GCC: Rethinking Alliances

TRUE FRIENDS? U.S.-Saudi relations have turned sour following Washington’s approval of the JASTA bill, which enables the victims of 9-11 attacks to sue Saudi Arabia. (Above) U.S. President Barack Obama is pictured with Saudi King Salman in Riyadh, April 21, 2016

The shifting sands of the GCC’s geostrategic environment

By Adel Abdel Ghafar

Two decades of an almost uninterrupted rise in hydrocarbon prices allowed the states of the Gulf Cooperation Council (GCC) to invest in infrastructure, education and health, as well as provide generous subsidies for their people. Fueled by high energy prices, ambitious rulers not only invested in the economic growth of their countries, but also their militaries, massively increasing their defense spending. More broadly, GCC states, led by Saudi Arabia, have repositioned themselves as leaders of the Arab world. Facing internal turmoil, traditional Arab centers of power like Cairo, Damascus and Baghdad have been ceding ground to Riyadh, Abu Dhabi and Doha.

Despite this growth and prosperity, the GCC states are facing unprecedented challenges at a time when the mantle of leadership is passing from an older generation to a younger one that is eager to make its mark. The geostrategic environment is becoming increasingly hostile as a re-assertive Iran seeks to challenge the regional order. Ongoing conflicts in Syria, Iraq and Yemen show no immediate signs of military resolution. Meanwhile, the era of high oil prices came to an abrupt end in 2014, raising difficult economic questions.

Falling Oil Prices and Shifting Economic Norms
Lower oil prices have forced GCC countries to rethink their public spending. Saudi Arabia has led the charge with a McKinsey-inspired reform agenda dubbed “Vision 2030” that aims to diversify the Kingdom’s sources of revenue and get more Saudis working in the private sector. The reforms undertaken by the government have started to bear some fruit. According to the IMF, the deficit in the budget is set to narrow from 13 percent of GDP in 2016 to 9.6 percent in 2017.

Despite this, the Kingdom continues to suffer from high unemployment and has been forced to raise cash in its first ever bond sale, worth USD 16.5 billion. Last month, the government announced that it will cut the wages and perks of public sector workers considerably.

Next door, the UAE continues its push to diversify its economy, and according to the IMF, has had more success than its neighbors so far. Kuwait’s attempt at subsidy reforms faced a strong backlash from the population and parliament, leading the emir to dissolve parliament altogether.

In Bahrain, subsidy cuts caused petrol prices to rise by 56 percent early in the year, while in Oman higher petrol prices have affected drivers’ consumption habits. Overall, there is an ongoing recalibration of state-society relations across the region, and the full consequences are still playing out.

Domestic and International Challenges Force Strategic Realignments
The shift in domestic economic norms is also having a geopolitical impact, as GCC states seek to find reliable allies to meet regional challenges as well as to stabilize the price of oil. There is a sense that the U.S. no longer prioritizes relations with the GCC, including its ‘special relationship’ with Saudi Arabia. Saudi–U.S. relations are going through a turbulent time, exasperated by the Iran nuclear deal as well as the new U.S. law that enables families of 9/11 victims to sue the Kingdom. Saudi Arabia and other GCC countries have responded by pursuing more independent and muscular foreign policies, as well as deepening intra-GCC relations in the face of external threats.

Accordingly, the diplomatic spat between Saudi Arabia, the UAE and Bahrain on one hand, and Qatar on the other, regarding their respective positions on Egypt, seems to have been largely forgotten for now.

Specifically, the Qatari–Emirati relations continue to improve. Qatar’s emir has met the crown prince of Abu Dhabi a number of times this year, most recently last week.

During their meetings, it is said that they have discussed cooperation on security and economic issues. Qatar agreed to supply more natural gas to the UAE via the Dolphin pipeline system, with the additional amount allocated for Sharjah and Ras Al Khaimah.

The Dolphin pipeline, created in 1999 to supply Oman and the UAE with gas from Qatar, has the capacity to carry 2 billion cubic feet of gas per day, or about 25 per cent of the UAE’s daily consumption.

The Saudi–Emirati relationship—despite a number of issues, including the direction of the Yemen war and a long-standing border dispute—is also developing, with the neighbors recently establishing a council that seeks to strengthen their bilateral cooperation. The UAE is one of the biggest investors in Saudi Arabia, with investments estimated at more than $9 billion and trade volume exceeding $19 billion, accounting for almost half of intra-GCC trade in 2014.

Finally, all GCC member states continue to deepen their economic regulatory ties and are set to implement a region wide Value Added Tax (VAT) from 2018. Currently the GCC is in the process of approving a common legal framework for the introduction of the VAT system.

OPEC Deal…For Now
Two years of lower oil prices have also motivated the Organization of Petroleum Exporting Countries (OPEC) members to finally reach an agreement to cut production. Complicating any agreement is the tension between Saudi Arabia and Iran, key OPEC members. Iran, newly free from sanctions, has a keen interest in increasing production, despite lower oil prices, a stance Saudi Arabia resisted.

