Cairo – Decypha: Since the formation of the Gulf Cooperation Council (GCC) in 1981, it seemed that the six Gulf countries, comprising the bloc, had formed an unbreakable unit, joined by a common religion, ethnicity, language and, more importantly, a common view of what is good for their oil-driven economies. However, on June 5th 2017, onlookers were shaken by the news that GCC members Saudi Arabia, UAE and Bahrain are leading a growing coalition of non-GCC countries in imposing political, social and economic sanctions on another GCC member; Qatar. The sanctions were imposed based on accusation of Qatar’s direct funding and harboring terrorist groups, as well as close economic and political ties with Iran, which the U.S. President Donald Trump explicitly accused of supporting terrorists during his May visit to Saudi Arabia.
These sanctions prevent any land, sea or air vessel originating from, or passing through, Qatar from entering the sovereign borders of the sanctioning countries. The sanctioning nations also ordered their politicians to return home within 48 hours while expats were strongly advised to leave Qatar within two weeks. “I don’t think that the region has been in such turmoil so close to home; and I think everyone is speculating how far these steps will go forward," said Mohammed Ali Yasin, Chief Executive of Abu Dhabi's NBAD Securities to Reuters on June 5th.
So far, a break in the GCC bloc is looking more likely than a change in Qatar’s national foreign policies, which Qatari officials see as an infringement upon their sovereignty. “We have a big question mark about the future of the GCC after and during this crisis,” said Qatar’s Foreign Minister Mohammed bin Abdulrahman al Thani to Al Jazeera June 8. “We didn’t hear anything from the secretary general of the GCC since the escalation started. There is an unknown future from our side [regarding] the GCC, and how this organization can operate effectively.” Ultimately, a break in the GCC will have significant and far-reaching economic and political repercussions that will reshape MENA’s economic and political landscapes and balance of power.
Historically Stressful Relations
The first public fallout with Qatar was in the 1990s after it created Al Jazeera news network, which was accused of deliberately seeking to destabilize the region and serve Qatar’s agenda. In 2011, Qatar was accused of cooperating with Iran in funding and harboring terrorist organizations. In 2014, Saudi Arabia, UAE, and Bahrain withdrew their ambassadors for eight months from Qatar as a form of escalation.
The 2017 fallout seems to be the next natural step to force Qatar to abandon its policies of supporting such groups. It came days after Trump signed a $110 billion weapons deal, late May, with Saudi’s King Salman. The triggering event for the crisis was when Qatar News Agency (QNA) published, late May, comments by Qatar’s king, Sheikh Tamim bin Hamad Al Thani, defending Iran against Trump’s claims that it is stoking “the fires of sectarian conflict and terror,” and calling for sanctions “until the Iranian regime is willing to be a partner for peace,” said Trump. The rest of the attending Arab nations seemingly agreed with the notion. “[Iran is] the tip of the spear of terrorism,” said Salman at the time.
Despite the Qatari government claiming that QNA was hacked and that Tamim’s criticisms are “fake news,” the fallout seemed inevitable. Ultimately, official statements from Saudi Arabia, Egypt and Bahrain made it clear that diplomatic ties are severed to protect their respective national security as well as the security of the region as a whole. So far, Qatar’s officials have denounced the allegations. “The measures are unjustified and are based on claims and allegations that have no basis in fact,” the statement read on Al Jazeera network.
First Aftermath of Economic Damages
A highlight of Qatar’s economy is that it has the second highest gross domestic product (GDP) per capita in the world at $129,700 as of 2016. It also has a $335 billion sovereign fund that is already invested in foreign assets. Furthermore, Qatar is the world’s biggest exporter of liquid natural gas (LNG), accounting for 13% of global supply. The sanctions, however, will unlikely hinder these exports since Qatar has always relied on sea freights to export LNG. “I don’t think there will be any impact on us [...] We get gas directly from Qatar by sea,” said R.K. Garg, Head of Finance in Indian-based Petronet, to Reuters on June 5th.
However, the immediate negative implication of the sanctions was that future contracts on the Qatari riyal fell to an 18-year low, indicating that the value of the riyal has gone down despite maintaining the same peg to the dollar as before the sanctions. Meanwhile, the Qatari stock exchange dropped 7% from 9,928 points on June 5th. It rose again since June 6th from 8965 points to 9,237 on June 8th.
One of the sanctions' biggest casualties is Qatar's airline industry. It was instrumental in attracting about three million tourists and transit visitors a year, and growing the sector to account for 4.3% of the total GDP and 8.8% of non-oil GDP in 2015, according to government data. The losses incurred by airlines will be the result of grounding 76 daily trips to UAE, Bahrain and Saudi Arabia, of which 52 are operated by the national airline, Qatar Airways, according to data from scheduling firm OAG as reported by Bloomberg in June. Some 30% of Qatar Airways revenue could be affected based on estimations of aviation analysts at Frost & Sullivan, as reported by Bloomberg. These disruptions will impact inter-GCC travelers the most. “Rules stopping citizens of the UAE, Saudi Arabia and Bahrain from even transiting in Qatar could cause significant disruptions,” said Paul Sullivan, a Middle East expert at Georgetown University talking to Bloomberg June 5th.
