polisario Front as a terrorist organisation has gathered 16 co-sponsors and would convert Morocco’s territorial dispute into a counterterrorism file. Ultimately, the US is strengthening Morocco’s stance bs Spain as it seeks to grow its influence in the region and control an important global chokepoint.

Israel’s Angle

Spain is the most effective European state on Palestine because it moved from language to statute, embargoed the weapons, closed the ports and dragged a recognition wave behind it. Attacking that position through argument has failed for two years.

Ceuta attacks it differently. It puts Spanish soldiers, Guardia Civil and army on a beach facing tens of thousands of unarmed Muslims, with 111 dead in the water, and it does so in the same summer Madrid is lecturing Israel about killing civilians. That footage runs on Arabic television and across Moroccan and Gulf social media without any need for a press office. A government that says genocide in Gaza is now the government that filled a morgue in Ceuta. Whether the comparison is fair is beside the point. It is available, and it is being used.

The reverse current matters more. 80,000 people crossing a Spanish border in 48 hours is the best recruiting event the Spanish hard right has had in a decade, and the Spanish hard right is unambiguously pro-Israel. Every point that moves from the governing coalition towards Vox moves the Palestine file with it. Israel does not need Spain to normalise tomorrow. It needs the Spanish position to become electorally expensive, and a country that has just watched its enclave overrun is a country where defending Muslim causes costs votes.

Morocco is the demonstration model for what comes after. The military relationship has been running since 2021 and a joint work plan was agreed at a committee meeting in Tel Aviv in January. Rabat took the recognition of its territorial claim as payment. Madrid has a territorial claim of its own to worry about now.

What Morocco charged

Rabat did not design any of this. It inherited a quarrel between its two largest patrons, saw that its geography had been repriced without lifting a finger, and moved fast enough to bill for the revaluation.

The bill is being paid. On 3 August, 3 days after the beaches filled and with bodies still being recovered, the European Commission wrote to Madrid proposing that the Union increase its support to Morocco, offering enhanced early warning systems and improved technical and financial assistance. Interior ministers met on 4 August and the operative goal, by the admission of officials in the room, was to lower the temperature. Italy suspended free movement with Spain and called for its suspension from Schengen. France tightened the Pyrenees. Austria accused Madrid of handing out entry tickets to Europe. The bloc’s new migration pact, in force since June, failed its first live test in 4 days.

Rabat’s own statement came on 3 August, in flat procurement language. Morocco is not a policeman or a guard for Europe. It is a sovereign partner and not a subcontractor, and the rules of the European partnership require review. It also holds a valve that outlasts the news cycle, since under the 2012 bilateral agreement no unaccompanied Moroccan minor can be returned without prior case by case agreement from Rabat. Every child still in Ceuta is a file Morocco can process slowly.

Despite, Morocco’s emboldened position, none of this reflects a country that has become prosperous. Reserves hit 469.8 billion dirhams in April, up 23.4% on the year. Growth is above 4%. Tanger Med moved more than 11 million containers in 2025. Against that, GDP per capita is 4,153 dollars against 26,774 in Ceuta, youth unemployment is 37.2%, and the 2025 protests over hospitals and schools produced 2,400 prosecutions instead of a budget. Thus, while the state is benefiting, got solvent and armed, the population got a fence to run at as poverty and unemployment ramp up.

Morocco’s only growth export is people who want to leave, and it has found two buyers willing to underwrite the management of them, one that wants the southern shore of Gibraltar and one that wants Spain’s moral authority on Gaza destroyed. Normalisation in 2020 bought Rabat recognition. Recognition has been converted into a standing contract, and the service is proving, at intervals, that Spain cannot hold its own border without permission.

The IMF published its annual assessment of the Saudi economy on 29 July, projecting growth of 1.7% for 2026 and describing early stabilisation in non-oil activity between April and June. Its validity lasted 24 hours.

On 30 July, the General Authority for Statistics released flash estimates for the second quarter. Real GDP contracted 4.8% year on year. Oil activities fell 24.7%. Seasonally adjusted, output fell 1.2% in the first quarter and 4.9% in the second, which is two consecutive quarters of contraction on the only definition that matters. Non-oil activity, the sector described as stabilising, shrank 0.5% in the quarter being described. The Ministry of Finance published its half-year budget performance report in the same window, and that is the document nobody read.

Getting to 1.7% for the year now requires roughly 4.3% growth in each of the remaining two quarters, in an economy that cannot move its principal export at volume. Population is expanding at over 2%, so real output per resident fell close to 7% year on year in the second quarter. Non-oil growth has decelerated for six consecutive quarters, from 5.4% to 5.4%, then 4.9%, 4.6%, 2.9% and 0.6%. In the seasonally adjusted quarter the only expanding line in the entire economy was government activity, contributing 0.03 of a percentage point. Year on year, government grew faster than the non-oil private sector, 0.9% against 0.6%. Strip out the state and there is nothing holding the private economy upright.

The ledger nobody read

The fiscal report is where the argument settles, because it records what happened rather than what was projected. Revenue in the first half came to 599,756m riyals, up 6.1% year on year. Spending came to 759,757m, up 15.4%. The deficit for six months is 160,002m riyals, around 42.7bn dollars, which is 96.7% of the entire deficit budgeted for the full year. Half the year has consumed almost all of the annual allowance, and the second half of 2025 ran 11% heavier on spending than the first.

The Fund projects full-year expenditure falling to 27.2% of GDP from 29.1%, and a deficit of 3.7%. Neither survives contact with the ledger. First-half spending alone is close to 16% of annual GDP and rising against an economy that is shrinking. The half-year deficit is already 3.35% of GDP. Public debt was projected to end the year at 32.1% of GDP. It stood at 1,684,993m riyals on 30 June, around 449bn dollars, or 35.3%. The projection was breached in June, with six months still to run.

There is no consolidation happening. Capital spending rose 32.4%. Military spending rose 12% and has already absorbed 52% of its annual allocation. The general items line, which carries debt cost and the emergency allocation, rose 43.8%. Education rose 5.4%, the slowest line in the budget. The state is spending more, earning marginally more, and borrowing the entire difference.

