Qatar: Six Countries Sever Diplomatic Ties, Gulf Unity Under Threat

Qatar: Six Countries Sever Diplomatic Ties, Gulf Unity Under Threat


 A. What happened?

On June 4 2017, Saudi Arabia, the UAE, Egypt and Bahrain cut diplomatic ties with Qatar. The four Arab countries—joined a few hours later by Yemen and the Maldives—decided to: a) interrupt their diplomatic relations with Qatar; b) expel Qatar from the coalition currently fighting in Yemen; c) interrupt all transport links with the country, including airspace access ; d) block Al Jazeera and other Qatar-based media outlets; e) ban their citizens from traveling to Qatar; and f) give resident Qatari nationals two weeks to leave the country.

Saudi and its allies accuse Qatar to support terrorism, in collaboration with Iran. The diplomatic cut-off – officially adopted to “protect national security from the threat of terrorism” – was announced by the Saudi official news agency. According to the agency, Qatar is collaborating with Iran and backing Islamist terrorist organizations in the Middle East and North Africa (MENA) region. In late May, statements by Qatar’s Emir – posted in the Qatari official news agency website –created uproar, as he: a) suggested that the current US government will be short-lived; b) advocated for a closer relationship with Iran; and c) defended Hamas, Hezbollah and the Muslim Brotherhood. Qatar’s government has denied the accusations and claimed that the website was hacked.

Oil prices rose and Qatar’s stock market declined. Oil prices rose by 3.3 percent in 18 hours, from USD 49.1 per barrel of Brent – a six-week low – on Sunday June 4 to USD 50.7 in the early hours of Monday June 5. As of 5pm KWT on Monday June 5, oil prices had lost most of the earlier gains, declining to around USD 50.3. On Monday June 5, the Qatar’s stock market dropped by 7.3 percent, its biggest decline since 2009. In the rest of the Gulf the markets seem less concerned: Riyadh’s Tadawul started the day with losses of around 0.7 percent but closed with a gain of 0.5. Dubai lost 0.7 percent and Abu Dhabi remained flat.

B. Why did it happen?

Over the past few years, Qatar has adopted an audacious and often divisive stance in foreign policy, upsetting traditional allies. Qatar, a member of the Gulf Cooperation Council (GCC), shares with Iran the exploitation of a large gas field in the Gulf. Forced to play a dual role, the country is caught between two tensions: the Saudi-Iran rivalry for the leadership of the region, and the Sunni-Shiite divide. In other words, Qatar is trying to balance: 1) its GCC membership and strong ties with the West (the country hosts a large US air-base); with 2) a good relationship with Iran, an historical rival of most Gulf monarchies. In order to safeguard its natural resources and fearing a destiny similar to Kuwait in 1990, the country embraced the strategy of becoming a global diplomatic power, and aimed at international prominence as an insurance policy. Over the years, Qatar has supported almost all factions in regional conflicts, by means of: a) political pressure in Iran, Lebanon, Yemen and Afghanistan; b) military intervention in Syria and Palestine; and c) financial support in Egypt. This seemingly incoherent foreign policy has generated frustration and distrust in most GCC neighbours— in particular Saudi Arabia. Periodic bouts of tension ensued: in 2014, Saudi Arabia, the UAE and Bahrain got into a nine-month standoff with Qatar. Thanks to the intermediation of Kuwait and because of Qatar’s decision to support Saudi efforts in the Yemen conflict, tensions eventually subsided. However, Qatar never changed substantially its foreign policy.

In this tense context, the recent moves of the Trump administration – signalling realignment with Saudi – helped trigger the current crisis. Most GCC countries consider that the Obama administration (2009-2017) weakened the Gulf-US alliance, mostly by adopting a softer stance on Iran. In late May 2017, during the visit of President Trump to Saudi Arabia and the UAE, the US administration realigned with traditional allies by endorsing Riyadh with USD 110bn in arms sales. As a result, Saudi rulers felt they could act firmly against Qatar.

C. What will happen next?

Over the next month, most of the impact will be felt by Qatar, with: a) some food shortages (around 40 percent of food imports arrive by land from Saudi Arabia); b) the cancellation of some direct flights; c) the impossibility for Qatar Airways to make use of Saudi and Emirati airspace; and d) a correction in the local stock market. On the international markets, oil prices will be affected by the rising tension, experiencing mild increases.

Until the end of 2017, three scenarios are possible:

Base case (70 percent likelihood) – Qatar gives in to pressure, and economic and diplomatic relations return to normality. Over the next weeks, supported by the mediating help of Kuwait, Qatar will try to mend its relationship with Saudi Arabia. Moves in this direction have already started: for example, Qatar has urged Hamas officials to leave the country. Like in 2014, Qatar’s government is likely to decrease its: 1) cooperation with countries and organizations (Iran and Turkey, Hamas and the Muslim Brotherhood) perceived as hostile by the Saudi authorities; and 2) involvement in regional conflicts, namely Syria and Palestine. Media coverage of organizations perceived as conflictive (Hamas and the Muslim Brotherhood) will be restricted. As a result, the land blockade and the expulsion of Qatari nationals will be lifted. Within a few months, full diplomatic and economic relations could be re-established. In the longer term, Qatar will try to maintain its foreign-policy stance, but it will limit the level of international and diplomatic activity to pre-crisis levels. Until uncertainty dissipates, the impact on the international markets will be limited to temporary upwards pressure on oil prices, which might increase the trend level by about 10 percent (to USD 55). Poor sentiment is likely to hit regional stocks, although the impact is likely to be substantial only on the Qatar Stock Exchange. In the regional fixed income space, plans of regional bond issuance will remain largely unaffected, particularly as Qatar announced in February that no bond would be issued in 2017. In the secondary markets, Qatari bonds could reverse some of their year-to-date gains (Qatar’s 10-year sovereign bond yields declined from 3.7 percent at the beginning of the year to 3.1 in early June).

Bear case (10 percent likelihood) – Qatar refuses to yield, tensions intensify. If the Qatari leadership refuses to change its current policy stance, sanctions will be escalated. While Qatar could opt for reinforcing ties with non-GCC partners, such as Iran or Turkey, the US could threaten to withdraw its military base from the country – and the UAE will lobby to obtain it. Saudi and its allies could adopt a more belligerent position, putting pressure on oil prices, which could rise above USD 60 per barrel. The positive fiscal impact on the regional economy would be offset by declining investment, as a result of both: a) uncertainty; and b) declines in stock and bond prices, which would in turn increase most firms’ funding costs. It is also possible – although unlikely (to-date, Saudi and Iran have kept all political issues out of any Opec deal) – that Qatar, Iran and Iraq decide to withdraw from the current Opec agreement, increasing the volatility of oil prices and reducing their trend level by about 15 percent, to USD 40 per barrel.

Bull case (20 percent likelihood) The structural tension between Qatar and the rest of the region are resolved. Qatar gives up on its ambitious foreign policy plans and fully aligns with Saudi’s guidelines, increasing the internal cohesion of the GCC. The negative impact on regional stock and bond markets gradually dissipates, with no noticeable impact on global financial markets or oil prices.