The sparks of the West Asia conflict triggered by the face-off between the US-Israel axis and Iran is now igniting repercussions beyond the geopolitical landscape. The impact of the war is dismantling the very foundations of the US hegemony in terms of dollar dominance. This is however not a sudden rupture of the dollar hegemony. But the emerging scenario is reflecting a massive trust deficit in the gulf nations towards the United States and its financial markets as a stable, credible and reliable investment platform.
As the geopolitical landscape of West Asia is embroiled with massive escalation and cascading effect across the region, the gulf countries are entangled with severe economic and military loss. For example, the oil refineries of the region are hit, trade has been disrupted, energy transportation has been dwindling as the strategic waterways and sensitive chokepoints are blocked. Also, the airports in major West Asian cities have been shut and the economic activities are severely ruptured. Thus, the Israel-Iran friction has altered the economic map of West Asia incurring huge losses.
At such a challenging juncture, as per the reports, several countries of the Gulf Cooperation Council(GCC) including Saudi Arabia, UAE, Qatar, Kuwait are reviewing their overseas investment and aiming to withdraw the major chunk of investments in the American financial market. This financial and economic reassessment is deemed as a solution to cope up with the war time losses. Currently, as mentioned, the gulf economies are shattered due to multi-sector loss. The trust on the US market and dollar-pegged economy is depleting. The US is no more considered as a safe-haven for investment given the war time losses and reduced stability of the American portfolios.
West Asia conflict accelerates fiscal cliff & reduces trust on US for investment
The US economy is hitherto entailed with massive fiscal deficit and gradual subsidence of the dollar dominance. The latest massive escalation in West Asia causes further economic pressure and severe strain on the US fiscal balance. The war incurs huge losses on the US economy in terms of military losses that will indeed have a ripple effect on the US Federal Reserves. For example, the losses in terms of aircraft, missiles, energy etc. causes strain on the economy. The reduced economic activities during war time causes further stress on the economy.
Also, under President Donald Trump regime, there is a massive trust deficit on the US economy as an impact of tariff war, spiking inflation and soaring fiscal deficit. Cumulating all these factors, the trust of the gulf nations on the US federal reserves as a stable investment hub and safe-haven is depleting. Thus, the countries of West Asia are reassessing their investment strategy in the US economy. Another vital aspect is that the Israel-Iran conflict is mounting economic pressure on the gulf economies, depleting their resources and the channels of income generating economic activities are severely scuffled.
Amidst such an economic and geopolitical skirmish, the West Asian economies are rethinking their investment calculations and assessing whether the US is a safe-haven and credible income generating destination. Will the investments in American portfolios act as a credible tool to bridge the fiscal deficit and help to cope up with the economic stress created during the war? The question ponders among gulf economies. If the gulf nations embark on such a pivotal and overarching strategic decision to withdraw considerable investments from the US financial market, it will indeed be a major blow to the dollar dominance and the solid US footprint or hegemony in West Asia.
The intensity of gulf investments in the US market
The Gulf nations have collectively invested over two trillion dollars in the sovereign wealth funds of the United States. The West Asian economies have invested in the US assets which includes, treasury bonds, stock markets, technology companies, businesses and in the real estate portfolios. However, as an impact of the ongoing confrontation, the major revenue sources of the Gulf countries have been fractured. Energy infrastructures such as oil refineries in Saudi Arabia, Bahrain, UAE, Qatar have been hit leading to severe economic loss for the countries. The closure of airspaces and strategic chokepoints such as the Strait of Hormuz have been blocked causing further economic pressure to the gulf economies and their revenue sources.
Along with the fracturing of primary sources of revenue, the costs of security have been spiking due to the escalating conflict. Military expenditure is soaring. Thus, with reduced revenue and soaring expenditure, the gulf economies are weighing the cost-benefit of investing in the US portfolios as a stable source. If the gulf states disinvest from the US financial market, the repercussions might trigger global volatility.
What happens if Gulf economies withdraw from the American markets
As discussed, if the gulf economies sell their US federal bonds and disinvest from the American financial market, the wave of repercussions will spread across the globe. The dollar hegemony will dwindle gradually, the dollar as a reserve and stable foreign exchange currency will lose its potential. The large-scale withdrawal from the US stocks and treasury bonds will indeed create turbulence across the global financial market, as the borrowing costs for Washington DC will spike.
The oil rich economies of the gulf region predominantly trade oil in dollars thus rendering the synonym petro-dollar. The oil exporting nations sell crude oil in dollars and the excess or surplus US currency they possess will be reinvested in the American treasury bonds and other federal holdings. This cycle of purchasing dollars and reinvesting it back in the US economy has been running for decades and this indeed has sustained the dollar hegemony coupled with the geopolitical influence of the United States.
However, with the latest conflict in West Asia, the gulf economies are reassessing the density of their financial exposure to the US economy. If consolidated, the move might drastically alter the global economic architecture. As the conflict between the US-Israel axis and Iran escalates, to what extent the war redraws the geopolitical and geoeconomic map of West Asia and beyond is an enigma!
