War in Gaza: Turbulence for the GCC
Key Takeaways:
The conflict in Gaza raises pertinent questions about the future of the India – Middle East – Europe Economic Corridor (IMEC) project, with Israel’s role as gatekeeper for its Northern Corridor now in doubt.
The US and its BRICS competitors will seek to increase their investment in Gulf Cooperation Council (GCC ) states to secure regional trade and support.
The GCC may seek to diversify its regional partners amidst rising competition from Iran for regional hegemony.
Qatar's role as international mediator in the conflict and support for Iranian backed groups may once again lead to internal divisions within the GCC.
On October 7th, as Hamas paragliders and ground troops infiltrated Israeli territory, geopolitical analysts scrambled to predict the response of the Gulf Cooperation Council (GCC) states to the emerging conflict. Saudi Arabia faced heightened scrutiny from the Arab world due to its prominent role in the Organisation of Petroleum Exporting Countries (OPEC) and its recent initiation of US-sponsored normalisation efforts with Israel. Crown Prince Mohammed bin Salman had previously hinted in interviews with American news organisations that a significant agreement, dubbed the 'deal of the century,' was in progress. The GCC’s response to the Gaza conflict is akin to a juggling tightrope walker, maintaining a careful balance of development through the India-Middle East-Europe Economic Corridor (IMEC), countering Iranian influence in the Middle East, and championing the Palestinian cause. The current reported death toll of the conflict in Gaza has reached 22,000 and will continue to rise as Israeli mechanised forces strike further into Gaza, supported by artillery and air strikes. As Palestinian casualties mount and Hamas’s operational ability is gradually diminished, the Iranian regime will continue to utilise their proxies in Lebanon (Hezbollah) and Yemen (Houthis) to exert pressure not only on the Israeli regime, but also those perceived to be standing idle to Israeli action. GCC states, whilst mitigating the potential economic impacts of a prolonged Gaza conflict, must also be pro-active in asserting their regional dominance in light of Iranian influence.
Immediate Implications
The US will actively bolster its investment and co-operation with the GCC to pre-emptively address rising Chinese influence in the Gulf market. China has been emboldened by attacks on American installations in the Middle East and Saudi Arabian intent to diversify its political allegiances, evidenced by its acceptance into the BRICS alliance on January 1st this year. Likewise, Russia (another BRICS member) has recently ramped up its efforts to court the GCC states. Russian president, Vladimir Putin, recently visited the UAE and Saudi Arabia, projecting the image of Russia as a viable power broker in the Middle East and keen partner in energy co-operation. US goods and services trade with Saudi Arabia (the largest GCC economy) totalled an estimated USD 46.6 billion in 2022, alongside around USD 12.2 billion of US foreign direct investment (FDI) in the Gulf state. President Biden had, prior to recent escalations in Gaza, been cultivating an uninterrupted and steady relationship with the GCC states, culminating in the 2022 Jeddah Security and Development summit. The summit stressed the importance of co-operation in regional security and strategic investment, with the GCC states pledging USD 3 billion to the US Partnership for Global Infrastructure and Investment, a fund designed to promote American business interests. Interestingly, perhaps in a bid to appease the more outspoken pro-Palestinian elements within the GCC, the US also pledged USD 200 million to improving patient care for Palestinians, intended to upgrade the East Jerusalem hospital network. With increased US funding, Western businesses could gain advantages, as American investment may caveat the involvement of Western and American companies in GCC projects. However, as US military installations are targeted in Iraq and Syria, Iranian and Hamas leaders continue to conflate the US and Israel into a single enemy entity, evidenced by Iran’s foreign minister making reference to ‘rapid attacks by the US and the Zionist regime’. The GCC, therefore, may opt to accelerate their diversification of strategic partnerships with countries that have thus far taken a nuanced stance towards the conflict in Gaza. This diversification is focused on India and China, despite Indian Hindu sentiment being sympathetic towards Israel due to their own Islamist challenges in Kashmir. Chinese investment in the GCC has steadily increased the scope of its Belt and Road Initiative (BRI), providing financing and experience to infrastructure projects such as the recent collaboration between Sungrow (a Chinese provider of inverter and energy storage solutions) and the Neom Green Hydrogen Project in Saudi Arabia. The US is cautious about growing Chinese financial influence and aims to bolster economic ties with the GCC to stabilise regional partnerships. However, its standing among Arab nations has suffered significantly from ongoing pressure from Iranian proxies and Arab discontent over its ties with Israel.
