A ‘Qatar crisis’ or Signs of the GCC’s decline?

With recent developments on the Arabian Peninsula, it is becoming increasingly clear that the nature of political, economic and security challenges in the Gulf region has significantly changed since the foundation of the Gulf Cooperation Council in 1981. Initially, Saudi Arabia and the smaller states of the UAE, Bahrain, Kuwait, Oman, and Qatar sealed the alliance as a reaction to regional security threats (such as the Soviet incursions of Afghanistan and the Iraq-Iran war), aiming to secure political stability of their oil-rich monarchies but also to foster economic and social integration that would ensure the region’s perpetual prosperity. However, the alliance once built and sustained on the basis of petroleum income now faces new threats at a time of sustained and stubbornly low oil prices. Is the Qatar crisis an indicator of the GCC’s decline?

Qatar’s role as the black sheep of the GCC is not new. Compared to the rest of the alliance, its divergent policies have been a long-standing issue for Saudi Arabia, Bahrain and UAE (whereas the states of Kuwait and Oman have been pursuing their typically neutral foreign policies). Nevertheless, the reason behind Qatar’s current isolation goes far beyond accusations of its ‘misguided’ policies in Libya and Syria. There is an underlying issue within the GCC that explains why Qatar’s Sheikh Tamim bin Hamad al-Thani’s pro-Iranian remarks in May 2017 sparked the sudden crisis that escalated beyond the usual quarrels within the Gulf and led to a land, sea and air blockade of Qatar imposed by the Gulf troika and Egypt on June 5, 2017.

In recent years, the Gulf economies have been burdened by lowered oil prices, resulting in significant blows to governmental revenues dependent on oil income. Since the rentier social contract that preserves stability in the GCC states is built on the subsidies that their citizens have become used to receiving from their governments, preserving fiscal stability becomes decisive for the future of the Gulf.

Saudi Arabia (currently undertaking its 2030 Vision economic reform programme, which seeks to diversify and transform the domestic economy beyond the petroleum industry) is not the only Gulf state to recognise the challenge. The reform of the private sector, diversification, reduction of government spending and job creation are some of the key goals that feature in the respective ‘Vision 2030s’ of every member of the GCC (with exception of Oman and its 2020/2040 agenda). However, the implementation of such ambitious plans takes time, and is not guaranteed to succeed. Instead, political issues undermine the GCC’s capability to tackle such problems, to achieve solid economic and social integration between its members and importantly, to face new economic and political realities.

 

Geopolitical changes in the Gulf

The recent decline of the US involvement in the Middle East has increased the security concerns of the Gulf states, especially that of Saudi Arabia. The small emirates of Kuwait, Oman, UAE and Qatar have pursued foreign policies that seek balancing the Kingdom within the alliance by maintaining cordial relations with Iran. With raised insecurity, the Saudi desire to maintain a grip over the GCC has become more aggressive as the Kingdom fears Iran’s encroachment upon its neighbourhood.

The fear is further exacerbated by another geopolitical change in the region: the growing importance of China as an economic partner. The ‘New Silk Road’, or China’s Belt and Road Initiative (BRI) has been the centrepiece of Chinese foreign policy since 2014, and aims to develop an extensive infrastructure network that would establish a connection with the Mediterranean in order to boost economic cooperation in Asia. This strategy would elevate China’s role not only in the global economy, but also in global affairs as it would continue to assert its role as a sponsor of regional development.

While the BRI does not directly involve the Gulf region, the BRI’s geographical positioning can have a significant impact on the Arabian Peninsula. One part of the project consists of a sea route (the ‘Road’) which is designed to connect the South China Sea and Europe via the Indian Ocean, Gulf of Aden and Suez Canal, thus reaching the African continent. The land route (the ‘Belt’) circumvents the Arabian Peninsula from the other side, and directly involves Tehran.

Having the potential to influence Iran’s economic build-up, China’s development of the BRI is of concern to Riyadh for several reasons. First, a stronger Iran raises the threat perception in Riyadh, particularly with regard to the Kingdom’s Eastern Province, where the majority of the population is Shia. Saudi fears of Iranian involvement in political affairs also extends to Bahrain, with its Shia-majority population but Riyadh-friendly Sunni regime whose principal security guarantor is Saudi Arabia.

With raised uncertainty over the current state of the Saudi-US security pact, Saudi Arabia not only faces its own security concerns, but also a loss of credibility within the GCC in terms of protection from Iran in case of potential aggression. Considering the increase of insecurity on the Peninsula, the previously mentioned balancing policy of the small emirates of Oman, Kuwait and Qatar could transpire into stronger relations with Iran, thus eroding the Saudi-led alliance from within.