That last point is stated explicitly in the financing table. Two sources are listed. From government reserves, zero. From debt, the full 160,002m riyals. The general reserve closes the half year at 399,070m riyals, roughly 106bn dollars, untouched, while the state paid 29,099m riyals in interest over the same six months, a bill 19.6% higher than a year earlier. The reserves are not being used because using them is legible to markets in a way that issuing sukuk is not. Riyadh is buying silence with interest payments.

The revenue side removes the last defence. Non-oil revenue grew 2.4% in nominal terms, which against reported inflation of 2.2% means real non-oil revenue is flat at best. Taxes on income, profits and capital gains rose 2.4%. Other revenue fell 2.5%. Taxes on international trade fell 13%, which is Hormuz appearing directly in the receipts. Oil revenue rose 9.4% on the war premium and carried the entire increase. The central recommendation put to Riyadh is non-oil revenue mobilisation. The period under assessment contains none.

Two further numbers explain the rest. Subsidies rose 117.2% and grants rose 218.9%. The 2.2% inflation figure is not a fabrication, it is a purchase, costing over 8bn dollars in six months in price caps on fuel and food. And when oil revenue and interest are stripped out entirely, the state runs a non-oil primary deficit worth 23.3% of non-oil output. A decade into Vision 2030, the non-oil economy requires an injection of rent and borrowing equal to almost a quarter of everything it produces.

Debt as the last growth engine

Saudi Arabia raised 49.34bn dollars across 58 bond and sukuk issuances in the first half of 2026, close to half of all Gulf primary debt issuance. Outstanding Saudi debt securities passed 520bn dollars in 2025, up 21% in a year, and are projected to reach 600bn by the end of 2026, making the Kingdom the largest dollar debt and sukuk issuer in emerging markets. The 2026 borrowing plan was set at 217bn riyals, covering a 165bn deficit and 52bn of maturities. It was declared roughly 90% complete in May, before the fiscal position deteriorated further. In July the debt office redeemed 17.1bn riyals of domestic sukuk early and simultaneously issued 17.2bn in replacements running to 2041, which is maturity extension rather than repayment.

Beneath the sovereign, the same machinery runs through the corporate sector. On 27 July the national electricity provider signed a 15.8bn riyal murabaha facility, around 4.1bn dollars over seven years, arranged by seven domestic banks and unsecured. It follows a 1bn dollar syndication and a facility of up to 1.5bn earlier in the cycle. The proceeds are described as general corporate purposes, which is the standard formula for balance sheet support rather than project finance.

This is where the credit numbers acquire meaning. Private credit growth is projected to halve from 10.2% to 5.8%. That is not a demand story. Domestic deposits are being rotated out of private lending and into state-linked balance sheets, because the sovereign and its utilities are the borrowers carrying the guarantees. The private sector that was supposed to carry diversification is being crowded out by the entities diversification was supposed to replace. Direct investment has fallen from 2.6% of GDP to 1.5%, and even that is inflated by intra-group transfers and by infrastructure lease structures counted as inbound capital.

None of the corporate borrowing appears in the 35.3% debt figure, and neither does sovereign fund leverage, the national oil company’s own paper, mortgage securitisation, or the sale and leaseback contracts through which pipelines, desalination plants and power capacity have been monetised. Those structures exist so the cash arrives and the liability never shows on the sovereign line.

The riyal already has two prices

The peg holds at 3.75 for everyone with legal recourse. It does not hold for everyone else. Saudi Arabia funds roughly 70,000 students across 30 countries on a programme costing over 9bn riyals a year. Stipends are written in riyals, 6,512.5 a month for a single scholar with 5,606.25 for a spouse and 812.5 per child, and paid in the currency of the host country. Between the riyal obligation and the payment sits a conversion rate set by each cultural bureau. In July the Canadian rate moved from 2.57 riyals per Canadian dollar to 2.81747, against a market rate of 2.66. The same entitlement that produced 2,534 Canadian dollars in June produced 2,311 in July. Students across multiple countries reported deductions of at least 15% in the same month. In the eurozone, transfers fell from around 1,900 euros to 1,600, a cut of 16%, while the euro moved 1.72% against the dollar over 12 months. At 15%, the implied riyal to dollar rate is 4.41.

Under Article VIII of the Fund’s own articles, a spread of more than 2% between official rates constitutes a multiple currency practice. The assessment released on 29 July does not mention it. A state that operates one rate for its bondholders and another for its riyal obligations abroad is running a plural exchange regime. Egypt looked like this for years before it floated, and the tell was always the same, the emergence of purpose-specific rates for constituencies that cannot complain. Riyadh is not short of dollars, so this is fiscal adjustment rather than external collapse. But the direction is unambiguous. Adjustment is being pushed down into administrative tables and allowance schedules that no market prices and no auditor examines, precisely so the headline number never moves. The general education law issued by royal decree on 24 July, opening school management to private and non-profit operators, belongs to the same programme. Both are retrenchment executed on populations with no capacity to resist.

The forecast for 2027 is 5.5%. It assumes shipping normalises, oil holds, and capital returns on schedule. Even if all three arrive, the arithmetic underneath does not change. Closing a non-oil primary deficit of 23.3% requires cutting the spending that generates the non-oil growth, and every point of closure comes out of the demand the private sector runs on. Consolidation and diversification are in direct conflict, and no Gulf state has resolved that conflict without a rent windfall doing the work for it.

What the three documents describe between them is a state financing its own contraction on borrowed money, suppressing the price index with a subsidy bill it cannot sustain, crowding its banks out of private lending, and devaluing quietly against the people least able to object. The recession is the visible part. The model failing to pay for itself is the part that will still be there in 2028.

A country does not sign away half a century on a whim. When UAE state owned DP World committed in late July to a 50-year concession for two deepwater terminals on the UAE’s Gulf of Oman coast, it was not making a bet on Fujairah. It was making a bet against the Strait of Hormuz, and against the premise that has underwritten Emirati prosperity for two generations, that oil, gas, containers and capital can always find their way out through the 21 miles of water separating Iran from Oman. That premise died on 28 February, when US and Israeli strikes killed Iran’s supreme leader and Tehran answered by closing the strait through which around 20% of the world’s oil normally moves. Everything Abu Dhabi has done since has been an attempt to live without it, and the attempt has become the organising project of the state.

