Iran lashed out in all directions after the United States and Israel launched a bombing campaign across its territory on the weekend, killing Iran’s supreme leader Ali Khamenei and numerous senior figures in the government. Iranian missiles and drones targeted several U.S. allies in the region, landing on both military targets and civilian sites like airports.

Other infrastructure has been hit in crossfire, apparently including an Amazon data centre in the United Arab Emirates. It caught fire on Sunday after being hit by unidentified “objects.”

The threat to human life and the destruction of property from the conflict carry far-reaching economic consequences as well, including for Canadian businesses and investors with interests in the region.

Hazard in the shipping lanes: The danger posed by Iran’s counterattacks quickly disrupted supply chains that depend on key routes through the Gulf region. Some shipping companies have ordered their vessels there to find safety and stay put. Others, such as Maersk, have re-routed freighters that would have used the Suez Canal shortcut between the Indian Ocean and the Mediterranean to take the long way around Africa, deeming the canal too risky.

Getting to the Suez Canal means sailing close to Yemen, where Iran-backed Houthi militias have previously targeted cargo ships and have declared they’ll do so again after the U.S. and Israeli attacks.

The longer route adds time—a week or more—and costs, and longer voyages keep cargo ships occupied, sucking up a share of global transport capacity.

When the Houthis last attacked cargo ships, the effect was modest but real, not nearly as bad as the supply-chain backups caused by the COVID-19 pandemic but still affecting inventories, shipping times and bottom lines.

Oil soars: Global oil prices promptly shot up, but whether this will last is unclear. The spike is largely because of a “fear premium,” Scotiabank’s modelling and forecasting director Olivier Gervais wrote in an analysis note.

Iran ordered ships not to pass through the Strait of Hormuz, the maritime chokepoint between the Persian Gulf and the world’s oceans. This cut off ports in Iraq, Kuwait, Bahrain, Qatar and the United Arab Emirates. Ordinarily about 20 million barrels of oil and petroleum products a day pass through the strait—roughly five times Alberta’s daily production.

Elsewhere, Saudi Arabia suspended some operations at a major refinery on Monday, after it was struck by debris from an attempted drone strike. China, incidentally, is the primary buyer of Iran’s own heavily sanctioned oil.

Yet bond-rating service Morningstar DBRS said in a note that it’s not yet changing its forecasting assumptions about commodity prices: “We believe there is too much uncertainty to determine if crude oil prices will remain high, and it is largely dependent on how the conflict plays out,” wrote Ravikanth Rai, associate managing director of energy and natural resources ratings.

Because Canada is an oil exporter, higher prices are broadly good for its economy, Gervais wrote for Scotiabank. A $10-a-barrel increase works out to a 0.5-percentage-point boost to gross domestic product, according to Scotiabank’s economic models—if the increase is sustained for two years.

After the immediate uncertainty passes, lasting changes in production in the Middle East will determine where prices settle, Gervais wrote.

Caution for banks: The conflict may delay or disrupt plans for some of Canada’s largest banks, which have been eyeing expansion into the Middle East since late last year. In December, RBC CEO David McKay said he was “excited” about the opportunities in the region, among other new markets. Last month, the bank was reportedly seeking licences to expand its capital markets and wealth management operations in the region, with plans to open offices in cities like Abu Dhabi and Riyadh.

On last week’s first-quarter earnings call, McKay said Canada’s next wave of growth—spanning defence, energy, Arctic and critical minerals projects—will require “a significant amount of domestic and foreign capital.” By expanding in markets such as the Middle East, he said, RBC aims to help “intermediate” that capital into the country.

When asked whether the turmoil in the region could delay its expansion plans or prompt a reassessment of its exposure, RBC declined to comment. TD also declined to comment on the situation.

CIBC, Scotiabank, and BMO did not respond by deadline to questions about whether recent developments are affecting their trading activity and capital flows. 

National Bank also announced the opening of its first office in Dubai in January. On Monday, spokesperson Merick Seguin told The Logic the bank is monitoring developments in the region, but had no changes to announce.

It’s too early to tell whether the conflict will affect Big Six balance sheets, said Shalabh Garg, an analyst at Veritas Investment Research. Heightened tensions could increase trading volatility, Garg noted, potentially boosting the banks’ trading revenue. But Canada and the U.S. have limited direct exposure to Iran and are not dependent on Iranian oil supply, he said.

“I don’t see much of an impact on credit,” he said in an emailed statement.

If tensions persist and oil prices remain elevated, however, inflationary pressures could re-emerge, reopening the door to an interest rate hike. Such a move would be “beneficial for the banks’ margins,” but bad for loan growth potential, Garg said.

Pensions on watch: The Middle East isn’t currently a major market for Canada’s top pension funds. CPP Investments, the largest of the Maple 8, told The Logic its holdings in the region are worth about $1.5 billion. That’s about 0.18 per cent of its $781-billion portfolio, said spokesperson Frank Switzer.  

Caisse de dépôt et placement du Québec has deeper ties to the market through its partnership with Dubai-based port operations giant DP World, and spokesperson Conrad Harrington said the fund is monitoring events closely. DP World has suspended operations at its port in Dubai, he said, “particularly for the safety of its employees.” 

Conflict in the region may temper plans to ramp up the pensions’ investments there. Prime Minister Mark Carney had been positioning the funds as key players in strengthening Canada’s economic ties to the Middle East. In November, Ottawa announced that retirement fund managers controlling a combined $2 trillion in assets were set to visit the region this year “to develop new opportunities for long-term investment and deepen partnerships in sectors such as energy, infrastructure, and AI.” 

Risk assessment: Canada’s largest life insurers have also expanded into the region over the past year, with Manulife and Sun Life both opening offices in Dubai to serve wealthy clients across the Middle East.

Sun Life’s recently opened office in Dubai remains secure, said Alessandra Nigro, a spokesperson for the company, in an emailed statement to The Logic. She added that, as with any period of “heightened global uncertainty”, Sun Life regularly reviews its risk assumptions while “continuing to monitor conditions closely.”

Manulife did not provide a spokesperson to comment on the record.

Update: This story was updated to include information on insurance companies with operations in the Middle East.