Why Punishing Qatar Could Also Hurt Its Gulf Rivals

  • More penalties carry economic, political risks for both sides
  • Expelling Qatar from the GCC seen damaging the organization

NUS' Sluglett Says Saudi's Demands Can't Be Met

The four nations who cut diplomatic and trade links with Qatar last month will find it difficult to significantly increase the stakes for the world’s largest gas exporter without hurting their own economies.

Saudi Arabia, the United Arab Emirates, Bahrain and Egypt have promised additional punitive measures on Qatar after it rejected their 13 demands for ending the standoff last week. They accuse it of supporting terrorism, meddling in their internal affairs and cozying up to their rival Iran -- all charges that Qatar has denied. Mediation efforts led by Kuwait have failed to prevent the dispute dragging into a second month.

Here are some of the options that Saudi-led alliance can pursue and the impact on both sides.

GCC Expulsion?

Unlikely due to an expected veto from Kuwait and Oman, expelling Qatar from the Gulf Cooperation Council would have severe political, economic and social consequences. Qatari citizens have long enjoyed visa-free access to the other five GCC nations -- and vice versa -- while businesses enjoy preferential treatment that would be lost if Qatar was expelled or its membership frozen.

Expelling a member would severely damage the organization. While the six members have struggled to agree on measures such as establishing a single currency, they have pushed through an accord on value-added taxation to bolster revenue after the drop in oil prices. The bloc’s weakening or disintegration would also be welcomed by Iran, Saudi Arabia’s main rival for regional influence with which the kingdom is locked in proxy conflicts from Yemen to Syria.

The breakup of the GCC “would probably lead to more disputes between the Gulf countries spilling out into the public arena,” Jason Tuvey, an economist at Capital Economics in London, said in an emailed note on Wednesday, adding that disbanding the group remains unlikely even if Qatar is expelled.

Tougher Sanctions?

Sanctions have already caused Qatar’s costs to quickly rise, with Qatari planes banned from Saudi and U.A.E. airspace and goods once imported cheaply through the land border with Saudi Arabia now coming in via sea or plane.

Finding additional measures that would seriously pressure Qatar’s economy is difficult because the country’s vast gas revenue is mostly derived from sales outside the region -- beyond the bloc’s control. Qatar’s three biggest trading partners in 2016 were Japan, South Korea and India respectively, data compiled by Bloomberg show.

Though trade with Qatar isn’t critical for the boycotting countries, their economies do miss out due to sanctions. Turkey has stepped in to ship food imports that were coming from Saudi Arabia, while Iran has provided assistance. Qatar is finding alternative sources of dairy products, while building supplies and materials critical for Qatar’s $200 billion infrastructure upgrade for soccer’s 2022 World Cup are now being routed via ports in Oman and Kuwait -- GCC members which haven’t taken sides in the spat.

Pressuring Partners?

One avenue the Saudi-led bloc may pursue is to force international companies to abandon business deals with Qatar to retain contracts with the boycotting nations. Saudi Arabia in particular may have leverage in this area -- from arms purchases to the future listing of a stake in state-run oil giant Aramco, the country’s wealth is in demand.

Even so, the timing is not ideal for the bloc to play hardball with its trading partners. The plunge in oil prices has left Gulf producers in need of overseas investment, while Egypt is still recovering from a financial crisis that was driven in part by a shortage of hard currency. Europeans nations, in particular, won’t accept being forced to make choice, said Andreas Krieg, a lecturer in the department of defense studies at King’s College, London.

The tactic also looks like a non-starter given the many cases where global conglomerates already have contracts in both Qatar and a bloc nation. India’s Larsen & Toubro Ltd., for example, is building a stadium for the World Cup in Qatar, and has major infrastructure projects across the Gulf -- including in the U.A.E. and Saudi Arabia.

Pulling Money Out

The bloc could order its banks to pull all their funds out of Qatari financial institutions. But while this could strain domestic liquidity for Qatar, it would also deprive other Gulf banks from earning higher interest rates on the riyal -- the key reason for parking money in Qatar in the first place.

Qatar’s three-month interbank rate climbed to 2.47 percent on July 12, the highest level since 2010. That compares with 1.55 percent in the U.A.E. and 1.8 percent in Saudi Arabia, according to data compiled by Bloomberg.

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