No end in sight: The GCC-Qatar diplomatic crisis

The Economist Intelligence Unit (The EIU), the research and analysis division of The Economist Group, the sister company to The Economist newspaper in its latest white paper posited that it expects the current diplomatic crisis to take years—rather than months—to resolve, owing to the deep level of mutual distrust between Qatar and its Arab neighbours.

The longer Qatar remains subject to economic sanctions, the worse the implications will be for internal political stability, particularly if the welfare of Qatari citizens is affected by the crisis.

The political rift with the Gulf Arab states and Egypt may bring internal rivalries in Qatar to the fore. This, in turn, could undermine the position of the emir, Sheikh Tamim bin Hamad Al Thani.

The growing presence of foreign troops in Qatar will fend off risks of internal coups or foreign invasion, but will simultaneously exacerbate the hostilities between Qatar and the boycotters.

Operational risks facing corporates in Qatar in particular, and in the Gulf region in general, will rise in light of the sanctions, which we expect will be tightened further. The rolling crisis between Qatar and fellow Arab states will heighten geopolitical risks in the Middle East and undermine business and investment sentiment in the Gulf region, with Qatar bearing most of the brunt.

On June 5th Saudi Arabia, the UAE, Bahrain and Egypt severed diplomatic ties with—and closed most transport links to—Qatar, but the tension reached new heights weeks later when Qatar refused a list of sweeping demands that included the closure of the Al Jazeera media network.

The demands also include halting logistical and financial backing for Islamist groups and ending defence ties with Iran. As the situation continues to evolve, the conflict will enter a new phase of tighter economic sanctions on the tiny Gulf state, with far-reaching ramifications for internal stability and business operations.

Qatar’s internal rivalries will come under some strain

With mediation efforts already thwarted by the reciprocal hostilities, Qatar will now seek to build up the presence of foreign troops (especially Turkish) as a safeguard against perceived threats of foreign invasion or internal dissent by political rivals to the emir and his father.

Concurrently, it will continue to tour foreign capitals in Europe and North America to rally international support for its cause.

These efforts will face countermeasures by the four Arab states, which will rely mostly on economic embargoes to pressure Qatar into accepting their demands (albeit with little success).

Read Also  Foremost Arabic Scholar, Sheikh Mustapha Zhuglol dies at 80

Further, we do not discount the possibility of Saudi Arabia and Bahrain backing their tribal allies in Qatar to undermine Sheikh Tamim. The position of the current youthful Qatari emir will, therefore, grow increasingly vulnerable, particularly if rivals within the monarchy start to mobilise against him.

However, the tight control over the Qatari military by the current Al Thani rulers means that the removal of Sheikh Tamim will not be an easy task. In any case, threats to Sheikh Tamim’s position will also be reinforced as the dispute drags on and if it inflicts serious economic pain on Qatari citizens.

 

Military invasion is not expected

The report attaches a very low, if any, probability to Qatar being invaded by a fellow Gulf country—although the impact of such a scenario would be devastating to the Qatari economy. Indeed, Saudi Arabia and its allies will be aware of the risks of mobilising their forces against Qatar, which currently hosts around 11,000 US troops and which boasts a military co-operation pact with Iran.

Given the risks associated with an invasion (which would bring Saudi troops into direct confrontation with Turkish and potentially Iranian troops), the kingdom is more likely to rely on economic sanctions as the primary means of pressuring the Al Thani monarchy into accepting the four countries’ demands.

We, therefore, expect Qatar to remain subject to the current embargo for an extended period of time (years rather than months), which will inflict heavy economic losses on the tiny emirate. Even if a diplomatic resolution is brokered by Kuwaiti mediation, historical tensions and the deep mutual distrust between Saudi Arabia and Qatar mean that diplomatic spats would recur in the future.

Corporates face new operational risks

Given the downside risks to domestic stability, businesses operating (or seeking to operate) in Qatar may wish to take the following precautionary measures.

  • Monitor political developments closely. Whenever possible, firms would be advised to rely on Arabic news sources as they provide more in-depth and more frequent coverage of the dispute. Prostate media are particularly useful as a means of gauging government policies towards the parties involved in the rift.

  • Watch out for sanctioned Qatari entities and individuals. Western intelligence agencies and media outlets have reported in the past on various Qatari individuals and entities with alleged links to terrorist organisations. Although Qatar signed on July 11th a memorandum of understanding (MoU) with the US on countering terrorism financing, the current crisis will undoubtedly bring these entities under greater scrutiny. Firms would be advised to conduct due diligence on their potential local partners inside Qatar before entering into business agreements or conducting financial transactions.
Read Also  Police detain Danjuma Katsina over Facebook posts

  • Seek legal protection. Corporates are advised to seek contractual clauses that ensure normal businesses with entities located in all countries relevant to the dispute. Further, establishing government contacts at the highest possible level is of paramount importance, as is adherence to legal restrictions placed on trade with any sanctioned entities.

  • Anticipate higher freight costs. Qatar-based companies may need to establish new distribution channels and means of transport (possibly through Oman, Kuwait and Morocco), which will be costly and time-consuming. Generally speaking, countries which have taken a neutral stance on the conflict are good locations for setting up alternative transport and distribution infrastructure.

  • Hedge positions to mitigate riyal risks. Those considering further investments in Qatar should be careful and take measures to mitigate their exposure to local-currency fluctuations. A growing number of foreign banks (outside of Qatar) are no longer buying the Qatari riyal, which they are now seeing as unprofitable to exchange. Further, attracting foreign talent may prove challenging if the volatility of the riyal persists, as it would undermine the value of worker savings. Firms may need to offer more lucrative packages to foreigners and, in extreme cases, face demands for salaries to be paid in foreign currencies.

  • Diversify borrowing options. Saudi Arabia and the UAE may tighten the embargo by recalling deposits from Qatari banks, which would tighten liquidity conditions further (and make it more difficult to source hard currency). Given the heavy dependence of Qatari banks on non-resident deposits, firms investing in the country should aim to avoid a heavy reliance on domestic financing options. In case Qatari banks pare back lending, companies should be careful to spread their debt exposure among multiple lenders and seek alternative financing avenues (either via foreign sources or potentially issuing equity) to beef up their capital base.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

WP2Social Auto Publish Powered By : XYZScripts.com