Bahrain’s western wager sinks in Hormuz

Manama tied its security and economy to Washington, Tel Aviv, and Abu Dhabi. Now, the smallest GCC state is discovering how little protection that alignment offers when the Strait of Hormuz closes

Aidan J. Simardone

The Cradle 

A causeway, a small island, and a vanished oil route now define Bahrain’s crisis. Since Iran closed the Strait of Hormuz to hostile shipping, the economies of the Persian Gulf have been forced into emergency mode as energy exports stall and tourism dries up. 

Some Gulf states can lean on vast sovereign wealth funds. Others entered the war with balanced books and enough credit to borrow through the shock.

Bahrain has neither cushion. Even measured against its tiny population – the smallest in West Asia – its sovereign wealth fund is the weakest in the Gulf Cooperation Council (GCC). It is also one of the most indebted states in the world and required a bailout as recently as 2018, and depended on Saudi military intervention to crush the 2011 uprising.

Whether anyone will rescue Manama again – financially or militarily – is now an open question. For years, Bahrain has tied itself tightly to the west, becoming the second Arab state to normalize relations with Israel through the Abraham Accords. But as western hegemony recedes and even Saudi Arabia takes a more independent line, Bahrain may find itself increasingly alone.

Strained before the war

Even before the Strait of Hormuz closed, Bahrain was in trouble. Compared with other GCC countries, its oil reserves are small at 125 million barrels. Meanwhile, Qatar has a population three times larger and 25 billion barrels in oil reserves.

Despite this, oil accounts for 60 percent of the Bahraini government’s revenue.

The political strain predates the current war. During the 2011 Arab Spring uprisings, the Al-Khalifa monarchy faced a mass revolt by Bahrainis angered by a Sunni ruling dynasty that has long marginalized the country’s Shia majority. The uprising was crushed only after Saudi Arabia sent troops across the King Fahd Causeway. Manama also increased state spending to quell public anger.

But when oil prices tumbled, Manama found itself with no more cash. Rather than risk another revolt in their backyard, Kuwait, Saudi Arabia, and the UAE in 2018 stepped in to provide a $10 billion bailout.  Bahrain promised to improve its finances and diversify its economy. 

But little changed. Its budget deficit of 10 percent and debt of 135 percent of GDP regularly puts it among the top ten worst in the world. Days before the Iran War, Fitch downgraded Bahrain’s credit rating.

Betting on Washington and Tel Aviv

To attract investment, Bahrain pushed deeper into the western camp. In 2005, Manama dropped its boycott of Israel in exchange for a free trade agreement with the US. In 2017, Bahrain denounced the Arab League boycott of Israel and welcomed Israelis into the country. 

Three years later, it became the second Gulf Arab state after the UAE to recognize Israel under the Abraham Accords. In 2022, Bahrain signed a security agreement with Tel Aviv, followed by another with Washington the next year. At one point, Manama was even pursuing a free trade agreement with Tel Aviv.

Bahrain did pull its ambassador when Israel’s genocide of Palestinians in Gaza began in October 2023. But it has done little else. Israelis can still visit the country, and Bahrain was one of the first Arab states to condemn Hamas’ actions during Operation Al-Aqsa Flood. In 2025, Bahrain welcomed Israel’s new ambassador to the country.

There were payoffs. Bahrain-Israel ties could generate hundreds of millions of dollars. Manama has agreed to a $17 billion deal with Washington, including a $2 billion partnership with US companies to develop its aluminum industry in the hopes of diversifying its economy. 

Meanwhile, its closest ally, Saudi Arabia, was forging a different path. The kingdom has agreed to start selling its oil in Chinese yuan. This undermines its relationship with Washington, under which all oil would be sold in US dollars in exchange for military protection. Rather than rely on America’s protection, Riyadh signed a mutual defense agreement with Pakistan. Saudi Arabia has also expressed increased frustration at Israel’s continued aggression.

As Riyadh and Manama diverged, Bahrain drew closer to the UAE. Like Bahrain, Abu Dhabi has forged closer relations with the west, including Israel. The UAE is now one of the top three foreign investors in Bahrain, and non-oil trade has doubled over the last fifteen years. In 2025, the two countries held joint military exercises and, in the past week, discussed deepening cooperation.

Bahrain’s reliance on western-backed security networks grew more visible most recently, when Ukrainian President Volodymyr Zelensky visited Manama on 5 May to propose drone and defense cooperation against Iranian attacks. The visit reflected a kingdom increasingly dependent on external security partners, even as the region around it moves in a different direction.

