Gulf wealth funds face pressure as regional conflict drains investment reserves

Kuwait’s Future Generations Fund has been tapped for domestic financing only twice in its history. The first time was 1990, when Iraqi forces invaded. This week marks the second. That a sovereign wealth fund holding over $1 trillion in assets has been pulled into service again tells you something about how hard the current conflict is pressing on Gulf economies.

The war that began in February has upended the economic calculus across the Gulf Cooperation Council, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. Foreign investment into these economies has collapsed by as much as 67 percent. Uncertainty surrounding critical trade routes like the Strait of Hormuz and Bab al-Mandeb has compounded investor anxiety. The deeper strain, though, lies in what Gulf states can no longer do: project financial and political power abroad through the foreign investments that have defined their global influence for decades.

The immediate fiscal pressure is severe. Justin Alexander, an economist specializing in the GCC, told Middle East Eye that the war creates “short-term impacts on fiscal revenue,” forcing some Gulf states to either stop providing capital to sovereign wealth funds or draw from them entirely. Oil and natural gas exports have declined by more than 30 percent, a loss that ripples through every budget calculation. Saudi Arabia is now seeking to borrow up to $8 billion through its debt management centre, a move experts describe as unusually urgent for a kingdom that has previously relied on loans to fund megaprojects.

These financial pressures have forced a fundamental reordering of priorities. Domestic infrastructure now competes directly with foreign investments. The Strait of Hormuz’s closure has made bypass pipelines suddenly essential rather than optional. The UAE has begun constructing a second pipeline to the port of Fujairah. Saudi Arabia is pursuing similar redundancy measures. Ben Cahill, a senior fellow at the Atlantic Council, noted that “these pipelines are expensive and geopolitically complicated, but the Gulf states will spend serious money for back-up options.” Such projects could collectively cost tens of billions of dollars, capital that would otherwise flow to international ventures.

The divergence in how Gulf states respond reveals different strategic calculations. Saudi Arabia has “continued many of the strategic recalibrations that were underway before the Iran war,” according to Robert Mogielnicki, a researcher specializing in the Gulf. The UAE is “seeking to restore normalcy,” while Qatar grapples with “growing economic pressures due to its significant exposure to Hormuz.” Justin Alexander expects the shift from foreign investment toward domestic priorities to persist: “The demand for domestic spending for recovery and in new infrastructure will compete to some extent with foreign investment priorities.”

Years of economic diversification efforts have provided some cushion. The region has invested across logistics, tourism, and e-sports to reduce dependence on hydrocarbon revenues. That broader economic base has served as a “buffer amidst a sharp downturn in hydrocarbon production,” Alexander said. Yet the very sectors diversification targeted have been hammered. Tourism to the Gulf has dropped sharply, devastating airlines and hotels. Revenue from tourism investments held abroad, such as Qatar’s holdings, has not compensated for oil and gas losses. Heavy manufacturing has been disrupted by the Hormuz closure, with aluminium processing plants and data centres directly struck by Iranian strikes.

Mogielnicki observed that diversification “continues to be an important longer-term objective,” but the war has “pushed some of the economic diversification agenda points a bit lower on the priority list.” The redundant infrastructure now being built will further limit the ability to pursue diversification for its own sake. “Clearly, lots of excess infrastructure is not the most cost-efficient approach to economic diversification,” he said.

Gulf states have not abandoned foreign investment entirely. Record deals have been announced in recent months, though many had momentum before the war began. On August 4, a Saudi-led consortium finalized the acquisition of Electronic Arts, the American video game developer, for $55 billion, marking the largest leveraged buyout in corporate history. On August 24, France and Saudi Arabia announced a joint project to build three theme parks near Paris, including one inspired by the manga franchise Dragon Ball Z, accompanied by a $7 billion investment from Saudi Arabia’s Qiddiya Investment Company.

These investments serve dual purposes. Kristian Alexander, a Gulf security analyst at the Middle East Institute, explained that the EA acquisition “provides access to global franchises and digital audiences, while the Paris project potentially gives Saudi-owned Qiddiya an international operating platform and European visibility.” The Paris announcement came during Crown Prince Mohammed bin Salman’s official state visit to France, demonstrating how foreign investments function as instruments of geopolitical leverage.

Meanwhile, Saudi Arabia has halted construction on The Line, the 170-kilometer smart city central to the Neom megaproject, until at least 2030. Neom, initially valued at over $1 trillion, faced massive restructuring after cost projections suggested expenses could rise eightfold. Logistical constraints and shrinking oil revenue forced the kingdom to refocus on AI data centres and digital infrastructure instead.

Qatar has pursued a distinct strategy through luxury hotel diplomacy. The emirate has accumulated acquisitions across New York, London, Paris, Barcelona, Singapore, Italy, and Switzerland, establishing itself at the intersection of luxury and finance. These investments provide strategic influence in key sectors while raising fewer questions than defence, energy, or infrastructure deals would. Kristian Alexander noted: “A tourism project is easier to present as employment, environmental tourism and economic development.”

A recent acquisition illustrates this approach. A Qatari consortium acquired Assomption Island in the Seychelles to build an ultra-luxury resort near the Aldabra Atoll, a UNESCO World Heritage Site. The site had previously been chosen by the Indian military for a naval base as part of its strategy to counter China’s growing presence in the Indian Ocean. The luxury hotel investment allows Qatar to establish an economic foothold in this strategically important region without requesting the explicit sovereign privileges associated with a military base.

GCC states must continue investing abroad to sustain the economic and political influence these deals have built, particularly as the region assumes a more central diplomatic role. Qatar’s position in international negotiations over Hormuz exemplifies this. Yet the strait’s closure and the war’s financial toll strain Gulf finances at precisely the moment they can least afford it. How long oil and natural gas exports take to recover will determine whether domestic infrastructure demands crowd out the foreign investment strategies Gulf states have spent decades building.