Gulf states navigate new Middle East order as US-Iran deal emerges amid Israeli territorial expansion

A new US-Iran deal proposes a disputed $300B reconstruction fund for Tehran, causing alarm among Gulf states. They fear the money, meant to be from them, will empower Iran's proxies and reward its recent aggression, including attacks on their energy infrastructure. While the UAE considers conditional engagement, the deal is complicated by Iran's demand for an Israeli withdrawal from Lebanon amid Israel's largest territorial expansion in decades.

US-Iran reconstruction fund dispute

• ▪US Vice President JD Vance stated the $300 billion fund would be backed by Gulf states if Iran complies with the agreement
• ▪US President Donald Trump denied reports of the fund, asserting that neither the US nor Gulf partners would be expected to contribute
• ▪A US-Iran Memorandum of Understanding (MoU) includes a plan for at least $300 billion for Iran's reconstruction and economic development
• ▪The reconstruction fund is an alternative to Iran's demand for compensation from the US and Israel for what it views as an unlawful war

Gulf states security concerns

• ▪The recent war demonstrated Iran's willingness to block the Strait of Hormuz and strike critical energy infrastructure in Gulf states
• ▪Gulf states have internalized that the US is not prepared to topple the Iranian regime, accelerating a trend of dialogue with Tehran
• ▪Gulf states fear the financial terms of the US-Iran deal could empower Tehran’s regional networks of militias and proxies

Iranian proxy network financing

• ▪Analysts expect Iran may immediately begin refinancing its proxy networks, potentially starting with the Houthis to control the Bab el-Mandeb Strait
• ▪The reconstruction fund could free up Iranian resources to invest in militias in Iraq, Syria, Lebanon, and Yemen, which directly threaten Gulf security

Gulf investment reluctance toward Iran

• ▪Saudi Arabia, the UAE, and Bahrain feel the fund risks rewarding Iranian aggression and undermining deterrence
• ▪Gulf leaders want the fund tied to verifiable limits on Iran’s regional interference and nuclear ambitions
• ▪Saudi Foreign Minister Prince Faisal bin Farhan stated that trust with Iran must be rebuilt before financial investments can be addressed

IRGC power consolidation risks

• ▪The IRGC holds a hostile view of Gulf Arab states, accusing them of collaborating with the US and normalizing ties with Israel
• ▪The war has left the Islamic Revolutionary Guards Corps (IRGC) with greater power in Tehran, causing nervousness among Arab states
• ▪Iran has made Israel’s withdrawal from occupied territories in Lebanon a condition for the peace deal with the US to be fully implemented
• ▪Since 2023, Israel has taken control of roughly 1,000 square kilometers of land in Gaza, Lebanon, and Syria, its biggest expansion in decades

UAE pragmatic engagement strategy

• ▪The UAE's strategy is to make Iran more invested in regional stability through economic integration, not to make it strategically stronger
• ▪The UAE may contribute to the fund if it is conditional, transparent, phased, and tied to verifiable Iranian restraint