<h2>Executive Summary</h2><ul><li><p>The October 2023 attacks have <strong>undermined efforts to repair relations between Israel and the Arab states</strong>, and between rival Gulf powers.</p></li><li><p>Israel’s conduct since has <strong>weakened its global standing</strong>, making Saudi recognition less likely and <strong>obstructing the proposed India-Middle East-Europe Economic Corridor</strong>.</p></li><li><p>Iranian attacks on Gulf countries has prompted them to seek <strong>additional security partnerships</strong> while retaining their ties with Washington.</p></li><li><p>Disruptions to Gulf trade extend beyond energy, affecting Indian <strong>imports of sulphur, aluminium and fertilisers</strong>, alongside exports such as basmati rice.</p></li><li><p><strong>Strategic petroleum reserves and alternative export routes</strong> have contained the damage, but energy, freight and insurance prices will remain elevated.</p></li></ul>.<p>Prior to the October 2023 attacks, governments across West Asia were beginning to resolve longstanding disputes. The Abraham Accords established diplomatic relations between Israel and the UAE and Bahrain; later, Morocco and Sudan also agreed to normalise ties with Israel. The UAE followed its agreement with regular exchanges of delegations, the establishment of Jewish religious institutions and the removal of antisemitic references from school textbooks. Separately, the Al-Ula agreement in January 2021 ended Saudi Arabia’s and the UAE’s dispute with Qatar. Saudi Arabia and the UAE also repaired relations with Turkey, and Saudi-Iranian tensions eased with the return of an Emirati ambassador to Tehran.</p><p>These diplomatic shifts created opportunities for economic cooperation. I2U2 brought India, Israel, the UAE and the US together to pursue joint projects. The India Middle East Europe Economic Corridor (IMEC), announced at the 2023 G20 summit in New Delhi, proposed sea and rail connections linking India with Europe through the UAE, Saudi Arabia, Jordan and Israel. However, the October 2023 attacks and the conflicts that followed undermined the political cooperation on which these initiatives depended.</p><h2><strong>Israel’s Growing Isolation</strong></h2><p>Israel’s conduct in Gaza and the West Bank has drawn criticism from several European governments, including France, Italy, Ireland, Spain and Portugal, as well as countries across Asia, Africa and Latin America. An Israeli-controlled buffer zone now covers around 60% of Gaza, with a proposed expansion to 70% that would leave approximately 2.1 million Palestinians confined to the remaining 30%. Statements by members of the Israeli government favouring Palestinian displacement have intensified opposition to its policies. Within the US, a Senate proposal requiring presidential reporting on human rights violations in the occupied West Bank was defeated 51–47 but received support from 46 of 47 Democratic senators. Alongside declining support for Israel among Democrats and younger Americans, this indicates that Israel can no longer take bipartisan American backing for granted.</p><p>Israel’s actions have also made Saudi recognition increasingly difficult. Saudi Arabia has made diplomatic relations conditional on the restoration of Palestinian statehood, leaving little prospect of an agreement under current circumstances. This obstructs IMEC, whose proposed route runs from India’s west coast to UAE ports, across Saudi Arabia and Jordan and onwards to Haifa in Israel. Without Saudi participation in a transport corridor connecting these countries, the project’s longest overland section cannot function as envisaged.</p><h2><strong>Gulf States Seek New Security Partners</strong></h2><p>America’s withdrawal from its Obama-era nuclear deal with Iran undermined diplomatic efforts to resolve the dispute over Iran’s nuclear programme. The February 2026 attacks on Iran took place while fresh negotiations were underway, with Omani mediators indicating that an agreement was close at hand. Iran had repeatedly warned that it could threaten shipping through the Strait of Hormuz if attacked. It had also told Gulf governments that they could face retaliation if they failed to use their influence with Washington to prevent an attack. While the scale of Iran’s response surprised many, the possibility of retaliation had been made abundantly clear.</p><p>Iranian missile and drone attacks have weakened Gulf states’ confidence in American protection. The perception that US air defences prioritised American and Israeli assets while leaving Arab partners exposed has encouraged them to seek additional security partnerships, including the Mecca Joint Defence Agreement between Saudi Arabia, Turkey and Pakistan. This amounts to an ‘America Plus’ approach: Gulf governments intend to retain their American partnership while developing other security relationships.