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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Turkey is being positioned as the war’s biggest winner before the war has even ended. The logic is seductive. Iran is degraded. Israel is overstretched. The Gulf is paralysed. And Turkey, the region’s largest NATO power, sits outside the blast radius with a booming defence sector But the assumption that Ankara will simply absorb Iran’s regional weight mistakes proximity for inheritance. Turkey’s strategic position has improved. Its structural vulnerabilities have deepened at the same time. The net outcome is far less certain than either triumphalists or catastrophists suggest.

The short-term damage is real and measurable. The Borsa Istanbul dropped 7% on the morning of the strikes. Foreign investors liquidated between $25 billion and $30 billion in Turkish assets in the first weeks of the conflict, moving into dollars as emerging market risk appetite collapsed. The central bank burned through more than $40 billion in reserves in a matter of weeks to stabilise the lira. Inflation remains above 30%, well beyond the government’s 16% year-end target. Every $10 increase in oil prices adds roughly $5 billion to Turkey’s current account deficit. The roughly $30-per-barrel rise since the start of the year, if sustained, would add $15 billion to the gap. Turkey’s 3-month trade deficit through March hit nearly $29 billion, suggesting the 2026 total could eclipse last year’s $92 billion. Industrial capacity usage fell to its lowest level since August 2020. This is not the profile of a country coasting to victory.

Tourism, a critical hard-currency earner that brought in $65 billion in 2025 on 53 million visitors, is under direct pressure. Bookings from Germany are down. Iranian tourist flows to the eastern border city of Van have stopped. Turkish Airlines and Pegasus have halted flights to Iran, the UAE, Jordan, Lebanon, Syria, and several Gulf destinations. Jet fuel prices have surged over 100% compared to a month before the war began. Estimates suggest Middle Eastern tourism could decline 11% to 27% in 2026. The government’s $68 billion revenue target for the sector now looks unreachable. Three Iranian missiles have entered Turkish airspace since February 28, all intercepted by NATO systems. The US closed its consulate in Adana and advised citizens to leave southeastern Turkey. For a tourism sector that depends on perceived safety as much as actual safety, these are not trivial signals.

The strategic upside

And yet the structural opportunity is undeniable. A weakened Iran removes the single most capable non-Arab Muslim power from the regional chessboard. What remains is Turkey. By geography, by military capacity, by NATO membership, and by industrial base, Ankara becomes the dominant actor adjacent to the Levant, the Caucasus, the Black Sea, the Gulf, and North Africa simultaneously. No other state in the region holds that combination.

The defence sector is the clearest expression of this positioning. Turkey’s domestic defence production rate now exceeds 80%, up from roughly 20% two decades ago. Defence and aerospace exports surpassed $10 billion in 2025, a 48% year-on-year increase. 5 Turkish companies sit in the global top 100 defence firms. The KAAN 5th-generation fighter programme is moving toward serial production with 48 units already contracted to Indonesia and serious interest from Egypt and Saudi Arabia. The Steel Dome multilayer air defence system, led by Aselsan with Roketsan and other national firms, has already delivered over 100 components to the Turkish armed forces. A further $1.92 billion package secures deliveries through 2031. The 2026 defence budget stands at $27.3 billion, a 33.9% increase over 2025, with more than 1,000 active projects worth nearly $100 billion. Ammunition production capacity has been scaled from 4,000 units to 65,000 annually, targeting 1 million by 2028. Turkey is not merely arming itself. It is building the industrial capacity to arm others in a region that has just witnessed its existing security architecture shattered.

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The Islamabad ceasefire announced this week is not a return to the status quo but the inaugural act of a new regional order defined by ledger dominance. While global attention remains fixed on the temporary suspension of kinetic strikes, the real revolution is occurring in the maritime law of the Gulf. The proposal to institutionalise transit fees for the Strait of Hormuz represents the final collapse of the post-1945 security architecture, where the US Navy underwrote the free flow of energy as a global commons. By converting a natural waterway into a sovereign toll booth, Tehran is effectively nationalising the primary artery of global industrial life. This is not a desperate grab for liquidity by a sanctioned state; it is a fundamental restructuring of the political economy of the Middle East, where the ability to disrupt is being formalised into a permanent right to invoice. This is important because it may also incentivise Houthis to try to financialise their geopolitical location to monetise Red Sea access, creating a global rippling effect.

