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Geopolitics

Tunisia has reached a fork in the road. At the end of one path, there is a complete democratic transition wherein the voices of the citizens are heard, rights are acknowledged, and the economy is liberalized. Down the other, there is a fragile central government unable to respond quickly to reform, a flat economy, and the omnipresent threat of recruitment by extremist groups of unemployed youth. Both of these paths are impacted by corruption. Since the fall of the Zine El Abidine Ben Ali regime in 2011, the newly minted democratic state has tried to stabilise operations and begin the implementation of various reforms, but the lingering effects of political instability caused by various successive governments, political party in-fighting, and the informal economy (which was at the centre of the situation involving the self-immolation of street vendor Mohamed Bouazizi that sparked the revolution) continue to fuel corrupt practices.

In fact, corruption has risen, according to Chawki Tabib, the head of the Tunisian Anti-Corruption Committee. “The CPI [corruption perception index] which is issued annually by TI [Transparency International], confirmed its increase. In 2010, which marked Ben Ali’s final year in power, Tunisia occupied the 59th position according to the CPI, while it made it to the 76th position in 2015.” Tabib explained most recently that while the government continues to prosecute members of the Ben Ali regime in court, the corrupt system is still in place that benefitted the few and due to weaknesses in the government, others have been able to exploit the system. He goes on to say that stamping out corruption in Tunisia can only be successful with political will.

How does this play out in the lives of average Tunisians? Corruption touches nearly every facet of life around the country. As most people rely heavily on government-subsidised services, declining capabilities by the government often leads to paying bribes in order to get the most basic services to be carried out. Dealing with the police, judiciary, businesses, and educational institutions are often marred by corrupt dealings since the “democratisation of corruption” has occurred since the Arab Spring revolutions. In other words, since the revolution, it not only the government involved in corrupt activities; now, with weak government institutions, there is little preventing corruption across many sectors.

In April 2017, a journalist broke the story that the parliament had reintroduced a bill to give amnesty to those who had taken part in corrupt dealings during the Ben Ali regime; the public response was swift. Protests erupted and were followed by additional demonstrations and skirmishes in May 2017 when the government sent the army to the oil fields in southern Tunisia to protect the area from protesters who had turned off the pipeline. There was a perception that the government was hiring those outside of the community to come in and work in the oil fields and little of that money was invested back into the community. “The protesters’ demands have steadily solidified: a quota of jobs for local people at the oil companies drilling in the region, the creation of jobs in an environmental agency and an investment fund for job creation programs.” Later that month, the Prime Minister Youssef Chahed launched a campaign aimed at cracking down on corruption across the public and private sectors. While the campaign has been immensely popular among Tunisians, there are those that believe the campaign was strategically launched to turn attention away from the country’s economic woes.

Because Tunisia has been the darling of the international community since the Arab Spring protests, international assistance is saturating the scene. The International Monetary Fund started implementation of a 4-year Extended Fund Facility (EEF) in 2016. In August 2017, Björn Rother of the IMF visited Tunisia to check on progress of the EEF’s implementation. “The outlook for the Tunisian economy is slowly improving, but challenges remain. Growth is on track to reach 2.3 percent in 2017, supported by a pick-up in phosphates, agriculture, and tourism. But structural obstacles in the economy continue to weigh on exports.” Structural obstacles include systemic and widespread corruption, but with the government’s new anti-corruption campaign, there is hope that it will boost business confidence in Tunisia.

As Tunisia progresses on this path toward economic development, there will be bumps along the way and dealing with corruption will continue to be a priority. The government’s efforts to become more transparent and accountable is in direct response to not only the Arab Spring protests, but also because the government understands that democratic transition must go hand in hand with economic development, thus addressing the most basic demands of the Tunisian youth.

