How the Iran War Could Affect Hyperscalers’ Huge AI Plans in the Middle East

Tech companies have been funneling billions of dollars into AI infrastructure projects in the Middle East in recent years, attracted by cheap and readily available energy and land, along with support from local governments.

But Iran’s war spilling over into neighboring Middle East countries raises questions about the future of data center and digital infrastructure construction in the region, particularly if it turns into a protracted conflict, experts told CNBC.

Data centers have already been the target. Iran’s wave of retaliatory attacks hit AWS facilities in the United Arab Emirates and Bahrain, causing disruptions to banking, payments, business, and consumer services.

While the Iran war is unlikely to drive hyperscalers away from existing AI infrastructures in the region, it could impact future investment should hostilities drag on.

There could be a “shift in where the next wave of capacity will be built,” Patrick J. Murphy, CEO of Hilco Global’s geopolitical unit, told CNBC.

“If geopolitical risk continues to rise in the Gulf, companies can accelerate projects in places like northern Europe, India or Southeast Asia, where energy supplies, regulatory frameworks and security conditions are more predictable.”

The Middle East has quickly become a key hub for technology companies looking to build infrastructure to support the rise of AI.

A concerted effort by the region’s governments to attract international investment (and divest from China to appease the US administration) has borne fruit.

Oracle, NVIDIA and cisco They are all involved in OpenAI’s AI campus in the United Arab Emirates, called Stargate, which, in collaboration with Emirati firm G42, will span 10 square miles and include 5 gigawatts of capacity. Saudi company Humain is investing billions of dollars in developing AI infrastructure and microsoft said it would invest $15 billion in the United Arab Emirates by 2029.

But security considerations around facilities that power digital infrastructure in the region have come under scrutiny in the past week following the Iran attacks.

Those attacks indicate that data centers can now be “considered legitimate targets of attack in modern armed conflicts,” Aalok Mehta, think tank director at the Center for Strategic and International Studies. “This will significantly change the way enterprises think about data center security in the future.”

AI infrastructure companies are likely to make contingency plans due to the situation, he added. “Whether considering moving to less vulnerable regions or hardening current and future data centers with missile defense and anti-drone technology.”

There are still big attractions for companies looking to build AI infrastructure in the Middle East.

“The region remains attractive to companies in terms of capital from sovereign wealth funds, government participation, available energy and its role as a gateway to markets in the global south,” Tess deBlanc-Knowles, senior director at the Atlantic Council think tank, told CNBC.

Middle Eastern governments are also likely to rush to reassure American companies and encourage them to maintain their commitments in the region.

“The United Arab Emirates considers the development of AI to be essential for its future and is betting heavily on this technology,” Mehta said. “It is investing many billions of dollars to support the transition to AI and has also played a central role in facilitating many of the large AI infrastructure partnerships.”

Given the huge costs invested in facilities already operational, along with power contracts, land agreements and fiber connectivity, it is unlikely that AI hyperscalers will look to relocate built capacity.

“Data centers typically need to be located close to their customers to ensure low latency and reliable service,” Tancrede Fulop, senior equity analyst at Morningstar, told CNBC. “Therefore, relocating or closing facilities could result in breaches of service level agreements and reputational risks.”

But scenario planning around the Iran war and its impact on the broader Middle East region will weigh on investment committees and boards.

Instead of exiting the region, companies could take steps to “protect their investments,” slowing new capital deployments or pausing planned partnerships, deBlanc-Knowles said.

If the conflict persists or escalates, such coverage can become an “assessment of alternative regional centers to reduce exposure to sustained disruptions from a broader regional conflict,” he added.

The Iran war could cause digital infrastructure developer Pure Data Center Group, which has operational data centers in Riyadh and Abu Dhabi and is planning further expansion in the Middle East, to “slow down” in the region, Gary Wojtaszek, the company’s interim president and CEO, told CNBC.

Pointing to the energy and capital available in the Middle East, Wojtaszek said: “Until last week, I would have said, ‘Hey, this is amazing, right?’ And now it’s like, okay, well, maybe let’s slow down here.”

“But I do think that eventually the hostilities will calm down,” he said, adding that “there will be a lot more focus on development there” in the future.

Companies could initiate cost-benefit calculations to guide their future investment plans, Mehta said.

“They will ask questions like: How long could this war last? How much will new tightening measures cost? Are there viable alternative sites for data center construction? How much delay would moving to an alternative location cause?”

Google and microsoft declined to comment on how the Iran war was affecting its data center and AI infrastructure projects in the region. AWS, G42, Humain and OpenAI did not respond to a request for comment at the time of publication.