Israeli ministers have insisted that the current IDF operations in Gaza are part of a longer protracted conflict against Hamas, dispelling any notions of an imminent end to hostilities. As this conflict and its various spill overs continue, the US and Israeli backed IMEC project appears to slip further and further from reality. The India – Middle East – Europe Economic Corridor (IMEC) was intended to connect the aforementioned regions by contemporary multimodal transportation networks, such as shipping lanes, railroads, and other infrastructural endeavours, to promote commerce and inter-regional economic cooperation. Whilst the US largely hoped that the IMEC would curb the influence of China’s BRI, the UAE and Saudi Arabia view it as a means to consolidate themselves as the largest economic actors in the MENA region. The combined total GDP of the countries involved in the IMEC project is approximately USD 47 trillion, amounting to nearly half the world’s total GDP, with the corridor itself purportedly expected to yield approximately 40% in cost savings compared to the current trade infrastructure in the region. As the UAE and Saudi Arabia comprise the central node of the North Corridor (Arabian Gulf to Europe) and the East Corridor (India to the Arabian Gulf), they stand to benefit most from the proposed infrastructure. This includes a railway system that will provide a ‘reliable and cost-effective cross-border ship-to-rail transit network’ and a pipeline for clean hydrogen exports, of particular importance to Saudi Arabia’s sustainable energy diversification efforts. Saudi Arabia's National Transport and Logistics Strategy aims to make the country a key global logistics hub linking Asia, Europe, and Africa as part of Saudi Vision 2030. This initiative would benefit significantly from the advantages of new rail infrastructure under the IMEC.
A critical dimension of the IMEC is the Israeli port of Haifa, which serves as the North Corridor’s entry point to the Middle East. Benjamin Netanyahu, the Israeli Prime Minister, said in a September 2023 address to the UN that the IMEC would ‘build a new corridor of peace and prosperity that connects Asia through the UAE, Saudi Arabia, Jordan and Israel, to Europe’. Yet, as the Arab world denounces the Israeli invasion of Gaza, this corridor of peace and prosperity appears far-fetched. Whilst Saudi Arabia, unlike its Gulf neighbours Bahrain and the UAE, never joined the Abraham Accords, some progress towards normalisation had been made prior to October 7th. Given this breakdown in relations, alongside obvious security concerns, further IMEC negotiations appear highly unlikely as Saudi Arabia seeks to establish itself as the leading Islamic proponent of Palestinian autonomy. Therefore, Israel’s position as port-of-entry for European integration with the IMEC is currently unfeasible due to political animosity, throwing the project into limbo. In the GCC, a discontinuation of the IMEC project would harm Saudi Arabia and the UAE economically and damage their political prestige.
Should the East Corridor fail to materialise, the GCC will fail to build upon an already firm trading base with India. As of 2022, India’s total exports to the GCC amounted to USD 43 billion, with total bilateral trade at around USD 154.73 billion. The UAE and Saudi Arabia are India’s third and fourth biggest trading partners respectively, whilst Qatar accounts for 41% of India’s total natural gas imports. Whilst a halting of the IMEC project will not necessarily disrupt existing trade between India and the GCC, facilitated by infrastructure such as the Jebel Ali Port, it will significantly limit the future growth aspirations of the UAE and Saudi Arabia. Although prior instances of tension between the GCC and India had a limited impact on their political ties (as seen in 2022 when relations remained steady despite disparaging comments by a member of the Indian government about the prophet Muhammed), Indian politicians could now adopt a more rigid position regarding the GCC's rejection of the IMEC project due to political disagreements. India is a key provider of food security for the GCC, who import around 85% of their food, and Narendra Modi's government will likely emphasise this dependence to urge GCC states to continue the IMEC project, ensuring India's economic influence in the Middle East and beyond.
Looking Forward
The GCC states find themselves positioned between two strategically important trade routes, the Strait of Hormuz and the Red Sea, making use of both to export natural resources and maintain supply to their import-based economies. An average of 20.5 million barrels per day of crude oil, condensate and oil products passed through Hormuz in January to September 2023, alongside 20% of the global Liquified Natural Gas exports flowing through this sea passage every year. More than 10% of global trade flows through the Suez Canal and Red Sea on the West of the Arabian Peninsula, allowing shipping to circumvent the Cape of Africa. Despite this, these two sea passages are considered strategic chokepoints for the GCC, the risk heightened by actors such as the Houthis and Iran, who are politically opposed to the UAE and Saudi Arabia. The fragility of these routes has been exposed by the recent hijacking of Israeli linked cargo vessels in the Gulf of Aden and an alleged Iranian drone strike on an Israeli-managed container ship near the Strait of Hormuz. Iranian proxies have declared that their attacks targeted vessels associated with Israel. However, the Galaxy Leader, seized by the Houthis, was operated by a Japanese company. Although it was partly owned by an Israeli individual, the ship had not been traveling to or from Israel. Western companies, whether linked to Israel or not, will be wary of shipping in these areas, spelling potential trouble for the imports of GCC countries. Whilst oil and bulk vessels had traditionally been seen as prime targets in previous conflicts, the Houthi’s have sought to capture commercial ships for their political, rather than strategic, importance. In 2022, bilateral non-oil trade between the UAE and Israel reached a record high of USD 2.5 billion, the highest amongst the Arab states. Yet this trade may become a target for the Houthis and Iran, intent on coercing the GCC’s relationship with Israel and harming the latter’s exports. If extreme measures are enforced by Iran, such as a hypothetical blockade of the Strait of Hormuz, or hijacking and attacks in the Red Sea/Gulf of Aden intensify, companies in the GCC could find themselves effectively embargoed, starved of exports as shipping diverts from the region, fearful of attacks. Complete closure of the Strait remains unlikely, however should Iran enact measures akin to those in the Red Sea, where major companies such as MAERSK and BP have had to rethink shipping routes due to attacks from the Houthis and drones, then shipping to and from the Arabian Peninsula may be forced to halt operations, severely impacting Bahrain, Kuwait, Saudi Arabia and the UAE.