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Geopolitics, Investment
For a long time China had viewed the Middle East as a US influence zone. But, as a reflection of its growing power and ambitions, it is now becoming a more visible actor in the Middle East. Beijing’s involvement in the region is primarily motivated by its economic interests. Qatar is China’s top gas provider and Saudi Arabia is its second largest oil supplier. The United Arab Emirates (UAE) serves as a distribution centre for China as most Chinese exports to the Gulf Cooperation Council, West Asia, Africa, and Europe go through the UAE. As demonstrated in the table below, its trade relations with the region have also grown tremendously and are likely to grow further. In fact, it has recently signed a major deal with Saudi Arabia that worth nearly $65 billion and agreed to increase bilateral trade with Iran to $600 billion in the next ten years.

 

China’s trade volume with S. Arabia, Iran, Egypt, Turkey, and UAE in 2005 vs. 2015

 

 

Saudi Arabia

Iran

Egypt

Turkey

UAE

Year

Export

Import

Exports

Imports

Exports

Imports

Exports

Imports

Exports

Imports

2005

3,824

12,246

3,297

6,787

1,934

211

4,254

622

8,730

2,046

2015

21,684

30,151

17,831

16,035

11,963

916

18,63

2,961

37,069

11,532

Note: Total Import / Export Value in millions of US Dollars – current value.

Source: Compiled from the World Integrated Trade Solution database (World Bank), which is available at http://wits.worldbank.org/CountryProfile/en/Country/CHN/Year/2005/TradeFlow/EXPIMP/Partner/ARE/Product/all-groups

China’s interest in the Middle East is also related to its ambitious “Belt and Road Initiative” (BRI). In 2014 Beijing launched this $40 billion project that aims to revive the Silk Road, its ancient trade network, to connect China to Central Asia, the Middle East, Africa and Europe through roads, railways, ports, and oil and gas pipelines. There are already noteworthy achievements. For example, in 2016, a freight train made the journey from China to Iran in just 14 days, significantly shortening the regular 45 days delivery time via sea route. Beijing is also currently negotiating a free trade agreement with the Gulf Cooperation Council (GCC) and working with Israel on a railway proposal to connect the Red Sea to the Mediterranean that bypasses the Suez Canal. Once completed, the BRI will significantly boost China’s trade and economic relations globally.

There are also political motives that might explain the recent momentum in China-Middle East relations. Beijing’s most important foreign policy conflict involves the South China Sea (SCS), which is one of the most strategic commercial shipping routes in the world and also contains significant natural resource reserves. Beijing claims sovereignty for nearly the entire SCS. However, the United States doesn’t recognise Beijing’s claim, viewing it as a violation of international law and maintains a strong military presence in the region to challenge China. As a rising power, China first needs to secure control of its neighbourhood. Its greater involvement in the Middle East may help China in this regard by diverting US attention away from the SCC to the Middle East. In fact Beijing announced its first “Arab Policy Paper” in 2016, recently opened its first overseas naval base in Djibouti and started the construction of an arms factory in Saudi Arabia to manufacture armed. Others had previously refused as China has grasped the opportunity.

Beijing also actively promotes the Shanghai Cooperation Organisation (SCO) in the Middle East, a security organisation jointly led by China and Russia. Iran applied for SCO membership in 2008 and Turkish President Erdogan mentioned in 2016 that Turkey could also seek SCO membership. India and Pakistan have recently become full members, and China’s Deputy Foreign Minister Li Hailai stated that Beijing “welcomes and supports Iran’s wish to become a formal member of the SCO” and would also consider Turkey’s membership if it files an application. China’s Ankara ambassador also stated in May 2017 that Beijing “is ready for Turkey’s membership.”.

China is now a more active player in the Middle East, not only in economic but also in political terms. China’s active engagement in the Middle East may actually contribute to stability in the region. A stable Middle East serves China’s interests better as conflicts within the Middle East such as the Qatar crisis pose a threat to its energy supplies, free-trade negotiations, BRI project, and regional trade prospects. Beijing emphasises sovereignty, territorial integrity, and the principle of non-intervention and avoids taking a clear side in political conflicts in the area. It maintains good relations with both Iran and Saudi Arabia and has no major enemy in the region. Beijing appears to be an honest and impartial broker in Middle East conflicts and may soon play a greater role in mediating disputes, which may further strengthen its standing in the region in future.

