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Economy, Geopolitics

How does a cat react when boxed-in and threatened with existential danger? In a classic “fight or flight” response, and when “flight” is not an option, the cat arches its spine for all-out might and fights back like a multi-headed demon. That’s what the tiny state of Qatar has been doing ever since its detractors boxed-it in—it conjured up a spine of steel and has been fighting back with all the energy and wherewithal it could muster. The outcome shows clearly that from the beginning of the blockade by Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt a year ago , Qatar has been playing the hand it was dealt masterfully, outflanking one and all at every turn.

In fact, for a lesson on how to engender a multiplier effect from the sum-total of their resources, large corporations planning all-out public relations campaigns have a lot to learn from how Qatar’s Emir Sheikh Tamim bin Hamad Al Thani mobilized his country’s full cadre of top lieutenants and pointed everyone—including himself—in every possible game-impacting direction.

Moreover, despite the as yet unresolved Saudi-led boycott, the results have been astounding, be that in regard to Qatar’s current state of the economy, its citizenry’s morale and, arguably, the country’s standing among non-involved nations worldwide. Significantly, to help withstand the trade embargo, Qatar forged ahead with newly-found shipping routes via Oman and displayed its resolve and ability to step up—at warp speed—the development of various self-sufficiency agricultural and local production-type initiatives. The outcome? Qatar recently boasted that the current month of June 2018 will show a 50% increase in its merchandise trade surplus over that of the same month a year ago, and that business conditions in the private, non-oil sector continue to improve over the period just prior to the trade embargo.

Going back to the fateful Riyadh summit of May 2017, when President Trump lectured some 50 Arab leaders on the need to stop financing Jihadist movements, it was then evident that the Saudis and Emiratis had whispered effectively in his ear and gained his support at the expense of the “mischievous” Qataris. Trump bought the argument that Qatar was squarely in the Iranian camp, and that it was indeed a principal source of financing for Hamas and other extremist groups. Since then however, Qatar has made considerable strides in convincing those who can arbiter objectively that the Saudis and Emiratis perhaps had it in for them essentially because of the independent lifestyle of its people and their prevalent posture against tyrannical rule. In addition, Qatar argued—in many quarters convincingly—that the free-wheeling Al-Jazeera, their prime news agency, was the precise symbol that Qatar’s neighbors abhorred the most, and that all the other arguments, including Iran’s stake in their oil and gas industry, were but a smokescreen to hide those other core concerns. Be that as it may, public opinion seems to have shifted on the subject, with Qatar looking all the more judicious.

Furthermore, Qatar-skeptics need only view the current posturing of the American camp, with both Trump himself and Secretary of State Pompeo reversing course and working feverishly to finally find an amicable resolution to the impasse in the Gulf, their concern revolving primarily around not driving Qatar into the Russian camp. This became all the more urgent when Qatar recently threatened to sign on the dotted line for the purchase of S-400 surface-to-air missiles from Moscow. For months now, the Saudis have been objecting heatedly to the deal, with Crown Prince Mohammad bin Salman—and King Salman himself—recently asking French President Macron to intervene in the matter. They even threatened to take military action against Qatar on the grounds that if their neighbor installed the air defense system, it would put the Kingdom’s security interests at risk.

This now-sweltering episode originated in October 2017. It followed a visit to Doha by Russian Defense Minister Sergei Shoigu that was aimed at bolstering ties between the two countries and, from the American-Saudi perspective, giving Moscow a significant foothold in the Gulf. However, whether the deal is ultimately consummated or not, it is a clear eye-opener as to Qatari Emir Sheikh Tamim’s mindset of not sitting still while awaiting others to take action on his country’s behalf. When its back was shoved against the wall, Qatar chose to fight back, and although the final chapter has yet to be written, the tiny state seems to be holding its own, and then some.

 

 

 

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Economy, Geopolitics

On December 5, 2017, Kuwait Emir Tamim bin Hamad al-Thani announced the abrupt ending of the 38th Annual Gulf Cooperation Council (GCC) Summit on its first day.  According to the Emir, the GCC was considering ways to modify the GCC’s statute to allow for more effective dispute resolution. “Any dispute on the Gulf level must not affect the continuation of the summit.”   This was the first meeting of the GCC since the Arab world’s crisis with Qatar began in June 2017. The diplomatic rift began when several Arab countries (including Bahrain, Saudi Arabia, and the United Arab Emirates) cut their relationships with Qatar due to their belief that the Qatari government funded terrorism and has close ties to Iran. The crisis has persisted and still remains a difficult thorn in the side of the decades-old GCC. Holding this summit was an indicator for the world that the situation could be resolved and the GCC could remain, as noted by Emir Al Sabah.  But while there had been high hopes that holding the annual meeting may actually bring parties together to address concerns, the fact that only two heads of state (the Emirs of Qatar and Kuwait) attended indicated the rest of the Gulf was not ready to talk. The sudden conclusion of the summit is not a high indicator for success.

