The aftershocks of the war in the Middle East are spreading into the global financial system, with one of the world’s wealthiest countries seeking a financial lifeline.
Donald Trump and his Treasury Secretary Scott Bessent have confirmed that the United Arab Emirates and “numerous” other countries in the Middle East and Asia have asked the US for financial support in the form of currency swap lines, or the ability to swap their currencies, at minimal cost, for US dollars.
At face value, the UAE shouldn’t have any need of financial support from the US or anyone else.
As its ambassador to the US, Yousef Al Otaiba, said this week in a post on “X,” the UAE is “one of the world’s most financially resilient economies, underpinned by more than $US2 trillion ($2.8 trillion) in sovereign investment assets.”
Its central bank has more than $US300 billion of foreign currency reserves and its banking system holds about $US1.5 trillion of deposits, he said.
That would signal that the country’s problem, if it has a problem, isn’t one of solvency, but liquidity.
The UAE has pledged to invest $US1.4 trillion in the US over the next decade. It has also been a major financial benefactor of the Trump family.
While it does appear that the UAE’s testing of the waters with the US is precautionary rather than in response to an immediate threat, it would be surprising if the Gulf nation wasn’t experiencing, or at least anticipating, some liquidity stresses.
The UAE’s currency, the dirham, has been pegged to the US dollar since 1997 at a rate of 3.6725 to the dollar. To maintain that fixed rate, during a period when the war has caused the greenback to appreciate materially, the UAE would be running down its reserves of US dollars.
In normal times, before the war, defending that exchange rate wasn’t an issue because the UAE had built up massive dollar reserves as a major exporter of oil, which is overwhelmingly denominated in US dollars.
US and Israel’s war on Iran, however, had – and continues to have – punishing consequences for other countries in the region, particularly on their revenues from the oil exports that used to flow through the Strait of Hormuz, a critical global shipping lane that the Iranians have effectively closed.
The UAE’s production quota within the OPEC+ cartel allows it to export up to 3.5 million barrels of oil a day. It has a pipeline, built to bypass the strait, that has a capacity of about 1.8 million barrels a day. That means, however, it has lost the ability to export as much as 1.7 million barrels a day – worth more than $US170 million a day at current prices.
With the war now into its 54th day, the cost to the UAE of that lost income – and the US dollars it hasn’t generated – is very material, running into the many hundreds of billions of dollars. Almost all of UAE’s 6 million or so tonnes a year of LNG exports are also shipped through the strait.
The war’s cost to the country goes beyond the loss of its oil exports. Iran’s response to the conflict, which has seen it deploying missiles and drones against its US-allied neighbours, has caused significant infrastructure damage, including to the UAE’s energy production facilities, has ravaged its aviation and tourism sector (with more billions of dollars foregone) and triggered some capital flight from a key Middle East finance hub.
Having seen its inflows of US-dollar-denominated revenues shrink, the UAE could raise liquidity by selling some of the assets held within its sovereign wealth funds.
More than a third of those assets are in America, where the UAE owns about $US120 billion of Treasury securities, is a major investor in the sharemarket and is very active in its private equity market.
Bessent told a Senate hearing on Wednesday that providing a currency swap to the UAE could benefit the US by stabilising foreign exchange markets and protecting American assets by preventing their sale in a “disorderly” way.
The last thing the Trump administration wants is for the Middle Eastern countries – who, as a region, are estimated to be losing more than $US500 billion of income a day during the war – to start offloading their US Treasury securities and other financial assets in a firesale to raise liquidity. It could be highly destabilising for the US.
There’s an additional motivation. The UAE has reportedly told the Trump administration that, if it ran short of US dollars, it might be forced to use China’s yuan, or other currencies, for its oil and other financial transactions.
China has been very keen to convince the Middle Eastern oil producers to settle at least some of their trade in its currency. Iran has demanded payment for the tolls it imposed on ships allowed to pass through the strait in either cryptocurrency or yuan.
Oil – petrodollars – is one of the pillars of the US dollar’s global dominance of finance and trade, and of the cheaper-than-otherwise debt Washington is able to raise, despite debt levels that are quickly accelerating under Trump from what was already an unsustainable path.
It would make sense to the US government to shore up an ally and prevent it from dumping its US Treasuries and stocks and shifting the settlement of at least some of its energy trades into yuan.
The UAE is also a close friend of the administration and the Trump family.
It has pledged to invest $US1.4 trillion in the US over the next decade.
It has been a major financial benefactor of the Trump family, secretly acquiring a 49 per cent stake for about $US500 million in the family’s cryptocurrency company World Liberty Financial just ahead of Trump’s inauguration.
More than $US180 million of that was attributable to the Trump family, with the family of Steve Witkoff – Trump’s special envoy to the Middle East, alongside Trump’s son-in-law Jared Kushner – also getting a tidy piece of the action.
Another UAE fund subsequently used World Liberty’s stable coin for a $US2 billion transaction that would have generated tens of millions, if not hundreds of millions, of dollars for the Trump and Witkoff families.
The Trump administration, two weeks later, approved the sale of 35,000 of America’s most advanced computer chips – chips regarded as so tied to national security interests that the Biden administration had blocked their export – to the UAE.
Jared Kushner’s private equity firm has received hundreds of millions of funds to manage from the UAE and, all up, several billion dollars from the Middle East.
That might help explain why, when asked whether the US would help the UAE, Trump said it had been “a good country” and that “it’s been a good ally of ours.”
Regardless of the financial entanglements, whether familial or state, it would seem only fair that the US – whose decision to attack Iran has caused the collateral damage to other countries and economies in the region – should do something to help ameliorate some of that damage and ensure that it heads off a potential liquidity shock to the region that could turn into something more fundamental and destabilising, and not just for the Gulf nations.
If the war continues to drag on, no one would want to turn what the International Energy Agency has described as “the most severe oil supply shock in history” into a global financial crisis purely because of a regional shortage of US dollar liquidity.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.From our partners
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