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Sun 11 Jun 2017 10:42 AM

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Gulf crisis: How long can Qatar remain isolated?

Qatar is facing its worst political and economic disaster in decades, with three of its GCC neighbours cutting ties and closing their borders. The pressure is expected to see the peninsula state bring its foreign policy into line with the Saudi-led alliance — but the question is, how long can it remain isolated?

Gulf crisis: How long can Qatar remain isolated?
Further measures could be taken against Qatar this week in the worst crisis between Gulf states in decades.

Further measures could be taken against Qatar this week in the worst crisis between Gulf states in decades.

Hopes of a quick resolution to the dispute, which has seen the peninsula state all but cut off, appeared unlikely by the end of last week, with UAE Minister of State for Foreign Affairs Anwar Gargash saying Qatar “is in denial”.

The decision on June 5 by the UAE, Saudi Arabia, Bahrain, Egypt and at least four other countries to close air, land and sea links with Qatar and ban its citizens has already cost millions of dollars.

The Qatar Stock Exchange has continued to fall after more than 7 percent was wiped off  the bourse within two hours of it opening on June 5 and global ratings agency S&P downgraded Qatar’s rating on June 8 to AA- from AA and put it on negative credit watch list in light of the blockade.

“We believe this will exacerbate Qatar’s external vulnerabilities and could put pressure on economic growth and fiscal metrics,” S&P analysts wrote in announcing their decision. They warned Qatar’s credit rating could be further downgraded if the crisis substantially increased or was prolonged.

Bloomberg also reported some banks in Saudi Arabia, the UAE and Bahrain were cutting their exposure to Qatar amid concerns the blockade would be widened.

Those concerns were fuelled late on June 7 when Gargash warned that the alliance was willing to take further action against Qatar if it did not start to make assurances that it would overhaul its “subversive” foreign policy.

Qatari residents rushed to leave the blockaded state last week, while those remaining cleared supermarket shelves.

“For us, this is a critical issue and there is no turning back to the status quo,” Gargash said in Dubai.

“There has to be, first, a very clear political indication, whether it’s to the mediator, whether it’s to the GCC countries, that Qatar is changing course. You start with that. You can’t start mediation when Qatar is in denial and I think right now we are in a phase where Qatar is in denial.”

He had earlier warned that the only “solution” was for Qatar to “amend his behaviour”, respect pledges and charters and “to be mindful of brotherly and neighbourly relations”.

Saudi Foreign Minister Adel Al Jubeir also said efforts would be made to resolve the conflict.

“We see Qatar as a brother state, as a partner,” he told a press conference in Germany.

“But you have to be able to tell your friend or your brother when they are doing the right thing and when they are doing the wrong thing.”

The anti-Qatar alliance accuses it of supporting extremist groups and of serving the interests of regional arch-rival Iran.

Kuwaiti Emir Sheikh Sabah Al Ahmad Al Sabah has been flying from Gulf capital to capital in a bid to mediate between his waring neighbours (he played a pivotal role in ending a 2014 dispute).

US President Donald Trump also has offered to assist, despite on June 6 taking credit for the dispute two weeks after his visit to Riyadh. In a Tweet, he appeared to side with the Saudi-led alliance.

All of the analysts who spoke to Arabian Business said they expected Qatar would be forced to come into line with its GCC partners.

“The emerging anti-Qatar coalition is unlikely to back down without some change in the Qatari government’s orientation and policies,” Firas Abi Ali, IHS Markit senior principal analyst on the Middle East and North Africa, said. “[That includes] the expulsion of Qatar-based Hamas and Taliban leaders and wanted Egyptian clerics.”

Qatar’s central bank is facing an economic crisis with foreign banks withdrawing deposits and the riyal falling to a low.

Ali warned that Qatar would need to go further than it had previously to prove its new direction was sincere.

“The changes demanded, however, would be hard for Qatar’s leadership to execute. Qatar is likely to initially attempt to create the illusion of complying without fully doing so, but this will likely trigger a more stern response,” he said.

