Saudi Arabia has adopted strict austerity measures to combat the dual effect of falling oil prices and the coronavirus crisis. Unlike previous measures that were lifted when oil prices recovered, a July 1 VAT increase (from 5% to 15%) is more likely to stay in place, which could present challenges to low-income families, businesses, and plans to revive domestic tourism.
On November 5, the United States fully reimposed sanctions on Iran that had been waived or lifted under the 2015 Joint Comprehensive Plan of Action nuclear deal. U.S. officials have expressed their desire to apply maximum economic pressure on the Iranian regime without inflicting unnecessary harm upon allies that maintain important trade and business ties with Iran. As the United States aggressively enforces sanctions on Iran’s energy, shipping, and financial sectors, certain Gulf Arab states will find themselves in the difficult position of balancing economic relations with Iran against the evolving foreign policy objectives of the administration of President Donald J. Trump. The Office of Foreign Assets Control is unlikely to apply secondary sanctions – punishments for transactions with Iran by non-U.S. companies and individuals – upon Gulf Arab government entities for existing economic linkages with Iran, as the United States does not want to negatively impact cooperation with allies over high-priority initiatives like monitoring terrorism financing. However, sanctions will complicate efforts by Gulf Arab states to secure foreign partners for critical economic initiatives that involve Iran and accomplish strategic country goals.
Despite U.S. sanctions, Qatar, Oman, and Kuwait will continue to strengthen economic ties with Iran given the country’s economic weight within the region. Qatar – at the center of a rift straining ties among Gulf Cooperation Council states – relies on Iranian airspace, shipping lanes, and exports to mitigate the impact of a regional embargo. Oman and Kuwait maintain varying degrees of regional autonomy and political neutrality, which afford more opportunities for economic engagement with Iran. With an estimated gross domestic product of $439.5 billion in 2017, Iran possesses the second-largest economy in the Middle East after Saudi Arabia. The Iranian economy was expected to grow by 4 percent by the end of 2018 before Trump announced his intention to reinstate sanctions, which led the International Monetary Fund to revise the growth forecast to reflect an estimated contraction of 1.5 percent. Despite revised growth estimates, Iran’s expected GDP will exceed that of the United Arab Emirates, the third-largest economy in the region, by nearly $40 billion and permit the Islamic Republic to remain an integral economic actor within the Gulf.
OFAC rarely sanctions the government-related activities of U.S. allies. Qatar, Dubai, and Oman are hubs for Iranian banking, but the United States has not aggressively penalized government-owned financial organizations in these countries for commercial transactions with Iran. Although Congress expanded the scope of secondary sanctions on Iran between 2010 and 2013, the U.S. government’s primary concern remained funding and transactions related to terrorism. In fact, the National Bank of Abu Dhabi was one of the few government-owned organizations in the Gulf states targeted by OFAC, although the consequent penalties related to a violation of U.S. sanctions on Sudan rather than Iran.
Economic relations between Qatar and Iran reflect a combination of long-term cooperation and shorter-term partnerships. Qatar derives approximately 60 percent of its export revenue from the North Dome/South Pars gas field, the world’s largest natural gas reservoir, which it shares with Iran. Since its discovery in 1971, Qatar and Iran have cooperated to delineate the various zones of the field and facilitate incident-free exploitation of the abundant gas reserves. The specific commercial operations, however, remain clearly segmented into separate Qatari and Iranian spheres of activity. Qatar previously offered technological assistance to Iran in an attempt to prevent overproduction of the gas field, but Qatar’s foreign energy partners were constrained by prior U.S. sanctions from sharing technological knowledge.
In August, the French oil company Total announced that it would withdraw from a contract to develop a portion of Iran’s South Pars gas field as a result of U.S. sanctions. Although the state-owned China National Petroleum Company will assume control of the project, experts suggest that the safe and efficient exploitation of Iran’s natural gas requires technology and technical expertise held predominantly by Western companies. Therefore, Total’s departure from Iran will increase Qatari concerns over the efficient and responsible utilization of Iran’s portion of the shared field.