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Geopolitics, Investment
In June 2017, Saudi Arabia, Bahrain, the United Arab Emirates (UAE), and Egypt cut political and economic ties with Qatar over an accusation that it supports terrorism in the region. Qatar, a small Gulf country that tries to pursue an “independent” foreign policy, has been under intense pressure by the Saudi camp. Saudi Arabia, Bahrain and UAE accused Qatar of sponsoring terrorism in the region several times in the past and even withdrew their diplomatic missions in 2014 for eight months. But this time the Saudi Camp has more support in the region and appears to be more aggressive. Qatar’s policymakers are now in a difficult position. Their domestic legitimacy and international standing will significantly weaken if they submit to the Saudi camp, but will face a political and economic isolation if they don’t.

Turkish President Erdogan harshly criticised the Saudi-led sanctions, immediately started delivering food supplies to the country and quickly ratified a previously signed military agreement to deploy troops to a Turkish military base in Qatar.

Turkey and Qatar already had strong ties before the crisis. Their foreign policies have been in alignment in most critical issues threatening the region. Both Turkey and Qatar have opposed the military coup in Egypt that carried Abdel Fattah el-Sisi to power, refused to recognise Hamas and the Muslim Brotherhood as terrorist organisations, and provided support for the rebel groups that fight against the Assad regime in Syria. Moreover, to the dismay of Saudi Arabia, which views Iran as a major security threat to its livelihood and thus aims to isolate it, Turkey and Qatar refuse to distance themselves from Iran.

Thus, what brings Turkey and Qatar closer is their similar foreign policy orientations in the region. The Erdogan administration doesn’t have many allies left in the region with a similar foreign policy outlook and is likely to face further political isolation in if it loses Qatar.

There are also additional reasons that might explain why Turkey backs Qatar in the conflict. On 18 December 2016, during one of their frequent meetings, Qatari Emir Al Thani signed an arms trade deal with Erdogan, agreeing to buy $2 billion worth of arms from Turkey. Qatar’s strong reserves serve as a foreign policy tool for the country. Such deals, whilst helping Qatar to diversify its arms suppliers, are particularly important for Erdogan as his administration which has been heavily investing in domestic arms production with a declared aim to change Turkey from being an ‘arms importer’ to an ‘exporter.’ The arms deal with Qatar in this regard sends a signal to Erdogan’s conservative supporters that the country is on the right track.

Qatar also serves as an emergency energy supplier for Turkey, which is located in an unstable political neighbourhood and has to rely on Russia and Iran for its energy needs. But this means that Turkey’s energy security is always at risk. Qatar provided liquefied gas to Turkey when its gas supplies were threatened after it shot down a Russian warplane in November 2015, demonstrating how important it is for Turkey to have a reliable energy supplier at the times of crisis.

Qatar also provides an investment platform for Turkish companies that have lost their market shares in Libya, Egypt, Russia, Iraq, and Syria. This is especially important for the Turkish construction industry, which is one of the most prominent sectors in Turkey and dominated by contractors with close ties to Erdogan. The Turkish construction industry has already set its sights on the $170 billion investment budget that Qatar has allocated for its hosting of the 2022 World Cup. In fact, Turkish Deputy Prime Minister Mehmet Simsek recently said: “Turkish contractors have undertaken projects worth $13.7 billion in Qatar. Qatar is according positive discrimination to Turkey not only in words but also in deeds, giving strong support to Turkish companies doing business there… I’d like to also underline that we are ready to provide any contribution to our Qatari friends in the 2022 World Cup organization.” (http://www.atimes.com/article/qatari-money-rise-turkey/)

