Strategic Insight: The Gulf Co-operation Council

by Nick Alcock

The Gulf Co-operation Council (GCC) States - Turning East?

The Persian Gulf states have seen the US under President Obama draw down its engagement in the Middle East over the last few years, weakening its regional relationships and causing traditional Sunni Arab allies to turn increasingly towards non-traditional partners. Historic trust, always fragile, has been undermined by a series of events including: the Iranian nuclear deal and the tentative warming of US-Iranian relations; the failure of the international coalition to deal with Daesh; the perceived selling-out of long-term allies such as Hosni Mubarak in Egypt (and lukewarm US support for President Abdel Fattah el-Sisi); and a reduction in US dependency on Middle Eastern oil. The Gulf Co-operation Council (GCC) does not feel it can rely on, nor does it want, the US as its sole security guarantor in the future.

While the UK has tried to deepen its relationships with the GCC recently, it has been tarred with a similar brush to the US – albeit without its bilateral relations being underpinned by a security agreement. 

While these historic relationships will not disappear in the foreseeable future, Russia and China have been the main beneficiaries of this shift of focus, gaining influence and strengthening bilateral relationships. In the GCC states, where foreign policy and economic ties are determined by personal relationships, prejudices and interests, at least as much as by strategy and values, this trend will shape future engagement with the West, including business and commercial opportunities.   

Russia

The Syrian crisis is a significant factor in the recent increase in engagement between Russia and the Middle East, albeit in heated discussion. Saudi Arabia, the UAE and Qatar are deeply concerned about Russian support to President Bashar Al-Assad and cooperation with Iran. Saudi Arabia in particular has tried to manipulate Russia towards its own position through a series of offers - US$10bn investment into the Russian economy and significant defence procurement contracts - and threats - continued oil price pressure and promises to increase support to the Syrian opposition.

While these appear to have had little effect on the Russian position so far, what is clear is that a resolution to the Syrian crisis is likely to require both the Gulf Arabs and the Russians to continue to engage.

Even without Syria, there is an underlying trend of increased engagement between the Arabian Gulf and Russia. The GCC are conscious of the positive role Russia could play in the region, despite Gulf Arab states’ present disquiet over Russian action in Syria. Saudi Arabia, under the powerful influence of deputy crown prince, Muhammad bin Salman, was looking to diversify its sources of support away from the US and towards non-traditional allies well before Russia escalated its intervention in Syria in September 2015. Muhammad bin Salman views relying solely on the US to guarantee security, especially during the remaining months of Obama’s administration, as risky. Under Muhammad bin Salman’s stewardship, Saudi Arabia is discussing with Russia the possibility of oil pricing talks with OPEC, defence procurement deals, and infrastructure contracts. In June 2015 Moscow and Riyadh announced a deal to co-operate on the development of Saudi Arabia’s civil nuclear power capability.

Separately, on the back of visits by Crown Prince Muhammad bin Zayid of Abu Dhabi, the UAE is taking forward significant infrastructure opportunities in the CIS and is keen to protect the regular flow of wealthy Russian tourists to the Emirates. 

China

China is increasingly reliant on Middle Eastern energy, with Saudi Arabia alone accounting for 20 percent of China’s oil imports. With the West’s share of GCC trade falling, there are predictions that by 2020 the largest share of GCC exports will go to China (about $160 billion). By 2020, China will also dominate the GCC import market, providing about $135 billion of goods. HSBC research suggests that currently 22 percent of Chinese firms’ global investment is directed towards the Middle East.

However, China has historically been cautious about investing heavily in a region where the US has had the established alliances. It also has to balance Gulf regional engagement against maintaining oil flows from Iran – a hedge against reliance on the US, but an impediment to fully exploiting the resources of the Sunni Arab states. In spite of this, there is increasing Arab demand for China to play a greater role in the region, whether to counter-balance the US or to make the US work harder to maintain its relationships.

To date, China’s influence on Middle East affairs has been marginal, but this is changing. It views dependency on imported oil as a strategic vulnerability, and in light of reduced US engagement, is beginning to step up its diplomatic and commercial involvement in the region.  Oman is for example strengthening relations with China to limit the risk of appearing too close to the US and the UK. While the Oman-China relationship was initially based on oil, it has expanded into non-oil sectors, with Oman now using Chinese influence to establish a commercial presence in East Africa, notably Tanzania. Qatar too is significantly increasing its economic relations with China.

The GCC’s tilt towards other countries in the Far East is accelerating. As well as China and India, Malaysia and the Philippines stand out, the former owing to its role in Islamic finance and the latter to its provision of workers to the Gulf.

The Commercial Implications

The Gulf states may well be moving away from traditional twentieth-century alliances amid concern over the reliability of historic relationships. This is a fundamental shift in the region which both China and Russia are proactively working to exploit.  This is reflected in the gradual shift of Gulf capital to Asia, with Gulf sovereign wealth funds increasingly investing directly into Eastern markets.

While Saudi Arabia is unlikely to abandon the US and the West at the moment, they see value in exploring new alliances and creating competitive tension in the race for their petrodollars. But it is not simply about keeping pressure on the US. Whilst Western capabilities, skills and products will continue to be seen as high quality, Far Eastern providers are catching up fast, regularly outcompeting on prices and fewer legal and regulatory impediments to doing business.

These strategic shifts in relationships - economic and political - are already being felt commercially. The progress of negotiations, contracts and disputes will continue to be influenced by geopolitics and views of the leaderships. It remains as vital as ever to invest time and effort in developing and maintaining relationships on the ground, and to assess and re-assess risk as the kaleidoscope turns.

 

Nick Alcock
Nick heads the Advisory practice and is a Middle East and North Africa expert.

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