The Nuclear Club and a Managed Collapse

Initially I wanted to write about three topics in this blog, the current Conflict, The IMF Bailout program, and Dollar Bypass. But I felt I won’t be able to explain three things like a Lehman in a single blog, it would be so big, that you might lose interest in middle, and leave without reading the whole blog just like last time. I wouldn’t blame you, these social media app have literally killed our attention span, we need a new content in every 15 second. That’s why I tried to kept the conversation focused on two topics only.

There are so many developments happening in the world right now at same time, it is genuinely next to impossible to keep pace with everything. Human Decision-making is getting harder day by day. I still remember sometime back in 2024–25, my Manager asked me, whether we should go long on oil contract, he didn’t had any thesis, mine was that, the world is so desperate for sustenance right now specially country who are solely dependent on oil, they won’t fight the market for higher price, lot of Infra projects were stalling in Saudi Arabia likes of NEOM Project, because they were running out of oil money and allocating a decent part of their budget to different areas like Sports and welfare.

They have tried to fight the market by cutting supplies, but at a point when the world and many developing countries are moving toward multiple option for their energy requirement, it’s not a good idea to play hardball. One can see the recent news of UAE getting out of OPEC framework proves this thesis, that they independently want to pump the oil without any supply restriction. People who were in control of Setting the price are now price taker.

So, unless a full-blown war doesn’t break out in Middle east, I was not expecting oil to go beyond, $70–75 in long term also. So, we didn’t buy those contracts. And Close to 15 months after that, the war started and OIL is above $100. My manager hit me with a smug face recently, (that’s very childish of him).

That’s the problem with war; it doesn’t follow models. It doesn’t arrive gradually, and it doesn’t respect probabilities. It rewrites them. And when it does, the impact is never limited to the countries involved. It spreads through balance sheets, supply chains, currencies and especially for economies dependent on external resources (in today case its emerging markets across Asia which is getting impacted)

Conflicts are rarely just about sovereignty. There’s always a financial layer beneath them — shadow economies, strategic leverage, and hidden programs, and this is exactly what US uncovers sometimes back with IRAN, with their out of control URANIUM Enrichment, a Hidden Nuclear Program which led to full blown attack on IRAN followed by many failed Ceasefire and negotiation attempts, which eventually led to IRAN losing the control of a world most crucial checkpoint the Strait of HORMUZ.

I will not bore you with much number here, which I usually do with my client’s, it will revolve more around the issues which led to these events.

The question of why the U.S. opposes Iran’s nuclear program isn’t technical — it’s strategic

Before 1979, Iran was a U.S ally. That relationship was built after the 1953 CIA-backed coup (Operation Ajax), which removed Prime Minister Mohammad Mossadegh after he nationalized oil, and reinstated Shah Mohammad Reza Pahlavi. The Shah aligned with the West but ruled autocratically, creating deep resentment inside Iran.

But everything flipped in 1979. The Shah fled, and Ayatollah Khomeini took power, and Iran transformed into an anti-Western Islamic Republic. The breaking point came when the U.S. admitted the Shah for medical treatment — triggering the embassy hostage crisis, where over 50 Americans were held for 444 days. The U.S. responded with sanctions and asset freezes, and from that moment, Iran became a structural adversary. From that point, the U.S. opposed Iran across conflicts — from the Iran-Iraq War to proxy wars in Syria and Yemen, and even the killing of General Qasem Soleimani in 2020.

It’s not that U.S does not want IRAN oil to flow in the market, or want to have a piece of toll at HORMUZ, the real issue is IRAN intention with URANIUM Enrichment, a nuclear capability. The U.S. does not fear a bomb alone — it fears what follows. A nuclear Iran would likely trigger a regional chain reaction, pushing countries like Saudi Arabia, UAE, and Egypt to pursue nuclear weapons, permanently altering the Middle East balance.