Whilst the Houthi’s have largely targeted shipping, their recent use of ballistic missiles to strike directly into Israeli territory will be of particular concern to the GCC. These missiles have crossed Saudi Arabian airspace to reach Israel, with misfires posing a potential risk to Saudi civilians and infrastructure. Of particular concern is the Houthi’s ability to conduct these long-range strikes on potential GCC targets such as the Saudi desalination plants on the country’s western coast. 70% of Saudi Arabia’s drinking water is provided by such facilities, presenting a critical strategic weak point for Saudi Arabia. The Yemeni Civil War, which the UN states has claimed over 350,000 lives, is still ongoing. Despite currently experiencing a lull, Saudi Arabia may soon lose patience in tolerating Houthi missiles entering their airspace and threatening their vital desalination industry.
In 1973, King Faisal of Saudi Arabia, in response to the US supply of armaments to Israel, imposed a ban on oil exports from Arab OPEC members to countries that supported Israel, causing oil prices to skyrocket and inflation to rise in the US and the West. Saudi Arabia is currently the largest global oil exporter, representing 14.5% of global oil exports, with its GCC neighbours, Qatar and the UAE, accounting for 4.12% and 6.15% respectively. Thus far, the GCC states have played the role of middlemen in the Israel-Gaza conflict, appealing to both Islamic and Western interests. Should Israel’s continued offensive result in further civilian loss or direct Western intervention, the GCC hold the power to leverage their control of the global oil market to force Israel or the US to back down from a total capitulation of the Islamic resistance in Gaza. However, this situation is highly improbable. The recent Arab League and Organization of Islamic Cooperation summit in Riyadh illustrated that Arab states were unable to reach a consensus on a universally accepted plan to persuade Israel to negotiate. Hence, the likelihood of a coordinated economic campaign against Israel and the West seems doubtful. While Western energy suppliers might be wary of a complete embargo on oil and gas exports by the GCC, these concerns are largely unfounded, and the Gulf states continue to export energy to the West.
The recent summit in Riyadh appeared to indicate a period of détente in the previously hostile relationship between the GCC and the axis of Iran and Syria, yet this united front appears a façade. Alongside the absence of a unified response to Israel, Iranian proxies carried out targeted strikes on the US in Iraq and Syria. Turkey vowed to persist in occupying northern Syria, while GCC states reiterated their backing for the Yemeni Republic against the Houthis, condemning their sustained foreign backing. Whilst appearing to unite the GCC, the conflict in Gaza may exacerbate pre-existing tensions. It was only 2 years ago that the Saudi-led blockade of Qatar ended, which was a response to the latter’s support for Islamist groups including Hamas and the Muslim Brotherhood, as well their close ties to Iran. The blockade involved a diplomatic, trade and travel boycott, with Qatari-registered ships and planes banned from entering the sovereign territories of Saudi Arabia, Egypt, UAE and Bahrain. Qatar, an import dependant country, reported an import deficit of almost USD 1.6 billion and total estimated financial losses from the blockade were estimated at around USD 43 billion. Currently, Qatar serves as mediator between Hamas and Israel, despite facilitating the Palestinian group’s leadership since 2016 and serving as one of their chief financial backers. However, Qatar’s role as the GCC’s chief negotiator in the Gaza crisis highlights limits to Saudi Arabian dominance, having long presented itself as the de-facto political and economic leader of the GCC states. This, coupled with Qatar’s rapport with Iran, and Iran’s consistent support of proxies in the region, could lead Saudi Arabia and its GCC allies to take definitive steps to curb Qatari influence, such as a renewed blockade. Many companies operating in Qatar’s domestic private sector somewhat benefited from the last blockade, as the Qatari government was forced to diversify and expand local production where possible. Should another blockade occur, multinational companies operating in Qatar would have their imports/exports restricted, resulting in severely disrupted output. Whilst there has been little indication that tensions have reached previous levels, diminishing GCC relations with Iran and Qatar make a renewed blockade a distinct possibility.