In the beginning of June, the nations of Bahrain, Egypt, Libya, Maldives, Saudi Arabia, Yemen and the United Arab Emirates collectively imposed a trade and travel boycott against their neighbor Qatar. Nearly two months later, Qatar remains defiant, in the face of sanctions and has refused to comply to 13 demands, of fellow Arab nations.
The emirate had also been asked to shut down Al Jazeera and other Qatar-funded news outlets.
Later, Qatar was told it needed to agree to six principles on dealing with political extremism and terrorism.
When the aforementioned together, withdrew their ambassadors and severed economic ties with Qatar last month, the resulting diplomatic crisis, was not expected to last for very long.
In addition, Qatar is heavily reliant on food and other essential supplies. Before the sanctions, these provisions were brought in by truck through Saudi Arabia. Now the country has been forced to change suppliers.
The notion for a possible early solution to the crisis was based on the knowledge, that Qatar conducts a $9.5 billion USD (United States Dollar) in trade on an annual basis with Bahrain, Saudi Arabia and the United Arab Emirates. Qatar for example, provides the Emirates with a third of its natural gas.
In fact, Qatar is the world’s largest exporter of liquified natural gas (LNG) and produces up to 77 million tons of gas annually. The country has proven oil reserves that exceed 25 billion barrels and natural gas reserves, are the third largest globally.
The recent global shift in energy demand from oil to natural gas, has benefited Qatar tremendously. The small emirate, has become the world’s richest country per capita.
Although 2.7 million inhabitants reside in this tiny desert nation, only 300,000 are actual citizens. The latter are the true beneficiaries, of the enormous wealth being created. The rest are foreign born migrant workers, mostly employed on the vast construction projects, that have been initiated by the government around the country.
This natural resource has allowed the country to accumulate some $340 billion USD in reserves. This enormous cache, will help permit Qatar to survive for now, the present attempts by a number of neighboring countries to punish and isolate the nation.
Qatar has been accused by a number of neighboring states in undermining regional stability. They claim that Qatar is using its vast wealth to fund terrorism, throughout the Middle East.
Furthermore, they claim the close ties Qatar maintains with Iran and Turkey, is adding to the general insecurity, felt by the string of oil wealthy nations that surround the south side of the Persian Gulf.
Qatar denies the accusations. They instead insist, they are being punished for backing groups and individuals that their neighbors do not approve of. These would be the more authoritarian hereditary and military rulers.
The government of Qatar has refused to negotiate a settlement, unless the punitive measures taken against their country, are reversed. The Emir insists the sovereignty of Qatar must be respected, but is willing to discuss various issues, if the embargo is lifted first. He contends the blockade is in reality, a violation of international law.
The ongoing blockade placed on Qatar by fellow Arab nations, could permanently alter the economic arrangements, that have long defined relations within the Gulf Cooperation Council (GCC). This organization was created to unite the smaller Gulf states, to form a bulwark against Iran. It has largely acquiesced to the leadership provided by Saudi Arabia.
Both Saudi Arabia and the United Arab Emirates, have proved there are willing to endure economic pain to advance long term policy objectives. This has been evidenced in their present stance in cutting oil output to maintain price stability.
Saudi Arabia in particular, has taken the lead through OPEC (Organization of the Petroleum Exporting Countries), in using production cuts to advance the goals of the cartel. The kingdom has repeatedly used its vast oil revenues, to attempt a regional order, often to the detriment to its domestic economy.
Saudi Arabia for example, embroiled itself in the Yemeni civil war. The intervention in that war has proved to be disastrous. In addition, to adding to the misery of the people living in Yemen, it resulted in the first budget deficit for the kingdom in decades. The first year of that participation alone in 2015, cost the Saudi government a total of $5.3 billion USD.
The United Arab Emirates and Saudi Arabia similarly, devoted billions of accumulated wealth, to influence political events in Tunisia, and the civil wars in both Libya and Syria.
The former two nations along with Kuwait, sponsored the 2013 military coup, that overthrew the Muslim Brotherhood in Egypt. The three countries then provided a whopping $23 billion USD, to keep the government of General Abdel Fattah el-Sisi financially solvent, during the first 18 months in power.
Saudi Arabia has often taken positions that have worked to the detriment of its Arab neighbors. The decision to keep pumping crude in 2014, despite the global collapse in oil prices, collectively cost the Gulf states some $890 billion USD.
Although in hindsight, the increased Saudi crude production failed to significantly stop the growth of the oil shale industry in the United States, it did impact Iran’s oil revenues, which was the main objective of the Saudi government.
In turn, it brought financial consequences that included the introduction of taxes, a reduction in widespread subsidies and the need for international loans, for the first time in years. This occurred not only in Saudi Arabia, but in many of the neighboring Gulf States.
The Saudi quest for regional supremacy over Iran, is what brought the crisis with Qatar to a head. The rivalry with Iran, has resulted in defense spending rising sharply in recent years. This was even before the $110 billion USD in additional armaments, that comprises the deal with the United States agreed upon in May.
In response to the ongoing economic sanctions, Qatar has already taken steps to reorient its trade towards Iran and Turkey. Goods that used to come through Saudi Arabia, now arrive from the latter two countries.
There is little more Saudi Arabia can do at this point, short of military action. The economic punishment has already been put in force. Expelling Qatar from the GCC, will accomplish very little.
Only two nations in the GCC, have not broken relations with Qatar, they are Kuwait and Oman. The former has continued to offer mediation for the dispute.
Qatar has traditionally promoted a less militant stance towards Iran. Since the 1990’s Qatar has often been the dissenting voice in the GCC, preferring to follow a more independent path, in both economic and political matters.
In April of this year, Qatar decided it would boost output from the largest gas field globally. Known locally as the North Dome, it shares this mostly offshore strategic energy tract with Iran. Up to this point, Qatar Petroleum insists, the present diplomatic rift with some neighboring countries will not affect output.
Efforts made by the United States, to end the standoff earlier this month failed. The Americans have a special relationship with Qatar, with some 11,000 military personnel stationed there, in an attempt to ensure regional stability. The troops there provide command and air power for the United States in Afghanistan, Iraq, Syria and 17 other nations. It is the largest American military base in the Middle East.
This week the Turkish president Erdogan is in the region, to possibly achieve a compromise between his ally Qatar and the Arab states engaged in the blockade and sanctions.
Although Qatar remains defiant, the economic isolation is having an impact on the domestic economy. Shipping costs have gone up tenfold, but Qatar has already begun shipping shipping cargo through Oman, to get around restrictions from the neighboring United Arab Emirates.
Long term gas and oil contracts have remained intact. Despite this, Moody’s Investors Service earlier this month, has changed Qatar’s credit rating, from stable to negative.
Low international gas and oil prices already led to the first fiscal deficit in 15 years. Last year, Qatar sold $9 billion USD in bonds, the largest offering in the history of the Middle East. This was done to close the gap in government funding.
This starkly contrasts with previous years, where budget surpluses averaged 15% of GDP (Gross Domestic Product). On a positive note, public debt remains at a low of 35.8%.
Analysts are still concerned, that the financial and economic risks arising from the ongoing dispute, will only deepen over time.
Qatar’s stock market had lost about 10% or about $15 billion USD in valuation, during the first month of the crisis. Although, more recently, 6% of its pre-crisis value has now been recovered.
However, the longer the crisis lasts, the more financial and economic disruption will take place, not only in Qatar, but the entire Persian Gulf region as well.