How the conflict over Iran affects the economies of the UAE and Saudi Arabia. Analysis (part 2)

The conflict over Iran is already going beyond investment risks and is beginning to directly affect key sectors of the region's economy. The impacts on energy infrastructure and rising prices are putting pressure on the global market. At the same time, military spending is growing and the burden on the budgets of States is increasing. In this part of Izvestia's economic analysis, we explain which areas, in addition to investments, have already felt the impact of the conflict and where financial losses are occurring. In the first part of the material, we discussed how the investment system of the Persian region is organized and which countries are currently losing their invested funds.

Energy losses

• The Middle East crisis is one of the largest in scope for the global oil industry in recent decades. The current conflict has already led to the fact that foreign oil companies from the UK, USA, France, Italy, the Netherlands, Switzerland and the Persian Gulf countries are facing direct losses due to the slowdown in production and exports.

• First of all, these are foreign oil and gas companies, namely British BP, American ExxonMobil, French TotalEnergies and Italian Eni. During the de facto paralysis of the Strait of Hormuz, oil exports were almost halted, and production in southern Iraq dropped from about 3.3 million barrels per day to 0.9 million barrels. This means a loss of about 2.4 million barrels per day. If we take the oil price at $100 per barrel, it turns out that companies do not receive about $240 million in revenue daily (or about $7.2 billion per month). If the crisis lasts about three months, the total losses in the Iraqi sector alone could exceed $20 billion.

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• The French company TotalEnergies clarified that its production decreased by 15%. Such a decrease means losses of about $2-4 billion in annual terms, while maintaining the current situation. In addition, the company lost about 2 million tons of liquefied natural gas production due to shutdowns in Qatar, which, at average market prices for LNG, could also mean several billion dollars more lost revenue.

• British Energean, operating on the Israeli shelf, has completely stopped production. If the downtime drags on for six months, the company's total losses could approach $3 billion, which is comparable to its annual profit.

• Dozens of energy facilities, including gas fields and LNG terminals, were damaged during the strikes. For example, Qatar has lost about 17% of its LNG production capacity. Considering that Qatar is the largest exporter of LNG, the loss of about 15-17% of capacity means a potential loss of about $20 billion in annual revenue.

• Overall, oil production in Kuwait, Iraq, Saudi Arabia, and the United Arab Emirates collectively decreased by at least 10 million barrels per day as of March 12. This is the largest supply disruption in the history of the global oil market.

• The region provides a critical share of global energy supplies. Any restrictions immediately create a shortage in the market and increase price volatility, which increases pressure on the global economy.

Military expenses

• Iran has one of the largest armies in the region. The number of its armed forces reaches about 600 thousand people. These are both regular troops and the Islamic Revolutionary Guard Corps. If necessary, the country can quickly increase the number due to reserves. Tehran also actively uses its proxy organizations in various parts of the region (we wrote more about all the official and unofficial participants in the conflict here).

• Iran's military budget is about $10 billion per year. At the same time, the country relies on missiles and drones. In particular, its arsenal includes thousands of missiles with a range of up to 2,000 km. Iran actively uses drones and develops its own weapons production.

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Saudi Arabia spends much more on defense. Its military budget exceeds $70 billion a year, but the size of the army is about 250 thousand people. The UAE has an even smaller army (approximately 70,000 troops). Their military budget is estimated at $20 billion. Both countries purchase modern weapons from the United States and Europe. They mainly spend the military budget on aviation and air defense systems, which are now being actively spent.

• As a result, the balance of power remains difficult. Saudi Arabia and the UAE are stronger in terms of technology and military spending. The Gulf countries' economy allows them to finance military operations for longer. Iran is less dependent on arms imports because it relies on its own production.

Prospects for conflict

• The conflict over Iran has already escalated into a regional war: the United States failed to achieve a quick victory, and the confrontation began to expand. Iran retaliates not only against American facilities, but also against their allies, including countries providing infrastructure and support, which effectively makes them parties to the conflict.

• The fighting has affected more than a dozen countries, and there is a risk of further escalation and the involvement of new participants. In particular, facilities in different countries of the region and beyond may be affected.

• Saudi Arabia and the UAE are not directly involved yet, but they are already suffering economic damage due to attacks on their infrastructure. Therefore, it is becoming increasingly difficult for them to stay on the sidelines, and they are gradually inclined to become more actively involved, although they try to act cautiously.

• The economic model of the region is already shifting towards non—resource industries: in the UAE, their share exceeds 75% of GDP, in Saudi Arabia - more than 50%. These sectors depend on international capital flows, trade, and services. When tensions rise, they are the first to react to changing risks and expectations.

When writing the material, Izvestia talked and took into account the opinions of:

• Igor Semenovsky, political scientist, Associate Professor at the Financial University under the Government of the Russian Federation;
• American political scientist Malek Dudakov.