At dawn on March 9, swarms of Iranian Shahed-136 drones crossed the Persian Gulf and struck the Al Ma'ameer facility on Sitra Island, the crown jewel of a $7.3bn modernisation programme that Bahrain had only finished completing in late 2025. At least 32 people were injured in the latest attack on the small island nation.  

Thick smoke rose above Manama's financial district. Within hours, Bapco Energies, the country's state-owned energy group, had invoked force majeure on all group operations affected by the attack, becoming the latest in a string of Gulf producers, alongside QatarEnergy, Kuwait Petroleum and Iraq's southern fields, to formally suspend export commitments as Iran's retaliatory campaign against American and Israeli targets in the region continues to widen.

The strike was more than a military statement. It was an attack on Bahrain's economic identity. The Sitra refinery, first built in 1935 and now upgraded to process 405,000 barrels a day of imported Saudi crude into high-value ultra-low sulphur diesel and jet fuel, accounts for the overwhelming bulk of the country's export earnings. Over 80% of Bapco's refined products and crude oil go overseas. For a kingdom that derives roughly 70% of government revenues from hydrocarbons, an indeterminate shutdown is not merely a logistical problem, it is a fiscal emergency.

Bahrain on the edge

Little Bahrain's finances were already fragile well before the first Iranian missile was fired. The IMF warned in January that the fiscal deficit had reached 11% of GDP in 2024 and that public debt had climbed to 134% of GDP — above even the 2020 recession peak. That puts Bahrain in a league of its own among Arab states, surpassed regionally only by Lebanon in terms of debt-to-GDP.

Unlike Qatar or Kuwait, which entered this conflict with vast sovereign wealth funds capable of absorbing a prolonged revenue shock, Bahrain's Mumtalakat holding fund holds an estimated $18bn, substantial on paper, but modest relative to the scale of its liabilities and the pace of the current disruption.

In December, Manama had announced what analysts described as its most ambitious fiscal consolidation in years: an 11-part package including higher utility tariffs, fuel price increases for businesses, a new corporate tax and a 20% cut in administrative spending. That programme now looks extraordinarily difficult to deliver. Rising inflation driven by energy disruption, a contraction in refining revenues and a collapse in regional tourism, its international hub all but closed, it’s a debtor's nightmare.

"Bahrain sits at the sharpest intersection of this conflict's military, economic and political pressures," said Wasay Mir, a MENA-focused geopolitical risk analyst based in Washington and Doha.

"With government revenues already stretched thin, Manama will have little choice but to borrow more to cover the gap."

Arabian war doctrine

The targeting of Bapco fits a strategic logic that Iranian planners have clearly embraced: the systematic degradation of the Persian Gulf states' economic infrastructure, rather than their military assets, i.e., soft targets.

Bahrain is host to the US Navy's Fifth Fleet and a founding member of the coalition that normalised relations with Israel under the Abraham Accords. Tehran didn’t like that.  

Iran's new supreme leader, 50-something Mojtaba Khamenei, elevated by the Assembly of Experts following the death of his father, Ayatollah Ali Khamenei, in the US-Israeli strikes of February 28, has shown little inclination towards restraint.

The precedent was set at Saudi Arabia's Abqaiq facility in 2019, when drone strikes temporarily knocked out over half of Riyadh's oil output. What has changed since then is the precision, scale and coordination of Iranian drone technology. The Residue Hydrocracking Unit at Al Ma'ameer, the most technically advanced component of Bapco's modernisation programme, was specifically targeted, suggesting detailed intelligence about the facility's most economically sensitive systems.

Also, Bahrain's air defences, while not negligible, are far thinner than those of Saudi Arabia or the UAE.

Bahrain is not alone in its predicament. QatarEnergy has declared force majeure on LNG shipments from Ras Laffan, the facility that supplies roughly a fifth of global liquefied natural gas. Kuwait has cut output at its fields and refineries. Iraq's southern production has also been shut off in recent days.

