America’s war on Iran may bring Bahrain to its knees

What was once a glitzy petro-skyline now looks like a cautionary tale. The plate-glass skyscrapers of Manama, Bahrain’s capital, are pocked with jagged holes from which singed girders gape. As America and Israel have rained bombs on Iran, Iran has rained retaliatory drones and missiles on this tiny Gulf island of 1.6m. Refineries, factories, high-rise apartments and the headquarters of America’s Fifth Fleet have all been hit.

Even before the war began, Bahrain was on course to run a budget deficit of more than 10% of GDP this year, owing to the (previously) low oil price and rising debt-servicing costs. At 146% of GDP, its public debts are among the heaviest in the world. Almost a third of government revenue goes on interest payments.

Bahrain used to host a thriving banking industry which, along with fairly modest revenue from oil and gas, sustained a comfortable prosperity. But those days are gone. As Dubai became a bigger hub and bankers tried to win favour with rich rulers in Saudi Arabia and the UAE, financial firms relocated their offices. Gas reserves are dwindling.

The oil and aluminium industries account for more than two-thirds of government revenue and around a quarter of GDP. Both have been hit. BAPCO, the national oil company, has halted some shipments from its Sitra refinery. Aluminium Bahrain (ALBA), which operates the biggest aluminium smelter outside China, has suspended exports. The smelter is still running, but many fear it will follow a similar plant in Qatar and stop work. Restarting an aluminium smelter is no easy task: once cold, they can take six months to reactivate.

The main problem is not Iran’s bombardment, but the closure of the Strait of Hormuz. That leaves no way to export oil or aluminium. If Iran mines the strait, it could remain closed for months, freezing Bahrain’s economy.

There is a long-standing assumption in the Gulf that Saudi Arabia and the UAE will always bail Bahrain out, as they did, along with Kuwait, in 2018. That could well happen again this time. “But you can only bail somebody out if you have the cash yourself—and these countries are suffering, too,” says Khalid Janahi, a former banker.

Bahrain has a further vulnerability that keeps its rulers up at night. With the airport closed, its only connection to the outside world is a 25km causeway to Saudi Arabia. More than 80% of tourists—mostly thirsty Saudis, visiting the closest spot where alcohol is legal—arrive this way. An Iranian attack on the causeway would be a “doomsday scenario”, says a businessman, which would shatter whatever confidence remains.

Bahrain’s Sunni ruling class has no love for Iran, which has long tried to stir up unrest among the island’s largely Shia population. (The ruling class have done their bit to stir up unrest, too, through their undemocratic and repressive rule.) It is ironic, therefore, that Bahrain looks considerably less able to endure a protracted war than Iran does. ■