Surprisingly, Iran’s nuclear foundation was built with the U.S help in the first place. Under Eisenhower’s 1953 “Atoms for Peace” program, the U.S. transferred nuclear technology to Iran. By 1967, Iran had a U.S supplied research reactor using highly enriched uranium. Iran signed the NPT in 1968 and expanded its nuclear ambitions under the Shah. After 1979, the program was initially halted, but revived during the Iran-Iraq War when chemical attacks and global isolation reshaped Iran’s security thinking. By the late 1980s and 1990s, Iran rebuilt its program covertly, acquiring centrifuge designs from Abdul Qadeer Khan (a Pakistan Nuclear Physicist) network and developing enrichment capabilities outside international oversight.

In 2002, undeclared nuclear sites were exposed, triggering global scrutiny. This led to the 2015 JCPOA deal, where Iran agreed to limit enrichment and allow inspections. However, in 2018, the U.S withdrew, arguing the deal was temporary and didn’t address missiles or long-term risks. Iran then resumed enrichment, reaching 60% — far beyond civilian needs for energy requirements but short of weapons-grade.

So where is the Gap? Iran is not actively building a bomb — but it is deliberately staying one step away from it.

That’s the real conflict. The U.S. now demands zero enrichment. Iran sees enrichment as a sovereign right. Add to that a complete trust breakdown — Iran believes any deal can be reversed politically — and negotiations collapse. This is not a negotiation failure. It’s a structural conflict. Iran is essentially saying: “Remove pressure first, then we talk.” The U.S. is saying: “Concede first, then we ease pressure.” That’s a classic deadlock.

Now comes a question: If nuclear risk is the concern, why were US allies, like Pakistan and Israel were tolerated?

The Answer is simple because non-proliferation was never the real rule. Pakistan’s nuclear program progressed under sanctions, but those sanctions were repeatedly lifted whenever Pakistan became strategically useful, whether during the Soviet-Afghan war or post-9/11. Once Pakistan crossed the nuclear threshold in 1998, rollback became impractical. If you and Anyone thinks that US and Pakistan are allies, you really need to understand Geopolitics from Scratch.

Israel followed a different path — developing nuclear capability outside the NPT framework, eventually accepted under a policy of “strategic ambiguity” after U.S. pressure faded in 1969.

The pattern is consistent: Nuclear enforcement depends not on rules, but on utility. Countries that align with U.S. interests are tolerated. Those that challenge the system are constrained.

And this logic doesn’t stop at weapons.

With tensions soaring in the Middle East, many are wondering why the US is turning to Pakistan as a mediator. Surely there are stronger, more influential options available. Pakistan holds very few cards in this game. After all, this is a country that knocks on the IMF’s door every few months just to service debts owed to previous lenders like Saudi Arabia, UAE, and China.

The Coming tone may sound like a rant, and it is, but it’s worth asking: How does a country this economically fragile become a chosen intermediary in such a high-stakes region?

The same system that decides which countries can cross the nuclear threshold also decides which countries are allowed to stay financially alive when their economies collapse, and Pakistan is a Perfect example of it.

Countries like Iran are isolated because they operate outside the system. Countries like Pakistan are repeatedly bailed out because they remain inside it, despite economic failure. But how does these countries get themselves into neck deep Debts, that no amount of increase in interest Rate could save them. Can’t the government reduce the subsidies or stop the freebies, or how does the Government sponsor freebies, can the increase in corporate tax rate or personal tax help them, and even after so many efforts what’s the need for Debt rollover, aren’t the previous lender is checking how these countries are spending the money which is given to them. Let’s understand all of these things one by one:

Let’s get one thing straight before going further. The IMF is not your typical lender. It doesn’t care about upside. It steps in when no one else wants to. By the time IMF money shows up, the problem is already visible the only question left now is how bad it can get, and how far it can spread.

At its core, the problem is brutally simple. A country has income, and it has obligations. The Ratio Between These two things is what economist calls Debt to GDP. When obligations start growing faster than income you don’t fix it overnight you postpone it, you borrow more, refinance old debt, and hope growth catches up.

And most of the time, it doesn’t. They Survive the Crisis by rolling it over and borrowing more, and Stays Credible enough that new Lenders don’t gets sniff of underlying problem.

