By Devmini Bandara
In an increasingly interconnected world, wars rarely remain confined to the battlefield. Conflicts between major powers reverberate through global markets, supply chains, and political institutions, often impacting countries far removed from the immediate theatre of war. For the Global South, and particularly for small, import-dependent economies like Sri Lanka, the consequences of geopolitical conflicts such as a potential US–Iran confrontation could be profound. The issue is not simply the war itself, but the channels through which its shocks are transmitted to vulnerable economies.
Across much of the Global South, economic resilience remains fragile. Developing countries are only partially prepared to withstand large external shocks, primarily because their economies lack the buffers required to absorb sudden disruptions. These shocks typically arrive through rising energy prices, escalating shipping costs, imported inflation, currency pressures, and tightening global financial conditions. For economies already constrained by high debt and limited fiscal space, such disturbances can quickly destabilise fragile recoveries.
Recent international assessments reinforce this concern. The United Nations Trade and Development (UNCTAD) Report 2025 emphasises that inadequate economic resilience remains a “binding constraint” for many developing countries. According to the report, three structural weaknesses continue to undermine the capacity of Global South economies to manage crises: insufficient financial resources, limited access to technology, and gaps in institutional capacity. These structural issues reduce governments’ ability to respond effectively to external shocks.
Compounding these vulnerabilities is the growing impact of climate change. Developing countries are increasingly trapped in a climate-debt cycle, where extreme weather events create economic damage that must be financed through borrowing, thereby worsening fiscal pressures. The frequency of extreme climate events has more than doubled in recent decades, rising from an annual average of around 127 events in the early 1990s to approximately 271 between 2020 and 2024. Countries such as Pakistan, the Philippines, and Sri Lanka have all experienced devastating floods and climate-related disasters that strain already fragile economic systems.
Against this backdrop, a major geopolitical shock, such as a conflict in the Gulf would hit many Global South economies at a moment when they have limited room to respond. Their readiness is uneven, and import-dependent economies are particularly exposed.
Yet the Global South also possesses an important source of resilience: collective political identity. Many developing countries share common historical experiences of colonialism, economic marginalisation, and struggles for development. These shared experiences often translate into cooperation on the international stage. In an increasingly volatile global order, countries across the Global South frequently align around demands for more equitable global governance and resistance to hegemonic power structures.
Small States in a World of Great Power Conflict
For small states like Sri Lanka, geopolitical conflicts among major powers present a unique dilemma. While these states may have little influence over the conflict itself, they often bear significant economic consequences. Sri Lanka is a classic example of what international relations scholars describe as a “peripheral” import-dependent economy. In such economies, external shocks, particularly those affecting energy markets, shipping routes, and labour migration can rapidly cascade into domestic crises.
A US–Iran conflict would illustrate this dynamic clearly. Sri Lanka did not choose the conflict, yet its economy could be pulled into its fallout. Fuel costs could surge, shipping routes could become more expensive, tourism flows might decline, and remittance income could become uncertain.
Perhaps the most immediate economic impact of a Gulf conflict would come through energy markets. West Asia holds roughly half of the world’s oil reserves and about 40 percent of its natural gas. The Strait of Hormuz, one of the world’s most critical maritime chokepoints, carries roughly a third of global seaborne oil and a quarter of liquefied natural gas shipments.
Any disruption to this route could trigger sharp price spikes in global energy markets. While some large economies might absorb these shocks relatively easily, developing countries would face far more severe consequences.
Sri Lanka’s dependence on West Asian crude oil illustrates this vulnerability. The Sapugaskanda refinery still relies heavily on crude imports from the region. If shipping through the Strait of Hormuz were disrupted, refinery operations could face serious risks once existing reserves are depleted. Although authorities claim the country maintains fuel stocks, the greater problem lies in the cost of replenishment. The next shipment would likely be far more expensive, pushing up fuel prices domestically. Rising fuel costs would then cascade through the economy, increasing transportation expenses, electricity generation costs, and food distribution prices. Even modest increases in global oil prices can reignite inflation in economies like Sri Lanka’s. After a difficult period of economic crisis, renewed inflationary pressure could once again erode household purchasing power and undermine economic recovery.
