The interim agreement between the United States and Iran brought cautious relief after nearly four months of war, but questions remain about what comes next. The accord, signed in mid-June 2026, extended the cessation of hostilities for 60 days while the two sides negotiate a more durable settlement and envisages the restoration of commercial passage through the Strait of Hormuz. Markets responded quickly as oil prices fell with growing expectations of the gradual return of disrupted Gulf supplies. Yet with the United States and Iran resuming strikes around the Strait of Hormuz and U.S. President Donald Trump declaring that the ceasefire is over, it is clear that a return to regional stability will be a process rather than a settled outcome.
While South Asia may not have been the principal theatre of the war, its economies were deeply exposed to the consequences. Countries in the region faced higher energy and transport costs, inflation, currency pressure, weaker external balances, and slower growth. Dependence on Gulf energy, remittances, migrant labor, and vulnerable maritime routes also emerged as a key strategic vulnerability. For South Asia, this pause offers a moment to assess how conflicts beyond the region can transmit powerful economic shocks and expose structural vulnerabilities in an increasingly multipolar world in which rivalry among major powers is more frequently expressed through geoeconomic confrontation and armed conflict.
How a Distant War Hit South Asia at Home
The war reached South Asia principally through energy markets. Before the conflict, approximately 20 million barrels of crude oil and petroleum products passed through the Strait of Hormuz each day, equivalent to approximately one-quarter of global seaborne oil trade, with the great majority destined for Asian markets. Following the outbreak of hostilities, the average number of ships passing through the Strait fell from more than 80 per day to about five. The disruption translated into higher energy and transport costs, inflationary pressures, currency depreciation, weaker external balances, and slower growth across South Asia. The region was especially exposed because of its heavy reliance on imported energy and the relatively limited fiscal and external buffers available to several countries, including Bangladesh and Pakistan. More broadly, the war revealed how dependence on Gulf energy, remittances, migrant labor markets, and vulnerable maritime routes have become sources of strategic economic vulnerability for South Asia.
The war also produced sharp disruptions across oil, gas, and fertilizer markets. Brent crude rose from around USD $70 per barrel before the conflict to a peak of USD $118 in late March, an increase of nearly 70 percent, before falling back to about USD $73 at the end of June as Gulf shipments resumed. At the peak, oil-importing South Asian countries therefore faced a global benchmark price almost USD $50 higher for every barrel of crude. As the world’s third-largest oil importer and consumer, India ships in about 90 percent of its oil, making its economy one of the most exposed to the war-related disruptions.
The disruption to liquefied natural gas was potentially more serious. Qatari and UAE exports passing through the Strait account for almost one-fifth of global LNG trade, while Bangladesh, India, and Pakistan obtained almost two-thirds of their LNG supplies through this route in 2025, exposing electricity generation and gas-intensive industries to supply shortages and higher prices.
The war revealed how dependence on Gulf energy, remittances, migrant labor markets, and vulnerable maritime routes have become sources of strategic economic vulnerability for South Asia.
Fertilizer markets tightened at the same time because the Gulf normally supplies roughly one-third of globally-traded urea. Middle Eastern urea export prices rose by about 40 percent. India, which purchases more than 40 percent of its urea and phosphatic fertilizers from the Middle East, subsequently paid nearly twice as much as it had two months earlier in a major import tender, while most of Bangladesh’s major fertilizer factories were shut, compounding pressure on domestic supplies.
These costs produced the combination of higher inflation alongside weaker activity. The World Bank projected South Asian growth to slow from 7 percent in 2025 to 6.3 percent in 2026. Governments faced pressure to cushion consumers through subsidies, price controls, and tax cuts even as rising import bills strained fiscal and external balances. Central banks faced a similar dilemma: Tighter policy could contain inflation and currency pressures at the expense of growth, while accommodating the shock risked worsening both. India’s rupee reached a record low of around 97 against the dollar, with reserves falling to USD $671.6 billion by late April. Similarly, Pakistan entered the crisis with reserves of only USD $8.2 billion and 1.9 months of import cover, with its weekly petroleum import bill surging by 167 percent.