The shock was severe enough to justify the scramble. Container traffic through Jebel Ali, the busiest box port in the Gulf and the commercial heart of Dubai, has fallen by roughly 95%. War-risk premiums that sat at 0.25% of a vessel’s value before the war have climbed to between 3% and 10%, turning a routine transit for a $100 million tanker into a toll of $3 million to $10 million. Around 6,000 seafarers have been stranded in Gulf waters. In July two Emirati supertankers were struck by cruise missiles inside the strait, killing a crew member and injuring 8. The mainstream reads the Emirati response as prudent resilience-building. It is better understood as flight, and the flight is stranger than it looks, because the same state that is spending billions to move its exports and its treasury out of Iran’s reach is spending as much again to persuade everyone else’s money to stay inside it.

Building a second coastline

What is under way is not a set of discrete infrastructure projects but the reorientation of an entire political economy around a single geographic problem, executed through the instruments the state actually controls. ADNOC, DP World, Mubadala and Etihad Rail are not private firms responding to a market signal. They are arms of the state, and their simultaneous mobilisation is the clearest expression of how the UAE governs, through the balance sheets of sovereign vehicles directed from the top. The organising doctrine has a name now. The foreign trade ministry has declared that the country is moving towards zero Hormuz dependency regardless of whether the strait is open or closed, and that the plan will not stop even if traffic resumes. That is not contingency language. It is a decision to treat the strait as permanently unreliable and to rebuild the country’s outlets accordingly.

On the energy side the spine of the effort is the Abu Dhabi Crude Oil Pipeline, which has carried crude from the Habshan fields overland to Fujairah since 2012 at up to 1.8 million barrels a day. During the blockade it has been the difference between the UAE, which kept exporting at reduced volume, and Kuwait, whose seaborne crude simply stopped. Abu Dhabi is now fast-tracking a second west-east line, a project once costed at around $3 billion, to roughly double bypass capacity to 3.6 million barrels a day by 2027. DP World’s new terminals extend the same logic to cargo, lifting the group’s UAE box capacity from 19.4 million to nearly 22 million containers a year and letting freight enter and leave the country without touching Hormuz before moving overland to Dubai, Abu Dhabi and the wider Gulf. The plan reaches beyond Fujairah to Khor Fakkan, Dibba and at least one entirely new harbour on the Gulf of Oman, stitched together by Etihad Rail’s 900 kilometre freight spine from the Saudi border to the east coast, capable of moving up to 60 million tonnes a year, and by the 238 kilometre line being built to connect Abu Dhabi’s industrial belt to the Omani port of Sohar. The ambition is a second entrance to the country that does not depend on the sea lane every rival approach must use.

The trouble is that the escape is partial by design, and the parts that cannot escape are the ones that matter most. Crude can be piped around Hormuz. Liquefied natural gas cannot. The flagship Ruwais gas project, nearly fully booked ahead of its 2028 start and pitched as the country’s entry into the global gas trade, sits on the Gulf coast inside the strait, as does the refined-product output of the Ruwais refining complex. The pipeline solves the problem for the one export that can travel by land and leaves the higher-value molecules where they have always been, hostage to the tanker route. Even the crude bypass is a fraction of what is needed. Against the 17 to 20 million barrels a day that crossed Hormuz before the war, a doubled pipeline moving 3.6 million barrels replaces a slice, not the whole. And geography compounds the ceiling. Fujairah lies around 80 miles from the strait, comfortably inside the range of the drones and cruise missiles Iran has been firing all year, and the port has been hit repeatedly, its oil zone set alight more than once. A bypass that is itself a target is a hedge, not an exit.

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Iraq’s prime minister received the coffin of Iran’s supreme leader at Najaf airport on 7 July, met the US president in Washington on 14 July, and signed 48 agreements worth more than $60bn on 17 July. The agreements cover oilfields, power generation, infrastructure and a crude pipeline running to the Mediterranean through Syria. He holds office because the Iran-aligned bloc that still controls the oil and finance ministries nominated him. Iraq is not changing alliances. It is being drawn into a regional effort to reduce the value of Iranian geography, and it has less capacity to refuse than any other state involved.

The veto

Washington selected the prime minister. On 24 January the Shia bloc that controls parliament nominated a former prime minister who had served two terms. The US rejected him publicly within 3 days and said financial support would end. The Treasury had already frozen the physical dollar shipments flown from New Jersey to the Central Bank of Iraq, suspended the oil revenue payments held at the New York Federal Reserve, and halted security assistance. Iraq depends on those transfers to convert oil sales into spendable currency, so suspending them stops the state paying salaries rather than merely signalling displeasure.

The channel Washington used was one it built. The occupation authority created the Central Bank’s foreign currency auction in 2004 to stabilise the dinar. The auction sells dollars from oil revenue to Iraqi banks against import documentation, which made it the main route through which Iraq’s political class converted state revenue into private wealth and through which sanctioned Iranian trade obtained hard currency. Documents from the Iraqi parliament’s finance committee record billions smuggled through it between 2006 and 2014. The mechanism designed to stabilise Iraqi currency became Iran’s most reliable dollar supply inside Iraq, and in 2026 the US suspended it long enough to determine who formed the government.

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Iraq’s prime minister arrives at the White House next week to sign an agreement reviving the Kirkuk-Baniyas pipeline, the 800km line from northern Iraq to Syria’s Mediterranean coast, shut in the 1980s and finished off by the 2003 invasion. A US investment firm will fund and manage the rebuild, an American oil major and a Qatari company are attached, and Syria’s foreign minister flies in for the ceremony. Days earlier Washington moved to strike Syria from the state sponsors of terrorism list it had held since 1979. The timing is no accident. The pipeline is the American layer of a corridor architecture that the Gulf states and Turkey have spent the past year building through Iraq and Syria, and the visible end of a reallocation that has been under way since the war. The India-Middle East-Europe Economic Corridor, IMEC, assigned the region’s outlet to Europe to Israel through the port of Haifa. The routes now being financed run through Syria and Iraq, and Israel is left out of every layer. Nobody will announce that IMEC is dead, but the capital has started to move accordingly.

The corridor that never had a chance

IMEC was announced at the G20 in New Delhi on 9 September 2023 as the American answer to the Belt and Road, a 4,800km multimodal route running Indian goods by sea to Khalifa Port, by rail across Saudi Arabia and Jordan to Haifa, and onward to Europe, with a hydrogen pipeline, an electricity interconnector and a data cable running alongside. The signatures on the memorandum belonged to India, the US, Saudi Arabia, the UAE, France, Germany, Italy and the European Commission. The three states the route physically depends on, Jordan, Israel and Greece, signed nothing. Jordan, the mandatory transit country, was listed only as an anticipated future signatory.