The Gulf Cooperation Council has been seen as a success since its inception in 1981. It provided a coordinating platform for the burgeoning oil-producing Arab Gulf countries and a solitary unit to counter the influence of Iran in the wake of the Iranian Revolution. The cultural and historical ties between the six-member states–Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates–is the foundation by which the large, coherent entity was formed. “It is also a fulfilment of the aspirations of its citizens towards some sort of Arab regional unity.”   The GCC has worked to align its economic, social, technological, and military efforts for the mutual benefits of each member state.

One aspect of the GCC that is not well-developed, however, is its dispute resolution mechanism. During the 2017 annual summit, Kuwait Emir Sheikh Al-Sabah noted that a task force may be set up to deal with the crisis between the GCC and Qatar, but the GCC already has such mechanisms to handle these problems. In fact, this is not the first rift among Qatar and the GCC. Kuwait mediated this issue in 2014 when similar concerns over Qatar’s foreign policy emerged and Bahrain, Saudi Arabia, and the UAE cut diplomatic ties.

The primary concern, of course, for the member states is survival of this unifying platform. “The last thing we need is for the GCC, the most perfect body in the Arab world, to catch the flu or catch the disease of Arab fragmentation and splintering,” says Abdullah Al Shayji, Professor of Political Science at Kuwait University. Various divisive issues have risen particularly since the Arab Spring protests in 2011 and the current U.S. administration’s approach to unifying the Sunni Arab world against the Shi’a Iranian threat leads to an additional pressure among GCC members. Part of this is being fueled by the Crown Prince of Saudi Arabia, Mohammed Bin Salman. The young prince’s ambitious modernization efforts have been rapid as of late and media reports indicate he was behind the UAE’s recent announcement of a new coordination effort with Saudi Arabia. “According to the Resolution, the Committee is assigned to cooperate and coordinate between the UAE and Saudi Arabia in all military, political, economic, trade and cultural fields, as well as others, in the interest of the two countries.”  There are concerns that such a step indicates the beginning of the end of the GCC in its current composition and unity may be no more.

Convening the GCC member states did indeed illustrate that the cooperation body still holds meaning for the Gulf, but the inability to resolve the crisis with Qatar may lead to additional long-term problems. The new Emirati-Saudi cooperation agreement could just be first of many launched among the member states to maneuver around the Qataris, but the fact remains that the blockade is costing all members billions of dollars in lost revenue. A break among the Gulf states could also mean a weaker Sunni front to the perceived encroachment Iranian influence in the region as the Syrian and Yemeni civil wars rage on. We may very well see rapid reform instituted in the GCC to deal with the diplomatic crisis, but it is unlikely to be successful as long as the Sunni Arab states demand foreign policy changes that the government of Qatar believes puts them in a difficult position.

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Economy, Investment

In October 2017, the government-owned news outlet The Jordan Times reported that Minister of Planning and International Cooperation Imad Fakhoury had met with members of the U.S. administration to ask for additional assistance in carrying out economic development projects in the country. For Fakhoury and the government of Jordan, continual reliance on such assistance from the international community is an important component of their economic development strategy. As one of the few beacons of stability in the region, Jordan has positioned itself as a reliable partner and ally for many countries. Jordan also wants to be increasingly seen as a prime location for international business ventures amidst the crises of the broader Middle East. The government is trying to balance international support with ongoing reform measures to make progress with the Jordan 2025 plan as the guiding mechanism for change.

