Russia’s recent attack on Ukraine is billed as Europe’s largest war since World War II. While European countries, and to a much lesser extent the United States, will bear the brunt of the war, its effects are proliferating beyond the continent. They include implications for a new world order and parallels for “reunification” between China and Taiwan. While the Gulf Arab states may wish to avoid getting caught in the middle of a “Russia versus the West” conflict, the Ukraine crisis is already affecting the region’s tourism, food, energy, and other economic sectors.

Tourism

The emirate of Dubai in the United Arab Emirates hosts large numbers of Russian tourists annually. In 2021, Dubai was the destination of choice for 6% (600,000 visitors) of tourists from Russia, ranking after Egypt with 10% (1 million) and Turkey with 45% (4.7 million), according to the Russian Association of Tour Operators.

Russian Visitors to Dubai (in millions)

Russia’s Ranking as a Source Market of Visitors for Dubai

The Russia-Ukraine war is likely to result in a fall in the number of Russian visitors, particularly if the military phase of the war drags on and as more Russian banks are suspended from the SWIFT interbank messaging system that facilitates international purchases. Due to concerns about safety over Russian, Ukrainian, and Belarusian airspace, Dubai-based Emirates and its partner airlines have already suspended flights to several Russian cities. The tourism spending per Russian visitor will also be impacted in line with the decline in tourism flows and the worsening ruble to dollar exchange rate. This is because Russian tourists, on average, tend to spend more than their European counterparts and stay longer, according to a study by Visa.

Tourism in Dubai is likely to take a bigger hit than Turkey or Egypt given the former’s greater reliance on tourism receipts that generated just under one-fifth of its gross domestic product prior to the coronavirus pandemic. With the huge fall off in inbound Chinese tourism flows to Dubai due to coronavirus-related travel restrictions in China, Russia has become even more significant as a source market of visitors.

Food

Russia and Ukraine are major exporters of wheat with a combined global market share of over 25% in 2019. A prolonged period of fighting has potential consequences for harvests, access to ports and grain storage terminals, shipping and insurance rates, and the spring planting season. Russia’s war with Ukraine has put food security – in terms of supply and price – on the top of the agenda for many countries in the Middle East and Africa since the region accounted for 70% of Russia’s wheat exports in 2021. For instance, Egypt imported $3.23 billion worth of wheat (over two-thirds of total wheat imports) from Russia and Ukraine, while the latter two accounted for almost three-quarters of imported wheat worth $1.6 billion in Turkey in 2019.

The Gulf Arab states, with their smaller populations and higher per capita income, are less vulnerable than their peers in the Middle East to disruptions and price increases stemming from the Ukraine crisis. The UAE, Oman, and Qatar have a high level of exposure to wheat imports from Russia and Ukraine; by contrast, the remaining Gulf Arab states import negligible or no wheat from the two countries. Between 2015 and 2019, for instance, Russia and Ukraine increased their market share from one-third (a value of $91.2 million) to almost half of all wheat imported by the UAE ($154 million), with Russia the origin of most of the wheat.

Share of Wheat Imports (%) From Russia and Ukraine as a Proportion of Total Wheat Imports

Nevertheless, ample grain storage facilities mean there is no short-term danger of supply shortages in the UAE. The bump from higher oil prices partly as a result of the Ukraine crisis should also help weather longer-term increases in wheat prices even in Oman where food-related protests have previously occurred.

In the case of Saudi Arabia, the disruptive effects of the war on supply reliability and price may cause it to reevaluate increasing wheat imports from Russia to offset declining production in the kingdom. Saudi Arabia had only just opened its market to Russian wheat in 2020; this was followed by a seven-fold increase in 2021 albeit from a low base.

Oil and Gas

Prior to the Ukraine crisis, oil and gas exporters were already benefiting from higher than budgeted inflows of hydrocarbon revenue. Brent crude at $78 per barrel at the beginning of January exceeded the fiscal break-even price of $66.80/bbl for 2022 for key Gulf states as a group, according to recent projections by JP Morgan. The war in Ukraine has pushed the price of crude to over $100/bbl and could yet rise further save for the fact that Russia – which accounts for 12.5% and 9.6% of global crude and refined petroleum exports, respectively – has not yet been hit by U.S. and European Union sanctions. As noted by Columbia University’s Adam Tooze, Russia is a strategic petro-state – its size in global energy markets probably renders it too big to be sanctioned.

Every $10/bbl increase in the oil price will add $65 billion to the Gulf Cooperation Council countries’ oil export receipts, according to estimates by HSBC in a February research note; oil at $100/bbl would result in budget and current account surpluses worth 10% and 15%, respectively, of the GCC’s GDP. On the one hand, the windfall is a boon to Gulf budgets in terms of financing economic diversification projects. On the other hand, the higher price of energy globally will translate into higher prices for goods needed by import-dependent Gulf states, including fertilizers, food, consumer goods, medicines, and solar inverters.

In the longer term, European politicians will be under more pressure to reduce their countries’ dependence on Russian coal, oil, and gas. This is true, even though, according to economics commentator Matthew Klein, Europe became increasingly reliant, not less, on Russian energy after Russia’s annexation of Crimea from Ukraine in 2014. The difference this time – assuming it holds – is the solid consensus in Europe opposing Russia’s actions. Qatar could be a winner since the ongoing expansion of its liquefied natural gas capacity may translate into exports that displace some Russian gas sales in Europe by the mid-2020s. Gulf states, like Oman, Saudi Arabia, and the UAE, that are able to deliver on and certify their green hydrogen energy projects may find receptive customers in Europe keen to minimize inputs of green hydrogen from Russia in applications such as vehicles, heating, and shipping.

Other Sectors

Uncertainty over the trajectory of the Ukraine crisis, and consequently over the scope and depth of future sanctions, is adding a geopolitical premium to commodities and manufactured goods, particularly those for which Russia is a significant producer. Depending on the product in question, this poses opportunities or challenges for Gulf companies.

For example, Russia and the UAE were the second- and sixth-largest source destinations for aluminum exports to the EU in 2019. The possibility, however slim, that Russia’s aluminum industry may face sanctions is likely to invigorate the search for non-Russian options. The UAE’s Emirates Global Aluminium and Aluminium Bahrain, or ALBA – which depend on the EU for 22% and 12% of their respective exports – will immediately benefit from soaring aluminum prices, although their current lack of spare capacity precludes additional sales. In the medium term, however, increasing their market share of green aluminum may be profitable and prudent.

It is a different story for nickel, where Russia has a 17% share of global exports. Although Russia is not a critical source, it is important enough so that supply disruptions due to a prolonged military conflict with Ukraine may add to preexisting supply chain issues that have delayed the rapid expansion of renewable energy capacity in the Gulf states. This is because nickel is used for lithium-ion batteries, solar panels, and coating generators – all key components for renewable power generation.

The exportation of semiconductors to Russia is now subject to strict U.S. controls as a consequence of the Ukraine crisis; this directly affects the UAE through its ownership of chip manufacturer GlobalFoundries. However, the current global supply backlog of semiconductors and the higher resulting prices, along with the fact that Russia is a small direct consumer of semiconductors that sources most of its needs from Chinese chip manufacturers, should offset any revenue loss from compliance with U.S. export controls.

It is shortsighted to imagine that the Gulf states have no stake in the Ukraine crisis. While the immediate economic impact of the conflict is manageable, particularly if military operations end quickly, the longer-term fallout from Russia’s relations with Europe and the United States will pose both opportunities and challenges for policymakers and companies in the Gulf.