It should be noted that Turkey’s support to Qatar is primarily motivated by political concerns, not by economic ones. In fact, Saudi Arabia and the UAE have always been a more important economic partner for Turkey and the Erdogan administration has been trying to further improve Turkey’s economic relations with them. According to the World Bank trade data, Turkey’s exports to the UAE totalled $4.7 billion and to Saudi Arabia $3.5 billion in 2015, while the same figure for Qatar was only $423 million. (http://wits.worldbank.org/CountryProfile/en/Country/TUR/Year/2015/TradeFlow/EXPIMP/Partner/SAU/Product/all-groups) But there are now social media campaigns in Saudi Arabia and the UAE that call people to boycott Turkish products. (http://www.birgun.net/haber-detay/calls-from-saudi-arabia-and-uae-to-boycott-products-of-turkey-amid-qatar-crisis-163961.html). There are also reports that the Al-Sisi government in Egypt has asked the Saudi-led coalition to apply economic sanctions against Turkey. (https://www.middleeastobserver.org/2017/06/16/37406/)

Because Turkey’s foreign policy orientation is similar to that of Qatar, it delivers a great blow to Turkey’s international legitimacy and standing if Qatar submits to the Saudi camp. But Turkey has also no intention of upsetting its relations with Saudi Arabia and its allies like the UAE. Having said this Ankara cannot assume a mediator role in the crisis because of its involvement in Qatar. This is why Erdogan’s July 23-24 visit to Gulf countries may be interpreted as a damage control attempt by Erdogan to show that Turkey’s involvement in Qatar is not an anti-Saudi move and his administration would like to maintain good relations with the Saudi camp. The problem lies in the fact that Turkey has already become a party to the conflict. At the moment, the Erdogan administration can only hope that the mediation efforts undertaken by Kuwait and the United States will resolve the crisis on favourable terms to Turkey.
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Geopolitics

On April 9, 2016, Egyptian President Abdel Fatah El-Sisi announced that two Egyptian islands–Tiran and Sanafir–were located inside the Saudi Arabian territorial waters and, therefore, they belonged to the Kingdom of Saudi Arabia. This announcement triggered waves of anger among Egyptians and remains a hot topic on the Egyptian streets and social media. Lawyers took the issue to the Supreme Constitutional Court and the courts sided with the lawyers: they believe that the islands belong to Egypt according to historical documents. Unhappy with such a verdict, El-Sisi took the issue to the Parliament and in June 2017 they decided that the islands belong to Saudi Arabia. The case continues to go back and forth in Egypt, but it is important to look at the historical context and to understand the strategic importance of the islands in Egyptian and Saudi politics.


Culturally, territorial integrity is important in Egypt because it is believed that the borders of the country have not changed much in the thousands of years of Egyptian civilization. In addition, agriculture has played an important part in its history and the thought of selling or losing land is considered shameful. There is popular phrase in Egyptian Arabic (al-ard ka al-`ird) which roughly translates to “the land is like a man’s honour,” meaning that the thought of losing land is akin to shaming the family. This phrase has been used quite frequently in opposition to President El-Sisi’s command to give back the island to Saudi Arabia.


El-Sisi claims there are maps dating back to 1897 indicating that both islands were owned by the tribes that inhabited present day Saudi Arabia whose country was established in 1932. The Egyptian courts argued differently. “The Court also argued that according to a 1906 maritime treaty between Egypt and the Ottoman Empire, the islands are Egyptian.” Geographically, the small islands of Tiran and Sanafir are located in the Gulf of Aqaba between the coast of the Sinai Peninsula and the Arabian Peninsula. Tiran is approximately 80 square kilometres and is about six kilometres from the coast southern Sinai coast. Sanafir is 33 square kilometres is about 2.5 kilometres from the Sinai coast. These islands are uninhabited by citizens of either country, but there is a light Egyptian police and military presence in addition to United Nations peacekeeping forces as a result of Camp David Accords signed between Egypt and Israel, which also stipulates that no heavily armed forces are permitted.