The economic consequences would extend far beyond energy markets. Gulf economies employ millions of workers from South and Southeast Asia, particularly from India, Pakistan, Bangladesh, Nepal, the Philippines, Indonesia as well as Sri Lanka. Remittances from these workers form a major source of household income and foreign exchange, accounting for about one-quarter of GDP in Nepal and around 8–9% of the GDP in Pakistan and the Philippines. Sri Lanka is similarly dependent on Gulf labour markets, with more than 1.5 million Sri Lankans working in the region, making it the country’s largest external labour destination. Remittances are a key pillar of economic stability, bringing in over US$6 billion annually, reportedly exceeding US$8 billion in 2025. A prolonged conflict in the Gulf could disrupt labour markets across the region. Hiring freezes, reduced economic activity, or large-scale evacuations could significantly reduce remittance inflows. Such developments would not only hurt migrant families but could also weaken Sri Lanka’s currency and strain its foreign exchange reserves.
Further, several Gulf countries are major buyers of Sri Lankan low-grown tea. If financial instability or banking disruptions in the region reduce demand, thousands of small tea producers could face income losses. Shipping disruptions could also affect exports to Western markets. If vessels are forced to reroute around the Cape of Good Hope to avoid conflict zones, transit times to Europe and North America could increase by 10 to 14 days. Higher freight costs would reduce the competitiveness of Sri Lanka’s apparel and rubber exports in already challenging global markets.
Tourism could also be affected. Major Gulf aviation hubs such as Dubai, Doha, and Abu Dhabi serve as transit points for more than 60 percent of Sri Lanka’s long-haul tourists from Europe and North America. Airspace closures or flight disruptions would directly affect visitor arrivals, undermining one of the country’s key engines of economic recovery.
International Law: A Myth?
Such conflicts also highlight deeper weaknesses in the global security system. The United Nations Charter prohibits the threat or use of force against another state’s territorial integrity or political independence except in instances of collective self-defense Under Article 51 of the UN charter, or with security council authorization Under Chapter VII of the Charter. This security guarantee is what primarily attracted smaller states to be signatories to the UN charter especially amidst the proliferation of nuclear weapons. But when powerful states act unilaterally or selectively apply international norms, the credibility of this system erodes. Smaller states are then left more exposed to both political pressure and the economic consequences of wars they did not initiate. This reality reflects sovereign exceptionalism in global politics where major powers possess the strategic freedom to act unilaterally and absorb the economic consequences of their decisions. Smaller states who are heavily import dependant, however, must endure the spillover effects. As a result, neutrality for many developing countries is less a strategic choice and more a survival posture shaped by economic dependence and geopolitical constraints.
The Changing Nature of Warfare
Beyond economics, modern conflicts also highlight shifts in military technology and strategy. According to realist theory in international relations, the global system lacks a central authority capable of guaranteeing security. As a result, states must rely on self-help to ensure survival.
This dynamic encourages both internal balancing of domestic military capabilities and external balancing of alliances. Increasingly, internal balancing is taking the form of technological diversification. The US-Iran confrontation reflects broader transformations in warfare. Modern conflicts now rely heavily on artificial intelligence-driven targeting systems, cyber warfare capabilities, low-cost precision drones, and sophisticated information operations. Technology companies, including major firms in Silicon Valley, are also becoming central actors in modern warfare by providing communication infrastructure, data systems, and artificial intelligence tools used in military operations.
These developments contribute to a classic security dilemma. When one state introduces new technologies, others interpret them as threats and accelerate their own military innovations. The result is a rapidly intensifying technological arms race. Future military advantage may no longer depend solely on expensive high-end platforms such as fighter jets or bombers. Instead, the emphasis is shifting toward diversified technological ecosystems combining drones, artificial intelligence, cyber capabilities, and information warfare.
Ultimately, the implications of a Gulf conflict extend far beyond West Asia. For the Global South, the central challenge lies not in the conflict itself but in the vulnerability of economies to external shocks. For small states like Sri Lanka, the lesson is clear: resilience is no longer optional. In an era of geopolitical volatility, economic preparedness, diversified energy systems, and stronger institutions will determine whether countries can withstand the next global shock, or once again be overwhelmed by it.
Devmini Bandara is a Research Associate at Factum. Her research focuses on AI, Platform and Data Governance, Technology Law and Digital Rights. She is a LLB graduate from the General Sir John Kotelawala Defense University and is currently working on her post-graduate diploma in International Relations at the Bandaranyake Center for International Relations.
Factum is an Asia-Pacific-focused think tank on International Relations, Tech Cooperation, and Strategic Communications accessible via www.factum.lk.
The views expressed here are the author’s own and do not necessarily reflect the organization’s.