However, in a policy shift directed by Deputy Crown Prince Mohammed bin Salman, Saudi Arabia has indicated a willingness to be more flexible on the issue. After a number of meetings in Russia which sought to find common ground between the Kingdom, Iran and Russia, the Saudi oil minister said: “The gap between OPEC countries is narrowing in terms of what are the levels at which we will freeze…the opinions are getting very, very close together.” This confirmed that Saudi Arabia and Russia both, despite disagreements on the Syria conflict, have an interest in cooperating to push oil prices back up.

These meetings and the softening Saudi stance led to the agreement in Algiers on September 28, 2016. According to the Financial Times, OPEC committed to reducing output to between 32.5 million barrels per day (bpd) and 33 million bpd. The new production target is a decrease of between 240,000 bpd and 740,000 bpd, from the 33.24 million bpd the cartel pumped in August.

This signals a shift in the OPEC strategy led by Saudi Arabia, which was previously to continue pumping oil at higher levels to maintain market share and increase pressure on high-cost U.S. shale producers. The new strategy bore some fruit instantly as Brent crude prices increased, but it remains to be seen if the modest production cuts will have sustainable longer-term price impacts.

Beyond oil prices, Riyadh has also been keen to reach out to Moscow to further economic cooperation and influence Russia’s stance on Syria. On this issue, however, the sides have yet to find common ground, despite Putin indicating that he finds Mohammed bin Salman to be a “very reliable partner.”

Sisi: No Longer Receiving Blank Cheques
After the ousting of President Morsi by a popularly backed coup, Saudi Arabia, the UAE and Kuwait stepped in to support the regime of Abdel Fattah El Sisi financially, pouring billions of dollars into Cairo’s coffers over three years. However, Sisi’s Gulf backers have become increasingly frustrated over the regime’s inability to redirect Egypt’s economy down a more self-sustaining path, as well as its lack of support in the Yemen conflict. Furthermore, Cairo’s recent support of a Russian-backed U.N. resolution on Syria caused further irritation, with Saudi Arabia cutting some oil deliveries to Egypt.

Egypt’s support of the Russian resolution is part of a wider warming in Egyptian-Russian relations. As Egyptian-U.S. relations become frostier, Vladimir Putin—sensing an opportunity–has continued to court Sisi. The two presidents seem to be kindred spirits; both are ex-intelligence officials turned strongman leaders.

The Russians have struck a deal to finance and construct an Egyptian nuclear reactor, and the countries have recently begun their first ever joint military exercise in Egypt’s western desert. There are even reports in Russian newspapers of negotiations for a Russian military base in Egypt, 44 years after President Sadat unceremoniously kicked out all Russian military advisors. Egypt is also strongly encouraging the return of Russian tourists, who would provide a lifeline for the ailing tourism industry.

Despite public assurances by Egyptian and Saudi officials that their nations remain close friends, the cutting of some oil shipments underscores the Kingdom’s displeasure and implies that support to the Sisi regime will no longer be a blank cheque. It is ironic that Saudi Arabia used oil as a weapon to support Egypt in the 1973 October War, but is now using it against Egypt.

Deeper Ties with Turkey
As Egyptian-Saudi relations hit a rough patch, Turkish-Saudi ties continue to deepen.

Trade volume between the countries has reached USD 8 billion, and their militaries have held four joint exercises in 2016 alone. On September 30, President Erdogan hailed the Saudi Crown Prince’s visit to Ankara for a bilateral meeting as a “strong message of Saudi solidarity with Turkey.” In early October, Saudi Aramco signed agreements with 18 Turkish companies for work on major infrastructure projects that are part of the Saudi Vision 2030.

Turkey has also patched up its relationship with the UAE over the past year, despite ongoing differences on Egypt and Libya. In April, Foreign Minister Mevlet Cavusoglu became the first senior Turkish official to visit the UAE in almost three years when he met with the Crown Prince of Abu Dhabi, Sheikh Mohammed bin Zayed. The next day the UAE announced it was sending its ambassador back to Ankara after a three-year absence.

Undoubtedly, Turkey’s strongest ally in the GCC is Qatar, and the countries have deepened their economic, political and military ties over the past few years. Last year, Turkey announced that it would build a military base in Qatar, the first of its kind in the region since Ottoman times. According to Giorgio Cafiero and Daniel Wagner, deeper ties between Turkey and Qatar make strategic sense as “both states face common enemies, sponsor the same non-state actors, have similar reactions to numerous regional crises, and ultimately share several long-term objectives.”
Finally, Erdogan’s government is also pleased that its arch-enemy, the Gulen movement, has been designated a terrorist organization across the GCC.

Shifting Sands
All these shifting alliances and recalibrations are occurring during the most inward-looking U.S. presidential elections in decades. It remains to be seen whether the next president will seek to reduce the U.S.’s involvement in the region, or increase it.

Regardless, especially for if hydrocarbon prices remain low, Russia seeks to reassert itself, and the conflicts in Syria, Iraq and Yemen continue, GCC rulers will need to be increasingly creative and flexible in their domestic and foreign policies.

Further recalibrations of alliances and fiscal reforms should be expected as they strive to achieve optimal internal and external outcomes.

Adel Abdel Ghafar is a political economist with a focus on the MENA region, and a visting fellow at the Brookings Doha Center.


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