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Roughly three months after the bombs stopped falling on Tehran, the shape of Iran’s reconstruction has arrived in two documents rather than one. The first is a memorandum of understanding signed on 17 June 2026 by Trump and the Iranian president, mediated by Pakistan and styled the Islamabad Memorandum, which ends the war, lifts the sanctions on an agreed schedule and commits at least 300 billion dollars to rebuilding the country. The second arrived five days later, a sweeping US Treasury licence that switches Iran’s oil exports back on and, for the first time in more than four decades, allows them to be sold and settled in dollars. Read together they are larger than a ceasefire. They are the terms of Iran membership in a new regional order powered by dollars.

The visible actor in the rebuild is a mining company. A US-Saudi minerals programme built around MP Materials, the Nevada rare-earth producer backed by the US government and the Pentagon, together with Saudi Arabia’s state mining champion Ma’aden and its investment arm Manara Minerals, has turned toward Iran’s reconstruction, moving inside the 300 billion dollar fund the memorandum created, a vehicle engineered as private investment rather than a grant or a reparations programme, capital designed to trigger investment into Iran rather than to hand money to it.

The easy reading is the spoils of war, Gulf money and an American miner picking over a country bombed into ruin between February and April. That reading is too shallow, and it misses the design entirely.

For 40 years the organising idea in the region was containment, a wall around Iran, an arc to be encircled and starved. Trump’s project inverts the geometry. The minerals deal and the dollar licence are the opening moves in something far larger than Iran, a single connected economic region stitching Asia, the Middle East and Africa into one directable space, with Europe drawn in along the India-Middle East-Europe corridor, anchored by US offshore capital, Israeli security depth and Gulf sovereign wealth, and built precisely to route around China and Russia rather than to confront them with another decade of sanctions. Call it what its own map makes it, an Asia, Middle East and Africa region (AMEA). The minerals firm is the industrial entry mechanism, the dollar licence is the monetary one, the reconstruction fund is the lever, and Iran is the keystone, not the enemy. This is not encirclement, it is absorption, and absorption is the more dangerous instrument because it does not look like a siege. It looks like an investment.

Iran is being put back inside the dollar

The war cleared the ground in 40 days. Beginning on 28 February the US and Israel launched close to 900 coordinated air strikes across Iran in under 12 hours, hitting government, military and nuclear sites in a single opening salvo, struck Tehran on 3 March, killed the Supreme Leader, and agreed a ceasefire on 7 and 8 April brokered through Pakistan. What the strikes destroyed was not Iran’s mineral wealth, which sits in the ground and cannot be bombed, but its capacity and its sovereignty, the processing, the energy, the leadership and the bargaining power. A bankrupted, decapitated state that still holds some of the largest reserves on earth is not a candidate for defiance, it is the ideal candidate for financialised absorption, because it cannot pay for its own recovery and the only capital large enough to fund the rebuild belongs to the bloc that just demolished it.

The memorandum is where the absorption is written down. Its 14 points end the war, remove the naval blockade within 30 days, hand the future administration of safe passage through the Strait of Hormuz to Oman and the Gulf littoral states, terminate the sanctions on an agreed schedule, release Iran’s frozen funds to its central bank, and commit at least 300 billion dollars of regional capital to reconstruction, with Trump insisting Washington itself will not pay. Paragraph 10 is the operative one. It instructs the US Treasury, immediately on signing, to license the export of Iranian crude, petroleum products and derivatives and, with them, all the banking, insurance and transport services that make an oil trade possible.

On 22 June the Treasury issued General License X, a 60-day waiver running to 21 August that lets Iran produce and sell crude, petrochemicals and refined products and, for the first time in more than four decades, be paid for them in dollars, with the proceeds flowing directly into the Central Bank of Iran rather than through the shadow-banking intermediaries Tehran has used to survive sanctions. The licence could release roughly 67m barrels of Iranian crude stranded in the Gulf and hand Tehran an immediate 8 billion to 9 billion dollar windfall, and it removes at a stroke the banking friction that has held Iranian volumes down, which is why the early read is that China, the buyer of roughly 90% of Iran’s oil, will now accelerate its purchases through formal dollar clearing rather than opaque channels, indirectly undermining a main channel of yuan internationalisation.

This is the move the minerals story need to be read within as dollar will likely also be used trade such materials. For more than 40 years Iran sold its oil almost entirely outside the dollar, in yuan, in barter, at a discount, through a shadow fleet and intermediary banks, and it did so deliberately, because settling outside the dollar was the one piece of monetary sovereignty that sanctions could not reach. The resistance economy was built on it. General License X reverses it. Iran’s single most important revenue stream is switched back on, but inside the dollar system, cleared under a US licence, booked through its central bank in the currency Washington controls. Minerals will also likely be expected to be traded in dollars. The autonomy Iran spent four decades constructing is surrendered in 60 revocable days for revenue and regime survival. The dollar is not the payment, it is the leash, because a licence that expires on 21 August is a licence that can be left to expire, and an oil sector that has just been re-plumbed into dollar clearing is an oil sector Washington can throttle by doing nothing at all.

The minerals deal builds the other half of the same cage. The reason a Pentagon-backed miner is planting refining capacity inside former enemy territory is that processing, not extraction, is the chokepoint of the modern economy, and one country owns it. China refines roughly 90% of the world’s rare earths and the magnets built from them, along with much of the planet’s lithium and cobalt, and in 2023 and 2024 it showed what that dominance is for by restricting gallium and germanium as instruments of policy. Turning Manara’s acquisition machine and MP Materials’ refining capability toward a bombed and bankrupt Iran is not charity, it is the construction of a non-China processing layer in the one place Washington could never previously reach. The Iranian ore matters less than the Iranian refinery, because the refinery is a node in a parallel supply chain, and the same refinery that makes Iran useful to the bloc is the refinery the bloc can switch off.

