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Global Business Risks of the Saudi-Qatari Dispute

Exploring the regional, global, and local implications of the Qatar dispute.

After several months of rising tensions, including a cyberwar and claims of hacking, on June 5th, three Gulf Cooperation Council (GCC) states - Saudi Arabia, the United Arab Emrites (UAE), and Bahrain - along with Egypt, announced they were breaking off diplomatic relations with Qatar (also a member of the GCC). They also announced an economic blockade of the tiny, hydrocarbon-rich emirate, including the closure of Saudi’s land border with Qatar and the cutting of air and sea links. Qatar was also removed from the Islamic Military Alliance created in 2015, and its websites and media have been blocked. These measures come against a geopolitical backdrop wherein Saudi Arabia has made moves that appear an attempt to destabalize its main regional rival, Iran. Consequently, Dun & Bradstreet’s economists have downgraded our risk rating for Qatar by one quartile, indicating heightened risk for this region. The conflict might cause cash flow, payments, and supply chain risks that impact doing business globally.

1. Regional Implications for Cross-Border Business

  •  Supply chains will be restructured in the Persian Gulf, particularly those that are connected to oil and gas. Most VLCC category oil tankers take on crude from several countries (including Qatar) to make up a single load, but the transport ban means that Qatari oil cannot be loaded in this form. Qatari ships usually refuel in the UAE, but the ban also precludes this. This will all add costs to Qatari exports of oil and gas, and business leaders might notice incremental costs.
  •  In security terms, attempts to destabilize Iran could be counter-productive. Tehran’s reaction might be to increase its support for groups in Yemen, Iraq, and Syria, as well as Hezbollah in Lebanon and Hamas in the Palestinian territories. In addition, the significant Shi’a populations in Bahrain and Saudi Arabia could be the focus of destabilizing attempts by Tehran. A destabilization of Iran would mean greater security and business risks in the area.

2. Global Implications for Cross-Border Business

  • Volatility in the Middle East and North Africa usually increases oil prices significantly. However, oil markets have been particularly sanguine about the recent developments, recognizing that it is not in the interests of the boycotting countries to halt flows of oil or gas.
  • Nonetheless, the situation is liable to raise concerns for gas-importing countries, such as the United Kingdom (UK), over the vulnerability of supplies. This could result in long-term policy changes related to the energy mix in these countries, and to the diversification of gas supplies.

3.  Local Qatar Implications for Cross-Border Business:

  •  Qatar’s imports might see shortages as a result of the conflict. Some 40% of Qatar’s non-oil imports, much of which are perishable, arrive through the Saudi land border, while a large proportion of the remaining imports are trans-shipped through Jebel Ali in the UAE. With both routes blocked, Qatar could face shortages if the dispute persists. Crucially, this will impact heavily on Qatar’s construction industry, which faces strict deadlines to ensure the infrastructure for the 2022 soccer World Cup is completed on time.
  •  Supply chains impacted by Qatar will be stretched, lead times extended, and prices will inevitably rise, putting pressure on cash flows and payments performance.
  •  In addition, Qatar will need access to hard currency to pay for its imports, but with the riyal now under pressure, more of the country’s reserve assets will be directed to supporting the currency to maintain the dollar peg. Exchange bureaux are already running out of dollars.
  •  A weakened riyal will likely deter investment, and non-resident deposits (many from other Gulf countries) will likely be repatriated; around 45% of deposits are by non-residents. Thus, credit is likely to dry up and interest rates rise. The longer the dispute drags on, the more acute these consequences will become.

Uncertainties to Monitor

  • Will Saudi try to extend the ban to other countries and get private companies to support the boycott?
  • Will Iran boost support for groups outside its territory?
  • Will the situation force Qatar’s emir from power? If so, who will replace him?
  • How will Saudi’s policy affect the domestic legitimacy of its rulers?
  • How will supply chains be reoriented in the Persian Gulf?
  • To what extent will this affect Qatar’s supply of LNG?

What is the Qatar Dispute About? Context from Dun & Bradstreet’s Economists

The commercial implications of the current situation are far more serious than those borne from the previous ten-month spat between Qatar and Saudi Arabia (and its allies) that occured in 2014, in large part because the Trump administration is taking far stronger a line against Iran (which, policy-wise, seems to be a key driver of the tensions) than did the previous administration.