</p><h2><strong>Alternative Routes Offer Limited Relief</strong></h2><p>The threat to energy shipments extends beyond Hormuz. An Iranian aircraft landing at Sana’a airport prompted Saudi concerns about renewed military supplies to the Houthis, who control northern Yemen. Saudi attacks on the airport drew Houthi retaliation against Saudi refining facilities, the East-West pipeline and positions around Bab el-Mandeb. This strait connects the Gulf of Aden with the Red Sea and lies on the shipping route towards the Suez Canal. Threats there expose vessels using the Red Sea to disruption even when they avoid Hormuz.</p><p>The UAE and Saudi Arabia are expanding infrastructure to reduce their dependence on vulnerable shipping routes. The UAE is doubling pipeline capacity to Fujairah, allowing more oil to reach this key export terminal, which lies far from Hormuz, and is exploring additional port capacity to reduce reliance on Jebel Ali. Saudi Arabia is seeking to expand its East-West pipeline, which carries oil towards Yanbu on the Red Sea and strengthen infrastructure protection. Kuwait and Bahrain have fewer alternatives because their export facilities lie inside the Gulf. Ship-to-ship transfers and the trucking of Iraqi oil through Syria towards the Mediterranean offer additional ways to move supplies but cannot eliminate the risks posed by attacks on shipping.</p><h2><strong>Indian Businesses Bear the Brunt</strong></h2><p>Indian manufacturers importing sulphur, aluminium and fertilisers from the Gulf face interrupted deliveries and the cost of finding alternative suppliers. Indian exporters also face difficulties reaching customers. Punjab’s basmati exporters, for whom Iran, Saudi Arabia and the UAE are important markets, have experienced disruptions to consignments. The conflict therefore affects businesses both on the purchase and the sales side.</p><p>Releases from strategic petroleum reserves have helped sustain oil supplies and contain price volatility. Even so, the estimated cumulative shortfall against a scenario without the war is 5-6 billion barrels. Even with oil trading above $100/barrel, markets may have not fully priced in the disruption to oil, LNG, diesel and jet fuel supplies. Threats to vessels passing through Hormuz and Bab el-Mandeb have also caused freight charges and insurance premiums to spike. While supplies may not get disrupted, higher procurement and transport costs will continue to put pressure on business margins and consumer prices until there is formidable peace pact signed.</p>
<h2>Executive Summary</h2><ul><li><p>The October 2023 attacks have <strong>undermined efforts to repair relations between Israel and the Arab states</strong>, and between rival Gulf powers.</p></li><li><p>Israel’s conduct since has <strong>weakened its global standing</strong>, making Saudi recognition less likely and <strong>obstructing the proposed India-Middle East-Europe Economic Corridor</strong>.</p></li><li><p>Iranian attacks on Gulf countries has prompted them to seek <strong>additional security partnerships</strong> while retaining their ties with Washington.</p></li><li><p>Disruptions to Gulf trade extend beyond energy, affecting Indian <strong>imports of sulphur, aluminium and fertilisers</strong>, alongside exports such as basmati rice.</p></li><li><p><strong>Strategic petroleum reserves and alternative export routes</strong> have contained the damage, but energy, freight and insurance prices will remain elevated.</p></li></ul>.<p>Prior to the October 2023 attacks, governments across West Asia were beginning to resolve longstanding disputes. The Abraham Accords established diplomatic relations between Israel and the UAE and Bahrain; later, Morocco and Sudan also agreed to normalise ties with Israel. The UAE followed its agreement with regular exchanges of delegations, the establishment of Jewish religious institutions and the removal of antisemitic references from school textbooks. Separately, the Al-Ula agreement in January 2021 ended Saudi Arabia’s and the UAE’s dispute with Qatar. Saudi Arabia and the UAE also repaired relations with Turkey, and Saudi-Iranian tensions eased with the return of an Emirati ambassador to Tehran.</p><p>These diplomatic shifts created opportunities for economic cooperation. I2U2 brought India, Israel, the UAE and the US together to pursue joint projects. The India Middle East Europe Economic Corridor (IMEC), announced at the 2023 G20 summit in New Delhi, proposed sea and rail connections linking India with Europe through the UAE, Saudi Arabia, Jordan and Israel. However, the October 2023 attacks and the conflicts that followed undermined the political cooperation on which these initiatives depended.