Ledger dominance and the privatisation of the global commons

For 8 decades, the Strait of Hormuz operated under a security escrow. Capital markets assumed that the cost of passage was zero because the US taxpayer covered the bill for regional stability. The 2026 conflict has exposed the terminal fragility of this arrangement. The move to charge up to 2,000,000 USD per tanker is the logical conclusion of a decade of maritime grey-zone warfare. It transforms the Islamic Revolutionary Guard Corps from a paramilitary force into a maritime central bank. If this fee is successfully codified, it sets a precedent that will inevitably be mirrored in the Bab el-Mandeb and potentially the Strait of Malacca. The world is moving from a system of guaranteed access to a system of sovereign subscriptions, where the security of a vessel is no longer a public good but a private service provided by the local hegemon. This shift has already seen maritime war risk insurance premiums surge by as much as 1,000% in certain cases, forcing states like India to consider 1,500,000,000 USD sovereign guarantee funds just to keep their trade flows moving.

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The war on Iran is not primarily about regime change, nuclear weapons, or regional stability. It is a currency war. The question at the centre of this conflict is whether the dollar or the yuan will invoice global trade for the next generation. Everything else is theatre around that structural contest.

When Operation Epic Fury launched on 28 February, Iran had already built something Washington could not tolerate. In January 2025, Tehran and Moscow signed a 20-year comprehensive strategic partnership treaty that formalised the elimination of the dollar from bilateral trade. By late 2025, over 80% of Iran-Russia trade was conducted in rials and roubles. Iran, China, and Russia signed a trilateral strategic pact in January 2026 explicitly designed to bypass SWIFT and construct alternative financial mechanisms. The infrastructure was operational before a single bomb fell. This was not hypothetical dedollarisation. It was a functioning parallel financial architecture.

The US did the same thing in Venezuela weeks earlier. Caracas had been selling the vast majority of its heavy crude to China in yuan and had joined BRICS-adjacent payment channels to circumvent the dollar. On 3 January 2026, Washington invaded, extracted the president, and immediately redirected Venezuelan oil sales back into dollar-denominated channels. The pattern is unmistakable. States that dedollarise their energy exports face military intervention. Iraq did it in 2000 with euros. Libya attempted it. Venezuela did it with yuan. Iran built the most advanced non-dollar energy payment system on earth and now finds itself under the largest sustained aerial bombardment since 2003.

The yuan corridor through Hormuz

Iran’s most consequential move has not been military. Since the closure of the Strait of Hormuz in early March 2026, Tehran has offered selective passage to tankers on one condition. Oil cargo must be invoiced in Chinese yuan. At least 2 vessels have already settled transit fees in yuan through a Chinese maritime intermediary. The fee structure is roughly $1 per barrel, meaning a single VLCC passage generates nearly $2 million in yuan-denominated revenue. Iran is also accepting stablecoin cryptocurrency payments, building a parallel digital settlement layer alongside the yuan channel with access to dollars.

This transforms the Strait from a shipping lane into a currency tollbooth. The practical consequence is a bifurcated global oil market. Yuan-denominated barrels flowing through Hormuz via China’s Cross-Border Interbank Payment System and dollar-denominated barrels rerouted at vastly higher cost for those refusing to settle in Chinese currency. Approximately 20% of global oil and gas shipments transited Hormuz in peacetime. That volume is now held hostage to a currency denomination question. The war premium that Western energy importers are absorbing is no longer temporary. It is becoming structural.

Iran chose the yuan deliberately. It did not demand roubles, despite the depth of its partnership with Russia, because Iran’s greatest trade deficit is with China. Beijing purchases the vast majority of Iranian oil exports and has done so for over a decade, settling in yuan since at least 2012. The rouble would have been geopolitically symbolic but economically useless for Tehran. Iran needs a currency it can spend, and it spends overwhelmingly in the Chinese economy. The yuan is not just a protest currency for Iran. It is the functional medium of its commercial survival.

The rouble, by contrast, is what Russia uses for its own purposes. Moscow internationalised rouble usage after the 2022 Ukraine war, pushing bilateral settlements in roubles with India, Turkey, and across Central Asia. But the Ukraine war also triggered a wave of redollarisation as frightened capital flooded back into dollar assets for safety. The dollar index surged. Treasury demand spiked. The same paradox is now playing out with Iran. The dollar index broke through to 2026 highs in the war’s opening weeks, testing 99.50, because energy importers worldwide scrambled to acquire dollars to pay for expensive crude. The short-term effect of every dedollarisation war is to strengthen the dollar temporarily while weakening it structurally.