“In the three-to-six-month outlook, Qatar will likely agree to the demands of its neighbours, leading Arab states to halt their escalation. Qatar has already expelled Hamas officials from its territory. It is likely to follow this step by expelling Taliban officials, some Muslim Brotherhood and Salafist clerics, and replace the management and editorial boards of [Qatari broadcaster] Al Jazeera, and support the US-Saudi-Emirati initiative to bring about normalisation of relations with Israel. Individuals and Islamist opposition movements across the Gulf Cooperation Council resisting this trend will be subject to international sanctions, deported or jailed.

“Failure to comply would increase the likelihood of sanctions against Qatar, and, in extremis, military action by Saudi Arabia and the UAE, with US acquiescence, against Qatar.”

Ali, though, said military escalation was unlikely, and Gargash assured that the alliance was not seeking to overthrow Qatari Emir Sheikh Tamim bin Hamad Al Thani.

Dr Theodore Karasik, a senior advisor at Gulf State Analytics in Washington DC, suggested that despite its wealth, Qatar would have to eventually comply with the demands being made of it.

“The situation for Qatar and its poor judgement can only be corrected if Doha capitulates on every aspect of their guilt,” he said.

Unlike in 2014 when similar concerns saw Saudi Arabia, the UAE and Bahrain withdraw their ambassadors from Doha for eight months – but life on the ground went on as per usual – the economic effects of the current crisis are expected to be Qatar’s pressure point.

More than one-third of the $1bn worth of food supplies imported into Qatar cross the land border with Saudi Arabia, while its national carrier Qatar Airways has had to ground some of its aircraft and made significant changes to routes, adding time and cost.

“The impact on Qatar’s economy is severe,” Karasik said. “Doha is unable to sustain itself from such blockades and GCC neighbours know this fact: Qatar has a huge dependence on external food security.

“In addition, the ripple effect across Qatar’s many projects, not only in Doha but also including investments overseas, are all now at high risk.”

Arqaam Capital analysts Jaap Meijer and Michael Malkoun said in a June 6 report that further measures against Qatar could include financial sanctions.

US President Donald Trump, Abu Dhabi Crown Prince Mohammed bin Zayed Al Nahyan and Saudi King Salman discussed concerns over extremist funding.

“The broadening of financial sanctions could have ramifications as the leading Qatari banks, such as Qatar National Bank, rely heavily on foreign funding, which could cool down its credit boom.”

The crisis also could add pressure on world football governing body FIFA to revoke Qatar’s hosting of the World Cup in 2022.

Kristian Alexander, an assistant professor at the College of Humanities and Social Sciences, Zayed University, said internal pressure, including from members of the royal family and businesses, also would force Qatar to change.

“Qatar can’t sustain this. To some extent it can prolong it because it can still export oil and gas and it has very strong sovereign wealth funds, so economically it could extend it, but in the long-term internal pressure [from] certain groups in Qatar, certain elements of society, will put pressure on the leadership to resolve it sooner rather than later,” he said.

“Qatar is going to resolve this and give in. They’ll present it as [though the disputing states] found a sensible resolution because Qatar doesn’t want to lose face by giving in right away.”

Head of frontier research at Dubai-based Exotix Strategy, Hasnain Malik, said Qatar was “vulnerable” for three reasons.

“Its security is ultimately reliant on hosting the US regional air force command centre at Al Udeid, which has been relocated before; its gas economy is reliant on cordial relations with Iran; and its non-gas economy is reliant on unfettered travel and goods transit across its borders, which requires cordial relations with Saudi,” he said.

The blockade is also affecting the wider Gulf, while putting at risk the six-member Gulf Cooperation Council. While Qatar will suffer the most economically, the effects cannot be contained to within its borders.

Anwar Gargash warned further measures could be taken against Qatar.

“Qatar’s business interests throughout the GCC is going to sap transformation programmes because of the intra-GCC merchant family finances and networks,” Kharasik said.

Hady Amr, an analyst who founded the Brookings Institute’s Doha office, agreed there were economic repercussions across the region.

“Clearly economic prosperity will be impacted. The GCC economies are not self-contained, but instead rely on a tremendous amount on international trade,” he said.

