Passing the six-month mark on the 5th of December 2017, the diplomatic rift between GCC states now looks set to continue into at least the first quarter of 2018. Whether it will stand the test of time, however, is another issue that is beginning to pique the interest of multinational commercial actors vested in regional peace. In the meantime, Shadow Governance Intel is focused on how the political justifications for this dispute are playing out in economic terms, considering whether any ‘spillover’ into global commerce may set to deepen over time.

Impact Points

  • With the political and commercial spheres so closely bound to one another in the Gulf, diplomatic crises between the region’s major players have the potential to spill over into its business environment.
  • Following the decision by Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates (“GCC+1”) to downgrade diplomatic relations with Qatar in June 2017, commercial actors are rightly concerned with the severity this political fallout will have.
  • More specifically, the emergence of an ‘us or them’ scenario may transpire in what would represent the ultimate nightmare for foreign investors. Should tensions remain over the long term, it may prevent international actors from tapping-up GCC-wide opportunities, making the days of gaining a regional presence simply a thing of the past.
  • The result would be to force foreign investors to choose commercial cooperation with either Qatar or Saudi / UAE. Currently, the potential downside political risks are high for entities with exposure to Qatar and the full extent to which these companies could be boycotted by the GCC+1 is not fully known.

Choosing (Economic) Sides in the (Political) Divide
With most GCC states having built up high levels of exposure to international capital markets – either through owning stakes in foreign entities or by allowing external actors to access their domestic markets – politically motivated disputes may catch foreign investors in its cross-hairs.

So far, the GCC rift has been treated as primarily a geopolitical issue. This is to say that coverage has largely focused on the allegations made by the GCC+1 bloc against Qatar of supporting terrorist groups and backing Iranian influence in the region. Whilst geopolitics is an underlying factor to this dispute, there is an economic dimension to the rift which may play out more discretely in terms of commercial decision-making and activity in the period ahead.

For example, it was reported by the Financial Times that Abu Dhabi was beginning to informally boycott western banks with big Qatari investment. The report claimed that entities including Credit Suisse (4.94%), Deutsche Bank (6.1% - 10%), and Barclays (5.97%) were unlikely to “win significant mandates in the capital of the UAE” because of their Qatari shareholders.

With one of ADNOC’s subsidiary companies expected to hold an Initial Public Offering (“IPO”) in 2018, an FT source stated that this could see major entities miss out on the call for purely political reasons. If true, this is a development which could dampen the expectations of many Western investors across the wider region. Saudi Arabia is preparing to embark on a privatisation strategy of its own, with the biggest scalp up for grabs being its national energy company, Aramco. As Gulf states seeks to attract foreign capital to avoid ‘austerity’, the question of whether they can be politically selective about their investment partners becomes key to answering.

Taking the view that they can be selective, a look at the Qatar Investment Authority’s (“QIA”) portfolio of assets provides in indication as to how far reaching this boycott could potentially become.

The QIA owns a 17% share in Volkswagen AG (“VW”), which distributes thousands of cars across the Gulf each year. Al Nabooda Automobiles is the distributor for VW in the UAE’s Northern emirates and may have a watchful eye on how this may affect its future business prospects.

In Saudi, SAMACO is the exclusive dealer of VW country-wide. SAMACO is held by the Al Nahla Group, which in turn is believed to be held by the Shabatly family. Their connections to the Al Saud family go back to the 1930s and so it is unclear how an economic boycott of this international entity would even play out among its own elites.

Adorning the ranks of companies that count the QIA among its shareholders are Agricultural Bank of China (12.99%), Tiffany & Co. (12.99%), and Royal Dutch Shell (2.13%). These entities are all feasibly in line to expand into the UAE and Saudi markets further, and so may be subject to extra scrutiny or subjugation as a result of their links to Doha’s elite. Investors are advised to build up an understanding of where Qatari influence (through ownership) lies over the short term.

An Emirati Power Play
For many years, Doha has vied for the attention of Western power brokers alongside Abu Dhabi.

Both Qatar and the UAE boast stable business environments in a region beset by barriers, under political leadership that is receptive to external engagement. This has brought inward flows of capital and expertise to both economies, making them wealthy and attractive destinations to set up camp in the Persian Gulf.

In this sense, a rivalry can be said to exist between these two states with regards to who occupies a higher standing in relations vis-à-vis foreign entities.