So why is El-Sisi arguing that the islands belong to Saudi Arabia? During the times of colonial expansion by Great Britain in the Middle East as a result of the ailing Ottoman Empire, agreements between Arab leaders eventually landed control of the islands of Tiran and Sanafir within the realm of the nascent Saudi Kingdom. When the war of independence and expansion by the State of Israel began in the late 1940s, Saudi King Abd Al-Aziz Al-Saud asked for assistance in protection of the islands by then-Egyptian King Faruq since there was a fear that Israel may continue to expand its influence further into Gulf like they did when they took control of the Port of Eilat. After Egypt took control of the islands in 1950 at the request of Saudi Arabia, they immediately sent their forces to the islands. They also closed the Straits of Tiran which led to the start of the war of 1967 between Egypt and Israel. Israel occupied the two islands twice: in 1956 during the Suez Crisis and again in 1967 during the Six Day War. Both islands were returned to Egypt in 1979 as part of the Camp David Accords. In 1982, the Egyptian government declared both islands as nature reserves to only be used by tourists for diving in the area.


Strategically, Saudi Arabia is very interested in re-obtaining the islands due to its efforts to increase its influence in the region. In 2012, the Saudi-owned oil company Aramco discovered oil reserves off the coast of the Duba Port. By controlling Tiran and Sanafir, they aim to set up shop to begin drilling. In addition, they are concerned about the security of the city of Tabuk. Finally, by controlling Tiran and Sanafir, Saudi Arabia can gain control of access to and from the Gulf of Aqaba.


While the debate continues in the Egyptian courts, the Egyptian street remains concerned about losing territory while President El-Sisi focuses on the importance of returning the islands to their rightful owners. Many Egyptians believe that there was a deal between El-Sisi and the Saudi King Salman in 2015 that focused on the transfer of the islands. Time will tell where the issue ends up.

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Geopolitics

Iranian politics is usually characterised by a political contestation between two broadly defined camps: Hardliner conservatives and moderate reformists. In Iran’s May 19 presidential elections, reformist incumbent President Hassan Rouhani competed against hardliner Ebrahim Raisi. Rouhani won a landslide victory, receiving approximately 57 percent of the vote. Rouhani has won the presidential elections on promises of a political and economic reform, prosperity, more jobs, and further opening up the country to the global market. 

Understandably, the economy was the most important issue in the election. The nation suffered from negative growth rates in 2012, 2013, and 2015, largely due to the economic sanctions imposed by the United Nations on Iran over its disputed nuclear programme. Rouhani signed a historic nuclear agreement, called the “Joint Comprehensive Plan of Action (JCPOA),” with the United States, Russia, China, and the European Union in 2015, agreeing to significantly curb his country’s uranium enrichment projects in return for the lifting of most sanctions. Most Iranians (76 percent) indicated their support for the deal, with an expectation that the agreement would end Iran’s isolation and reinvigorate its economy.

The JCPOA released nearly $30 billion frozen Iranian assets, removed the oil embargo and EU sanctions, and allowed non-US banks to resume their businesses with Iran. Following the agreement, SWIFT has reconnected Iranian banks to the global transaction network, enabling oil traders to transmit payments to Iran. Airbus and Boeing have sold new passenger planes to Iran, Total and Shell have agreed to undertake energy investments, and Renault and Peugeot-Citroen have signed deals with Iranian companies to produce some of their models in the country to reclaim some of their lost market shares.

Iran’s GDP grew by 6.5 percent in 2016 and inflation has dropped to single digits. Oil exports averaged 1.4m barrels/day in the 2015/2016 fiscal term but are expected to average 2.4m barrels/day in 2016/2017. However, unemployment remains high at 12.5 percent and growth in the non-oil sector was only 0.9 percent in 2016. Unemployment is likely to persist unless the non-oil sector experiences significant growth. But Iranian firms have difficulties to access finance as international financial investors still hesitate to enter Iran. Most sanctions on Iran have been lifted, but US sanctions remain in place, which significantly hurts the credit ratings of the country and its firms and makes dollar-based transactions risky for global companies. Also, US President Donald Trump is unwilling to back the nuclear agreement and even stated that it is “one of the worst deals ever signed,” which creates uncertainties on the future of the deal.