Bangladesh faced a distinctive combination of fiscal strain and market disorder. The newly elected government initially sought to avoid increases in domestic oil and gas prices and kept retail prices unchanged, requiring it to absorb subsidies of more than Tk 50 billion, or approximately USD $400 million, in March alone. Expectations that such prices could not be sustained, however, encouraged hoarding. In April, the government eventually raised prices of petrol, diesel, kerosene, and octane and imposed rationing, implementing seven-hour working days, and restricting mall operating hours in an attempt to conserve energy. Yet preexisting vulnerabilities such as political transition, persistent inflation, and constrained reserves had left little room to absorb the shock.
The Gulf connection also extended beyond energy. Remittances from Middle Eastern economies were equivalent to 5.6 percent of Pakistan’s GDP, followed by 2.9 percent for Sri Lanka, 2.8 percent for Bangladesh, and 1.6 percent for India. These figures highlight the significant exposure of these countries, as Gulf employment and remittance earnings make a substantial contribution to household incomes for millions of poor families, and foreign exchange receipts and overall external sector stability of these countries. Fortunately, the war did not lead to a major collapse in remittances, but any sustained weakening of construction, services, and labor demand in Gulf economies could affect migrant employment and reduce an important source of foreign exchange for South Asian countries.
Diplomatic Agency and Strategic Bargaining
The conflict also exposed the considerable variation in diplomatic agency across South Asia. Despite severe domestic economic constraints, Pakistan assumed a prominent intermediary role in the negotiations. The preliminary agreement was designated the Islamabad Memorandum of Understanding, with Pakistan serving formally as mediator and witness. Its proximity to Iran, established security relationship with the United States, and close political and economic ties with the Gulf states placed it in an unusual position to engage the principal parties. This enhanced diplomatic role could reinforce Pakistan’s strategic relevance and deepen its relationships with key partners. Its longer-term value, however, will depend on whether greater diplomatic visibility can be converted into tangible economic gains, including concessional energy arrangements, Gulf investment commitments, stronger U.S. engagement, and wider policy space in discussions with international financial institutions on balance-of-payments support and debt-rollover assurances.
India confronted a more complex diplomatic calculation. Its larger economy, substantially greater foreign exchange reserves, and more diversified international partnerships provided stronger capacity to withstand the economic shock, but also raised the cost of taking an unambiguous position. New Delhi had to balance its strategic partnership with the United States and close defense relationship with Israel against its longstanding ties with Iran, its extensive economic interests in the Gulf, and the security of millions of Indian citizens working across the region. This balancing act was made harder by strains in the U.S.-India relationship that predated the war, including frictions over trade, Pakistan, Russia, and strategic autonomy.
India’s caution also reflected operational and diplomatic concerns. The sinking of the Iranian warship IRIS Dena near Sri Lanka after it had taken part in naval exercises hosted by India, and wider risks facing ships and sailors transiting Middle Eastern waters, complicated New Delhi’s public positioning. At a BRICS meeting hosted by India, divisions over the Iran war prevented a joint statement. India declined to align itself unequivocally with Tehran, while supporting the restoration of maritime traffic and expressing concern about sanctions. Its position therefore centered on de-escalation and continuity of commercial flows without jeopardizing any of its major strategic relationships.
This caution reflected the constraints created by India’s broad and sometimes competing portfolio of partnerships. Pakistan’s more concentrated set of strategic relationships created an opening for mediation, whereas India’s wider international engagement required a more carefully calibrated response. Bangladesh, Sri Lanka, and most other South Asian countries possessed much less capacity to shape the course of the conflict. Their efforts focused mainly on diplomatic appeals, the protection and evacuation of citizens, and domestic measures to manage fuel and foreign-exchange pressures, including rationing and restrictions on new labor permits for the Middle East.
The contrast illustrates a wider point: Exposure to geopolitical shocks is determined not only by dependence on external markets, energy supplies, and remittances, but also by a country’s capacity to influence the decisions that affect those flows and to defend its economic interests when disruption occurs.