Amy Choudhary, a senior lawyer at Taylor Wessing, said multinational businesses with contractual obligations in Qatar would “experience difficulties and/or impossibility in completing their obligations”.

“The business disruption will be broad and affect many different industries from the construction sector to the delivery of sales and goods, such as construction material,” she said.

The extent of any damage to businesses will come down to the length of the crisis. While further measures have not been ruled out, a swift end to the crisis would be needed to minimise the fall out.

*Additional reporting by Sarah Townsend.


Crisis: how it escalated

The relationship between Qatar and the trio of Saudi Arabia, the UAE and Bahrain has been on tenterhooks for years, with the alliance accusing its neighbour of supporting extremism and becoming too close to regional arch-rival Iran.

So when the alliance announced early on June 5 that it was cutting diplomatic ties and closing its borders and airspace to Qatar observers described it as sudden, but not surprising.

Two weeks earlier, US President Donald Trump met all of the GCC leaders during a trip to Riyadh, where he said they discussed financing of extremists and how to deal with Iran. A day after the Gulf crisis escalated, on June 6 he Tweeted what appeared to be his support for the Saudi-led action.

“During my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar — look,” he Tweeted.

Qatar is accused of supporting extremist groups and of serving the interests of Saudi Arabia’s regional rival Iran.

Trump had barely left the region when comments were posted on the Qatar News Agency (QNA) website attributed to Emir Sheikh Tamim bin Hamad Al Thani indicating his support for Iran. Qatari officials claimed the site had been hacked but the comments added fuel to an already growing frustration with the young leader’s foreign policy.

Saudi Arabia, the UAE and Bahrain have accused Sheikh Tamim, who replaced his father as the Emir in 2013, and his regime of financing and harbouring members of groups such as Hamas, the Muslim Brotherhood, the Taliban and Hezbollah.

The withdrawal of ambassadors from Doha in 2014 was resolved eight months later on promises to reform. But the latest measures suggest Qatar had gradually returned to its former policies.

Following the QNA comments, Qatari-backed Al Jazeera network — often accused of bias, particularly towards the Muslim Brotherhood — was blocked in Saudi Arabia, the UAE and Bahrain. Last week, its offices and that of Qatar Airways were shut down.

Flying low: the impact on aviation

Flight disruption was one of the most pertinent outcomes of the actions taken against Qatar last week and is expected to cost its national carrier, Qatar Airways, millions of dollars.

The banning of Qatar Airways from Saudi, Emirati, Bahraini and Egyptian airspace hits one of the country’s most important — and visible — sectors of the economy.  The national carrier now has only a slither of room to leave the Gulf peninsula and is forced to make unscheduled stopovers for some long-haul flights. At least 76 daily flights are grounded, of which 52 — including 14 between Doha and Dubai — are operated by Qatar Airways and the carrier’s offices have been shutdown in Saudi Arabia, the UAE and Bahrain.

Frost & Sullivan estimates the airline will lose 30 percent of its revenues, without taking into account future impacts to its reputation.

There were claims that the UAE and Bahrain could not effectively ban Qatar from its airspace because they were parties to the 1945 international Transit Agreement. However, the Centre for Aviation (CAPA) argued there was no international mechanism to enforce compliance.

Qatar Airways’ offices have been shutdown in Saudi Arabia, the UAE and Bahrain, while some of its aircraft are effectively grounded.

CAPA said Qatar Airways relied heavily on the source markets of Saudi Arabia and the UAE and would be hard hit by the loss of customers from there.

Calculating the cost to Qatar Airways is difficult and would, obviously, depend on how long the crisis continues. Aviation analyst Saj Ahmed said some of Qatar’s A320s — its most common aircraft — could be redeployed but would be limited due to their lack of range.

“Parking planes is expensive and the costs vary wildly between airlines/airports. In short, the longer this impasse lasts, the cost could easily run into millions of dollars within weeks,” Ahmed said.

While other GCC airlines stand to pick up some of the cancelled bookings, analysts also argue that some foreign travellers will avoid the GCC altogether.

“There are few short term beneficiaries of diverted traffic flows and almost certainly a medium term negative impact for Gulf aviation,” CAPA wrote in an analysis.