The financial windfall from oil and gas exports may boost regional officials’ ambitious economic diversification plans but doesn’t make them foolproof.
U.S. President Donald J. Trump faces a deadline for the recertification of sanctions relief on May 12, when a waiver of a key sanctions law expires, and would need to be renewed lest the sanctions provided for in that law snap back into force. For the United States to reinstate these sanctions could jeopardize U.S. adherence to the Joint Comprehensive Plan of Action. This is a wholly American-made ultimatum, which has put European allies on edge, and prompted the Iranian foreign minister to make his case (and threats of “consequences” of exit) to the U.S. public this week.
Reneging on the United States’ end of the bargain in the JCPOA would appear to be, like many other decision points of the Trump administration, not a policy to make proactively, but rather an opportunity to be a spoiler to a former administration’s regional strategy. Along with North Korea, it is perhaps the most important foreign policy issue that Trump faces.
There is a paucity of ideas on how to engage the region, aside from the president’s taunts to extract payments, namely from Gulf Arab allies, for the U.S. security umbrella. There is an immediate need within the U.S. foreign policy community to produce an effective strategy for pursuing U.S. interests in the Middle East and to articulate how exactly to thwart Iranian expansionism and support for terror. Situating U.S. policy toward Iran within the broader socioeconomic challenges in the region provides some important context for why Iran’s economic integration is a threat to its neighbors, and why U.S. leadership and multilateral engagement, particularly with key regional actors in the Gulf, will be essential to regional stability. Washington may even have misjudged who benefits from the U.S. security umbrella and the tangle of disputes among the Gulf Arab states themselves and with their neighbor Iran. If any state is a “free rider,” it is China and other Asian state investors and consumers of Gulf energy products.
U.S. Policy Toward the Middle East and Countering Iran
The U.S. National Security Strategy released in December 2017 names Iran as a rogue state and sponsor of terrorist activity, and part of a nexus of drivers of regional instability including “jihadist ideology.” It does not, however, provide a vision of a regional security architecture for the Middle East, other than to mention a “strong Gulf Cooperation Council” as a regional organization and placid support for just two countries undergoing market reforms, Egypt and Saudi Arabia. Most notably, the NSS does not link the causes of either terrorist activity or jihadist ideology to the failure of governance models to create jobs, economic mobility, and inclusion for citizens. There is a connection in the way that states in the region experience distortions in their political economies, whether subsidized directly by oil and gas revenue, foreign assistance, or repression. A regional security strategy is not intended to fix all countries’ problems but to identify ways to create policy that shifts outcomes to the United States’ advantage.
The JCPOA is an agreement about limiting Iran’s nuclear capabilities. But it is also an agreement that conceptualizes economic growth, through the relief of sanctions and the opening of Iran to global financial flows, as a mechanism for peace and stability in the Middle East. It is a strategic use of multilateralism that formed part of an engagement of the wider region by an international coalition (the permanent five members of the U.N. Security Council, plus Germany). It identifies a single problem (Iran’s nuclear capacity) and offers an incentive that provides benefits not just to Iran, but to the region, if Iran can use its sanctions relief to grow, and even integrate investment opportunity for its neighbors.
The JCPOA underpinned a U.S. policy to encourage some multipolarity or balancing within the regional security architecture, or what the administration of U.S. President Barack Obama termed “sharing the neighborhood” among traditional regional rivals, specifically Saudi Arabia and Iran. Instead of the“twin pillars” strategy of the 1970s, which kept the United States at the center of balancing competing Saudi and Iranian areas of influence in the Middle East, the Obama “sharing” strategy relied on concepts of traditional economic liberalism, in that increasing trade ties and normalizing relations might create incentives for cooperation and increase the cost of conflict.
The Gulf States Regional Policy and Countering Iran
While the Gulf Arab states had good reason to feel excluded from the JCPOA process, they did not reject the deal. Nor has the GCC developed any coherent shared position to counter Iran. In fact, the weakness of the GCC has only been exacerbated by divergent approaches to Iran, and specifically to its economic integration across the Gulf. The isolation of Qatar by the quartet of Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt since June 2017 has had a perhaps unintended effect, doubling trade between Qatar and Iran (mostly in Qatari imports of food). Likewise, in bilateral security partnerships developing between Saudi Arabia and the UAE, there hasn’t been an apparent interest or security strategy to share the region with Iran, rarely acknowledging its strong links across the Gulf. In the near to medium term, it is not clear how Saudi Arabia and the UAE would deal with an isolated and destabilized Iran under renewed or increased sanctions. Would they seek to further weaken Iran to the point of regime collapse? While rhetoric has been increasingly hostile, there is no immediate call to confront Iran militarily by the Gulf Arab states. Even within the brutal conflict in Syria, the Gulf Arab states have not always agreed on how best to counter Syrian President Bashar al-Assad or Iran, but there is current consensus that the U.S. approach in April of limited strikes against the Syrian regime (avoiding Iranian or Russian targets) is preferred.
