MEI Policy Focus 2016-10 Can Oman’s Stability Outlive Sultan Qaboos? Giorgio Cafiero, Theodore Karasik Middle East Institute Policy Focus Series April 2016 Geopolitical risk analysts Giorgio Cafiero and Theodore Karasik examine the challenges of a political transition in Oman after Sultan Qaboos. The sultan has yet to name a successor, and regional threats could undermine Oman’s stability. The Sultanate’s overreliance on oil, the terrorism threat emanating from neighboring Yemen, and the ongoing geopolitical rivalry between Saudi Arabia and Iran are culminating into a perfect storm as the possibility of a transition beckons. The challenges presented in this paper will test whether Oman can resist the flames of regional turmoil, and maintain its stability in the event of a change of guard. Key Findings ♦ Of all G.C.C. states, Oman’s economy has suffered the most from low oil prices, with the country’s credit ratings falling as a result. ♦ Sultan Qaboos has no officially named heir, raising concerns for a potential power vacuum, ♦ Despite terror threat from Yemen, Oman’s social traditions render Omanis less susceptible to extremist ideology. ♦ Oman is likely to benefit from the lifting of sanctions on Iran, as Muscat looks to deepen economic ties with Tehran ♦ The United States might see greater value in its relationship with Oman should its friction with other G.C.C. states continue. Giorgio Cafiero Giorgio Cafiero is the Introduction C.E.O. and founder of Gulf State Analytics, s political and humanitarian crises de- a Washington, D.C.- Astabilize many Arab states, the Sultan- based geopolitical risk ate of Oman is a beacon of tranquility in consultancy. Cafiero is a foreign affairs analyst who a tumultuous region. The nation’s unique regularly contributes to cohesion and stability is largely attributable The Middle East Institute, to the legitimacy of Sultan Qaboos bin Said Al Monitor, The National Al Busaidi, the longest serving Arab ruler Interest, and LobeLog, among other outlets. still in power. Since ascending to the throne in 1970, Qaboos has transformed Oman Theodore Karasik from an impoverished state into a wealthy Theodore Karasik is the country with first-world infrastructure, a senior advisor at Gulf vibrant tourism industry and a military al- State Analytics. Based in liance with the United States and Britain. the U.A.E., Dr. Karasik also serves as a senior Yet, as Qaboos ages, the Gulf Arab nation advisor at Risk Insurance will in the near future transition to a new Management in Dubai and the Russian Business sultan, and the timing could not be more Council, Dubai. He has inopportune. Oman’s next ruler—still yet worked on Central Asian, to be determined—will inherit the lega- Russian, Caucasian, and cy of Qaboos, as defined by his domestic Arabian Peninsula issues for over 30 years. governance and foreign policy, which has placed Muscat at the center of regional and global security issues. The sultan is popular Sultanate lacks the enormous gas and oil and Omanis revere him to the point of high supplies of other Gulf Arab states, which emotion. However, Qaboos’ successor will adds urgency to Oman’s need to accelerate face a host of domestic and international this transition. Politically, there are con- challenges that represent threats to stability cerns about the country’s succession pro- in a post-Qaboos Oman. cess, which raises questions about Muscat’s ability to ensure stability under the rule of Internally, economic problems appear to be Qaboos’ successor. the most difficult challenge. Low oil pric- es have severely damaged Oman’s state fi- Externally, extremist groups in Yemen nances, further underscoring the economic such as al-Qaeda in the Arabian Peninsu- dangers of overreliance on the petroleum la (AQAP) and the Islamic State (ISIS) will sector. As with the other five G.C.C. na- threaten Oman’s security in the post-Qa- tions, Oman is determined to diversify its boos era. It is troubling to Muscat officials economy away from hydrocarbons. Yet the that AQAP controls Yemen’s Hadramawt Can Oman’s Stability Outlive Sultan Qaboos? 