How Bangladesh should prepare for a worsening Middle East war

Wars often end because somebody runs out of ammunition, money, political patience or confidence in the possibility of victory. The troubling feature of the present Middle East conflict is that we may not have reached that point. In fact, that point may still be a few months away.

In this article, I will analyse why this war may be difficult to stop, what may bring it to an end, and, assuming a bear-case or worst-case scenario, what Bangladesh can and should do to prepare.

Why the war may be difficult to stop

Iran has little incentive to capitulate, believing its restraint during last year's war may have given its enemies a false sense of security. More importantly, it understands that this war is about survival, not just of the regime but of Iran as a nation.

Israel has previously acted militarily against emerging nuclear threats, including Pakistan's nuclear programme. Iran is arguably Israel's most potent enemy, and with American support, Israel has a meaningful opportunity to weaken the Iranian state. Some argue that Israel's greatest window to do so lies within the next two to three years.

I do not think this is inherently an American war, except for the strategic imperative of limiting Chinese influence in the Middle East. China is the region's largest energy customer, and greater Chinese dominance could weaken the dollar's role in Middle Eastern oil trade and, eventually, its position as the world's dominant currency.

I do not think the dollar will die. Like the internet, it benefits from powerful network effects. But greater Chinese influence over the region and its oil trade could reduce the dollar's importance.

Now, let's look at what could potentially end the war.

What could create an off-ramp?

A financial shock in the US is one possibility. Diplomacy is another, but a distant second.

The US stock market is at an all-time high, fuelled partly by massive spending, hype and fear around artificial intelligence. Investors continue pouring money into tech stocks, pushing valuations higher and increasing the stakes in the AI boom.

I am not an AI critic. I find it useful, including for complex financial, economic and geopolitical modelling. But I remain sceptical of the trillion-dollar valuations attached to some AI companies.

Their justifications often assume an extraordinary degree of automation of human labour. Tech CEOs promising either AI heaven or hell should therefore be treated with a healthy dose of scepticism.

The war could also trigger a market correction. Despite efforts by the US administration and stakeholders in finance, technology and sovereign wealth, a sustained rise in bond yields could pressure markets. The enormous capital expenditure required for data-centre construction is another vulnerability: if companies begin cutting investment, it could amplify market fears.

The government should begin with rigorous stress testing. Bangladesh Bank, the Ministry of Finance and energy authorities should model oil at $120, $150 and $180 per barrel alongside LNG at $25, $30 and $40 per MMBtu.

The Trump administration has strong political and financial ties to the AI sector, and threats to major upcoming IPOs could create pressure to cool the conflict, if not end it.

Diplomacy may follow if the war begins threatening the US economy or markets. Oman, Qatar and Pakistan retain useful channels because they can communicate with parties that struggle to speak directly. China also has strong economic incentives to restore Gulf stability because of its dependence on regional energy and trade, although its ability to broker a settlement remains untested.

Another possibility is a regional security arrangement between Iran and the Gulf states. A deal could begin with practical commitments: Iran guaranteeing commercial shipping and Gulf energy infrastructure, while Gulf states assure Tehran that their territory will not be used for attacks. Maritime security, intelligence-sharing and escalation-management mechanisms could follow.

Such an agreement would require both sides to compromise. Money could also become part of the settlement. Gulf investment in Iran's infrastructure, energy and industry could support reconstruction, while Gulf governments could present it as a commercial investment and peace dividend.

Whether any of these pathways emerge soon remains uncertain.

The worst case scenario for Bangladesh

Crude oil could stay elevated above $120 per barrel for some time if both straits are shut. Of course, there is no forecasting where crude could go if China doesn't "control" its appetite for oil and growth the way it did during the first phase of the war. 

The Saudi economy is constrained with its exports severely affected. Saudi economic and fiscal pressures will at some point affect remittance inflows to our country. There is no telling how far Ansarallah escalates its attacks on Saudi Aramco facilities and other infrastructure of critical national importance. 

We already know of the damage to the East-West pipeline in Saudi Arabia. There are conflicting estimates about how quickly the pipeline can return fully to service. That uncertainty itself illustrates the problem. The world has spent decades building redundancy into its energy system. We are discovering that alternative routes can also become targets.

And of course, there are other nightmare scenarios including a wider conflagration that could range from usage of tactical nukes to ground invasion to wholesale destabilisation of states on which Bangladesh depends for remittance inflow from expatriate workers. 

For Bangladesh, the prudent planning assumption remains a conflict that gets worse not better. 