Notice what the two halves share. The oil is re-dollarised by licence, and the minerals are re-dollarised by capital. A rare-earth or base-metal project built with US and Gulf money, processed in a bloc-controlled refinery and sold into a Western supply chain is a project that prices, invoices and clears in dollars, the same dollars the oil now clears in. Iran’s two great resource streams, the one it pumps and the one it digs, are being plumbed back into a single currency at a single moment. The alternative was not hypothetical. China has spent a decade trying to drag the world’s commodity and metals trade onto the yuan, and an Iran rebuilt by Chinese capital would have fed its ore into yuan-priced Chinese supply chains the way it had been feeding its crude into yuan-settled Chinese refineries. The war foreclosed that. Stripped to its core, absorption is re-dollarisation, the recapture of an entire economy’s external earnings into the currency the bloc controls, run across oil and minerals at once because the prize was never a single commodity, it was the monetary system. Oil pays the bills and minerals build the supply chain, but both are now denominated, cleared and switchable in the same currency, and that is what makes Iran a member rather than a holdout, productive and indebted and with nothing sovereign left behind.

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By June 2026, Beijing had formally asked Rabat to negotiate a free trade agreement, a request the kingdom describes only as under reflection while it studies the impact and holds back from formal talks.

At face value, this looks like a good trade opportunity. A pact with the world’s second-largest economy would open 1.4 billion consumers to Moroccan exporters and loosen a dependence on Europe that has shaped the kingdom’s trade map for a generation. However, since 1 May 2026, Moroccan goods already enter China almost entirely duty free, under a unilateral exemption Beijing extended across Africa that expires in 2028. Morocco holds the export upside now, without signing anything. What an agreement would add is the reciprocal half, an obligation on Rabat to open its own market to Chinese goods permanently and to convert an informal arrangement into a binding one. Beijing is not offering Morocco a market. It is asking Morocco for a passport to Western and African markets.

What Beijing is actually asking for

The value Morocco carries for China is not its 38 million consumers. It is the stack of trade agreements that lets goods made on Moroccan soil enter the markets China is being shut out of. A lithium battery assembled near Kenitra leaves Tangier stamped as Moroccan and crosses into the European Union at 0%, rather than the 45% the bloc now levies on electric vehicles shipped from China. In recent years Chinese firms have committed close to 10 billion dollars to Moroccan industry, including a 1.3 billion dollar battery gigafactory near Kenitra that may grow to 6.5 billion, a cathode plant at Tangier, a battery materials joint venture at Jorf Lasfar tied to the royal holding company, and a tyre plant inside a zone designed to host 200 Chinese firms. Morocco gets jobs, plants and the prestige of an industrial story. China gets tariff cover, European proximity, local phosphates and cobalt, and a politically stable base from which to outflank Western trade walls.

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The lifting of Riyadh’s 5-year ban on Lebanese exports on 10 June was read across the region as a thaw, a gesture to a weakened Beirut. However, upon closer examination, it is nothing of the sort. It is the reactivation of a northern trade artery that runs through the Levant and Anatolia and never touches an Israeli port, and it is one move in a far larger design. Saudi Arabia is not delaying its entry into an Israeli-centred regional order. It is constructing a Saudi-centred one that functions without Israel at all. Syria may pay the price, yet again.

The infrastructure of a bypass

The Saudi turn is physical this time, not rhetorical. In late March, the national railway opened a freight corridor of more than 1,700 km linking the eastern ports of Dammam and Jubail to the Al-Haditha crossing on the Jordanian frontier, each train moving upward of 400 containers and halving the transit times of road haulage. It was launched as an explicit land alternative to the Strait of Hormuz, one element of a programme pulling cargo off the Gulf coast and feeding it across the peninsula to the Red Sea terminals at Jeddah and Yanbu. On 9 June, two memoranda with Ankara extended the logic northward, sketching an overland spine from the kingdom through Jordan and Syria into Turkey and on to Europe. The Saudi link to the Jordanian border already exists. The Turkish line already reaches the Syrian frontier. The missing pieces are a 400 km gap between Syria and Jordan, and a section between Turkey and Aleppo that Ankara will rebuild for around 100 million dollars, opening a direct line to Damascus. Test runs from Turkey through Iraq to the kingdom have proved the route. Other Gulf states have been invited to fold in behind it.

This is the revival of the Ottoman Hejaz line, inaugurated in 1908, running from Istanbul to Medina through Damascus and Amman, abandoned after the First World War and never rebuilt after the plans collapsed in the wake of the 1967 war. Its return is not nostalgia. The corridor from Aqaba through Amman, Damascus and Aleppo into Anatolia performs two functions at once. It bypasses Hormuz, and it bypasses Israel. Neither its Saudi backers nor its Turkish builders have disguised the second purpose. The route is engineered to strip Israel of any indispensable role in the movement of regional trade, and its proponents have framed it as the killing of the IMEC 2023 corridor that was meant to bind India to Europe with Israel as the hinge.

The redundancy Israel cannot offer

That earlier corridor, the India to Middle East to Europe route announced at the 2023 G20 summit, rested on Saudi-Israeli normalisation and on a northern leg carrying Gulf freight through Jordan into Israeli Mediterranean ports. It is now a memorandum without a road. It carries a financing gap of roughly 5 billion dollars, no construction timeline, and a political foundation that has dissolved. Coalition politics inside Israel stalled the rail through Israeli territory, and 99% of Saudis polled this year reject normalisation.

Israeli leadership has spent the war pressing the opposite geography, pipelines and routes carrying Gulf oil and gas west across the peninsula to Israeli ports, with Israel positioned as both commercial hub and the guarantor against any closure of Hormuz. The proposition turned out to be empty and Israel is not able to offer much. Instead, for example, the East-West pipeline, 1,200 km from the eastern fields to Yanbu, which was laid in the 1980s for precisely this contingency, has exported a record 7 million barrels a day, pushing roughly 5 million out through the Red Sea while Hormuz stood closed. On the energy map, as on the freight map, Israel supplies nothing the kingdom cannot secure without it.

This is what the Saudi-Turkish track is really carrying, and it is not a formal pact to strangle Israel. The two states are not even doing the same thing. Ankara runs an open embargo, having severed direct trade in 2024, with the official tally at zero since the middle of that year, even as goods still reach Israel through third-country rerouting. Riyadh’s method is quieter and more durable. It is not boycotting Israel at all. It is building a map on which Israel is no longer a necessary node, and a structure that routes around a state outlasts any embargo that merely punishes it.

