A Subsidiary Marmore First Take The GCC Diplomatic Crisis over Qatar June, 2017 www.emarmore.com agency was hacked. The crisis got worse when liquefied natural gas (LNG)3. Also, the three GCC HH Sheikh Tamim held a telephone call with the countries—KSA, UAE and Bahrain—have blocked re-elected Iranian President, Hassan Rouhani, their nationals from travelling to Qatar; while a few days after the news agency controversy. giving Qataris two weeks to leave their nations. Reportedly, Riyadh saw this as an act of defiance Also, they indicated that they would pursue Highlights that went against the interests of the GCC. The rift legal routes in an attempt to persuade friendly is already being dubbed in some quarters as the countries and companies to downgrade their ties biggest diplomatic crisis in the GCC region since to Qatar. Additionally, the closure of Qatar’s only the Gulf War of 19912. land border (with Saudi Arabia) threatens food What is the history of revolutionary movement that threatens regional supplies4. stability. What is the economic this issue? Abu Dhabi-based Etihad Airways and Dubai- As a consequence of the political differences, and financial market based Emirates Airlines announced suspension On June 05, 2017, Saudi Arabia, Egypt, the United when the Brotherhood government of Mohamed of all flights to Qatar from June 06, 2017 (until Arab Emirates (UAE) and Bahrain severed ties Morsi in Egypt fell in 2013 and Abdel Fatteh impact for Qatar and further notice). Qatar Airways, a rapidly growing with Doha, accusing the Qatari government of al-Sisi came to power, Riyadh welcome the the GCC? international carrier, is now threatened with promoting instability in the region. At the core development; whereas Qatar appeared resistant disruption to its operational network if flights of the latest diplomatic crisis are incendiary to it. As a result, a diplomatic crisis opened in The four Arab countries announced that they cannot access the national airspace of Qatar’s comments purportedly made by Qatar’s Emir 2014 when KSA, the UAE and Bahrain temporarily would close air and sea transport connections three closest neighbors5. HH Sheikh Tamim Bin Hamad Al-Thani at a Qatari suspended diplomatic relations with Qatar. with Qatar, which is the world’s top exporter of military graduation ceremony on May 23, 20171. Another contention is Qatar’s relations with Iran. Image Source: Searchbonus Figure: Qatar’s vulnerable geographical location A news report published on the Qatar News Agency (QNA) website, later on May 23, 2017, Why now? alleged that the Emir stated that Qatar shared a Unlike KSA, Qatar did not favor an approach of tense relationship with the U.S. President Donald completely undermining relations with Iran. For Trump’s administration, while favoring a role for instance, when KSA and some of its allies severed Iran in the region. Though on May 24, 2017, the diplomatic ties with Iran following the crisis that QNA made the announcement that its website erupted after the Kingdom executed cleric Sheikh had been hacked and false statements posted on Nimr al-Nimr in January 2016, Qatar only recalled it, the diplomatic and media damage had been its ambassador, a step short of cutting full ties. done in the rest of the GCC. With that backdrop of simmering tensions, the immediate trigger appears to be a constellation of The lead up to the crisis began earlier, according developments that occurred after U.S. President to many analysts and experts. According to some Donald Trump’s visit to Riyadh (KSA) in May 2017. experts, Doha had in recent years nurtured an Trump called for a joint front against Iran. abiding ambition of following an independent foreign policy, unlike the consensual approach Image Source: Searchbonus Three days after the Trump visit was concluded, of the majority of the GCC, dominated by the the Qatar News Agency carried purported Saudi perspective. The fault-lines appeared when comments by Qatar’s Emir HH Sheikh Tamim Bin Qatar welcomed the growing influence of the 1 The Washington Post Hamad Al-Thani, questioning the growing anti- Muslim Brotherhood in Egypt after the fall of 2 Vox Media Iran sentiment. However, Qatari officials quickly the Mubarak regime in 2011. However, KSA and deleted the comments and said their news 3 Financial Times its allies reportedly view the Brotherhood as a 4, 5 ibid 6 Mubasher Info 2 A Subsidiary Marmore First Take - The GCC Diplomatic Crisis over Qatar www. emarmore.com 3 Qatar has deep trading links with the rest of the worked out through Iran, the additional cost of On the day that followed the announcement, 2016, raising the yield on debt that is