According to a February 2017 IMF report, President Rouhani needs to undertake a comprehensive banking reform to attract foreign investors and create jobs. But it is very difficult for his administration to challenge the establishment and initiate any major economic reform. He is actually expected to transform an economy that he has little control over. The country’s powerful Islamic Revolutionary Guards Corps (IRGC), which reports directly to the supreme leader, runs a multi-billion dollar business empire that accounts for a quarter of Iran’s GDP. The IRGC is hostile to any foreign direct investment or reform that challenges its dominance. Moreover, Supreme Leader Ayatollah Ali Khamenei, who has a veto power over any legislation, clearly took the sides of the hardliners during the election and called for a “resistance economy,” in which he envisioned an inward-oriented economy that emphasises self-sufficiency and import substitution, a policy line that suits the interests of the IRGC and contradicts Rouhani’s economic agenda.

President Trump further complicates Rouhani’s business. In addition to his harsh rhetoric on Iran and threats to end the nuclear deal, he has recently signed a major arms sale agreement with Saudi Arabia, Iran’s major rival in the region. US arms sale to Saudi Arabia puts extra pressures on the Rouhani administration and forces it to increase military budget at the expense of social spending or infrastructure investments.

Iran’s May 19 presidential election has shown that most Iranians approve the nuclear deal, support Rouhani’s engagement with the West, and are eager for a change. However, Rouhani’s domestic authority is limited and any significant political or economic reform in Iran seems unlikely. But Iran’s supreme leader Khamenei is now 77 years old and in poor health. His death may strengthen Rouhani’s relative position and even pave the way for a significant change in Iran. Global powers should support Rouhani’s administration by removing the remaining sanctions, avoiding harsh rhetoric, and encouraging international businesses to invest in Iran as reformists’ future in Iran may depend on his success as president.

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Geopolitics

The recent referendum in Turkey changed its system from a parliamentary government to a presidential one. The newly empowered president will be able to appoint all ministers and head the Council of Ministers, issue decrees, and directly appoint or nominate almost all judicial members at the Constitutional Court and the High Council of Judges and Prosecutors. Opposition parties argue that the new constitution gives too much power to a single person, violating the principle of separation of powers and creating a de-facto dictatorship. The governing party insists that it guarantees a more stable and efficient government, which is required to effectively deal with today’s problems.

However, to the dismay of the current president, Recep Tayyip Erdogan, who was expecting a landslide victory, the new constitution was only approved by a 51-49 percent slim majority, leading many opposition groups to question its popular legitimacy. In addition, the Organization of Security and Cooperation in Europe (OSCE) and the Council of Europe stated in their post-referendum reports that the referendum fell short of meeting democratic standards. In fact, it was held under a state of emergency rule, all the means of the state were put in the service of “yes” campaigners by the government, and the Supreme Election Board changed the referendum rules in favour of the yes-side while the voting was still going on.

Erdogan adopted a very harsh rhetoric in his referendum campaign and called some European countries as “Nazis” and “Fascists” and the opposition as “terrorist allies.” He frequently stated that Turkey is surrounded by internal and external “enemies” that want a “weak Turkey” and for that reason oppose his rule. His main goal was to reach and mobilize the nationalist/conservative bloc in Turkey. The first public opinion survey following the referendum suggests an inverse relationship between education level and yes-votes. Accordingly, 70 percent of primary school graduates said yes in the referendum, while the same rate was only 39 percent for university graduates.  Erdogan’s supporters were concentrated in rural areas. He lost in commercial, industrial and coastal cities that suffer from the deteriorating relations with Europe and the declining economy most. In short, Erdogan’s anti-Europe, nationalist and harsh rhetoric did not appeal to voters living in urban areas but it did to voters in rural regions where small-scale farming is the primary source of income and people tend to be less-educated but more conservative, nationalist and pious.

In January 2017, the Turkish lira experienced a sharp drop, with the dollar/lira parity reaching to 3.9 lira per 1 dollar. The Financial Times wrote on January 10, 2017, that “Turkey appears closer to a full-blown currency crisis than at any point since the ruling AK party (Erdogan’s Justice and Development Party) took power in 2002.” Rising interest rates in the United States, high government spending in Turkey and a confidence decline in the country’s economy drop the value of the lira. However, Erdogan declared that it is the usual “internal and external enemies” that cause the decline. He even called all Turkish citizens to sell their dollars and euros, stating that those who have foreign currencies in their hands are not different from terrorists who carry guns and bullets. A dramatic interest rate increase would probably stabilize the currency and restore some of the lost confidence in the economy, but Erdogan strongly opposed it because an interest rate increase would further slow down economic growth while further increasing the already high unemployment level (currently 13 percent) and could therefore cost him the referendum.