Then comes the interest rate trap. As existing bonds reach their maturity dates, countries must roll over their debt, issuing new bonds at new rates. When Global Interest rates rises, the cost of refinancing explodes. A country which owes in dollars has to pay far more interest in dollar terms, while their own domestic currency revenue stays flat, this led to the solvency to flattens. The cycle continues until investors either refuse to buy more debt or demand higher interest, which can result in default or crisis.

Countries typically slide into crisis through combination of fiscal, monetary and External imbalance:

The biggest spending of any government is usually on Defence and the Subsides or the Freebies that they provide and the obvious solution to the above problem looks like, if not Defence at least stop the subsidies, but these things are considered more as political survival tool and not Economic Revival framework.

Pakistan Spends close to 2.5% of GDP on Education, but more is spent on subsidizing electricity prices each year, the debt from doing so keeps compounding. Here it creates a Circular Debt for them, think of it as a chain of many I O U and Nobody pays. (I would Recommend you here to Read a bit about Karachi Electric History).

The Problem with Subsidies and Freebies is that, they were never introduced for a Welfare revival tool, it was always a political survival tool, like who gives more free money or rations, INDIA is a Perfect example of it. (C’mon Don’t deny it). When any country tries to do the damage control, the political party usually gets voted out, because the cause and effect of Reform usually lead to Higher Inflation and majority of the income will go to paying bills than feeding families.

Most countries don’t collapse because of one bad decision, it’s a chain of Bad decision which comes one after another, the spending pattern generate short term political comfort and not long-term productivity goal, it comes at an expense of Piled up Deficit, weakened currency, compounding Debt and eventually run out of Reserve currency to pay for Import bills. That’s when institutions like IMF comes into the picture. This pattern is actually very similar across the countries which have gone absolutely bonkers in Fiscal management, not just Pakistan, this includes Argentina, and the recent one is SRILANKA.

Repeatedly financing large welfare program, printing money and external borrowing for Large low yielding infrastructure projects. Things like these temporary boost consumption but without long term productivity growth. In Sri Lanka Tourism Collapsed During Covid, Tax Cuts reduced revenue, foreign reserve dried up, and the country could no longer pay for fuel and imports. This all lead to Inflation exploded, shortages hit daily life and in the end Sri Lanka eventually Defaulted.

Enough with the narrative, let’s look at the number how bad the situation is, and is there any solution.

The Debt Rollover analogy which I explained above is not bad, as the Debt is not like from a normal bank, in fact every government in the world does this, including the US, Germany, and Japan. It is not inherently problematic. It Becomes a problem only when the new bond is issued at higher interest rate, a country credibility goes down, the foreign denominated bond costs more in local currency terms etc, etc., People don’t want to buy your Bond and many things.

The IMF projects Pakistan will have external financing needs of $20 billion in FY2025–26 rising to $23.7 billion in FY2026–27 not because it is borrowing massively new amounts, but because old debt keeps maturing and must be refinanced, and interest on existing debt must be paid, simultaneously. Pakistan’s entire foreign exchange reserves as of early 2026 are around $15 billion. It needs to find nearly $24 billion every single year just to service existing debt.

Pakistan is currently in the middle of its 25th IMF program, a 37-month Extended Fund Facility (EFF) worth $7 billion. The Conflicts with its neighbour India, makes the picture worse, it was estimated the 4-day standoff was costing both the nation approx. $1 Billion an hour combined, and to make matter worse, Pakistan hiked its defence spending by 20% this year taking it to $9 Billion.

The Country Recently paid $1.43 billion on its sovereign Eurobond while also facing a $3.5 billion loan repayment to the UAE. To offset this, the Current government secured fresh $3 billion deposits from Saudi Arabia and raised $500 million from the Eurobond market.

It is Pakistan usual habit to Rely on its neighbour countries for Bailout, starting with China and then followed up by their So-Called Allies Saudi Arabia and UAE, which then later Pakistan pay the psychological debt by sending their own soldier to fight in other people war.

It may Look like from the outside that the common issue here is Debt Management, well now you are partly right, but it has more to do with what you do with that Debt- they all were borrowing without building enough productive capacity to repay the borrowing later.

