‘freaked People Out’: Iran War Could Crimp Gulf Allies’ Us Investments

President Donald Trump is counting on money from the Gulf Arab States to power his economic golden age. But as the war with Iran nears its fifth week and the regional economy enters a free fall, hundreds of billions of dollars that Middle Eastern governments have pledged for U.S. projects are under threat.

That has the Trump administration concerned that Gulf leaders may not be able to fulfill promises to invest heavily in the U.S., according to three people familiar with the internal conversations, including one former administration official, granted anonymity to discuss them.

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

Any pullback on investments from Middle Eastern governments will limit the amount of capital available to U.S.-based tech startups, investment firms and big businesses that have come to rely on the region’s sovereign wealth funds and government-backed investment vehicles as a key source of cash.

But the effective closure of the Strait of Hormuz has largely choked off oil and gas revenue that support Gulf-based financial institutions that are a major source of global capital. And Iran’s attacks on critical infrastructure and flashy highrises have brought tourism to high-dollar destinations like Dubai and Doha to a standstill.

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

The U.S. and Iran have exchanged demands on terms that might bring an end to the conflict and revive global supply chains. But Iran has rejected Trump’s claims that the war is winding down. Thousands of U.S. troops are being sent to the Middle East — which threatens further escalation — and Iran has continued to launch attacks on airports, energy infrastructure and other critical targets across the region.

The Iranian conflict has created even more uncertainty about the viability of eye-popping investment pledges from Saudi Arabia, Qatar and the United Arab Emirates that economists had already warned would be nearly impossible to fulfill. Bank analysts say the attacks on Qatar’s natural gas facilities will meaningfully dent the country’s GDP — weakening its ability to deploy capital. And even before the Iran conflict began, Saudi officials were cautioning that they needed to rein in spending after unleashing capital at a torrid pace for the last decade.

Adnan Mazarei, a former deputy director at the International Monetary Fund who helped oversee the IMF’s response to the Arab Spring uprisings, said the most likely outcome is that Gulf leaders will “slow down” their follow-through on their America First investment pledges.

Mazarei has argued that many of the investment pledges Trump has secured from foreign governments aren’t realistic — particularly those from the Gulf. “I don’t think they will go back on their pledges,” he said. But now that Gulf leaders are staring at the costs of highly disruptive conflict, “those pledges are now becoming harder to deliver on.”

If those countries withhold capital to, among other things, rebuild their depleted missile defense systems, “that’s a problem,” said a second person, one of the three familiar with the administration’s conversations about the investment concerns.

“When you can't have people flying into Dubai and feeling safe at the airports being stricken across the pond from Iran, it's not good for tourism there,” the person said. “So you could have that situation where it leads to not being able to invest the trillions of dollars the Gulf has promised to invest in the U.S.”

The magnitude of the problem won’t be known at least until active hostilities cease and the effects will vary by country. Factors including indebtedness, war damage and the status of capital account surpluses — or deficits, in the case of Saudi Arabia — will play a role.

But the risks compound with every day the war continues and with every missile Iran fires. Middle East countries have been among the president’s most ardent backers, financially, diplomatically and rhetorically. Trump’s high-profile trip to the region last spring secured more than $2 trillion in investment agreements in the region, including nearly $150 billion between Saudi Arabia and American defense contractors, an order by the Qatari government for 160 Boeing planes and a $60 billion partnership between American energy companies and Abu Dhabi’s state-run oil firm.

The White House, asked about the war’s impact on Middle East investments, rejected the premise, stressing that it is a short-term campaign, not a long-term disruption.

“President Trump has always been clear about short-term disruptions as a result of Operation Epic Fury, but the long-term trajectory for American tech dominance and shared economic prosperity remains robust,” said White House spokesman Kush Desai. He added that the administration has “implemented a nimble and multifaceted approach to provide political risk reinsurance for cargo ships in the Gulf and stabilize energy markets with targeted sanctions relief.”

The U.A.E. has already doubled down on its pledge. And Desai said both the U.S. and its Gulf allies will be “better, safer, and more prosperous without Iranian terror.”

But it will also take months — possibly years — to rebuild the infrastructure that helped transform Gulf capitals into financial hubs. Gulf countries will “need money at home,” said Mohamed El-Erian, a professor at the Wharton School and chief economic adviser at Allianz.

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

The Qatari and Saudi Arabian embassies did not respond to requests for comment.

Trump has framed trillions of dollars in investments in the U.S., announced by companies since he took office 14 months ago, as the financial engine of his economic agenda. It’s a pitch he has made repeatedly on the trail as he attempts to sell that agenda to the American people ahead of the midterms.

“Inflation is plummeting, incomes are rising, the economy is roaring back, and America is respected again, perhaps respected like never before,” Trump said at an event at a packaging facility in Kentucky this month.

And the threat that the engine might stall could hardly come at a worse time for Trump and the GOP.

A Reuters/Ipsos poll released this week found that only 25 percent of respondents approve of Trump’s handling of the cost of living, which is expected to be a key issue in this year’s elections, and 29 percent approve of his economic stewardship, the worst rating he has ever received, and lower than any approval rating of President Joe Biden’s.

Still, Gulf leaders have a strong incentive to remain closely aligned with Trump. And the rebuilding efforts may offer significant opportunities for U.S. defense contractors and energy firms. Gulf leaders will soon have to spend heavily on missile interceptors, anti-aircraft guns and oil-and-gas facilities to replenish their defense capabilities.

“Many of the Gulf Coast countries are going to end up investing more in the United States,” IBM Vice Chair and former Trump adviser Gary Cohn said at POLITICO’s Economy Summit on Wednesday. “We are one of the greatest producers of weaponry in the world, some of the most sophisticated weaponry in the world, and I think most of those countries now will look at the need to protect themselves with a much more serious attitude.”

“There will be a natural move to support a great ally in the United States,” he added. “I don't see this as a negative. I see this as actually, a positive long term.”