The sanctions will also result in higher commodity and goods prices as the Qatari government attempts to find alternative sea freight routes to compensate for the closure of all its land borders, imposed by the UAE and Saudi Arabia. Maintaining supply levels will be another challenge because these land borders see $309 million worth of goods, mostly dairy products, move into Qatar, out of a total of $1.05 billion worth of food imports as of 2015. “Qatar is economically and socially most vulnerable from food and other non-energy imports,” said Sullivan. “If there is a true blockade, this could be a big problem for them.”
Qatar’s financing costs are also set to increase after a downgrade by Moody’s and Standard & Poor’s of Qatar’s sovereign credit rating by one grade to Aa3 and AA-, respectively. The outlook from both agencies is negative, indicating more downgrades. This will negatively reflect on Qatar’s $200 billion infrastructure works for the 2022 FIFA World Cup. It will also increase the cost of construction as well as other sectors that require a lot of raw materials and energy.
Meanwhile, other GCC members who are attempting to attract FDI to diversify their economies in the face of cheap oil will also suffer from sanctioning Qatar. “It brings the geopolitical risks into perspective,” said Tarek Fadlallah, Chief Executive officer of Nomura Asset Management Middle East, in an interview with Bloomberg Television in June. Accordingly, the longer this conflict continues, the less attractive GCC will become for FDI. “Asset managers will not differentiate between Qatar and the rest of the GCC, and international managers will take their hands off any credit from the GCC,” said an international banker based in the Gulf to Reuters who wished to remain anonymous because of political sensitivities. “If Qatar is seen as a terror financing or compliance issue, then asset managers will be cautious."
GCC sans Qatar?
For Qatar, its close ties with Iran can’t be easily abandoned. Standing testament to that is the fact that both countries have overcome historic religious rivalry (Qatar a Sunni majority and Iran a shi'a majority) to become allies. This is because, the majority of the oil and natural gas fields that Qatar relies on traverse the borders of both countries, including the North Field/South Pars field, the biggest natural gas reserve in the world.
On the other hand, Saudi Arabia has had a long-standing rivalry with Iran from political and religious perspectives, taking opposing sides on everything from oil prices to which political factions in war-stricken Syria and Yemen should be supported. “We are a primary target for the Iranian regime,” said Prince Mohammed bin Salman, the second in line for the crown, in The Financial Times last May.
Adding more uncertainty is the U.S.’s unclear stance. Rex Tillerson, the U.S. Secretary of State, expressed worry over the sanctions. “We are hopeful that the parties can resolve this through dialogue, and we encourage that,” he said during his visit to New Zealand at the time, offering Washington’s help if needed. This stance was expected given that Qatar is home to the biggest U.S. military base in the region (Al-Udeid Air Base). It hosts 10,000 U.S. and coalition members as well as the U.S. army regional Central Command. “The Gulf States are among our best partners in the region. The Gulf Cooperation Council’s (GCC) willingness to provide basing and access for U.S. forces is crucial to our ability to operate militarily,” said Gen. Joseph L. Votel, Commander of the U.S. Central Command, to Congress in his annual Posture Statement on June 6th. Yet, a few hours later, Trump showed support for the sanctions on Qatar by tweeting: “[Saudi Arabia and its allies] said they would take a hard line on funding extremism, and all reference was pointing to Qatar. Perhaps this will be the beginning of the end to the horror of terrorism!”
With mounting pressures, Qatar has the option to quit the GCC, and ally itself with Iran, Turkey and Russia, all of whom have strong economies and share Qatar’s political views. “The scale of punishment from Saudi Arabia […] could backfire, forcing Qatar into a closer relationship with Iran,” said Roula Khalaf is Deputy Editor of the Financial Times in a FT post on June 7th.
The initial signs of diffusing this crisis are not promising. “If recent history is any judge, Sheikh Tamim will protest and then fold, hoping another tactical retreat will do the trick,” said Khalaf. “[However,] the ferocity of the Saudi attack this time and the support of Mr Trump suggest that it will not.” Yet, some are still hopeful that the mediation attempts by King Sheikh Sabah IV Ahmad Al-Jaber Al-Sabah of Kuwait, in the wake of the sanctions, will help diffuse the problem just like he did in 2014. "Everyone is hoping that there will be intervention by wise people and things will cool down," said Yasin, of NBAD Securities.
Tamer Mahfouz