Saudi’s ruling family have stated their legitimacy is built on religion and the Saudi claim to the leadership of the Islamic world which can be problematic under such circumstances. Relations with Shiite Iran are extremely difficult, since Saudi Arabia accuses Iran of attempting to undermine and indeed subvert Saudi Arabia’s religious legitimacy through political and violent means throughout the region.

Secondly, China is a major economic partner for the Gulf, which could be threatened by the BRI and an economic shift towards Iran. China’s relations with the GCC emerged along with its increasing demand for energy and half of Chinese oil and gas imports now come from the GCC. China’s investments in the Gulf have been corresponding with this trend: numerous contracts in construction, joint ventures, and investing as much as 300 million USD in ports of Abu Dhabi.

Industrial and Commercial Bank of China Limited (ICBC) has also recently extended its operations to Saudi Arabia, opening a fifth ICBC branch in Riyadh with the other four located in Qatar, Emirates and Kuwait. Moreover, Saudi Arabia is the largest regional trade partner of China, which is of key importance for the success of its 2030 Vision. After losing opportunities on the Chinese market to Russia last year, the Saudis have increased their efforts to win over Chinese oil companies, which resulted in contracts of up to 65 billion USD upon King Salman’s visit of Beijing in March 2017.

 

A new economic axis?

The Kingdom’s intention to protect its economic interests is therefore apparent. However, the Qatar crisis has shed light onto a lack of agreement amongst the GCC states regarding the members’ future economic ambitions. What we currently see from Qatar’s isolation is an absence of common policies on energy cooperation with China and of the GCC’s response to the region’s changing economic realities and competition arising on such a basis. The Qatar crisis is thus a natural culmination of flawed political choices that are driving the region’s economic policies, emerging amongst the regional power changes and China’s BRI.

Qatar is currently the world’s biggest LNG exporter, and China’s leading natural gas supplier. Recently, Qatar announced its plan to increase LNG production which would re-affirm its leading role in the LNG market (which it was predicted to lose to Australia). The production increase was announced along with Qatar’s decision to remove a (self-imposed) ban on drilling in the North Field, the world’s biggest natural gas field it shares with Iran. As China’s BRI involves Tehran, Qatar’s increased economic cooperation with the Islamic Republic offered a significant source of income for both countries.

Iran had been seeking to boost its LNG market, which had been previously obstructed by technological and logistical problems. Since Iran’s South Pars gas field is located in the Persian Gulf (which it shares with Qatar), the only financially viable transportation method is via the sea route. Currently, Iran lacks sufficient capacity for liquefaction of its gas for tanker export, but international companies have already expressed interest in investing into Iran’s LNG technology. Consequently, Iran is likely to continue seeking Doha’s support in its ambitions.

Saudi Arabia, on the other hand, stands to lose out. First, it fears that with the BRI’s developments, Qatar’s success will set an example to the rest of the GCC emirates in pursuing better relations with Iran to the detriment of the Kingdom and intra-GCC economic cooperation. Second, losing the GCC emirates to Iran-China BRI trade deals would have a radical economic fallout for Saudi Arabia — currently scrambling for resources to tackle its own financial difficulties. It is therefore no coincidence that the Saudi-led blockade imposed on Qatar was sparked by Sheik al-Thani’s remarks endorsing Iran. The timing for Qatar's isolation suggests that the harsh response to Qatar’s divergent policies is not (only) about terrorism and foreign policy, although the US has affirmed its own concerns about Qatar’s links to some terrorist groups.

Instead, the timing suggests that it is a sign of Saudi insecurity over the future of the Gulf’s economy, and Saudi attempts to consolidate its power in the GCC as well as to warn GCC members from pursuing a similar path to Qatar’s. Third, while it is early to speculate over the post-war Syria, the economic reconstruction of the country will eventually require a great deal of investment, and Qatar has already expressed its own interests in doing so. A formation of a new Qatar-Iran-China ‘economic axis’ could thus extend to Syria, which would be a geopolitical disaster for Saudi Arabia.

 

The Qatar crisis backfires

Evidently, Qatar has been walking on a thin line between Iran and the GCC (or, more precisely, Saudi Arabia). However, the isolation of Qatar is not going to resolve the Gulf’s economic challenges. On the contrary, these actions damaged the GCC’s reliability as a predicable economic partner, and the fact that one GCC member learned of its blockade through the news and not through traditional diplomatic communication channels does not enhance the GCC’s image. In effect, apart from tarnishing Qatar’s ambitions in the region’s economy, the GCC has shattered its chances for credibility as a unified strong economic partner.

This is likely to influence the prospects of the Free Trade Agreement that has been discussed with China, and obstruct the flow of FDI that could help the Gulf states with the implementation of their national economic plans. Political quarrels and lack of policies that would prevent competition within the GCC over the Asian market thus stand in the way of diversification projects and planned economic transformation of the Gulf states and seriously put into question the drivers of economic policy in the Gulf.

 

Alexandra Gerasimcikova

OAG Analysis

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