Erdogan needs to make politically risky decisions to save the economy. He needs to improve relations with the West, reduce the political tension at home, adopt a more conciliatory rhetoric, encourage foreign direct investment, increase interest rates and cut government spending. But in his victory speech after the referendum, he actually promised to hold another referendum to reinstate the capital punishment, which violates the Copenhagen criteria and ends Turkey’s EU accession talks. Although the referendum is over, it appears that Erdogan still appeals to his conservative/nationalist/pious voter base and aims to keep them mobilized. He may in fact have plans for an early election, instead of the one scheduled in 2019. It seems likely that political tensions will remain high in Turkey and economic policies will be subordinate to domestic political calculations in the near future.

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Geopolitics, Investment

The Organisation of Petroleum Exporting Countries (OPEC) is, of course, operating in a very challenging time. OPEC is facing serious competition in the global market share for oil supply. The primary competition to OPEC’s market dominance is emanating from suppliers of shale gas, particularly US-based producers of shale gas. While many commentators are forecasting that demand for oil will eventually slow down, at this point in time it certainly remains strong. The ‘peak oil’ time that many have predicted is still many years away suggesting demand for oil will continue to remain strong for the foreseeable future.

OPEC recently decided to cut its oil supply, abandoning the idea that it should pursue market share at all costs. This decision has benefited OPEC’s primary competitor- namely US shale. One can understand OPEC’s decision given its members, particularly Saudi Arabia, have previously experienced negative consequences as the result of a ‘pump-no-matter-what’ approach in order to secure market share. While the rig-count in the US continues to rise, OPEC has publically declared and demonstrated that it will stick to curtailing its oil supply in an attempt to boost oil prices and bring the market back into what it considers to be the ‘right balance’.

There is a view that this tug-of-war between OPEC and shale-gas producers could result in the former’s demise. However these predictions are unlikely to come to fruition. The major problem with shale-gas is that despite recent improvements and efficiencies it remains a comparably very expensive operation. Saudi Oil Minister Khalid al-Falih hit the nail on the head when he recently addressed the current situation in his speech at the World Economic Forum in Davos, Switzerland. Al-Falih rightly stated that it would take considerable time for US oil production to claw back the ground it recently lost to OPEC in the ongoing fierce competition between the two for market-share.

The comparatively low-cost producing OPEC reduced their oil production late last year by an estimated 1.8 million barrels a day with the aim of propping up oil prices. The consequential rise in oil to above US$50 a barrel led to an increase in the number of US-based rigs for shale production that had previously shut down due to their unprofitability. However this resulted in an exhausting of the most fertile reservoirs and an increase in costs for contractors involved in the oil production process. As al-Falih pointed out, this will mean that there will be an inflation of costs for US shale producers in the coming years at least.

OPEC members are old hands at the oil game. They have faced challenges like this before and have predictably triumphed. The shale-gas producers are the new kids on the block buoyed by early success. However, the highly efficient OPEC is playing the long-game and it will continue to remain the key market-player until (if ever) the world decides it no longer needs oil.

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Geopolitics
Saudi Arabia recently established a coalition of Sunni states to combat terrorism under the banner of the Islamic Military Alliance to Fight Terrorism (IMAFT). Its stated purpose is to help defeat the Islamic State, al-Qaeda and others they believe to be terrorist states and organisations. To the surprise of many, Oman has decided that it wanted to join the Riyadh-led network declaring the organisation ‘a new chapter in regional Muslim unity’. Oman was the 41st nation-state to join IMAFT which includes nations like Pakistan, Egypt and Turkey but which does not include Iran, Syria or Iraq.