The national security strategy vis-à-vis Iran of Saudi Arabia and the UAE is essentially a low boil. Saudi foreign policy experts have described the policy as “maintaining the status quo.” The problem is that the current regional environment cannot be static; boiling over is an appropriate metaphor. Syria, Yemen, and Libya cannot be forever wars.
There is an emerging effort by Saudi Arabia and the UAE to articulate a strategic vision for the Middle East, centered on maintaining their own authoritarian systems of order and governance, but also offering an economic development model that is state-led, but capitalist. Crucial to the emerging Emirati model is the negotiation of the place of Islam in governance, and more broadly, how to ensure, as part of their constitution, the idea of equality under the law without prejudice to religious belief, race, or social status. The UAE has described its vision as “secular governance,” though Islamic law is the source of all law in the country. Overlaying the role of Islam is the role of the state in society and the economy. The Saudi economic transformation prescribed by Vision 2030 goes less far in addressing the role of Islam, but ponders the appropriate role of the state in generating growth and opportunity (the state is still dominant).
Two essential dilemmas emerge for the region: first, defining the role of religion in politics; second, limiting the role of the state, and the elite and ruling families that control it, in the economy – in short, addressing inclusion and economic mobility. Is it possible to expect the region to remain on hold, while it is simmering with discontent largely on economic issues that erupted in the 2011 Arab Spring and remain unsolved? Meanwhile, the Gulf Arab states, particularly their leading members Saudi Arabia and the UAE, are attempting to model a kind of authoritarian capitalism that is meant to be exported and replicated, except in Iran, which is somehow to be contained in a misery of its own. Their security dilemma is that the Iranian model, in its embrace of radical political Islam and energy-fueled growth must be proved inadequate, even disastrous. To delegitimize Iran, Saudi Arabia and the UAE have engaged in a high-risk foreign policy: initiating a conflict within the GCC to draw a line in the sand on political Islam; disrupting their own energy markets to diminish the growth capacity of an adversary; and entering the civil war in Yemen, risking regional escalation.
Relative Gains: Taking a Loss to Hinder Iran
The danger of a regional war is obvious. Less obvious is the threat to investment flows and opportunities needed for the Gulf Arab states’ own diversification and growth strategies. Saudi Arabia and the UAE have demonstrated that they are willing to accept diminished economic opportunities in order to reduce the gains of their adversary Iran. Qatar has played an important part of this calculation. Russia is a clear beneficiary.
Qatar’s wealth and rise in regional politics originates in its North Field, a vast reservoir of 1,800 trillion cubic feet of natural gas and 50 billion barrels of condensates, more than all the gas in the world’s other fields combined. Qatar began exporting from the field in 1997 and its national combined production reached more than one-third of global totals in 2010. In the interim, Qatar became very wealthy, with its current gross domestic product 17 times what it was in 1996. Qatar shares the field with Iran and announced a moratorium on production in 2005, and then reopened production in April 2017. Iran also announced in 2017 that it would increase production in the shared field (South Pars/North Field), raising gas exports to 365 million cubic meters a day by 2021, which, according to MEED, would be more than Qatar’s total liquefied natural gas exports for the year. The shared production would challenge, and even displace, Russia as a leading global gas exporter.
Both Saudi Arabia and the UAE need natural gas to fuel their domestic energy consumption. The UAE buys natural gas from Qatar via the Dolphin pipeline, but has not maximized imports (partly because of Saudi objections to the route of the pipeline through its own territorial waters) and because it will have an abundance of domestic electricity production through its new nuclear plants. Decreasing its Qatari exposure, the UAE is looking even to the United States as an alternative supplier. Saudi Arabia is looking to Russia to co-invest in Arctic natural gas production, in addition to its recent close coordination on oil production via OPEC. In both instances of Emirati and Saudi domestic energy policy, there is an underlying motivation to diminish the economic potential of Iran and, as a secondary effect, to undermine Qatari wealth and regional influence. The choices overlook Russian cooperation with Iran in Syria and even Russian investment in Iran. China too is able to straddle the Gulf, with favorable access to energy and infrastructure investments and bank loans to both the Gulf Arab states and Iran, with none of the costs of military intervention in Syria.
Ironically, many of the shared goals of infrastructure investment and domestic development in the Gulf Arab states and Iran rely on common investors, mostly from Asia. Both Saudi Arabia and Iran seek to privatize and build new airport terminals. Both seek to increase railways and freight capacity. Around 60 percent of Iran’s export of oil and condensate volume goes to Asia, with China, India, South Korea, and Japan its largest consumers. Since the lifting of sanctions in 2016, European buyers have accounted for roughly 25 percent of Iranian oil exports, according to Goldman Sachs. If sanctions are reimposed by the United States, most of the trade to Asia is not expected to change much, only the exports to Europe. More likely is that the cost of insuring Iranian oil exports would increase, but the expectations of diminishing exports are limited. The clear winners of Gulf Arab state policies toward Iran have been Russia, China, and countries in Asia that buy energy from, and invest in, the region. The overlap of the Gulf Arab states’ energy, security, and development policies reveals some inconsistencies, or at least some very difficult choices in pursuing relative gains.