Neither state is working alone. The corridor is only the visible edge of a wider realignment, one built on a shared refusal to be subordinate to Israel or to let it dictate the region’s terms. That instinct has pulled Cairo and Islamabad in alongside Ankara and Riyadh, and their foreign ministers met repeatedly across the spring, in Riyadh in March, in Islamabad later that month, and in Antalya in April. On paper the grouping is heavy. It joins around 500 million people and a spread of assets no rival can match in combination, Turkish industry and ports, Saudi capital and crude, Egyptian command of Suez, and Pakistani strategic depth, the last of which brokered the current understanding between Washington and Tehran. Yet it is not an alliance and binds no one in law. It is a convergence of corridor politics and shared interest, broad in reach and thin in obligation.

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In Riyadh on Tuesday, Turkey and Saudi Arabia signed 2 memorandums of understanding on railways and logistics, formally bringing the kingdom into the revival of the Hejaz railway after Syria. The Ottoman original, built from 1900 with donations gathered across the Muslim world, ran from Damascus to Medina and carried a branch line down to Haifa. The modern version goes through Aleppo, Damascus and Amman. Feasibility studies are due before the end of this year, construction is scheduled from 2027, and 2 trial transit runs have already moved from Turkey through Iraq to Saudi Arabia along the Development Road from Faw Port. Unlike with the India-Middle East-Europe Economic Corridor (IMEC), nobody has drawn a branch line to Haifa this time. Turkey has said an extension to Haifa can occur only after the establishment of a Palestinian state and respect for the rights of the Palestinian people. Slowly, Israel turned from the centre of a regional trade hub geopolitics and geoeconomics into an outcast threatening the whole premise of the Abraham Accords and the IMEC regional integration plan centred around it. Through weaponised interdependence, Israel sought to undermine Iran and lock in Arab normalisation, but the Iran war showed the limits of Israeli aspirations and kicked off the marathon for the new regional order.

Israel’s short-lived edge

Israel and the UAE share a structural problem. Both are small against their neighbours in population, territory and depth, and both answered this dilemma the same way, by making themselves network nodes that bigger states could not route around. The academic literature calls this weaponised interdependence. Networks of finance, data, shipping and energy are hierarchical. They concentrate around a few hubs, and a state controlling a hub sees everything moving through it and can cut it off whenever it suits them, making connectivity a leverage.

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On 5 June 2026, the European Investment Bank released a further 500 million euros for Morocco, completing a billion-euro commitment to the High Atlas towns wrecked by the 2023 earthquake. Recovery efforts will include rebuilding roads, schools, clinics and others.

The new loan tranch extends an approach the palace has spent 15 years refining which seeks the conversion of outside dependency into domestic control as the region is ravaged with the Strait of Hormuz crisis consequences.

Morocco is not a kingdom quietly rebuilding, and not a logistics hub lucky to sit beside a war, but a monarchy that has learned to turn its own contradictions into leverage to stabilise the regime.

In this approach, Europe lends, Washington recognises, the Gulf reassures, China builds, Moscow abstains rather than blocks, and a burning region keeps routing capital, cargo and migrants through the government that still looks calm.

The war on Iran expedited the process. When US and Israeli strikes hit Iran on 28 February 2026 and Tehran answered by closing the Strait of Hormuz, the Gulf turned overnight from a key corridor into a target. Tanger Med, which moved 11.1 million containers and 161 million tonnes in 2025, suddenly presented itself not as a periphery but as the route that still works.

Fortunately, Morocco is more stable than almost all countries around it. It is not Egypt, where every external shock passes straight through the Suez Canal, the currency and imported fuel. It is not Jordan, boxed in by aid dependency, refugees and a war on its doorstep. It is not Saudi Arabia, whose own transformation is now lashed to enormous state spending and mounting financial strain.

However, whilst the advantage is real, the danger is to read that stability as regime health. Morocco is not strong because its social contract delivers. It is strong because the actors around it need its contradictions managed by the palace, and normalisation with Israel requires cementing the King rule.

When private credit stopped paying

The 2011 uprisings forced the monarchy to answer demands for work, services, dignity and accountability, and it survived through constitutional cosmetics, party management, a controlled political opening and tight fiscal discipline. It did not collapse, and it did not become a liberal market. Across the following decade the state quietly rebuilt its central role inside the economy while keeping the language of private enterprise intact.

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The International Monetary Fund concluded its 2026 Article IV mission to Riyadh this week with a verdict dressed in the careful language of approval. The Saudi economy, it said, is proving resilient in the face of the war, supported by strong fundamentals and diversified infrastructure. Growth this year will come in notably lower but holding up at around 2%, down from 4.5% in 2025, contingent on shipping through the Strait of Hormuz normalising in the coming months. Inflation is projected to rise to 2.3%. Higher oil prices, the Fund noted, would offset volume losses and ease the fiscal and current account deficits. It was a statement designed to reassure, and the markets read it that way.

The word resilience is doing an extraordinary amount of work here. Strip it away and look at the arithmetic, and a very different economy comes into view. A 2% expansion of a roughly 1.3 trillion dollar economy is about 26 billion dollars of additional output. In the same year, the Saudi state alone plans to borrow 58 billion dollars. That figure covers a 44 billion dollar budget deficit and 14 billion dollars in maturing principal. The sovereign is borrowing more than twice the entire increment of growth the IMF is celebrating. And the sovereign is only the first and smallest layer of the structure.

An Economy Running on Borrowed Money

The borrowing is everywhere, and it is simultaneous. In January the debt management centre raised 11.5 billion dollars in a single international bond sale that drew a 31 billion dollar order book. Days later it closed a 13 billion dollar syndicated loan earmarked for power, water and utilities. Then came the monthly domestic sukuk, 2.1 billion dollars in February, 4.11 billion in March, 4.52 billion in April, until by late May the state had quietly secured around 90% of its annual funding before the year was half over. The kingdom's total debt capital market, already past 520 billion dollars at the end of 2025, is on track to reach 600 billion dollars by the close of 2026.

The sovereign wealth fund borrows on its own account and outside the budget. It raised 2 billion dollars in January and a further 7 billion in May, the latter against a 23.8 billion dollar order book. Its total debt has quadrupled since 2020. Crucially, none of this appears in the 44 billion dollar deficit figure, because the fund's spending sits off the fiscal balance sheet entirely. It is leverage by the state that the state does not formally count.