1 region, including the main seaport of the acy, while Oman’s fellow G.C.C. members region’s capital city, Mukalla, situated only may prefer that the next sultan realigns 370 miles from Oman’s Salalah port.1 Nev- Muscat more closely with the Gulf Arab ertheless, the Sultanate is in a relatively states. However, if Oman maintains sta- safe position given robust border controls. bility and national cohesion after Qaboos’ Oman also lacks the common attributes of reign, the Sultanate will likely deny outside extremist growth, where the national fab- actors an opportunity to influence Muscat’s ric’s pillars of tolerance, dialogue, and non- foreign policy orientation. Oman has pre- violence have defined relations between the viously resisted pressure from Saudi Arabia country’s diverse religious and tribal com- and other G.C.C. states to tow the party line, munities throughout Sultan Qaboos’ reign. particularly when it concerns Iran. This in- dependent attitude is firmly engrained in In the grander geopolitical context, Muscat Muscat’s thinking and will be difficult to serves a unique role in the Middle East’s sway in a post-Qaboos environment. balance of power as a diplomatic channel between the Islamic Republic of Iran on one side, and Oman’s fellow G.C.C. states and Economic Challenges their Western allies on the other. In recent years, Oman and Iran have deepened coop- The 70 percent slide in oil prices since mid- eration in numerous diplomatic, economic, 2014 has truly underscored the risks of energy, and security spheres. Although the Muscat’s overreliance on the Omani petro- strengthening of Muscat-Tehran relations leum sector. Of all six G.C.C. states, Oman’s has not cost Oman its ‘good member stand- economy has suffered the most from tum- ing’ in the G.C.C., other council members bling oil prices. Dependent on hydrocar- have accused Qaboos’ independent foreign bons for 84 percent of its revenue, cheap policy of often undermining the council’s oil has pushed Oman into an era of auster- collective security. ity.2 In recent months, Muscat officials have implemented belt-tightening measures such as increasing “Of all six G.C.C. states, Oman’s corporate taxes, lifting fuel prices, hiking expat visa fees, economy has suffered the most removing utility subsidies, and from tumbling oil prices” indefinitely ending bonuses for state employees.3 In all probability, the Islamic Republic will The recent downgrading of Oman’s sover- look to the Sultanate’s next ruler for a con- eign ratings from Standard & Poor’s, which tinued relationship based on Qaboos’ leg- lowered Oman’s rating two steps to BBB- 2 Cafiero & Karasik stable from BBB+ negative, and Moody’s, Oman was one of the first G.C.C. states to which lowered Oman’s rating by two implement a robust long-term vision. Vi- notches to A3, is indicative of the mount- sion 2020 is a road map outlining Muscat’s ing financial pressure that falling oil prices plans for achieving specific economic and have imposed on the Sultanate, which is spreading to non-oil “the next sultan must continue driving sectors. Another fac- tor behind both rat- national efforts to diversify the ing agencies’ down- grading of Oman country’s economy away from oil” concerned the size of the country’s financial reserves in pro- social goals over the span of 25 years. The portion to population, which is remarkably main objectives include achieving econom- smaller than Kuwait, Qatar, and the United ic and financial stability, increasing the pri- Arab Emirates.4 vate sector’s role in the overall economy, enhancing revenue beyond hydrocarbon In the 1990s, the Omanis discovered that sectors, integrating the Sultanate with the their nation’s oil reserves were smaller than global economy, and developing the human previously thought, which prompted Mus- capital potential of Oman’s workforce. cat officials to accelerate plans for a transi- tion to a post-oil economy. Indeed, Oman’s Regardless of when Sultan Qaboos’ succes- 5.15 billion barrels of crude oil in its prov- sor ascends to power, the next sultan must en reserves today are far more modest than continue driving national efforts to diver- Saudi Arabia’s 268 billion, Kuwait’s 104 bil- sify the country’s economy away from oil. lion, the United Arab Emirates’ 98 billion, Sectors that appear most promising to col- or Qatar’s 25 billion. Oman ranks 21st in lectively save Oman from cheap oil include the world in daily oil production at 943,500 liquefied natural gas (L.N.G.), tourism, barrels per day (bbl/day), quite far behind sea and land-based logistics, agriculture, 2nd ranked Saudi Arabia at 9.7 million bbl/ and fishing. Given that Oman has rough- day and the United Arab Emirates and Ku- ly 20 years before it depletes its proven oil wait, ranked 8th and 9th respectively, with reserves, such economic reforms must be between 2.6 and 2.9 million bbl/day. pursued urgently and with a firm hand in the current fiscal and economic environ- In 1995, Oman decided to take on the chal- ment.6 The next four years are critical. lenges stemming from the nation’s more modest reserves of oil and production rates An optimistic outlook on Oman’s gas sector when officials announced the Vision 2020.5 has led many to see L.N.G. as a promising Can Oman’s Stability Outlive Sultan Qaboos? 3 path toward Oman’s transition away from an are also expanding to allow more docking oil-based economy.