The relationship between Iran and Qatar has strengthened since Doha defied demands to cut all diplomatic relations with Tehran after Saudi Arabia, Bahrain, the UAE, and Egypt imposed a diplomatic and economic embargo on Qatar in June 2017. The Qatari government restored full diplomatic ties with Iran, signed a memorandum of understanding with Iran and Turkey to facilitate new trade routes, and demonstrated a clear interest in strengthening links between Doha’s Hamad International Port and Iran’s Bushehr port, an important trans-shipment hub for Qatar-bound goods. Although many shipping companies pulled out of Iran ahead of the sanctions, the volume of Iranian non-oil exports to Qatar increased by 125 percent from 2017 to 2018. Meanwhile, officials from the Qatar Chamber and representatives from Iran’s Ministry of Industry, Mine and Trade discussed avenues for Iranian companies to strengthen business in Qatar and expand private sector relations.
Qatar Airways, a key player in Qatar’s economy, is also committed to expanding operations to and from Iran. The state-owned aviation company announced that it would continue to operate daily flights to Iran despite the U.S. sanctions. Iranian airspace plays a critical role in Qatar’s strategy to overcome the embargo, as Iran’s airspace ensures a feasible flight path to Europe and other destinations. Qatar’s increased utilization of the airspace has resulted in a 17 percent increase in air traffic over Iran. Since these commercial operations primarily involve passenger flights, the operations are unlikely to result in the enforcement of secondary sanctions by OFAC, which is more interested in operations involving the shipment of cargo.
Oman and Kuwait also possess incentives for deepening economic ties with Iran. Unlike Qatar, which must cooperate with Iran because of the geographic proximity of shared natural gas reserves and embargo-related activities, Oman seeks a larger share of Iran’s natural gas exports. Omani policymakers are assessing a $60 billion-gas pipeline that would transport 20 million cubic meters of Iranian gas to Oman for 25 years, and they intend to release the results of the official study in the coming months. As the gas pipeline initiative would counter efforts by the Trump administration to reduce Iranian energy exports to zero, securing leading multinational energy firms as partners for this project will prove difficult.
Yet the threat of impending sanctions has not diminished the Omani government’s efforts to further develop economic relations with Iran. Oman’s Minister of Foreign Affairs Yusuf bin Alawi discussed expanding Iranian investments in the Duqm special economic zone project during his visit to Tehran in early November, and the Omani and Iranian Chambers of Commerce organized 25 private sector trade delegations over the past year. Iranian exports to Oman grew by 24.46 percent to $520.71 million from 2017 to 2018. While Oman-based firms that engage commercially with Iran do risk violating secondary sanctions and facing enforcement action, many small and medium-sized firms are likely to view the potential economic rewards as worth the risk. The cost-benefit analysis for larger multinational firms is different because they represent larger, symbolic targets for OFAC and likewise must consider the subsequent impact of sanctions violations on global operations.
Iran’s economic shadow also looms large over Kuwait. Persistent ambiguity over the impact of sanctions on longer-term access to Iranian markets coupled with the threat of U.S. retaliation against global firms and organizations will make it increasingly difficult for Kuwaiti policymakers to attract U.S., European, and Asian investors for megaprojects in northern Kuwait. Silk City and the Northern Gulf Gateway, an integrated economic free zone incorporating five Kuwaiti islands, aim to position Kuwait as the premier entry point into Iranian and other northern Gulf markets. Moreover, specific sanctions targeting Iranian financial institutions will complicate Kuwait’s ability to manage Iranian financial flows within its banking and finance sector. The New Kuwait Vision 2035, proposed by the emir of Kuwait, hopes to strengthen the country’s credentials as a financial and trading hub.
There are further Gulf Arab-Iranian economic linkages, especially in Dubai and the UAE’s northern emirates. However, these relations will be partially qualified by a rather uncompromising foreign policy agenda determined in Riyadh and Abu Dhabi. Rather than altering the fundamental terms of economic engagement between Qatar, Oman, and Kuwait and Iran, the U.S. sanctions will primarily impact the ability of these countries to attract foreign partners and investment for Iran-focused initiatives. Underlying economic cooperation between Gulf Arab countries and Iran – whether as a short-term necessity or for longer-term development reasons – will continue despite the challenges posed by sanctions.
Advancing Oman’s technology initiatives can help the government address economic challenges that have assumed a new degree of urgency following the coronavirus outbreak and oil price collapse.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More