Who profits in Washington

The domestic US political economy of this war is rarely discussed, but it matters enormously. The war is costing approximately $900 million per day in military operations. US national debt reached $39.01 trillion on 26 March 2026, growing by roughly $1 trillion every 100 days. Annual interest payments now exceed $1 trillion, surpassing the entire pre-war defence budget. The administration has proposed raising the 2027 defence budget to $1.5 trillion. All of this requires continued global demand for the dollar and for US Treasury securities.

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The Knesset approved Israel’s 2026 state budget in the early hours of Monday morning, 62 votes to 55, with Iranian missiles landing on Israeli soil as lawmakers cast their ballots. The government framed it as a historic act of fiscal governance under fire. It is, in reality, a document built on accounting assumptions that the trajectory of this war is already destroying. The budget passed. The reckoning has not.

The approved NIS 699 billion package carries a 4.9% deficit ceiling, up from the 3.9% announced when the cabinet signed off in December. Government expenditure is growing at 8.8%. The defense budget now stands at NIS 143 billion, more than double the pre-October 2023 figure of NIS 65 billion. These numbers represent not a budget for reconstruction and recovery, but a war machine that has formally outgrown the economy sustaining it. What the figures do not show is the structural damage already embedded in the productive base of the Israeli economy, or the costs that have been deferred, displaced, and quietly omitted from the headline totals.

The Unbooked Costs

The Bank of Israel’s own accounting puts total war-related economic damage at approximately NIS 352 billion since October 2023, encompassing direct defense outlays, civilian compensation, property losses, and accumulated interest payments. The government’s preferred framing leans heavily on that figure as a closed balance sheet entry. It is not. The current Iran war, which began on 28 February with the US-Israel joint strike campaign, is running at an estimated NIS 9.4 billion per week in economic damage under full red-alert conditions, with military expenditure alone reaching $6.4 billion in the first 20 days of fighting. Those numbers are not absorbed in the approved budget. An emergency supplemental of NIS 39 billion was added to the 2026 draft on 10 March, but the war has no fixed endpoint, and the supplemental was sized against a conflict that is still escalating.

What makes this structurally serious rather than merely politically inconvenient is the nature of the costs now compounding. Construction across Israel has entered what can be a legal time bomb, with thousands of pending disputes between developers and homebuyers arising from war-related delays to unfinished projects. Palestinian labour, which underpinned large sections of the Israeli construction and agricultural sectors, has been almost entirely withdrawn since October 2023. Israeli agriculture is facing conditions described domestically as existential. The construction industry, already carrying deferred demand and a Bank of Israel-ordered restriction on balloon financing through end-2026, is not positioned to deliver the rebuilding programme the government’s recovery narrative depends upon. The speed of physical reconstruction will directly constrain the pace of economic normalisation, and current conditions suggest that pace will be slower, more expensive, and legally contentious in ways the budget does not price.

The Business Mortality Rate

The erosion of Israel’s small and medium enterprise base is one of the most under-examined dimensions of this war’s economic legacy. By mid-2024, approximately 46,000 businesses had closed since the start of the Gaza campaign, with projections suggesting the figure would reach 60,000 by year-end. By mid-2025, before the Iran war began, the estimated cumulative closure total stood at 80,000, with 77% of those being businesses employing fewer than 5 people. In the first 12-day Iran confrontation in June 2025, more than one-third of all Israeli businesses reported a revenue decline exceeding 50%. The restaurant and food service sector recorded 65% of businesses experiencing severe revenue loss in that single month. The current Iran war is of indefinite duration.

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The staggering price tag on American weapons and ammunition is not merely a product of advanced engineering or bureaucratic bloat. It is a deliberate feature of a system that functions as both economic stimulus and geopolitical control mechanism. This is military Keynesianism in action: using permanent, high-cost arms spending and exports to prop up the US industrial base, recycle dollars back into the domestic economy, and lock allies into dependency. The same playbook that drained Ukraine is now being applied to Saudi Arabia and the broader Gulf - heightening insecurity so that premiums keep flowing to Washington.

The Mechanics of the System

US military hardware is engineered for technological supremacy, extreme reliability, and global projection. That comes with premium pricing: precision-guided munitions, exhaustive testing, layered bureaucracy, and cost-plus contracts that reward spending rather than efficiency. But the deeper logic is protectionist. High prices, combined with strict export controls (ITAR), create a currency and capability barrier. Allies and rivals alike cannot easily replicate or mass-produce what the US sells. The result? The United States extracts rents while preserving its edge. These premiums are channelled back into the American military-industrial complex - jobs, R&D spillovers, and political power in key districts - artificially inflating the size of the US economy and budget.

