QATAR-GCC ROW: AN ANALYSIS

The latest escalations between Qatar and its neighboring GCC states viz. Saudi Arabia, UAE, and Bahrain featured severing of diplomatic ties including issuing of a deadline for repatriation of all Qatari nationals and diplomats, as well as a ‘blockade’ of airspace and all major ports as well as closure of the land boundary with Saudi Arabia, for all Qatari air and maritime traffic transiting from the three GCC countries. 

The relations have taken a deep downward spiral after the alleged hacking of the official Qatari state news channel following which multiple anti- GCC and pro-Iran statements quoting the Emir of Qatar, Tamim bin Hamad Al Thani, came to the fore. While the legitimacy of the hacking claim continues to be debated, the three GCC states along with Egypt, Yemen’s Saudi-backed Hadi government and Libya’s anti-Islamist House of Representative (HoR) have accused Qatar of supporting militant groups like the Muslim Brotherhood, Hamas, al-Qaida affiliate- Jabhat fath al- sham operating in Syria and the al-Qaida in Arabian Peninsula (AQAP) in Yemen and also for its ties with Iran, using it as a pretext for severing diplomatic relations. 

While the aforementioned claim of support for militant groups along with Qatar’s Iran policy has been ongoing for some time, the latest escalations highlight much deeper geopolitico-economic agendas of the GCC states. Attempts to force Qatar to realign its foreign policy with that of Riyadh through indirect economic coercion and creating geopolitical ‘shocks’ to influence the oil prices are seen as some of the larger goals of the current diplomatic maneuvering. By factoring these variables the report thus aims to examine the possible implications of the incident and presents a forecast of its impact on the business continuity in the region. 

On June 5, Saudi Arabia, UAE, Bahrain, Egypt, Saudi-backed Hadi government in Yemen and the anti-Islamist House of Representatives (HoR) which enjoys backing from the Emirates withdrew diplomatic relations with Qatar for the latter's alleged support for multiple militant and separatist groups in their respective countries. In this vein, with the exception of Yemen and Libya, the three GCC states and Egypt have announced the closure of air and sea ports for Qatari flights and vessels and closure of the Saudi-Qatar land boundary and at the same time ordered repatriation of Qatari diplomats and nationals in the next two and 14 days respectively. Similarly, all major Saudi carriers have canceled flights to and from Qatar with effect from June 5 onwards, with some Emirati airlines announcing cancellations with effect from morning hours of June 6.

Qatar and the GCC countries have been at odds with each other over multiple foreign policy issues, the former's support for the political arm of the Muslim Brotherhood, which is accused of undertaking subversive activities in Egypt and the region is one of them. Secondly, Qatar supports a more conciliatory approach between the GCC block and Iran and has supported diplomatic talks over brazen rhetorics. On the other hand, the interest of the GCC block involving Saudi Arabia, UAE and Qatar concur on issues concerning military engagement in Yemen and in Syria as well as the role of US in the region. 

Though diplomatic flare-ups around the aforementioned contentious issues have been experienced previously between Qatar on one side and Saudi Arabia and UAE on the other, as recorded in 2014 wherein the two sides suspended diplomatic ties and the standoff lasted for roughly eight months. However, the recent incident is highly notable given that the escalation has not been stipulated to a diplomatic stand off alone but also involves economic restrictions. 

Given Doha’s major dependence on maritime trade for export of Liquified Natural Gas (LNG), petrochemicals as well other commodities as well as its geographic location deeper in the Persian Gulf, these restrictions, if continued for an extended period of time are likely to potentially hamper the trade and thus the economy in the short to mid-term. 