The Hormuz Shock

Then everything came crashing down. In response to American and Israeli aggression, Iran seized control of the Strait of Hormuz, forbidding any hostile vessels from crossing, including from the GCC countries of Bahrain, Kuwait, Qatar, the UAE, and Saudi Arabia. 

Saudi Arabia can send some exports through the Red Sea. Until recently, the UAE could use its pipeline to export directly to the Indian Ocean. But Bahrain, Kuwait, and Qatar aren’t as lucky. Kuwait and Qatar have no significant pipelines connecting to Saudi Arabia. 

Bahrain has one connection, but it moves oil from Saudi Arabia to Bahrain, not the other way around. All three states have also suffered damage to energy infrastructure. Kuwait recently reported April exports of zero barrels, with similar data expected for Bahrain and Qatar.

The International Monetary Fund (IMF) projects negative economic growth in 2026 for Bahrain, Qatar, and Kuwait. Bahrain’s decline of 0.5 percent might seem modest, but there are several caveats. First, other than during the COVID-19 pandemic, this would be the first economic contraction in over 30 years. 

When Bahrain required a bailout in 2018, its economy was growing at 2.1 percent. Second, the IMF’s projection is based on the optimistic scenario that trade and production resume to normal by the middle of 2026. With Iran-US negotiations having not even resumed and GCC energy infrastructure destroyed, this is highly unlikely. 

Unlike the other GCC countries, Bahrain also has a small sovereign wealth fund. Qatar’s sovereign wealth fund is worth $580 billion, and Kuwait’s is worth $1 trillion. Both countries can sell some of their assets to continue providing government services amid the economic uncertainty. 

But Bahrain’s sovereign wealth fund is worth only $18 billion. And whereas Kuwait’s sovereign wealth fund (the oldest in the world) has invested in foreign assets, Bahrain’s investments are mostly domestic. Selling these assets would mean divesting from itself, further amplifying the economic crisis. 

Since the war began, Bahrain became the first GCC country to have its credit rating downgraded by Moody’s. Fearing it would not have sufficient foreign reserves, it entered into a currency swap with the UAE. But Abu Dhabi is likewise considering a similar deal with Washington, suggesting that the UAE Dirham is not as valuable as Bahrain believes. 

As the war continues, things could get even worse. Bahrain is an island whose only connection to the mainland is the King Fahd Causeway. In March, a drone struck the causeway, although causing minimal damage. 

In early April, it was closed due to an Iranian threat, which never materialized due to Iran and the US agreeing to a ceasefire the next day. But if fighting resumes, a single hit on the bridge could isolate the whole country.

Alone in the Persian Gulf

Whether the GCC will rescue Bahrain again remains uncertain. Gulf monarchies want to prevent unrest in Bahrain, where popular mobilization could inspire the region. But the GCC now has its own crises: Iranian attacks, economic decline, and rising domestic pressure. 

Although the bloc bailed out Bahrain in 2018, it withheld payment during the COVID-19 pandemic in 2020. Manama’s failure to repair its finances after the last bailout may harden that reluctance.

Bahrain’s closer alignment with Abu Dhabi comes as the UAE challenges Riyadh through its failed proxy war in Yemen, its interventions in Africa, and its exit from OPEC. If Bahrain becomes a firm Emirati ally, Saudi Arabia may see less reason to absorb the cost of another rescue.

Even if Riyadh chooses to intervene, geography may now limit its options. The Saudi military intervention in 2011 relied on the King Fahd Causeway, across which 150 military vehicles entered Bahrain.

If the causeway is destroyed, Saudi Arabia would struggle to move that force by sea, since it lacks large amphibious assault ships capable of transporting so many vehicles. The UAE has such vessels, but an intervention from Abu Dhabi would require a 400-kilometer voyage through the Persian Gulf under the threat of Iranian fire.

Bahrain is therefore trapped by the very alignments it has spent years cultivating. Its deepening bond with Abu Dhabi has complicated ties with Riyadh. Its western orientation has exposed it to Iranian retaliation. 

Its economy, weak long before the war, now faces high debt, a shallow sovereign wealth fund, damaged trade routes, and the possibility of physical isolation. 

Among the GCC states, Bahrain is the weakest link. The longer the Strait of Hormuz remains closed, the more exposed Manama becomes.