This is classic military Keynesianism. Defence outlays act as fiscal stimulus without the political baggage of civilian programs. They sustain concentrated benefits for contractors while the costs are diffuse. Cutting the redundant overhead (audits, middlemen, gold-plated specs) would shrink the US military footprint, the contractor lobby, and even headline GDP figures. Washington has no interest in that. Instead, it overcharges everyone else.

The Ukraine Precedent

Look at what happened in Ukraine. Kyiv was forced into a meat grinder of expensive US precision munitions and systems that burned through budgets at unsustainable rates. When the bills became impossible, Ukraine had no choice but to innovate: cheap domestic drones, low-cost artillery shells, and asymmetric tactics that bypassed the premium-price trap. Europe, meanwhile, was pushed deeper into dependency - buying more American LNG and weapons while its own energy and defence independence dreams faded. The conflict was framed as a war against Russia, but the economic winners were clear: US energy exports surged and arms sales boomed. The insecurity created by the high-cost model was the feature, not the bug.

Now It’s Saudi Arabia’s Turn

The same dynamic is unfolding in the Gulf right now.

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Libya’s $4 billion arms deal with Pakistan is stalling for the same reasons the Sudan deal collapsed. Saudi does not trust Haftar. British-made components in the JF-17 fighter jet trigger export controls that Islamabad cannot override. China’s reluctance to supply advanced systems to embargoed states adds another layer of obstruction. Pakistan’s own industrial pipeline is congested, with confirmed orders for Azerbaijan and active negotiations with Bangladesh, Indonesia, and Saudi. The deal, signed in December 2025 in Benghazi and celebrated as one of Pakistan’s largest-ever defence exports, was always more ambitious than deliverable. But the delay matters less for what it says about Pakistan than for what it reveals about Libya. The country is running 2 competing strategies for survival, and the war with Iran will determine which one prevails.

In January 2026, one month before the first US and Israeli missiles struck Tehran, the western government in Tripoli signed over $20 billion in oil development agreements with TotalEnergies and ConocoPhillips at the Libya Energy and Economic Summit. A senior adviser to the US president attended. Chevron signed an MOU for its return to Libya. A separate deal was concluded with Egypt. The projected revenues over the 25-year life of the TotalEnergies-ConocoPhillips agreement exceed $376 billion. The additional production capacity targeted is 850,000 barrels per day. This was transactional statecraft in its purest form. Tripoli wagered that the return of the current US administration had fundamentally altered the terms of engagement in the region, that economic outcomes now mattered more than democratic credentials, and that anchoring Libya’s oil future to Western capital would buy the political legitimacy that elections had failed to deliver. That wager now sits inside a war.

Libya produces approximately 1.4 million barrels of oil per day and holds Africa’s largest proven reserves at 48 billion barrels. It is exempt from OPEC+ quotas because of its political status. Oil and gas account for 95% of government revenue and exports. In 2025, total revenue reached 136.9 billion Libyan dinars, roughly $21.7 billion, of which 99.6 billion came directly from oil sales and 17.2 billion from royalties. The National Oil Corporation has set a target of 2 million barrels per day by 2028, with 1.6 million targeted for 2026 or 2027 through the Strategic Programs Office. In Libya’s first licensing round since the fall of the old regime, 37 companies out of 44 applicants pre-qualified to bid on 22 offshore and onshore blocks. Among them are some of the West’s largest energy firms alongside QatarEnergy, Turkey’s TPAO, and several Chinese operators.

The Iran war has transformed Libya’s energy position overnight. With the Strait of Hormuz effectively closed, global oil markets short by at least 10 million barrels per day as of mid-March, Brent above $100, and QatarEnergy declaring force majeure on LNG contracts, every barrel produced outside the Gulf gains a strategic premium. Libya sits on the Mediterranean, with direct pipeline and tanker access to Europe. Its crude is light and sweet, matching European refinery configurations. Its proximity to Italy, its largest buyer, means shipping costs are a fraction of what long-haul alternatives require. While the Gulf burns, Libya pumps. The question is who benefits.

Two bets, one war

Tripoli’s $20 billion deal and Benghazi’s $4 billion deal are not complementary strategies. They are competing bets on which version of the post-war order will hold. The west has anchored itself to US and French capital, to production-sharing contracts that carry weight in international arbitration, and to the logic that whoever can deliver barrels to Europe under legal certainty will hold the stronger hand when the war ends. The east has anchored itself to Saudi, Pakistan, the UAE, and Russia, to military partnerships that function as proxies for sovereignty, and to the logic that whoever controls the physical infrastructure where oil is produced holds the real power regardless of what Tripoli’s central bank says on paper.

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