Importantly, however, the sanctions by the US do not include oil or gas (partly because the UAE is dependent on Qatari gas). Similarly, internet connections with the north of the Gulf, such as Bahrain and Kuwait, which go through Qatar, are not being affected either. Thus, sanctions remain limited at present, and in our view are unlikely to be broadened in the short term. Indeed, less than a week after all Qataris were asked to leave the sanctioning countries, the order was eased.

It is also important to note which countries have lined up with Saudi Arabia and which have not. The Sunni leaders in Bahrain needed to align with Saudi Arabia because they are dependent on Saudi oil and support to keep their (increasingly restive) majority Shi’a population in line. The UAE does not appreciate Qatar’s relationship with Tehran, as three islands in the Persian Gulf claimed by the UAE are currently under the control of Iran. Elsewhere, in Egypt the Sisi government is dependent on Saudi and UAE financial support for its foreign-exchange reserves.

Although the four original countries - Saudi Arabia, the UAE, Bahrain, and Egypt - were later joined by Yemen’s government-in-exile and the eastern government in Libya (both rely on Saudi financial and military support), and by the Maldives, there appears to be a significant division within the ranks of the Sunni Arab countries. Morocco, Algeria, Tunisia in the Maghreb, and Jordan in the Mashreq, have not joined in the action. Indeed, two other GCC states, Kuwait and Oman, have conspicuously not taken sides in the dispute. Furthermore, non-Arab Muslim states, such as Malaysia and Pakistan, have notably stayed on the sidelines. Significantly, Turkey and – unsurprisingly – Iran have backed Qatar in the dispute. This constellation of positions leaves the way open for Arab leaders to help negotiate a resolution.

What are the Forces Driving the Qatar Dispute?

There are three main driving forces behind the diplomatic crisis.

1. International Criticism of Qatar

First, the states involved were highly critical of Qatar for allegedly paying a ransom of $1 billion (USD) to radical groups and Iran to free members of the Qatari royal family captured during a hunting expedition in southern Iraq. This has led to accusations that Qatar funds terrorist groups, such as al-Qaeda affiliates and Islamic State.

2. High Profile, Independent Foreign Policy

Second, Qatar has followed a high-profile and independent foreign policy for several years, often at odds with Saudi Arabia (which follows a puritanical Wahhabi Sunni ideology). This foreign policy includes support for the Palestinian organisation, Hamas, and for Muslim Brotherhood groups– for example in Egypt, where Qatar backed the democratically-elected Muslim Brotherhood government of President Morsi. Saudi Arabia and the UAE have since given support to Egyptian President Sisi who overthrew Morsi. A number of countries, including Saudi Arabia and the UAE, deem the Muslim Brotherhood to be a terrorist organization, which follows a different version of Sunni Islam from the Wahhabis. In addition, Qatar has played a significant mediation role in conflicts involving militant groups, undermining Saudi’s aspiration to regional leadership. Furthermore, Qatar has a much closer relationship with Iran than many of its GCC colleagues, not least because of the world’s largest gas field, which the two countries share.

3. Political Ties to the Media Outlet al-Jazeera

Finally, the media outlet al-Jazeera is funded by the Qatari royal family. Al-Jazeera is notoriously critical of many the authoritarian regimes in the region, leading to temporary bans, despite its popularity on the Arab street.

These issues have been ongoing for some time. So why is the dispute escalating now? One catalyst for the action appears to have been  President Trump’s recent visit to the Saudi capital, Riyadh. During the visit, he explicitly sided with Saudi Arabia in its regional ‘Islamic Cold War’ with Shi’a Iran, which is currently being fought out in proxy wars in Syria and Yemen, as well as in behind-the-scenes interventions in Iraq and Lebanon. The US’s perceived characterisation of this complex region as an essentially bipolar entity (with Saudi Arabia on one side and Iran on the other) has strengthened Riyadh’s position, encouraging it to attempt to rein in Iran-friendly Qatar. The US’s position, however is also made difficult, as its largest base in the Middle East is in Qatar - the base houses the US military’s Central Command, along with around 10,000 troops.

 

*Please note this article was written on the 12th June, there have been significant changes to the on-going dispute since then. 

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