“The Strait of Hormuz will either be a Strait of peace and prosperity for all or a Strait of defeat and suffering for warmongers.” — Ali Larijani, secretary of Iran’s Supreme National Security Council, 10 March 2026

On the night of 1 March, an Iranian Shahed drone struck the runway at RAF Akrotiri — the first attack on Cyprus from outside the country since the 1974 Turkish invasion. Within days, France, Italy, Spain, the Netherlands, and the United Kingdom had deployed naval and air assets to the Eastern Mediterranean. President Macron declared in Paphos that “when Cyprus is attacked, then Europe is attacked.” The Charles de Gaulle aircraft carrier now patrols Cypriot waters. Then, on 9 March, Turkey deployed six F-16 fighter jets to the occupied north of the island — exploiting the fog of war to advance a territorial posture that has nothing to do with Iran and everything to do with a frozen conflict Europe had spent decades trying to forget.

Three weeks into Operation Epic Fury, it is Cyprus, not Tehran or Tel Aviv, that best illustrates the cascading logic of this war. The island did not choose this fight. It imports all its energy; refined fuel prices have already risen ten per cent for petrol and twenty per cent for diesel. Its spring tourism season is haemorrhaging bookings. Intelligence agencies across Ankara, Athens, and Nicosia have raised terror alert levels, citing credible threats from both pro-Iranian networks and jihadist sleeper cells. Carnegie has assessed that the convergence of Greek, Turkish, and European military deployments is reigniting tensions between Greece and Turkey, between the EU and Turkey, and between Israel and Turkey — a multi-layered strategic deterioration from which Iran benefits whether or not it was intended. For a small, open, services-dependent economy where tourism is a mainstay of GDP, the damage compounds with each additional week of hostilities past the five-to-six-week mark — locking in losses that cannot be recovered within the 2026 fiscal year.

Turkey’s exposure is the most acute in the Eastern Mediterranean. Ankara imports ninety per cent of its oil and ninety-eight per cent of its natural gas. Every sustained ten-dollar rise in the oil price adds four to five billion dollars to the annual energy import bill — a direct hit to the current account, fresh pressure on the lira, and a new inflationary impulse into an economy where disinflation had been the central policy achievement of the past two years. Pre-war growth forecasts of four per cent and inflation projections below twenty per cent are now obsolete. Greece, more diversified, faces the mildest direct impact, but rising energy costs, softening tourism, and the fiscal burden of military deployments still produce its worst growth outlook since the pandemic. Across all three economies, the pattern is stagflationary: growth falling, inflation rising, fiscal space narrowing.

The Gulf states are absorbing the war’s most direct economic blow. Iran’s effective closure of the Strait of Hormuz — through which twenty per cent of global oil and critical LNG volumes transit — is the materialisation of a tail risk that markets spent decades underpricing. Brent crude surged from around $70 to nearly $120 per barrel. European gas futures spiked more than forty per cent. Goldman Sachs estimates that Qatar and Kuwait could each see GDP contract by fourteen per cent if fighting persists through April. QatarEnergy’s production at Ras Laffan and Mesaieed has halted entirely. Saudi Arabia’s Ras Tanura refinery has sustained damage, its fiscal deficit was already 5.3 per cent of GDP in 2025, and external borrowing had exceeded $143 billion before the first missile struck. The World Travel and Tourism Council puts the region’s losses at $600 million a day in international visitor spending. The Bahrain and Saudi Formula One races have been cancelled. The “Vision” diversification programmes — predicated on curated perceptions of stability that the war has demolished — are facing their first existential stress test.

Iraq is the extreme case. Ninety per cent of its budget revenue flows from crude exports through the Basra Oil Terminal and the Strait. Petroleum output has fallen an estimated seventy per cent. Daily revenue losses run to approximately three billion dollars. Some oil trickles from northern fields through the pipeline to Turkey; some moves by road tanker to Jordan. But these are capillaries where an artery has been severed. Public salaries and pensions, more than half of budget expenditure, are at direct risk. Iraq’s economy is a single-asset portfolio with no hedge — and the tail event has arrived.