Roots of Disorder in the Regional Political Economy
The Middle East has a lot of problems, including two, if not three, horrible civil wars. But it is not a zone of widespread state failure or extreme poverty. It is a zone of young people who are well-educated by global standards, able to access health care, and are connected to a world of ideas. They have real corruption fatigue and resist impediments to their social and economic mobility. There is a growing debate on how inequality fits into the puzzle of discontent and challenges to governance in the region. World Bank studies and the work of Elena Ianchovichina emphasize how the region faces a middle-income trap, and how strides in socioeconomic development have stalled at creating pathways to work and economic mobility, mostly because of the structure of economies that are heavily subsidized and inefficient, and business models that are top-heavy, family-owned, and not likely to hire and grow new talent.
New work by Facundo Alvaredo, Lydia Assouad, and Thomas Piketty presents the Middle East as the world’s most unequal region, in which the top 10 percent of citizens receive more than 60 percent of total income. As Kevan Harris argues, the path of the Middle East diverged from the Latin American experience, which featured liberalization that led to debt crises and a renewed social contract, often in the form of left-leaning democracies. In the Middle East, the social compact of a large public sector and highly subsidized energy costs, with little incentive for efficient manufacturing or new technology, left the state as a central economic actor and arbiter of growth, largely distorted by petrodollars and aid. As Harris argues:
The concentrated accumulation of Gulf incomes is rooted in the rest of the Middle East’s sorrowful trajectory. The outcome of four decades of cascading war across the region was to push the political and economic leadership of Middle East and North African states toward the Gulf monarchies. The Gulf model advertises a costless, codified capitalism: social citizenship for elite kinship minorities, imported professional and working classes and territorial security subcontracted to the American superpower.
There is a glass wall, not a glass ceiling, for young people in the Middle East, especially young women, in which wealth and political power are visible but wholly inaccessible to most. It is a crisis of missed opportunity and discarded talent. Governments have been responding with increasing calls for nationalism, in which the obstacles to inclusion and growth are external – in particular, security threats from violent Sunni extremists or pariah state Iran. In the Gulf, there is no change in power structures, keeping the state at the center of the economic model, even within proposed reforms, as in the Saudi case. Even the role of subcontracted U.S. security is less certain, heightened by the mixed signals of the Trump administration.
Time for a New Regional Paradigm, Locally Informed with Multilateral Support
Countering Iran, if that is indeed a U.S. objective in the Middle East, will require some understanding of Iran’s position as an ideological foil to other aspiring regional power centers like Saudi Arabia and the UAE, and to the shared economic challenges facing the region. The Iran deal is not a transaction that exists untethered to other decision points.
Iran’s regional foes and the U.S. administration are advocating a war of attrition in which Iran is weakened and spread thin in Syria, deemed an outcast for its support of Hezbollah and the Houthis in Yemen, and withering from within, the result of a failing economy, corrupt financial system, and a clergy out of touch with a youthful demographic (especially women) who see little opportunity on the horizon. But an imploding and angry Iran with its destructive elements in Syria and Yemen and with no ability to promise economic growth is not a benefit to the region or U.S. interests. The withering strategy, in which the United States continues to have one foot in the JCPOA and one foot on the pedal to increase targeted sanctions on Iran, may have run its course. The United States, if Trump does not recertify the sanctions relief, will be on a collision course with Iran, while undermining its credibility to establish an agreement with North Korea. Equally, the status quo strategy favored by the Gulf Arab states is unsustainable. At some point, alternative models of political and economic governance need to emerge. Even if confrontation with Iran is avoided, there are immediate demands for regional development strategies.
The lack of a U.S. strategic vision for the region has enabled short-term policies that have extended civil wars and drawn in outside actors like Russia, which sees an opportunity to rile the United States and develop new markets for both its weapons and energy resources. The current regional environment is at a tipping point, on the verge of enlarged conflict, but also at a moment of reckoning. Understanding localized grievances, broad socioeconomic trends, and why Iran’s neighbors see such risk, should inform U.S. regional security and aid policy. It might also encourage the United States to take a leadership role in broadening the negotiation, such that the JCPOA, or something new that emerges alongside it, might better incorporate the regional dynamics and offer the Gulf Arab states, and the Middle East more broadly, an alternative to the self-defeating rivalries that animate regional relations at the moment.
is a senior fellow and the founding director of the Program on Economics and Energy at the Middle East Institute.
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