The Bangladesh energy situation

For Bangladesh, another particularly interesting development is that our physical gas position is improving while our energy affordability problem is worsening.

Gas supply has recovered to around 2,610mmcfd, close to levels prevailing before the LNG-terminal disruption. Almost 1,000mmcfd of that supply is now imported LNG. Yet Bangladesh has approved an October LNG cargo at $29.795 per MMBtu, roughly three times the pre-war price.

An LNG cargo reaching Chattogram is therefore only half the story. The other half is whether Bangladesh can afford enough such cargoes for months.

We are already seeing the consequences in industry. A recent BKMEA survey found that 55% of knitwear exporters had experienced cancelled or reduced orders because of gas and electricity shortages. 87% suffered shipment delays, while nearly 60% had to offer discounts to buyers.

This is important because energy insecurity is no longer an abstract macroeconomic risk. It is appearing in export orders, factory utilisation and margins.

Yet Bangladesh also has important buffers. Moody's has just moved the country's sovereign outlook from negative to stable, citing stronger reserves, record remittances and easing external pressures. Remittances reached more than $1.5 billion in the first 14 days of September alone.

There is therefore no case for panic. There is a strong case for using this breathing room intelligently.

More energy options

The answer cannot simply be to import ever larger quantities of LNG regardless of price. Bangladesh needs greater fuel substitutability.

LNG should be prioritised where pipeline gas is difficult to replace. But LPG can substitute for natural gas in restaurants, bakeries, SMEs and some industrial boilers, dryers and furnaces. Bangladesh already imports LPG from a relatively diverse group of countries.

That opportunity requires infrastructure. Larger bulk purchases can reduce procurement costs, but only if Bangladesh develops adequate storage, terminals, regional depots and distribution capacity. Strategic storage should therefore become part of energy security rather than an afterthought.

Domestic gas exploration must accelerate. Nuclear generation at Rooppur should be brought online safely and efficiently. Coal, imported electricity, renewables and other generation sources should be evaluated according to reliability, cost and foreign-exchange exposure.

The objective is not to find one replacement for natural gas but to ensure that when one fuel or supply route becomes prohibitively expensive or unavailable, parts of the economy can switch to another.

The case for modeling

The government should begin with rigorous stress testing. Bangladesh Bank, the Ministry of Finance and energy authorities should model oil at $120, $150 and $180 per barrel alongside LNG at $25, $30 and $40 per MMBtu.

For each scenario, policymakers should know the likely monthly dollar requirement, subsidy burden, reserve impact, inflationary effect and financing need.

That exercise should lead naturally to another question: what is Bangladesh's economically sustainable LNG import envelope?

At one price level, additional LNG can preserve industrial production, employment and exports to justify the cost. 

At a higher level, the fiscal and foreign-exchange burden may become increasingly difficult to sustain. We should know approximately where those thresholds lie before markets force the decision upon us.

Scarcity also requires priorities. Export industries, fertiliser, food processing, hospitals, water systems and large employment-generating industrial clusters deserve advance planning around energy allocation. Fertiliser procurement should be secured early enough to protect crop cycles, because an energy crisis that becomes a food crisis would be considerably harder to manage.

Financing commitments should also be arranged early. Multilateral facilities, bilateral credit lines and trade-finance arrangements are easier to negotiate while reserves remain adequate and Bangladesh retains bargaining room.

Our Gulf exposure does extend beyond commodities. A prolonged regional slowdown could eventually affect migrant employment and remittances. Missions should therefore maintain credible emergency communication and contingency planning.

The capital market matters

A prolonged external shock also strengthens the case for capital-market reform. Bangladesh needs deeper domestic channels through which long-term savings can finance productive companies, particularly when bank-credit transmission is weak.

Strong private companies and profitable state-owned enterprises should be encouraged to list soon. Pension, insurance and mutual-fund participation can deepen under credible governance standards. Corporate bonds, green bonds and sukuk can gradually provide alternatives to bank financing.

Of course, none of this eliminates the geopolitical shock. It gives Bangladesh greater financial depth with which to absorb one.

The purpose of preparing for a worsening Middle East war is neither alarmism nor prophecy. Bangladesh today has stronger reserves and remittance flows, recovering gas supplies and meaningful policy room. Preparing for worst-case scenarios in the Middle East war will help protect the country as that room narrows.

Sketch: TBS

Sajid Amit, PhD is an experienced development sector professional, academic and investment professional, with work experience at Morgan Stanley and BRAC EPL. He has received awards for his investment research from Morgan Stanley and BlackRock. He can be reached at sh2367@caa.columbia.edu.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.