Beyond De-escalation: Building Resilience
The emerging agreement may ease immediate pressures, but it does not resolve the vulnerabilities that allowed a distant conflict to unsettle the region so quickly. Energy security must be the starting point, and diversification should mean more than purchasing the same fuel from additional suppliers after a crisis begins. South Asian countries must explore a broader mix of energy sources, including renewables with battery storage, flexible LNG procurement, expanded strategic stocks, and cross-border electricity trade along with flexible purchasing arrangements, adequate storage, and infrastructure capable of switching between suppliers and fuels.
The crisis also reframed renewables as long-term sovereign security assets immune to maritime blockades. While fossil fuel costs surged, solar paired with batteries became desirable, falling below fossil-fuel prices across Asia. Pakistan’s solar boom provided a USD $6.3 billion hedge in terms of savings generated. In India, the shock from the war has reinforced the 500GW non-fossil fuel capacity target, which would prioritize storage and regional trade as essential national security infrastructure.
The case for strategic reserves has also been made quite effectively. International Energy Agency (IEA) member countries released 400 million barrels from strategic stocks to moderate the fuel disruption, but most South Asian economies possess no comparable buffer. Bangladesh’s bipartisan parliamentary committee has recommended a 90-day strategic petroleum reserve, with a view to mitigating a similar sudden shock in future.
Preparedness must also extend beyond energy. The UN Conference on Trade and Development has called for early-warning systems linking developments in shipping, energy, food, and finance. South Asian governments should establish similar monitoring mechanisms, conduct regular stress tests, and prepare contingency plans for ports, fuel distribution, fertilizer supplies, and essential imports. Efficient customs procedures, digital port systems, and greater transparency over stocks would help reduce delays and panic-driven procurement.
Macroeconomic resilience is equally important because commodity shocks become more damaging when fiscal space, reserves, and social protection systems are already weak. Stronger domestic revenue mobilization, credible arrangements for managing commodity-price volatility, and targeted support can reduce the pressure on budgets and external balances. Generalized fuel subsidies are expensive and often confer greater benefits on higher-income consumers; temporary and targeted assistance offers a more sustainable means of protecting vulnerable households while preserving room for other essential spending.
Ultimately, while South Asia cannot insulate itself completely from geopolitical disruption, it can manage its interdependence more deliberately, build credible buffers, and reduce the economic damage when external shocks occur.
Migrant workers and remittance flows should also form part of national contingency planning, rather than purely labor-market considerations. Governments need stronger systems for worker protection, evacuation, and consular support, alongside efforts to diversify destination markets and assist returning migrants with reintegration. The World Bank similarly highlights diversified energy supplies, stronger fiscal buffers, and more effective safety nets for migrant workers and their families as important elements of resilience.
Regional cooperation can reinforce these national measures without requiring elaborate new institutions by building on existing frameworks such as the SAARC Framework Agreement for Energy Cooperation and the India-Bhutan and India-Nepal electricity trade arrangement. Regular technical coordination among energy ministries, central banks, port authorities, and customs agencies could improve information-sharing and emergency preparedness, while greater cross-border electricity trade could reduce dependence on imported fuels. South Asia can also learn from other regions. IEA members, for example, coordinate emergency oil stockholding; the European Union uses gas-storage targets and monitoring to strengthen winter preparedness; and energy cooperation in the Greater Mekong Subregion since the early 1990s is estimated to have generated savings amounting to about 19 percent of total energy costs, or about USD $200 billion.
Ultimately, while South Asia cannot insulate itself completely from geopolitical disruption, it can manage its interdependence more deliberately, build credible buffers, and reduce the economic damage when external shocks occur.
Views expressed are the author’s own and do not necessarily reflect the positions of South Asian Voices, the Stimson Center, or our supporters.
Also Read: Risk and Resilience: India’s Energy Security in a Volatile Middle East
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Image 1: Wikimedia Commons
Image 2: Narendra Modi on X