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When US and Israeli aircraft opened the war on 28 February and killed Iran’s supreme leader in the first hours, the best-case working assumption in Washington was that overwhelming force would break Tehran within weeks. Three months on, the Strait of Hormuz that carries 20% of the world’s seaborne oil remains contested, tanker traffic collapsed from around 60 vessels a day to near zero at the worst point, and the US has answered Iran’s closure with its own naval blockade of Iranian ports. The chokepoint did not discriminate between enemy and ally. The same closure that strangles Iran also severed Saudi exports and the longer the siege runs the deeper the wound cuts.

This is no longer a war that Saudi Arabia can watch from the sidelines while quietly banking the advantages. It is a vice closing on the kingdom from two directions at once, financial and strategic, and it is forcing a choice that Riyadh has spent years engineering its entire foreign policy to avoid.

The shared strangulation

Saudi crude exports fell by roughly half in March, to about 3.33 million barrels a day, as the effective closure of the Gulf forced the kingdom to reroute flows westward through the 1,200 kilometre pipeline to Yanbu, whose capacity has been pushed to 7 million barrels a day. Output was cut by around 2 million barrels in March, to near 8 million, and slipped further as the war continued. The largest refinery in the kingdom was halted, propane and butane exports stopped for weeks, and at one point Yanbu stood as the only functioning crude outlet. Aramco’s own leadership concedes that even if the strait reopened immediately, rebalancing would take months and could stretch into 2027.

Iran’s position is far worse, yet the logic is identical. Oil revenue, worth at least 30 billion dollars and around a quarter of state income before the war, has been throttled. The IMF projects a 6.1% contraction this year with no recovery before 2027, 2 million jobs have already gone, and the central bank has privately warned that rebuilding the war-damaged economy could take more than a decade. Reconstruction is impossible while the war continues because it demands finance, foreign exchange, and imported capital goods, and the blockade and sanctions choke all at once.

So both capitals face the same arithmetic. Neither can fund its future from oil while the chokepoint stays contested, and neither can wait the other out without absorbing damage it cannot recover. This is the unintended symmetry of the siege. It has manufactured a shared interest between Tehran and Riyadh, precisely where Washington assumed it was deepening a rivalry. The two are now cornered into one of two outcomes. They fight each other directly, which serves only their enemies, or they reach some form of pact. There is no longer a comfortable third lane.

The end of hedging

For two decades, the Saudi doctrine was to ensure that neither Iran nor Israel achieved regional dominance, to hedge between them and pocket the spread and that posture is now spent. The kingdom declined to enter the military campaign against Iran, issued symbolic condemnations of Tehran, preserved its ceasefire with the Houthis and leaned on Pakistani mediation. Washington has read all of this as betrayal. A leading US senator close to the White House warned in March that Saudi refusal to fight would carry consequences, and in late May widened the threat to severe repercussions for future relations should Riyadh, Doha and Islamabad refuse to join the Abraham Accords. The US president has pressed for simultaneous and mandatory normalisation as the price of the broader settlement.

This is the heart of the trap. Neutrality is no longer a tolerated position for any of the parties that matter. Tehran will not accept a Riyadh that quietly assists the campaign against it. Washington and Tel Aviv will not accept a Riyadh that refuses to convert the moment into normalisation. The kingdom is being pushed to either recognise that Iran has absorbed the worst the US could deliver and emerged standing, which is its own kind of victory, or to sign with Israel and then stand on the confrontation line against a wounded but undefeated neighbour. The official Saudi line, that normalisation requires an irreversible path to Palestinian statehood, is real, but it is also the last evasion available, and the pressure is designed to strip it away.

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The Q1 2026 budget report records the moment Saudi Arabia structurally broke from the oil revenue model and crossed into a debt-financed deficit economy. The Iran war is the immediate trigger. The architecture was prepared for the transition before the first missile crossed Saudi airspace in February. The numbers describe a kingdom now permanently dependent on issuance for the spending the oil line can no longer fund, with a productive base damaged by war, and a fiscal arithmetic that does not return to balance under any horizon the budget can credibly model. The crossroad the regime is at is not whether to choose between austerity and growth. It is whether to acknowledge that the model has changed or to keep running the financialisation programme until the markets force the change.

The headline carries the case. Q1 revenue fell 1% year-on-year to SAR 261 billion. Q1 expenditure rose 20% to SAR 386.7 billion. The deficit closed at SAR 125.7 billion, consuming 76% of the SAR 165 billion full-year deficit projection in three months. The 2025 outturn ran the same gap in starker form. The original 2025 budget projected a deficit of SAR 101 billion. The actual 2025 deficit, reported for the first time in this document, came in at SAR 276.6 billion. That is a 174% overshoot from the original budget, and roughly 12% above the mid-year revised estimate. The 2026 budget projects spending will fall 5.4% year-on-year. Q1 spending is up 20% year-on-year. The variance from the budget is already 25 percentage points after one quarter. The annual deficit ceiling is practically a fiction.

The revenue base has been structurally impaired

The oil revenue at SAR 144.7 billion is down 3% year-on-year, a number that understates the structural impairment beneath it. Pre-war Saudi exports through Hormuz averaged 6 to 7 million barrels per day. The strait was effectively closed by Iranian Revolutionary Guard action from 4 March, with crude flows through it falling from around 20 million barrels per day system-wide to just over 2 million during March. The East-West pipeline to Yanbu runs at 4 to 4.5 million barrels per day at ceiling. Even pushing alternative routes to maximum, including Bahrain crossover and Eastern Province crude rerouting, exportable Saudi volume sits at 5 to 5.5 million barrels per day, a 25 to 35% reduction sustained for as long as Hormuz remains functionally closed. The 7 April ceasefire is a paper instrument. Insurance markets have not normalised premiums on Hormuz transit. Ships are still being turned away. The strait is not open in any operational sense. The Q1 oil number captures only the early weeks of disruption. Q2 will absorb the first full quarter of impaired exports and will come in materially below the Q1 line. Full-year oil revenue probably lands around SAR 440 to 460 billion against pre-war run-rate of SAR 580 to 600 billion. That is a SAR 145 to 150 billion permanent revenue gap before any other variable moves.

