After almost a week of the on-going war in the Gulf - its Gulf War 3 already as far as I am concerned. But one big take out for me is that Iran’s drone programme is actually proving much more effective than its nuclear programme. Relatively cheaply with $20,000 drones Iran has proven able to rock the global economy.

Leaves me wondering why did Iran bother with its nuclear programme?

Iran has been helped by the Gulf states’ diversification programmes as it has created a target rich environment of assets in energy, logistics, tourism, air travel, agro inputs, chemicals, and even finance and international capital markets in close range of Iranian drones. Iranian drones have the ability to force a systemic crisis on the global economy.

Think of the inter connectivity beyond energy.

The Gulf states have focused on tourism, and attracting ex pats to boost their populations. This has seen a real estate boom. But what happens if Iran can keep the region insecure from continued drone attacks? Do ex-pats leave and tourists go elsewhere?

That would collapse a real estate bubble. And remember many of the homes, hotels, airplanes et al have been funded largely via foreign borrowing - and much now from Asia. Credit risk has increased which will risk capital flight, higher borrowing costs, and rollover risks and increase default risk. If we see increased default rates that reverberates to lenders in Asia, Europe and the US We all lose - which is why this is a globally systemic risk.

And as the FT noted in a piece this week what happens if Gulf states pull liquidity from offshore investments in Europe and the US to backstop their own markets? Well, that will tighten credit conditions in those overseas markets, causing dominoes to fall globally.

But surely the Gulf states will eventually figure out cast iron drone defences to ensure security. Not so fast if the experience of drone wars in Ukraine is anything to go by. Drones wars are wars of iteration as much as attrition. Drones are always evolving to counter drone defences. Hence, it’s unlikely the Gulf states will be able to ensure 100% security. And with insecurity likely for a longer timeframe the risks to the region’s business model of energy, tourism, logistic et al will be under threat - with doubts about its sustainability.

The above would suggest that the only solution for the Gulf states is either a) a complete military victory likely needing boots on the ground or; b) a lasting and sustainable political settlement.

Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London. This blog first appeared in his substack here. Subscribe here.