Though I initially said it’s a Rant but I’ll tell you why it’s a rant:

It is not that Only Distressed Economies have alone taken IMF debt, in fact there are many countries who have taken IMF loans, Including CHINA and INDIA also, which are some of the fastest growing economies in the last 10 years. But here’s the major difference:

China used the Debt for manufacturing Capacity, Export Infrastructure, creating industrial supply chain, meanwhile India after the 1991 Balance of Payment Crisis when Gold was Pledged as collateral, for a $2.2Billion Loan, though IMF money was paid back ahead of schedule, but that left a major National humiliation that still sits close to Indian economy history.

I urged you to read about that a bit in detail, the situation was very bad, in 1991 we had a forex reserve of $1.2billion, six months after that, it was at $600million, we could cover Imports for a maximum of 2 weeks, external debt was $70billion, India was days away from sovereign default.

Ships carrying goods to India were being held at ports because letters of credit from Indian banks were no longer being honoured internationally. This is not a metaphor, it literally happened. International CRA downgraded India, we were locked out of Global Capital market.

Then, India Approached IMF and Secured a $2.2billion in tranches. This led to a Sharp Currency devaluation (close to 19%), Fiscal Tightening (Subsidy Cuts, and reduction in Government expenditure). But things eventually flipped. The Reforms did it wonders:

Forex Reserve by 1994 was at $20billion which could cover for more than 7 months, GDP Growth was +7%, Inflation was at a falling of 10% and Fiscal Deficit was declining. India repaid the IMF loan ahead of schedule and got its gold back.

My idea about telling you this is that, India had a intention from the beginning to get out of this mess. The Key Difference between India/ China and other Distressed economies like, Pakistan, Argentina, etc. even after securing an IMF debts are mostly, can be seen in Fiscal Discipline, Tax base, Foreign Reserve, Policy Credibility and most Important nature of Lending.

When the condition gets so bad sometimes, and IMF is not Like the usual Bank of an average person, at least they can have some scrutiny over these countries, or is the IMF model is Flawed?

Well, they have the Scrutiny and the Model is Flawed also.

When an institution like IMF or World Bank lends, it only tracks measures like Fiscal Targets, Foreign Exchange Reserve, Monetary policy and the ground reforms, it tracks the Government data, all of which are Produced by (Wait for it………………) the Government Itself. If Pakistan’s finance ministry reports that defence got Rs 2.4 trillion and education got Rs 800 billion, the IMF just takes notes it. It doesn’t independently verify whether those funds actually reached the intended use.

But why IMF Lacks transparency, firstly, the founding article prohibits it from interfering in the political affairs of member state, secondly US holds 17% in IMF Voting rights and has veto power over major decisions( US anyway needs a Place to have a watch on what’s happening in Middle east, China and INDIA, and needs to Set up a Base after leaving from Afghanistan), and most important of all, due to the nature of Rollover debt, IMF always gets paid, Pakistan hasn’t defaulted on IMF payments ever.

What we think we know about military strength or economic resilience whether it’s Iran, the broader Middle East, Pakistan or INDIA, it is often just surface-level data. If a country has a wide revenue base, they can somehow withstand the conflict and stress for some time, like a contribution from both Formal and shadow economy, but countries who are solely dependent on a single source of Revenue and the regional conflicts which chokes them economically, can’t carry on for long. This is Exactly what’s happening with most middle easter countries.

The more we dig into these topics, the more they stopped feeling separate. The US does not oppose Iran’s nuclear program because of non-proliferation principles. It opposes it because a nuclear Iran cannot be threatened, sanctioned into submission, while IMF bailouts look like a story about debt and economics, but underneath both are really battles over control and dependence.

The IMF does not lend to Pakistan, Argentina, or Sri Lanka because it believes in their economic reform. It lends because letting them collapse would cost more geopolitically than keeping them on life support. Pakistan without IMF money becomes a Pitbull without a leash. An unpredictable Pakistan near Afghanistan, Iran, with 160 nuclear warheads, is not a problem the US wants, so the Cheque gets signed.