Iran’s Instability and the Gulf’s Indispensability

The war against Iran has tested two competing narratives about security in the Middle East, and have sharpened the resilience of the Gulf Arab Countries.

Two competing theories of regional power have been running in the Middle East for the past two decades. Iran’s theory was that military reach, military technology and proxy networks could substitute for economic weight in accumulating regional influence. The deliberate cultivation of instability forced every regional actor to account, hedge against and often directly and indirectly fight Tehran. The Gulf Arab states developed the opposite theory that influence built on indispensability and economic development outlasts influence built on fear, chaos and instability. From their view, a state that makes itself essential to global energy markets, international capital flows and regional infrastructure gives its international partners their own reasons to defend its stability without waiting to be coerced into it.

Both strategies have produced differing returns at differing times. Iran accumulated influence well beyond what its economy could support by cultivating non-state allies which a foothold in Lebanon, Syria, Iraq and Yemen that enabled it to project counter-pressure on Israel and the United States. The Arab Gulf states meanwhile accumulated oil wealth, strong international partnerships, military hardware and, increasingly, technological capacity and innovation.

The current conflict is forcing a reckoning between them. Iran’s strategy of managed instability has run into its own structural limits, especially following the collapse of its influence in Syria after Assad’s fall and in Lebanon after Israel’s war on Hezbollah. The Gulf’s strategy of indispensability is being tested under pressure by both the US and Israeli strikes on Iran and Iran’s GCC targeted retaliations. The two strategies are now producing measurably different returns.

The Instability Dividend, and its Limits

Iran’s strategic use of instability helped it project power across the Arab world in ways that few analysts fully anticipated, generating what might be called an instability dividend. This is the leverage extracted from regional disorder: the ability to shape political outcomes, extract concessions and deter adversaries not through economic or military superiority but through the credible threat of chaos. Vali Nasr argues in Iran’s Grand Strategy that beneath the ideological veneer of the Iranian state is a pragmatic forward defence doctrine through the deployment of proxy forces. Hezbollah gave Tehran a permanent military presence on Israel’s northern border. Iraqi militias extended Iranian influence deep into Arab politics. The Houthis turned Yemen into a pressure valve that could threaten Gulf shipping at will. A nuclear program kept deliberately ambiguous extracted concessions and sustained international attention.

None of this required a competitive economy, and Iran sustained this posture through decades of crippling US sanctions (albeit with the tactic economic support of China). But, as John West observes, the Gaza war proved to be a hinge point in this strategy after a series of domino effects including Israeli operations across the region degraded Iranian-linked proxies and the fall of Assad collapsed Iran’s forward defence. By the 12 Day War in June 2025, Iranian-linked proxies in the Arab world chose to stay out of the conflict.

China’s support for Tehran has always combined transactional interests — discounted oil, a sanctions-evasion corridor, occasional leverage with Washington — with genuine strategic benefit. Iran sits astride the Strait of Hormuz, through which roughly a fifth of the world’s oil passes, including around 40% of China’s seaborne crude imports. A Tehran hostile to Washington and capable of threatening that chokepoint gives Beijing indirect leverage over American power projection without bearing direct confrontation costs. As Chinese strategist Zhu Zhaoyi wrote during the current conflict, US involvement in the Middle East “inevitably diverts its strategic resources and attention, objectively constraining its capacity to sustain pressure on China in the Indo-Pacific.”

But the current conflict has eroded both dimensions simultaneously. Iranian strikes on Gulf infrastructure have directly harmed Chinese economic interests, while a degraded Tehran offers far less value as a strategic distraction capable of pinning American forces in the Middle East and out of the Pacific. The relationship’s transactional logic survives as long as Iranian oil flows, though Trump’s newly announced blockade of Iranian shipping may stem that flow. Meanwhile, the broader strategic case for China backing Tehran has weakened considerably.

The 12 Day War, followed by the now broader US-Israel-Iran conflict, has made those benefits harder to justify. Hormuz disruptions have pushed Brent crude past $100 a barrel, forcing Chinese refiners to cut runs and draw down strategic reserves – damage to Chinese interests that Iranian conduct directly caused. China’s most visible regional diplomatic achievement, the 2023 Saudi-Iran normalisation it brokered, has collapsed. As Miles Yu at the Hudson Institute assessed, a degraded Iran whose proxy network has been dismantled and whose nuclear program has been set back can no longer serve as a reliable diversionary magnet for American attention. The transactional logic of the relationship – oil and sanctions relief – survives. The strategic case has weakened considerably.

The broader US-Israel-Iran conflict has sharpened that picture. Despite an informal agreement with the GCC to refrain from attacking Gulf Arab states that remained outside the conflict, Iran struck Gulf infrastructure anyway, targeting oil and trade facilities, disrupting financial centres including Dubai, attempting to knock AI systems offline and moving to block the Strait of Hormuz. In doing so, Iran damaged the regional order that China depends on and undermined the diplomatic credibility Beijing had spent years building across the Gulf.

The 25-year cooperation agreement, signed in 2021, also captures the structural limits of that relationship in concrete terms. Beijing and Tehran envisioned a reported $400 billion in Chinese investment across Iran’s energy, infrastructure, and telecommunications sectors. Four years on, it has largely not materialised. Beijing’s pledge appears highly unrealistic given that cumulative Chinese investment in Iran over the preceding 15 years totalled only approximately $27 billion, according to the US-China Economic and Security Review Commission. The China Global South Project reported in 2024 that four years after signing, the agreement had yet to get off the ground, with Iran’s own chamber of commerce pressuring Beijing for implementation.