Egypt, though not a combatant, may suffer the most insidious damage — because every transmission channel is firing simultaneously. Within twenty-four hours of the operation, Israel suspended 1.1 billion cubic feet per day of natural gas exports, severing a supply line covering a significant share of domestic demand. The pound has depreciated as more than two billion dollars in hot money fled government debt, with total foreign portfolio outflows reaching six billion. Suez Canal revenues — projected to recover toward ten billion dollars in 2026 after the Houthi disruptions — face renewed collapse as Maersk, CMA CGM, and Hapag-Lloyd reroute around the Cape. Brent’s surge to nearly $120 creates a devastating gap against the budget assumption of $75. Inflation has jumped from ten per cent in January to 11.5 per cent in February; meat prices are up twenty-five per cent, fruit and vegetables fifteen to thirty. President Sisi has called the fuel increases “inevitable” to avert “harsher options.” But for the cafe worker in Cairo earning less than a hundred dollars a month, now unable to buy his children new clothes for Eid, or the grocer in a poorer district watching customers abandon fruit purchases entirely, the harshest option is already here. External debt stands at $163.7 billion. A third of the population lives below the poverty line. Each new stress — energy, currency, tourism, canal, capital flight — compounds the others, and there is no obvious restoring force.

What standard macroeconomic models miss — because they assume normal distributions and mean-reverting shocks — is that this crisis is revealing dependencies that were invisible until they broke. Qatar produces forty per cent of the world’s helium, without which semiconductor fabrication stops; that production has now halted entirely. Fertiliser shipments through Hormuz account for sixteen per cent of global flows; their disruption threatens food security from South Asia to sub-Saharan Africa. Iran’s cost-dispersal strategy — one-way drones at $20,000 per unit forcing interceptions by systems costing hundreds of millions — generates an asymmetry that is financial as much as military, and it is working. Insurance premiums for Gulf maritime transit have surged. Shipping companies are permanently reassessing the risk of operating in the Persian Gulf. Investment decisions are being deferred, foreign talent is reconsidering the Gulf’s offer, and these costs will not evaporate with a ceasefire. And perhaps most consequentially, reports indicate that Chinese-flagged and Chinese-linked vessels have enjoyed preferential passage through the Strait, with Iran formally closing the waterway only to the US, Israel, and Western allies. A handful of Turkish and Indian ships have also negotiated transit, but daily non-Iranian passages have dropped to single digits — and the overwhelming majority are Chinese-owned. Beijing is negotiating dedicated safe transit for its energy imports while most of the world’s shipping sits at anchor. If that arrangement solidifies, the Strait of Hormuz will have become not merely a chokepoint but a Chinese concession — a structural shift in the energy geography of Eurasia that no post-war diplomatic settlement can easily reverse.

This is where policy must begin. The India-Middle East-Europe Economic Corridor — IMEC — announced at the 2023 G20 summit and largely stalled since, was designed to link Indian ports to Europe via Gulf rail networks, overland through Jordan and Israel to Haifa, and onward by sea to Piraeus and Southern Europe. It was conceived as an infrastructure play. The war has made it a strategic imperative. A functioning IMEC would bypass both Hormuz and Suez. It would give Gulf economies the redundancy they fatally lack. It would offer Egypt’s neighbours an alternative to the canal bottleneck — and Egypt itself a reason to develop its SUMED pipeline and overland logistics. It would anchor the Eastern Mediterranean into a trade architecture commensurate with the security burdens Cyprus, Greece, and Israel are now shouldering. And it would provide a physical counterweight to the Chinese leverage over Gulf energy transit that this war is crystallising in real time. Every week that IMEC remains on a drawing board rather than a construction site, Beijing’s emerging stranglehold over the Strait grows harder to contest. The corridor’s estimated cost — tens of billions — looks trivial against the hundreds of billions this conflict is destroying.

The Gulf sovereign wealth funds, sitting on trillions in assets while their home economies contract at double-digit rates, should be leading this investment yesterday. The lesson of March 2026 is not that the Gulf’s diversification ambitions were wrong. It is that they were built on sand — on the assumption that geography would remain benign and that deterrence would hold indefinitely. Neither assumption survived contact with an adversary willing to spend $20,000 on a drone to force the expenditure of a $400 million air defence battery. The “Vision” programmes need a new chapter, one that prices in the fat tail that has materialised and builds the physical corridors to survive the next closure. Because the Strait will close again. And when it does, the question will be simple: has the arc of vulnerability from Kuwait City to Nicosia built the redundancy to absorb it, or will it be caught once more — an entire region holding a single-asset portfolio and no hedge?

© The Times of Israel (Blogs)