The Strait of Hormuz, through which approximately 20mn barrels of oil pass daily, has seen vessel traffic fall by some 90% compared with normal levels, according to ship-tracking data from MarineTraffic.

JPMorgan has warned that Gulf producers could exhaust available storage capacity within weeks if the closure persists.

Saudi limits

Bahrain's saving grace has historically been its relationship with Riyadh. Saudi Arabia provides crude oil from the jointly operated Abu Sa'afa field and has, along with Kuwait and the UAE, directed $7.5bn in financial support to Bahrain since 2018 to prevent a sovereign debt crisis.

In the current conflict, the political logic for continued Saudi support is, if anything, stronger: Riyadh cannot afford the symbolic and strategic blow of a neighbour's economy collapsing under Iranian pressure.

Yet Saudi Arabia is fighting its own battles. Ras Tanura, one of the world's largest oil export terminals, has itself been targeted, albeit with reportedly limited structural damage. The Saudi east-west pipeline, which can carry up to 5mn barrels a day westward as a bypass for the Hormuz closure, is being pressed into service but cannot fully compensate for the lost maritime route.

The kingdom's ability to simultaneously defend its own infrastructure, maintain the dinar peg that anchors Bahrain's monetary policy and extend fresh lines of credit to Manama is not unlimited.

Shi’ism and Bahrain

Iran's targeting of Bahrain is not solely a matter of geopolitics or energy strategy. The island's population is roughly 60% Shia Muslim, ruled by the Sunni Al Khalifa royal family. Tehran has historically portrayed itself as the protector of Bahraini Shia, and made territorial claims to the archipelago as recently as the 1970s when the British were leaving. Bahrainis have a historical connection to ancient Iran, with the Ajam community continuing to speak Persian.  

The 2011 uprising, suppressed with Saudi and UAE military assistance under the Gulf Cooperation Council's Peninsula Shield Force, remains a live memory for both the government and a population that Amnesty International has repeatedly described as subject to systematic political repression. Iran has long sought to use that to its advantage. Riyadh made sure the causeway between the two countries was also built so it could send reinforcements to quell any Shi’ite uprisings as well as the economic growth that ensued in recent years.

Iranian strategists understand that sustained economic pain, including rising unemployment, energy shortages, and fiscal austerity, could reignite internal grievances. Bahrain's government, acutely aware of this dynamic, has been careful to maintain fuel and food subsidies even as it cuts elsewhere. But with the refinery offline and export revenues in freefall, the fiscal space to sustain that calculus is shrinking by the day.

The force majeure moment

The invocation of force majeure by Bapco is, in legal terms, a routine exercise of contractual protection under extraordinary circumstances. In economic terms, it is a signal of how thoroughly the Iran conflict has penetrated the productive core of a Persian Gulf state that, unlike its neighbours, had little fiscal cushion to absorb the blow.

For now, Bapco insists that domestic fuel supplies remain secure, supported by contingency plans drawn up before the attack. International export commitments are suspended indefinitely. The $7.3bn modernisation that was supposed to define Bahrain's economic trajectory for the next generation, turning heavier crude into premium refined products for Asian and European markets, sits idle, its most advanced unit damaged by a drone that likely cost a few hundred dollars to manufacture.

Whether Bahrain can weather this storm depends on three things: how quickly the refinery can be assessed and partially restored, whether Saudi and Gulf Cooperation Council (GCC) financial support arrives before sovereign borrowing costs become prohibitive, and how long Iran keeps the Hormuz closed, making insurers not willing to take the risk.

Iran may not be seeking to collapse Bahrain outright. It does not need to. Keeping the pressure on a vulnerable, debt-laden neighbour that hosts American forces and normalised relations with Israel serves Tehran's purposes just as well. Murmurs from high profile Arab figures in recent days suggest the cost of hosting the US is now in question, and could lead to a broader shift when this immediate phase of war ends.