Though it remains unlikely, if the restrictions are enforced for a prolonged period of time, it may trigger inflation for basic and essential commodities like foodstuff, as Qatar majorly relies on imports for these goods and also create obstacles for exports. In light of these, Qatar will have to rely on Kuwait, Iraq, Oman or Iran for export or imports into the country, as these countries are outside the purview of the current restrictions and which continue to maintain diplomatic relations with both the groups. This too will have an impact on the prices of the commodities as a result of the disruptions. It also significantly elevates the risks of doing business, potentially hampering its credit ratings which may discourage investments in the country.

TIMING OF THE ESCALATIONS

Though issues concerning alleged Qatari support for militant groups like Muslim Brotherhood, Hamas, al-Qaida and its affiliates operating in the region has been pervasive for a while, the recent measure indicates of a more concerted and premeditated effort aimed at tackling the issue. The timing of the diplomatic rift is crucial at this point on time for two reasons:

Given that Qatar will host the Football World Cup 2022, has resulted in the undertaking of multiple major construction projects that are in different stages of development. This has led to a surge in Qatari imports of critical material for the projects through road, air and ports, which makes the best use of the existing routes that traverse through the Saudi, Bahraini and Emirati ports and airspace. A blockade of such a nature will potentially disrupt the cargo transit if it continues for a prolonged period and may hamper the set schedules. This, in turn, may pressurize the Qatari administrations to formulate and implement contingency plans and routes to facilitate the passage of goods and services which may compromise the set timelines.

More notably, the escalations started almost immediately following the conclusion of the visit of US President Donald Trump to Saudi Arabia on May 20-21 and which witnessed further strengthening of the partnership between Riyadh and Washington, as was witnessed by multiple big ticket defense and economic deals signed between the two. This, coupled with the stated ‘inwards looking’ US foreign policy highlights at least partial, tacit support for the move as long as the US interests in the region are not hampered. This view is further bolstered by the lack of any credible statements by the US authorities aimed at resolving the issue or preventing escalation. Finally, the underlying anti-Iran agenda of the initiative is in line with the existing narrative of Washington, which continues to prefer an aggressive stance towards Tehran. 

IMPLICATIONS

IMPACT ON OVERALL INTER-REGIONAL TRADE

The latest ‘blockade’ is likely to hamper the inter-regional trade between Qatar and the GCC states. The UAE and Saudi Arabia are Qatar’s largest trading partners within the GCC, comprising roughly 4 billion USD (6.7 percent) and 896 million USD (1.15 percent) respectively as of 2015 as per the World Bank. In addition to this, a sizable portion of the air and maritime traffic, including import and export items to and from countries outside GCC is transferred through these neighboring states and is also likely to be affected. Thus part of the Qatari logistical setup that is contingent on these states for the upcoming weeks is likely to be affected until contingency plans are put in place.

Secondly, preliminary reports indicate that Saudi and Emirati banks are holding off dealing with Qatari banks putting pressure on the Qatari riyal as it fell in the spot market to 3.6470 against the dollar. Though Qatar's vast foreign exchange reserves are likely to keep the currency afloat, for the time being, any long-term escalation is likely to influence Doha’s positions in the debt market.

IMPACT ON GAS PRICES

Qatar can continue to access the international waters around the Strait of Hormuz, without trespassing into the Bahraini, Saudi and Emirati territorial waters thus limiting disruptions to direct Qatari exports outside the GCC. However, any escalations of political tensions may affect the global LNG prices as Qatar continues to be one of the major players in the market. This in the short to mid-term may provide an opportunity for US shale gas which has been vying to establish a strong foothold in the global gas market thus becoming another factor for the US suspected tacit agreement to the latest Saudi initiative.  

IMPACT ON OIL PRICES

Though Qatar’s share in the global oil market is minuscule as compared to Saudi Arabia and UAE, it continues to be one of the smallest contributors within the OPEC. That said, political tension in the geopolitically sensitive region are likely to be part of Riyadh’s larger strategy to boost the depressed oil prices. However, given the glut in the oil market, the move as of now has failed to cause any significant changes in the oil prices. But, if the confrontation continues or witnesses an escalation which results in disruptions to production, the oil prices may witness a surge over the coming weeks. 