</p><h2><strong>Israel’s Growing Isolation</strong></h2><p>Israel’s conduct in Gaza and the West Bank has drawn criticism from several European governments, including France, Italy, Ireland, Spain and Portugal, as well as countries across Asia, Africa and Latin America. An Israeli-controlled buffer zone now covers around 60% of Gaza, with a proposed expansion to 70% that would leave approximately 2.1 million Palestinians confined to the remaining 30%. Statements by members of the Israeli government favouring Palestinian displacement have intensified opposition to its policies. Within the US, a Senate proposal requiring presidential reporting on human rights violations in the occupied West Bank was defeated 51–47 but received support from 46 of 47 Democratic senators. Alongside declining support for Israel among Democrats and younger Americans, this indicates that Israel can no longer take bipartisan American backing for granted.</p><p>Israel’s actions have also made Saudi recognition increasingly difficult. Saudi Arabia has made diplomatic relations conditional on the restoration of Palestinian statehood, leaving little prospect of an agreement under current circumstances. This obstructs IMEC, whose proposed route runs from India’s west coast to UAE ports, across Saudi Arabia and Jordan and onwards to Haifa in Israel. Without Saudi participation in a transport corridor connecting these countries, the project’s longest overland section cannot function as envisaged.</p><h2><strong>Gulf States Seek New Security Partners</strong></h2><p>America’s withdrawal from its Obama-era nuclear deal with Iran undermined diplomatic efforts to resolve the dispute over Iran’s nuclear programme. The February 2026 attacks on Iran took place while fresh negotiations were underway, with Omani mediators indicating that an agreement was close at hand. Iran had repeatedly warned that it could threaten shipping through the Strait of Hormuz if attacked. It had also told Gulf governments that they could face retaliation if they failed to use their influence with Washington to prevent an attack. While the scale of Iran’s response surprised many, the possibility of retaliation had been made abundantly clear.</p><p>Iranian missile and drone attacks have weakened Gulf states’ confidence in American protection. The perception that US air defences prioritised American and Israeli assets while leaving Arab partners exposed has encouraged them to seek additional security partnerships, including the Mecca Joint Defence Agreement between Saudi Arabia, Turkey and Pakistan. This amounts to an ‘America Plus’ approach: Gulf governments intend to retain their American partnership while developing other security relationships.</p><h2><strong>Alternative Routes Offer Limited Relief</strong></h2><p>The threat to energy shipments extends beyond Hormuz. An Iranian aircraft landing at Sana’a airport prompted Saudi concerns about renewed military supplies to the Houthis, who control northern Yemen. Saudi attacks on the airport drew Houthi retaliation against Saudi refining facilities, the East-West pipeline and positions around Bab el-Mandeb. This strait connects the Gulf of Aden with the Red Sea and lies on the shipping route towards the Suez Canal. Threats there expose vessels using the Red Sea to disruption even when they avoid Hormuz.</p><p>The UAE and Saudi Arabia are expanding infrastructure to reduce their dependence on vulnerable shipping routes. The UAE is doubling pipeline capacity to Fujairah, allowing more oil to reach this key export terminal, which lies far from Hormuz, and is exploring additional port capacity to reduce reliance on Jebel Ali. Saudi Arabia is seeking to expand its East-West pipeline, which carries oil towards Yanbu on the Red Sea and strengthen infrastructure protection. Kuwait and Bahrain have fewer alternatives because their export facilities lie inside the Gulf. Ship-to-ship transfers and the trucking of Iraqi oil through Syria towards the Mediterranean offer additional ways to move supplies but cannot eliminate the risks posed by attacks on shipping.</p><h2><strong>Indian Businesses Bear the Brunt</strong></h2><p>Indian manufacturers importing sulphur, aluminium and fertilisers from the Gulf face interrupted deliveries and the cost of finding alternative suppliers. Indian exporters also face difficulties reaching customers. Punjab’s basmati exporters, for whom Iran, Saudi Arabia and the UAE are important markets, have experienced disruptions to consignments. The conflict therefore affects businesses both on the purchase and the sales side.</p><p>Releases from strategic petroleum reserves have helped sustain oil supplies and contain price volatility. Even so, the estimated cumulative shortfall against a scenario without the war is 5-6 billion barrels. Even with oil trading above $100/barrel, markets may have not fully priced in the disruption to oil, LNG, diesel and jet fuel supplies. Threats to vessels passing through Hormuz and Bab el-Mandeb have also caused freight charges and insurance premiums to spike. While supplies may not get disrupted, higher procurement and transport costs will continue to put pressure on business margins and consumer prices until there is formidable peace pact signed.</p>