There are numerous obvious benefits associated with Oman’s decision including the sharing of vital intelligence with some of the Middle East’s leading intelligence organisations and a strengthening of its own counter-terrorism capabilities. These are extremely important considerations given the ongoing volatility in the region. However, this decision made in Muscat has also raised many eyebrows and questions.

Notable among these is that Oman has traditionally been non-interventionist in its foreign policy stance. This is perhaps best recently evidenced by its decision to stay out of civil war in Yemen where Saudi Arabia has played a leading role. Oman was the only member of the Gulf Cooperation Council who did not join hostilities, instead choosing to adopt more of an intermediary and diplomatic position. Oman also decided against joining the US-led war against Islamic State and stayed out of the recent Libyan uprising in 2011. In remaining committed to its policy of neutrality and non-interventionism, Oman has obviously not had to deploy its military into the neighboring sovereign nations, unlike most of the other states in the region. In short, Oman has preferred neutrality above all else.

A second important point worth considering regarding Oman’s decision to join IMAFT has to do with its relationship with Iran. Traditionally Oman has enjoyed close relations with Iran, a Shia state obviously left out of the alliance given its ongoing conflict with Saudi Arabia for hegemonic control in the Middle East. Tehran is less than impressed with Oman’s decision especially given the recent rise in tensions between the two Middle Eastern powerhouses.

Two inevitable questions arise from this. Does Oman’s decision to join IMAFT signal an abandonment of from its non-interventionist neutral position in favour of closer ties and siding with Riyadh? And if so, what does this mean for the future of Omani-Iranian relations?
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Geopolitics
There have been new developments in Egyptian-Saudi relations with regards to the ownership of two Red Sea Islands, Tiran and Sanafir, located at the southern entrance to the Gulf of Aqaba. Ownership of the islands gives one control of the entry and exit of the eastern arm of the Red Sea, leading to the port of Aqaba, which is a very popular tourist terminal for passengers and automobiles coming from across the shore in Egypt. The Gulf of Aqaba, where Jordan and Israel also maintain important ports, is of major importance for international commerce given it serves as a connecting point for the African and Asian continents. The importance of this passage is also evidenced by Egypt’s 1967 blockading of the Strait of Tiran, which helped trigger the Arab-Israeli/Six Day War.

The appeals court in Cairo has just upheld a decision by the lower Egyptian administrative court demanding the two uninhabited Red Sea Islands be transferred from Egyptian to Saudi control. There is no dispute between the two ruling regimes’ about the islands’ ownership, which Egypt has been protecting since 1950 at Riyadh’s request. In 1950 Saudi King Abdul-Aziz al Saud authorized the transfer of the islands to King Farouk’s regime with the aim of better protecting the islands against a possible Israeli attack. Saudi Arabia did not at the time possess the capabilities required to defend the islands against such an attack, which they were worried would occur following Israel’s successful defeating of Arab forces in the 1948 war in Palestine. Israel did manage to occupy the Islands in 1967 but then evacuated them in 1982 in accordance with a peace treaty it signed with Egypt. This court decision follows years of discussions between the two countries about their maritime borders.

Most Egyptian officials appear to be happy with the decision bearing in mind the Saudi Kingdom has provided Egypt with a large amount of aid and has heavily invested in the country in the last few years. Relations between the two countries only appear to be getting stronger with the Saudi Kingdom providing billions of dollars for the funding of a causeway connecting Sharm el-Sheikh and Saudi Arabia, helping to supply Egypt’s long-term energy needs. Internationally, the deal to return the Red Sea Islands to Saudi control seems to be well-received given there are no international agreements including the Camp David Accords which forbids Egypt from transferring this land back to Saudi Arabia. The transferring of the land also paves the way for the constructing of a bridge linking Saudi Arabia to the tip of the Sinai Peninsula in Egypt.

It should however be noted that whilst the deal has been supported by Egyptian parliament there are others in Egypt who have opposed the deal, interpreting the court order to be a violation of Egyptian sovereignty. Central to their argument is that Egypt had a claim to the islands predating the founding of the modern Saudi state. Some Egyptians have accused the government of ‘selling off their islands’.
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