“Cost Advantage Erodes”: Gulf States’ Rise as AI Data Center Hubs Falters Under Iran War Risks

AWS suffers permanent loss of Gulf data center records following Iranian attacks
Gulf states seek to become AI hubs on cost competitiveness and government support
Iran war erodes existing advantages, sharply increasing burdens on investors 

Some customer data stored at Amazon Web Services’ (AWS) Middle Eastern data centers has been permanently lost. Iran’s military attacks physically destroyed the data centers, rendering records stored exclusively at the local facilities without remote replicas irrecoverable. Markets expect the incident to deal a severe blow to the Gulf’s rapidly expanding AI infrastructure industry, which has leveraged inexpensive electricity and land alongside large-scale sovereign wealth fund investment. Given the immense concentration of assets at artificial intelligence (AI) data centers, analysts say escalating geopolitical risk is highly likely to diminish the Gulf’s investment appeal.

AWS Middle East Data Vanishes

On the 15th (local time), AWS announced in a notice that some customer data stored exclusively across its data centers in Bahrain and in one availability zone in the United Arab Emirates (UAE)—a cluster of data centers equipped with independent infrastructure—was irrecoverable. The facilities were damaged by drone attacks carried out by Iran’s Islamic Revolutionary Guard Corps (IRGC) in March and April, with firefighting water causing additional physical damage during efforts to extinguish the resulting fires. Local financial institutions and companies using AWS infrastructure also suffered a series of service disruptions. In the UAE, mobile and telephone banking services at several financial institutions—including Abu Dhabi Commercial Bank (ADCB), First Abu Dhabi Bank (FAB), Emirates NBD and Emirates Islamic—were temporarily suspended, while access failures were also reported across fintech platforms and corporate IT networks.

AWS activated its disaster-recovery plan immediately after the attacks and advised customers to transfer workloads to other regions, including the United States, Europe and Asia-Pacific, or restore their systems using remote backups. The Central Bank of the UAE, which had ordinarily imposed strict restrictions on the offshore storage of financial information, also granted temporary exemptions allowing some data to be transferred to overseas data centers to support financial institutions’ service-recovery efforts. However, data stored exclusively at the damaged facilities without remote replicas could not ultimately be recovered and was lost along with the physical servers. The Wall Street Journal (WSJ) reported that the incident is believed to be the first case in which a military attack physically destroyed customer data held by a global cloud provider, resulting in permanent data loss.

The Gulf’s AI Industry Strategy

Market observers say Iran’s attacks have dealt a direct blow to Gulf states that had been emerging as global data center hubs. Until the outbreak of the Iran war, Gulf states had rapidly absorbed global cloud and AI infrastructure investment demand by capitalizing on their cost competitiveness. According to global accounting firm PwC, industrial electricity costs in Saudi Arabia and the UAE stood at just $0.05–$0.06 per kilowatt-hour (kWh) last year. That was considerably below the $0.09–$0.15 charged in major U.S. markets. Industrial land in Saudi Arabia was also priced at approximately $10–$50 per square meter, substantially below the $150–$600 found in major data center hubs such as Northern Virginia. Moreover, because the Saudi and UAE governments can directly coordinate permitting procedures for large sites near power plants, they are better positioned to accelerate major projects than parts of the United States and Europe, where grid-connection and site-acquisition delays are common.

Vast sovereign wealth fund resources also underpinned the Gulf’s competitiveness. Saudi Arabia’s Public Investment Fund (PIF), the UAE’s Mubadala and the Abu Dhabi Investment Authority (ADIA) have made large-scale, long-term investments in data centers and AI computing infrastructure. Unlike other major markets, where private operators must secure tenants in advance before committing capital to facilities, the Gulf has developed a structure in which sovereign wealth fund financing absorbs a substantial share of the initial construction risk. Data-sovereignty regulations unique to the Gulf states have further stimulated demand for local data centers. The UAE, Saudi Arabia and Bahrain have generally required sensitive financial, government and telecommunications data to be stored and processed domestically, prompting global cloud providers to expand their local infrastructure.