Beijing will not expose its far larger Gulf relationships to the risk that full Iranian partnership would require. The economic costs are simply too high. Gulf-China commerce reached $257 billion in 2024, and Chinese firms have systematically embedded and adapted to the Gulf, building data centres, cloud platforms, and telecommunications networks that serve GCC governments. It seems China has larger interests in GCC stability than in Iranian ambition, and its behaviour reflects that. This leaves Iran isolated, but not fully abandoned.

How the GCC Became Indispensable

Gulf Arab states have pursued regional influence by making themselves indispensable to the global economy. Gesine Weber terms this phenomenon strategic indispensability, or the leverage that accrues to states that control critical resources and supply chain chokepoints. Henry Farrell and Abraham Newman call the underlying mechanism the chokepoint effect – the structural advantage that comes from controlling the node others cannot route around. The GCC states have applied that logic to their own economic strengths and strategic energy resources. AI is quicky becoming another major area of indispensability, which receives notably less attention as a potential chokepoint. Over the past decade, GCC states have committed more than $300 billion toward AI infrastructure, sovereign technology funds and digital industrialisation to modernise their economies and make their digital umbrella the node through which the region’s technological and financial future flows. That sets up the Gulf Arab states to lead the Middle East’s digital transformation over the long-term and out innovate Iran.

The GCC data centre market, valued at $3.5 billion in 2024, is projected to reach $9.5 billion by 2030, underpinned by over $13.5 billion in planned projects already in the pipeline. Chinese and American companies, including Amazon, Microsoft, Google, Oracle, Alibaba, and Huawei have all established dedicated cloud regions across the Gulf, and hyperscalers have committed tens of billions in investment to the region. Saudi Arabia’s Vision 2030 alone targets over $18 billion in data centre investment. Global technology companies, sovereign investors and neighbouring governments that depend on Gulf cloud platforms, payment systems and logistics networks for their own economic functioning stand to lose significantly if Gulf stability deteriorates. Yet, the sheer scale of investment means that a large number of multinational corporations (some with profits the size of medium to small countries) and states have a direct interest preserving Gulf stability. Iran’s strikes have put that proposition to its most direct test yet.

Gulf governments have also staked significant domestic credibility on technology-driven development. Vision 2030 in Saudi Arabia and the UAE Centennial 2071 have raised public expectations around employment, services, and quality of life in ways that create political incentives to continue delivering. Meeting those commitments requires external stability for internal development. The current conflict threatens both, simultaneously, by undermining regional security, exposing Gulf civilians to Iranian strikes and giving credence to the argument that Gulf stability is more fragile than its indispensability proposition implies. The longer the war continues, the more Gulf governments face pressure to demonstrate that the stability they have sold to investors and citizens alike is real rather than contingent.

The Gulf’s indispensability works precisely because it raises the cost of disruption for everyone invested in the region’s infrastructure, but it also raises the cost of disruption for the Gulf states themselves. The longer the war continues, the more Gulf governments face pressure to demonstrate that the stability they have sold to investors and citizens alike is real rather than contingent. If they succeed, the conflict will ultimately reinforce their indispensability by proving the Gulf can absorb shocks without breaking. If they cannot, the lesson learned is that indispensability without security is leverage without a foundation.

The Post War Tech Leap

When the dust settles, this war will have drained Iran economically and militarily and set its development back by decades. The Gulf capitals will sustain damage, but nothing comparable based on the current trajectory. The conflict will ultimately widen an innovation and development gap that was already growing before the first strike. The GCC’s AI ambitions give Gulf states a compounding edge that Iran cannot match, provided they emerge from this war with investor confidence intact.

Iran’s position after the conflict, under any plausible outcome, is worse than before. A severely weakened Islamic Republic faces accelerating brain drain driven by displacement, reduced Chinese appetite for the relationship’s reputational cost and degraded capacity to sustain its proxy networks. Even if the Iranian government survives, its economy and industrial base will be deeply degraded, forcing Tehran to double down on Chinese dependency – though Beijing may welcome that dynamic, seeing a cheaper client state with fewer alternatives rather than a reputational liability. Either way, neither path leads to a more competitive Iran in the near to mid-term. The postwar sanctions architecture will compound the problem: whether restrictions tighten, restructure, or selectively ease, Iran’s access to AI-adjacent technology will remain severely constrained for years.

The Gulf’s trajectory runs in the opposite direction. AI industrialisation is where the performance gap between the GCC and Iran will widen fastest and where it will be hardest to reverse. Iran has no equivalent program, no equivalent capital, and no equivalent access to the technology that would make one possible. That said, the Gulf’s AI workforce is largely imported, and a prolonged regional conflict tests talent pipelines too. Engineers and researchers who can work anywhere tend to leave war zones. The GCC’s advantage holds only if governments move quickly to reassure the skilled expatriate workforce that underpins their AI buildout.

Iran’s behaviour suggests it knows the stakes. The strikes on Gulf data centres indicate that Iranian authorities understand the emerging importance of AI infrastructure to the Gulf Arab states – and harbour an implicit belief that targeting it may degrade the war effort. But data centre targeting has structural limits. Data transfers to offshore facilities offer built-in resilience, and the strikes themselves are accelerating exactly the kind of geographic diversification and redundancy investment that will make Gulf compute infrastructure harder to disrupt in the future. If the Gulf’s indispensability proposition – its value to hyperscalers, sovereign wealth fund co-investors and Washington alike – can absorb a direct military challenge and emerge with sharper risk mitigation and deeper infrastructure redundancy, that would be the conflict’s most consequential outcome.