due in June GCC and the wider world. By the close of 2016, transportation and the risk premiums will reflect Qatari stocks were little changed. However, 2026 by 22 basis points to 3.4%. The yield rose a the trading value between Qatar and the GCC on Qatari export prices. Otherwise, Qatar will the rout pulled down the Qatari index’s price- further seven basis points on the day following nations posted QAR 38 billion (USD 10.4 billion), have to write off the additional costs accrued as to-earnings ratio from the highest level that it the announcement, taking it 49 basis points according to Qatari official statistics, of which 82% discounts if retaining market share is considered enjoyed since 20148. U.S. Dollar bonds belonging higher than Abu Dhabi’s (UAE) similar maturity or USD 8.55 billion were contributed by KSA and more important. to Qatar dropped by the most since November dollar debt. the UAE . In 2016, Qatar’s imports from the rest of the GCC totaled QAR 18.79 billion (USD 5 billion), The devastation that can be wreaked on stock and Image Source: Searchbonus of which the UAE took a share of 56% and KSA bond markets is worth stressing upon. The Qatari Figure: Qatar stock market reaction- QSE index declined sharply of 27% at an aggregate value of USD 4.55 billion. stock index fell 7.6% in the first hour of trade on Moreover, Qatar’s imports from Bahrain is 6% of its June 05, 2017, the day on which the diplomatic QSI - Index levels and Returns imports from the GCC nations. severance was announced7. Some of the top blue 10,400 2.0% chips were hit most, with Vodafone Qatar, the 10,200 1.0% Given the close trade and deep geographical links most heavily traded stock, falling below its 10 per 10,000 0.0% 9,800 with the rest of the GCC, especially the KSA and cent daily limit. Moreover, the KSA and other GCC -1.0% the UAE, the decision to sever ties by the group nations traditionally account for about 5-10% of 9,600 -2.0% of Arab countries is likely to have a deep financial daily trading on the Qatari stock market. Notably, 9,400 -3.0% impact on Qatar’s stock markets if the face-off the other concerned countries’ stock markets also 9,200 Index Level -4.0% continues for long. Moreover, Qatar’s ability to fell (albeit slightly) during the period, with Dubai 9,000 Index Returns transport its exports through sea and air may losing 0.8% and KSA by 0.2%. -5.0% 8,800 become extremely difficult. Even if options are 8,600 -6.0% Image Source: Searchbonus 8,400 -7.3% -7.0% Figure: Qatar bond market reaction- Credit Default Swap (CDS) of Qatar rose sharply 8,200 -8.0% 80 Mid Spread Close - CDS Qatar 75.33 70 Source: Reuters; Marmore Research 60 59.57 50 Though it is difficult to predict how the current UAE, transports about 2 billion cubic feet a day crisis will end, the trade and financial impact will of gas9. This is around 30% of the UAE’s average 40 be significant on Qatar if it is not resolved quickly. gas consumption daily. Though Qatar has not 30 Qatar also exports its gas to both the UAE and announced any retaliatory measures as of the time Egypt via LNG shipments. The two importers of writing this note, there is little doubt that it is 20 may start scouting for other sellers. The Dolphin Doha that will stand to lose economically the most 10 Energy pipeline, which Qatar uses to supply the against a larger unified front of Arab countries. 0 7 EconomicTimes 8 BloombergMarkets Source: Reuters; Marmore Research 9 MEED 4 A Subsidiary Marmore First Take - The GCC Diplomatic Crisis over Qatar www. emarmore.com 5 a false news story in QNA, which served as the Image Source: Searchbonus Figure: Graphical representation of how different scenarios can pan out What are the potential backdrop to the current crisis13. scenarios? The current crisis appears increasingly muddled Qatar said it would refrain from retaliating with numerous known and unknown players against the measures imposed on Doha, which involved. Thus, the outcomes are difficult to include the suspension of all land, sea, and air predict or ascertain. However, if Qatar does connectivity; the ejection of Qatari diplomats in not quickly accede and the crisis grows in the concerned GCC nations; and the order for all unpredictable ways, it can have deleterious citizens of Qatar living in those nations to depart impact on the rest of the GCC as well. For e.g., within 14 days. though Qatar is a relatively small player in oil, a A key component in the latest diplomatic rift prolonged crisis and hardening of stances can is likely to revolve around Qatar’s continued cause Qatar to provoke disturbances within Source: Marmore Research presence in the GCC bloc10.