IMPACT ON BUSINESS OPERATIONS IN QATAR

Given the series of suspension of flights by the Emirati and Saudi carriers to Qatar along with the airspace, the blockade may require rerouting of Qatari flights via Iran, Iraq, and Turkey. Another alternative being, layover to a neutral country which is expected to significantly increase the cost and travel time, especially for travelers choosing Qatari carriers. In this case international carriers of neutral countries or the Emirati and Saudi carriers set to gain at the expense of their Qatari counterparts at least for the duration of the crisis given the larger flexibility and relatively less probability for disruptions offered by them as compared to Qatari airlines. A similar case is likely to be witnessed with Qatari flagged vessels involved in the maritime trade in the Gulf region over the coming weeks. 

IMPACT ON OPERATIONS IN YEMEN

Along with the de facto embargo, Saudi Arabia also announced its dismissal of Qatar from operations in Yemen. Militarily, Qatar fielded roughly 1,000 troops on the ground for the operations and was one involved in training and funding of the UN-backed pro-Hadi militias fighting against the Houthi rebels. Furthermore, unconfirmed reports also indicated that Qatar had managed to establish back-channel negotiations with some elements of the Houthi militias operating in the country which may be severed with the withdrawal of the Qatari forces from the country. However, at the operational level, any significant shortfall as a result of the situation remains less likely for the time being. 

THE IRAN FACTOR

Doha’s alleged inclination towards Tehran, which has been considered as detrimental to regional security was one of the factors mentioned by the three GCC states for the suspensions of the diplomatic ties. However, a closer look at the economic engagements highlight the fact that UAE’s involvement was significantly greater with Iran throughout the sanctions period and beyond, with reports indicating that Iran constituted 16.5 percent of the UAE’s re-export market in 2014 and World Bank reports indicating that Iran comprised roughly 4.48% of total Emirati exports in the same period. Moreover, despite the accusations, UAE continues to maintain diplomatic relations with Iran while criticizing the Iran-Qatar ties, a fact which has been consistently underplayed in the media campaign launched by the three GCC states against Qatar. 

Secondly, given the diplomatic crisis as well as the operational difficulties faced by the Qatari traders, there remains a possibility of multiple stop-gap arrangements between Iran and Qatar facilitating movement of cargo through Iranian territorial waters and a more mutually beneficial trade and transit agreement between the two in the time to come. 

At the political level, the diplomatic and economic restrictions by Saudi Arabia are likely to be part of its larger strategy to force Qatar to realign its supposedly independent foreign policy with that of Riyadh. Parallely, it also serves as a warning to other smaller regional states like Kuwait and Oman of the possible consequences of differing significantly from the Saudi stance as well as possible consequences of engagements with Iran. 

Secondly, the latest diplomatic crisis is likely to facilitate a thaw in the Qatar-Iran bilateral relations over the coming months, given that Iran presents the next best alternative to working around the restrictions by the neighboring GCC states in case of a recurrence of a similar crisis. Additionally, given the convergence of economic interests between Iran and Qatar, including coordination on development and management of the large North Pars gas field as well as issues involving better cooperation on overland and maritime freight movement mechanisms are some of the areas that may bring Doha and Tehran closer. 

QFinally, given that the charges framed against Qatar remain pervasive and a temporary diplomatic breakthrough may be achieved, the probability of the return of these ‘sanctions’ remains very likely. This is expected to hamper investors confidence in the long run if similar incidents continue to recur. Moreover, given that an incident of such a magnitude was unprecedented, it is certainly expected to temporarily hamper local businesses reliant on inter-regional trade routes. In order to safeguard businesses against disruptions caused by similar incidences, Qatar as well as other businesses that engage Qatari firms are expected to the formulation and implement new and more efficient operations, managerial and logistic practices which are better geared to withstand similar contingencies in the future.

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