Saudi Arabia Builds State-Led Ecosystem

Governments across the region have also actively sought to attract AI investment and cultivate domestic industries. Saudi Arabia’s data center development policy entered full swing in 2021. That year, the Saudi Ministry of Communications and Information Technology (MCIT) announced four digital infrastructure initiatives, including the development of “hyperscale data centers,” and set a target of expanding national data center capacity to 1.3 gigawatts (GW) by 2030 through approximately $18.1 billion in investment. Around the same time, the government introduced measures to encourage private investment, including electricity rates as low as $0.048 per kWh for data center operators and support for site acquisition, permitting and international telecommunications connections. Amid these efforts, Saudi Arabia’s data center capacity increased from approximately 148 megawatts (MW) in March 2024 to 440MW last year.

Crown Prince Mohammed bin Salman subsequently launched HUMAIN, a state-owned AI company wholly funded by the PIF, in May last year, consolidating adjacent industries—including data centers, cloud services, AI models and application services—under a single company. Shortly after its launch, HUMAIN agreed with U.S. semiconductor company Nvidia to build AI data centers with up to 500MW of capacity over the next five years and separately committed to investing more than $5 billion with AWS to establish an “AI Zone” in Saudi Arabia. The Saudi government’s current targets for HUMAIN are to secure 1.9GW of AI computing capacity by 2030 and 6GW by 2034.

Table 1. Saudi Arabia and UAE Strategies for Developing AI Data Centers

UAE Partners With the United States

The UAE’s large-scale AI data center policy took concrete shape last year through intergovernmental cooperation with the United States. During U.S. President Donald Trump’s visit to Abu Dhabi in May last year, the United States and the UAE signed the “US-UAE AI Acceleration Partnership” and unveiled plans to develop the 5GW “UAE-US AI Campus” in Abu Dhabi. The project is a vast campus designed to concentrate multiple AI computing facilities alongside power and telecommunications infrastructure, with UAE state-owned AI company G42 serving as the principal developer. In exchange for supplying advanced U.S.-made AI chips and computing infrastructure to the UAE, the U.S. government included provisions requiring the UAE to invest in, construct or finance data centers in the United States on a scale commensurate with the facilities it builds domestically.

On the 22nd of the same month, the 1GW “Stargate UAE” project was officially announced as the first flagship development within the UAE-US AI Campus. G42 is leading construction of Stargate UAE, while U.S. and Japanese technology companies—including OpenAI, Oracle, Nvidia, Cisco and SoftBank—are also participating. The UAE plans to build 200MW of the total 1GW capacity in the first phase and begin operations this year. Separately, G42 is securing an additional 200MW of data center capacity with U.S. software company Microsoft. The project is intended to expand computing capacity for AI and cloud services on Microsoft’s Azure cloud platform, with the two companies planning to bring the infrastructure online in stages before the end of this year.

Fallout From Geopolitical Risks

The Iran war has emerged as a potentially devastating variable for the Gulf’s previously fast-growing AI infrastructure market. The Gulf states’ data center construction-cost advantage rests on the assumption that infrastructure facilities can operate reliably over extended periods. Now that military attacks have demonstrably destroyed data centers, market anxiety over investment returns is inevitably intensifying. The exceptionally high asset concentration of AI data centers further compounds these concerns. According to the Swiss Re Institute, an economic and insurance research organization, buildings and underlying infrastructure alone at a large data center can cost as much as $20 billion per site. With tens or hundreds of thousands of graphics processing units (GPUs), substations, cooling equipment, fiber-optic networks and other costly systems concentrated at a single hub, the prolonged shutdown or destruction of just one facility can cause enormous asset losses and service disruptions.

Investors in future Gulf data center projects are expected to incorporate factors such as △exposure to missile and drone attacks △access to multiple power and telecommunications networks △the ability to distribute computing workloads and data across other countries and △the level of physical protection into their assessments of project viability. The Gulf’s existing cost competitiveness may be partially diluted in the process. Strengthening physical defenses would substantially increase initial construction costs, while duplicating computing resources and data in other countries to prepare for the paralysis of infrastructure in any one region would also entail considerable expense. Insurance could further increase the financial burden. Conventional property and business-interruption policies purchased by data centers typically exclude war-related damage, while securing separate war-risk insurance entails substantial additional costs. According to the Carnegie Endowment for International Peace, premiums for $100 million in war-risk coverage in the Gulf have surged to $5 million since the outbreak of the Iran war. That is approximately 19 times the prewar level.