In fiscal year 2017, the U.S. government reported it provided $1.28 billion in economic aid primarily through macroeconomic growth initiatives via the Department of State and USAID, making Jordan one of the largest recipients for aid.  That was under the Obama administration. Under President Trump, foreign assistance is just one area among several under consideration for deep cuts. As of now, only a little under $400 million is planned for economic assistance to Jordan. Such conversations for the government come at a time when Jordan is leading an ambitious national project to fundamentally revamp many aspects of the country. Launched by King Abdullah II in May 2015, the aforementioned Jordan 2025 plan aims to implement reforms focused on improving the private sector, expanding civil society, and increasing democratic institutionalization. Fakhoury noted, “the main objectives of the blueprint are to address the challenges of rising living costs, poverty and unemployment and to lead the community to a more prosperous level in the coming 10 years.Jordan is just one many countries in the region undertaking ambitious long-term economic plans in this manner. But as the GCC-Qatar rift persists and oil prices continue to fall, Jordan’s path toward diversification puts it further ahead than the Gulf countries.

One way in which these changes are happening on the economic front is through partnerships with other countries and international organizations. The International Monetary Fund (IMF) worked with Jordan to develop an economic development reform package in 2016 to complement the strategy of the Jordan 2015 plan. As part of the reform, an initial assessment of the situation was in order. While Jordan experienced economic progress from 2010 to 2014, stunted growth caused by an influx in Syrian refugees as a result of the Syrian civil war, rising debt and deficits, as well as disruptions in trade caused by regional crises has affected the country since 2015. Though the country is in the process of impleme. These are expected to continue for some time in order to get the country back on track.

Despite these harsh realities, Jordan’s reforms steps are steady. The World Bank recently noted in its 2018 “Doing Business” report that Jordan has improved its ranking to 103 which is not far behind most of the GCC and better than the regional average of 126. “Divided into subnational and regional level analyses, the report covered 11 indicator sets including starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.” Major contributors to this improvement over the last few years included how much easier it is to get credit and streamlining the customs processes at ports.

So what is in store for Jordan? Despite not having a wealth of natural resources like their neighbors in the Gulf and Iraq, Jordan plans to use their strategic geographic location in the region and political stability as a launchpad to the Middle East and Asia for international businesses. As noted in the Jordan 2025 plan, the Hashemite Kingdom wants to become a “regional hub for architectural and engineering services” as well as for transport and logistics. They also plan to further develop several other sectors like tourism, health care, digital business, and financial services. Jordan’s rather liberal society, openness to investment, and stability provide a fertile investment climate for would-be investors.

The major reforms and changes taking place in the country are directed at reducing trade barriers and clarifying and implementing procedures more in-line with international standards. Tariffs and other taxes are still applied to most imports and some items require licenses to import (like pharmaceuticals), but the environment is becoming more friendly to investors and this is a priority for the government. As Jordan moves forward with its reforms, international businesses can look forward to new opportunities in a country in the center of a rapidly changing region.

 

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Economy, Investment

In July 2017 the Central Bank of Egypt announced that they would not issue legislation allowing the trading of cryptocurrencies. The result is that Bitcoin and others are not legal money until they are regulated. Earlier in the summer, Bitcoin Egypt had announced it would go live in August 2017. It was, in fact, this announcement made by Bitcoin that promted the response seen above from the Central Bank of Egypt denying it. Currently the actual launch date is yet to be announced, and there will likely be many more hurdles before Bitcoin and others are able to get the regulation they seek. Cryptocurrency is one of many contentious issues affecting the future of cash in the Middle East.

While there are stark differences in terms of economic development between the oil-rich countries of the Arabian Gulf and the countries of North Africa still reeling from the aftermath of the Arab Spring protests of 2010-2011, there are commonalities. According to Finextra Research, cash is still the preferred method of payment in the Middle East. Most of the region uses smartphones and debit cards, but economic and technological infrastructure is lacking in much of the region. Do a quick Google search on “debit cards in the Middle East” and you will come across endless forums full of would-be travelers asking about the use of debit and credit cards at famous tourist destinations in the region. Unsurprisingly, seasoned tourists recommend they bring the cash and keep the debit card in case they need to use an ATM. While the use of debit cards is on the rise (particularly in the GCC countries), many merchants are not able to handle debit and credit card transactions.

This fact is affecting e-commerce businesses as well. Careem–a ride-sharing competitor of Uber–is currently valued at $1.2 billion and outpaces Uber in the region. One interesting difference: riders can pay in cash. Careem’s success is not felt across sectors. Souq.com, an online shopping platform, was the region’s primary destination for online goods since 2005. In the spring of 2017, Amazon acquired Souq.com in an attempt to expand its reach further into the region after a decline in sales. But much like their earlier venture into e-commerce in the Middle East, a problem remains: how to get customers to pay online?

