1 “A GCC House Divided: Country Risk Implications of the Saudi-Qatari Rift” by M. Nicolas J. Firzli x this article was first published in the Sunday Apr. 6 2014 edition of Al-Hayat (Riyadh/London) Sir Richard Francis Burton who was tasked by the Royal Geographical Society with assessing (what we would call) “country risk” in the various areas of the Arabian Gulf famously said that these regions are “very difficult to define, politically and geographically”… While the global Great Recession and ensuing “Arab Spring” have taken a heavy toll on many nations in Southern Europe, North Africa and the Middle East, yielding unprecedented volatility in country risk metrics, GCC member-states, with the exception of Bahrain, seem relatively immune to economic decline or political subversion. GDP growth in the GCC is currently around 4% (compared with 1% on average in the rest of the MENA area), public finances are generally in good shape, property prices in downtown Dubai are now higher than pre-crisis levels and the Qatari government is given free rein to transform central London's historic skyline with strange skyscrapers- the fact that most of the 72 storeys of the Shard, the tallest building in Europe, are still empty says more about the Doha body politic than it does about property price dynamics in the UK! But, looking beyond the rosy macro metrics and the seemingly stable ECR scores, there are two major risk factors that institutional investors can’t afford to ignore. First, a sizeable chunk of GDP growth in the past three years (up to 60% according to some estimates) boils down to seemingly indiscriminate infrastructure spending and unreasonable real estate investments: including “highways to nowhere”, mega-airports servicing heavily subsidized national carriers, gargantuan stadiums and sumptuous social housing projects. This has only been possible because the price of oil has stabilized at a relatively high level (around $100 a barrel) unlike all previous recessionary cycles since 1980 (start of First Persian Gulf War). But nothing guarantees such price levels in perpetuity… GCC policy makers are faced with difficult choices as oil revenues have to be used in priority to fund the expensive public infrastructure and social entitlements needed to ensure political stability at home and finance the costly weapons procurement programs required to protect the Arabian Peninsula from a militarily resurgent Iran which has “irredentist” territorial claims over Bahrain, the UAE, and parts of the oil-rich Eastern Province of Saudi Arabia. In that tense context, the 2011 withdrawal of US troops from Iraq (which reinforced proIranian political parties in Bagdad) and the November 2013 Geneva Interim Agreement on Iranian Nuclear Program (IAINP) were largely viewed as “betrayals” by mainstream GGC analysts. Beyond Iran and other external threats, there’s a second risk factor looming over the GCC area: on March 5 2014, Saudi Arabia, the United Arab Emirates and Bahrain (a country generally aligned with Saudi Arabia) announced the withdrawal of their ambassadors from Qatar, an unprecedented diplomatic move signaling deep geostrategic divisions within the GCC- the Kuwaiti and Omani governments adopting a prudently neutral stance. Beyond irreconcilable ideological rivalries- Riyadh and Abu Dhabi favoring political stability at home and moderation abroad while Doha promotes its brand of fundamental “social transformation” across the whole 2 MENA area and parts of the Caucasus and Sub-Saharan Africa (future historians may call it the “Capitalist Theory of Permanent Revolution”!), there’s a more material nature to the present predicament: a fight to the death between the world’s leading oil and natural gas producers, which will have deeper and longer lasting consequences than the largely overstated “Crimea crisis”. . . TAGS: Abu Dhabi, Arab Spring, Country Risk, Dubai, Economic Development, GCC Countries, GDP Growth, Geopolitics, Great Recession, Infrastructure Spending, London Bridge, MENA Area, Natural Gas, Oil Price, Oil Policy, Oil vs. Gas, Real Estate, Royal Geographical Society, Saudi-Qatari Rift, The Shard, Saudi Arabia, Social Entitlements, UAE, UK.