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There is a strategic logic to what the US has spent the past several months doing in the Middle East, Latin America, Eurasia, and Southeast Asia that goes well beyond the stated objectives of any single operation. Taken together, the seizure of Venezuelan oil infrastructure in January 2026, the war on Iran, the Ukrainian attacks on Russian tankers and refineries, and the Major Defense Cooperation Partnership signed with Indonesia on 13 April 2026 constitute a coherent programme of energy encirclement directed at one target: China. This is not a war about Iran only. Iran is the instrument. The war is strategically about China.

The Geometry of Encirclement

China imports roughly 11 million barrels of oil per day. Iran, before the war, supplied around 87% of its exports to China at heavily discounted prices, accounting for approximately 1.5 million barrels per day of Chinese intake. Venezuela, whose largest customer was China through a debt-for-oil arrangement that had been running for over a decade, sent 55% of its crude to Beijing before Maduro’s removal in January 2026. Russia, through Rosneft and Lukoil, supplied as much as 20% of Chinese crude imports – roughly 2 million barrels per day – before US sanctions in late 2025 forced Chinese state refiners Sinopec and PetroChina to cancel shipments, affecting nearly 45% of Russia’s crude flows to China. China’s imports from other Gulf countries through Hormuz were also impacted.

In the space of less than four months, Washington has moved to simultaneously tighten or complicate access to China’s most important oil suppliers. Russian supplies were disrupted by the Ukrainian attacks on Russian tankers and refineries. The Strait of Malacca, through which 40% of global trade flows and the vast majority of China’s seaborne energy imports travel, is also scrutinised. The US-Indonesia defence pact, signed last week, expands joint operational access to Indonesian airspace, deploys American surveillance sensors along the strait, and integrates Washington’s monitoring architecture across the waterway. China now faces a coherent chokepoint strategy stretching from the Caribbean to the Persian Gulf to the South China Sea. That is not coincidence. That is a doctrine.

The Venezuela piece is particularly revealing because it was done without a shot being fired at China directly. Washington extracted Maduro, handed control of oil revenues to a US-aligned transitional authority, and then issued the studied message that Beijing could continue purchasing Venezuelan crude – but at market prices, not the discounted rates that had serviced Chinese debt. The US effectively transformed China’s largest South American oil relationship from a strategic asset into a dollar-denominated commercial dependency supervised by Washington. China’s “teapot” refiners, the private processors that handle the bulk of sanctioned crude, are no longer just commercial actors. They have been reclassified as strategic vulnerabilities whose survival depends on US political tolerance.

The Deindustrialisation Thesis

The precedent for what Washington is attempting with China was already demonstrated on Europe. When Nord Stream was destroyed in September 2022, Germany lost the industrial foundation that had made its manufacturing sector the engine of European growth. Cheap Russian gas had underwritten everything from BASF’s chemical production to the competitiveness of German steel. With it gone, Germany’s deindustrialisation accelerated into a structural collapse: electricity costs surged to among the highest in the developed world, major firms relocated production, and the country’s GDP contracted for two consecutive years. Europe’s industrial base, once Washington’s peer competitor in advanced manufacturing, now depends on US LNG at US-determined prices.

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The same week Indonesia signed a major defence cooperation partnership with the US at the Pentagon, its president sat with Vladimir Putin at the Kremlin for 5 hours negotiating Russian oil. That is the Indonesian story in a single photo. Not multi-alignment. Not strategic hedging. The war on Iran has made all of its contradictions visible at once.

On 13 April 2026, the US and Indonesia formalised the Major Defense Cooperation Partnership at the Pentagon. It covers military modernisation, joint exercises in maritime and subsurface domains, autonomous weapons co-development, and expanded special forces training. Washington is simultaneously seeking blanket overflight access for US military aircraft through Indonesian airspace, giving the US direct surveillance capability over the Strait of Malacca, the world’s busiest chokepoint for oil and petroleum liquids. Jakarta says the proposal is still under review. Multiple Indonesian outlets reported that Prabowo had already approved it.

On the same day, Prabowo was in Moscow. He spent 2 hours in bilateral talks and 3 hours alone with Putin. The outcome was a long-term energy and mineral resources cooperation agreement, covering oil and gas supply, downstream processing, and what Jakarta now frames as energy resilience. Russia has received a formal request from Indonesia for oil product supplies. Prabowo told Putin he had come to “consult” because “the global geopolitical situation is evolving and changing very rapidly.” This is the 5th meeting between the 2 leaders in a single year.

From Moscow, Prabowo flew directly to Paris to meet Macron. The 3 meetings in 72 hours tell you everything about where Indonesia is and where it is not. It is everywhere. It is anchored nowhere.

Buying everything, choosing nothing

The military procurement alone reveals the depth of the contradiction. Indonesia is now acquiring or has committed to 42 Rafales from France, 48 5th-generation KAAN stealth fighters from Turkey, 42 J-10s from China, 16 KF-21 Boramae from South Korea, and has a freshly signed defence partnership with the US covering autonomous systems and next-generation technologies. That is 5 fighter platforms from 5 countries across 4 geopolitical blocs, with zero interoperability between any of them. The finance ministry cleared $3.1 billion in foreign loans for Chinese military equipment alone, including CM-302 coastal anti-ship missiles. The defence budget for 2026 is 187.1 trillion rupiah.

This is not diversification. Diversification implies a strategic logic where different suppliers reduce dependency on any one of them. What Indonesia is doing is accumulating bilateral defence relationships as political signals to each partner, without a unifying operational concept. The J-10 deal signals to Beijing that Jakarta takes Chinese military technology seriously. The MDCP with Washington signals that Jakarta remains inside the US security architecture. The Rafale signals European sophistication. The KAAN signals solidarity with Turkey and the emerging non-Western defence industrial base. Each deal makes sense on its own. Together they describe a country that has not decided whether it is a US security partner, a Chinese economic client, a BRICS strategic actor, or a non-aligned middle power. It is currently all 4 simultaneously. The war has made that position untenable.

The Hormuz shock and the scramble for oil

The closure of the Strait of Hormuz since 28 February has exposed Indonesia’s most dangerous structural weakness. The country is a net oil importer with 20 days of domestic reserves. Around 25% of its crude imports transit through Hormuz. Over 50% of the world’s nickel is produced in Indonesia, and 75% of the sulphur required for nickel processing comes from the Middle East through the same waterway. When Iran shut the strait, Indonesia lost access not just to fuel but to the chemical inputs that sustain its most strategically valuable export commodity.

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