One idea that has been suggested is the use of Bitcoins, or generally, cryptocurrency. The huge advantage being that a user would not need a bank account, only an internet connection and an e-wallet. With this in mind, it is not surprising that a few Bitcoin companies have emerged in the region. ShuBitcoin touts the benefits, “The Middle East, unfortunately, ranks among the lowest in terms of access to financial services. However it also has one of the highest mobile penetration rates in the world, and Bitcoin has the potential to bring financial services to anyone with a phone.” Not only can this be helpful for the average person wishing to make transactions online, it also provides access to international markets for businesses which has been particularly helpful for startups in the Gulf.

Unfortunately cryptocurrencies have been abused and globally there have been many reports that terrorist groups have used Bitcoin transactions to fund their activities, undetected in the secure blockchain records. For governments that have difficulty monitoring financial activity and without strong institutional capacity to handle corruption, Bitcoin poses a problem. If Bitcoin is attractive because one does not need a bank account and because the transactions are secure, governments are more likely to have an issue.

Whatever the issues are for Bitcoin and other e-commerce activities, it cannot be denied that the use of internet for financial transactions is popular in the region. With a large youth population and high internet penetration and mobile phone usage, it is inevitable that the Middle East will become better integrated into trends of digital transactions and commerce.

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Economy
In April 2016, King Salman and Deputy Crown Prince Mohammed bin Salman Al Saud announced an ambitious ‘Vision 2030’, which mapped out the Kingdom’s social and economic future. It heralded a dramatic transformation in Saudi Arabia’s strategic approach moving forward. At the core of Vision 2030 is the partial sale of shares in Aramco, the world’s largest oil company, as a step toward creating what it hopes can be a country transforming wealth fund.

Is Saudi Aramco the planet’s most valuable company?

In October 2016 Aramco’s CEO Amin Nasser announced plans to sell a 5% stake in its entire business rather than just the downstream business. This puts Aramco in a position to emerge as the world’s most valuable company post-IPO. Aramco’s reserves are twelve times greater than those of their nearest Western competitor, ExxonMobil . The initial listing will be on the Saudi stock exchange and listings on London, Hong Kong and New York may follow.

Why an IPO?

Believe it or not, Saudi Arabia is running out of cash. Years of deficit funding, profligate public subsidies, lavish defense spending and an expensive war in Yemen combined to produce a budget deficit of $79 billion in 2016. All this, despite steep cuts to public spending and state subsidies. Using the Kingdom’s $2 trillion company valuation, a partial sale of Aramco could raise $100 billion, positioning Saudi Arabia for financial independence from oil. “IPOing Aramco and transferring its shares to PIF (the Public Investment Fund) will technically make investments the source of Saudi government revenue, not oil” Deputy Crown Prince Mohammed bin Salman Al Saud said last year. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

Potential IPO barriers

Traditionally, oil has been one of Saudi Arabia go-to levers of ‘soft power’. Preserving that power has involved shrouding Saudi Arabia’s oil reserves and operating costs behind a veil of secrecy that is a poor fit with the levels of transparency investors expect. With management and the board all being government appointments, this sets the scene for potential conflicts between the demands of the Saudi state and the need to serve its public investors. Similarly, much of Saudi Aramco’s income from operating the world’s largest onshore oil field flows through a complex mix of royalties and taxes laid out in an opaque concession agreement. An IPO would require Saudi Aramco to open its books for the first time in 2017 and provide accurate data on the Kingdom’s total crude reserves as preparation. Yet that very mystery enables the Saudis to exert significant influence over global oil prices so effectively.

So what?

Turbulence can, of course, be the investor’s friend by opening up new opportunities. Equally, turbulence can wreak havoc with carefully weighted investment decisions. The mooted Saudi Aramco IPO offers a ringside seat to Big Oil’s river of cash and the October statement could be a game changer for investors now the whole Saudi Aramco business is likely to be included in the IPO. However, as always the devil is likely to lie in the detail around pricing, and the level of information investors can expect to receive around profits, operating costs and particularly – reserves.In April 2016, King Salman and Deputy Crown Prince Mohammed bin Salman Al Saud announced an ambitious ‘Vision 2030’, which mapped out the Kingdom’s social and economic future. It heralded a dramatic transformation in Saudi Arabia’s strategic approach moving forward. At the core of Vision 2030 is the partial sale of shares in Aramco, the world’s largest oil company, as a step toward creating what it hopes can be a country transforming wealth fund.
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