For its part, Doha has long been viewed as a favoured location of Western governments in the Gulf. The U.S. chose to station one of its biggest overseas airbases, Al Udeid, southwest of Qatar’s capital city and various American administrations have leveraged relations with the Al Thani family to navigate political affairs in the wider region, including dialogue with the Taliban and the release of overseas hostages.

Likewise, the U.K. has been a bilateral partner of Qatar’s since its foundation and is the beneficiary of lucrative inward investments into its economy. Bloomberg reported that this investment stood at U.S. $35 billion (minimum) as of 2014, with the Qataris spending huge sums in the City of London and in big British corporations.

Interestingly, even though the Emirates enjoys its own set of equally warm ties to Western actors, these Qatari ‘lifelines’ ostensibly sit unwell with its GCC counterparts. Indications therefore suggest that Abu Dhabi’s power players are seeking to thwart Doha’s standing at their (or someone else’s) expense.

For example, leaked emails from the account of UAE Ambassador to Washington, Yousef Al Otaiba, underscore the view that Abu Dhabi is keen to see Qatar subjugated by the U.S. In April 2017, when asked to explain why Doha’s Marriot hotel (Emirati-owned) became the host for a Hamas sponsored meeting, Otaiba responded by saying he would move it [the hotel] if the U.S. moved the airbase (Middle East Eye, 3 June 2017).

As such, Otaiba is believed to be lobbying against Qatari interests in the halls of Washington, an order no doubt issued from the very top by Mohammed bin Zayed (“MbZ”). The UAE is a big purchaser of American weapons and has courted actors from the private security industry before whilst building and equipping its own armed forces. The potential to win an overseas airbase would only boost its ability to cooperate with its biggest international ally.

Indeed, relations have been historically tense between Qatar’s former ruler, Hamad bin Khalifa, and the UAE. The 2017 and 2014 diplomatic rifts are only the recent manifestations of this tension, which has seen attempts from both sides to undermine each other’s political leadership throughout the years, with Abu Dhabi allowing exiled Al Thanis to carry out coup attempts (The Guardian, 21 July 2017).

As such, U.S. ties to Qatar are clearly a bone of contention for the Emiratis behind closed doors and much work is being done by UAE sympathisers to try and disentangle Doha from the international community.

Making Saudi the ‘New Qatar’
To the West of Abu Dhabi, Mohammed bin Salman (“MbS”) has now consolidated his power base in Saudi Arabia. As such, the GCC dispute could also be a potential play aimed at bringing Riyadh closer to Washington – at Qatar’s expense.

Previously, Saudi’s staunchly conservative outlook placed limitations on its ability to partner with the U.S., creating obstacles to the type of socio-economic cooperation that is otherwise possible in the likes of Abu Dhabi and Doha. But with MbS leading a wide-ranging economic reform agenda and (so far) acting on his promises, the rift with Qatar may be a chance for Riyadh to erode Tamim’s lure as a regional leader.
 
Saudi could plausibly host the U.S. airbase, for example, and became a top FDI destination for American businesses and expatriates. The same logic applies to its role vis-à-vis British actors, whereby Saudi already enjoys a booming relationship in terms of defence contracts. With the Kingdom set to become a more attractive destination to work and live, investors will have more options in terms of where to set up shop – but faced with the choice, many may flock to the established investment centres of Abu Dhabi and Doha.

If not for the UAE’s gain, Emirati support for this rift could therefore be to boost Saudi’s candidacy as an FDI spot. MbS and MbZ are at the centre of a new power nexus in the region, which is currently driving enhanced relations between Saudi and the UAE, meaning that Abu Dhabi would no doubt lobby for its neighbour.

Outlook
Whilst not making it explicit, the boycotting nations are creating a long term ‘us or them’ scenario for foreign investors in the Gulf. The questions then become why and for whose gain? With an interest in similar entities, it may be impossible to fully implement a boycott of international commercial actors.

Ultimately, regional fissures tend to be marred by squabbles, which cause them to ebb and flow in terms of severity. It often comes down to who can ride out the negative externalities longest, so as to avoid conceding ground first. This may turn into a game of chicken whereby rapprochement is inevitable, but who makes the first move will vary.

Until that point, a strong understanding of ownership trends and commercial dynamics will be needed.