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Published in YaleGlobal Online Magazine
President Bush Visits the Gulf

Published by Current on 2008-01-11

In the perception of Arab leaders of the Persian Gulf countries, George W. Bush and Mahmoud Ahmadinejad mirror each other: they are both widely disliked in this region, their shrill rhetoric is not appreciated around here, and their visits - the Iranian president came to a summit of the six-nation Gulf Cooperation Council in Doha last month, and his American counterpart, who's already in the Middle East, will be arriving in the Gulf this weekend - are largely unwelcome. But the Gulf leaders also understand that both these leaders are wooing them for political and economic reasons that flow from Iranian and American self-interest and are less likely to benefit the GCC countries themselves.

"If Gulf leaders were to communicate a message directly to both Bush and Ahmadinejad, it would be: 'Tone it down, and please do not interfere with our rising prosperity and trade which keeps our societies stable, and keeps the wheels of commerce turning. Rather than making political points, we'd much rather expand our economic interests,'" said Anthony D. Harris, the former British ambassador to the United Arab Emirates, who now lives in Dubai. "A sharp deterioration in the local security situation on account of other people's frictions is not what the Gulf leaders want."

The ambassador's point about the desire of Gulf leaders to focus more intensively on economic growth is underscored by the long-awaited launch of the Gulf Common Market on January 1. It's the equivalent of a European Common Market , and it opened for business some 26 years after the GCC was formed. The Common Market, in principle at least, has resulted in the creation of the biggest economic bloc in the Middle East and Africa. The six GCC countries have a combined gross domestic product of $800 billion, and they sit on nearly 450 billion barrels of crude oil and 41.55 trillion cubic meters of natural-gas reserves. These countries account for about 45 percent of the world's proven oil reserves of 1.1 trillion barrels and also possess nearly 20 percent of proven global natural-gas reserves.

For foreign investors, the Common Market offers enhanced opportunities of regional projects in both the private and public sectors. But the GCC countries are still essentially raw-material exporters despite some diversification. Intra-GCC trade accounts for only around 7 percent or so; in the case of the European Union countries, the figure was about 65 percent before economic unification.

President Bush - who began a nine-day trip through the Middle East on Wednesday - will be first big-name visitor to the world's newest economic powerhouse, where, if Washington plays its cards right, enormous new opportunities await US companies. According to U.S. Treasury Department reports, the outward flow of foreign direct investment from the GCC countries totaled nearly $50 billion last year; of that figure, almost $20 billion was invested in the US, representing nearly a two-fold increase from 2001 to 2006.

The launch of the Common Market has its supporters as well as skeptics. For example, Eckart Woertz of the Gulf Research Center in Dubai notes that trade of goods and services has been already liberalized under the GCC customs union, launched in 2003 though not yet fully implemented.

"This makes the GCC more attractive as destination of exports, as the market is larger (once customs union is fully implemented), but one needs to hold the horses a bit," Woertz says. "The GCC's GDP is roughly equivalent to the one of The Netherlands - hardly a mass market. And the Asian competition has not slept in recent years."

GCC expenditures will include not only domestic economic development, but also investments in foreign companies. For example, the Abu Dhabi Investment Authority - which poured $750 million into Citigroup not long ago, making it the largest stakeholder in the financial-services behemoth - is reported to have more than $700 billion at its disposal for additional investments. And not to be outdone by its traditional Gulf rival, Saudi Arabia will soon establish a sovereign wealth fund, said to be capitalized at $900 billion. Dubai, too, is steadily expanding its investments abroad, with high-profile stakes in bourses such as Nasdaq and companies such as Sony.

Of course, major investments from the Middle East are certain to be closely scrutinized by US authorities. Says Woertz, "The dollar is a disaster waiting to happen; oil-price strength is fundamental; and current account surpluses of oil exporters are here to stay for a long time. So if they - and the other oil exporters, and the Asians - decide to buy more and more real stuff such as equities, gold etc., instead of increasingly worthless treasury bills, I wouldn't rule out protectionist measures and capital controls by the U.S. I think the main real reason for such protectionism will be economic, not political, although they will be, of course, a lot of talk about terrorism."

Be that as it may, US companies cannot afford to ignore the GCC region. Take, for instance, the retail industry here. Led by demand for luxury goods - mainly from Europe and the US - the industry exceeded $100 billion in 2007. This figure is expected to increase in 2008. According to a new report released this week by the Arab Monetary Fund, private consumption in the United Arab Emirates - which means spending by individuals and families on goods and services - amounted to $84 billion last year, or nearly $20,000 per capita in a country with a population of barely 4.25 million. Nearby Qatar, which has a population of about a million, placed second in consumer spending in the GCC, with an average of $12,500 per person. And Saudi Arabia, with an estimated population of 23.6 million, showed per capita consumer spending of $3,764.

All this should be good news for President Bush, who's expected to be accompanied by administration officials involved with developing commercial ties to the GCC region. But will Bush pursue an economic agenda as vigorously as a political one?

The conventional wisdom in Washington seems to be that President Bush - in addition to discussing the Arab-Israeli issue with the Israelis, Palestinians and Egyptians - will want to reassure the four GCC countries he's visiting - Bahrain, Kuwait, Saudi Arabia and the UAE - that the US is fully committed to protecting them against any hegemonic plans that their non-Arab neighbor, Iran, may entertain. Bush's official itinerary began in Israel on Wednesday; he then moves on to the Palestinian stronghold of Ramallah in the West Bank, Kuwait, Bahrain, the UAE, including Dubai and Abu Dhabi, Saudi Arabia and Egypt. It is Mr. Bush's first trip as president to Israel or Saudi Arabia. Possible unannounced stops include Iraq and Lebanon, two nations where Bush has pushed his "freedom agenda" for the Middle East harder than anywhere, according to The Wall Street Journal.

But the GCC leaders, who formed their organization 26 years ago, have already reached a modus vivendi with Iran. They invited Iran's Ahmadinejad to the GCC summit in Doha, where the talks focused on building stronger economic and commercial ties to the Persian power, which has a population of 71 million. Iran has proposed a regional free-trade pact with the GCC: Of Iran's global exports of $100 billion annually, about $2 billion go to the UAE - mostly agricultural products, including pistachios - while Iran imports more than $10 billion worth of electronic and other manufactured goods from the UAE, mainly through Dubai. Iranian officials have said that Iran has invested more than $120 billion in the UAE economy through various entities - considerably more than the United States if one sets aside investment in the energy sector.

The GCC countries welcome foreign direct investment. In the UAE, for example, FDI last year grew by nearly 11 percent to nearly $20 billion from the 2006 figure, according to estimates by the International Monetary Fund. In principle, the new Common Market creates the possibility of enhanced FDI, especially in manufacturing and the promise of diversification.

The new Common Market excludes Iran, whose unpredictable president, Ahmadinejad, has frequently expressed Iran's desire to expand its trade ties with the GCC countries. Although Iran qualifies as a "Gulf state" - and is also an Islamic country like the six GCC members, the group has never asked Iran to attend the group's meetings. Of course, Iran is almost totally a Shia state, while the native populations of the GCC countries are largely Sunni - although Iranian emigres constitute significant trading and mercantile constituencies in nearly all of them. In the UAE, for example, some 500,000 of the country's total population of 4 million are people of Iranian origin.

Ahmadinejad is not especially popular with the GCC leaders, not the least because of their private concerns that Iran might work toward destabilizing, or even toppling, the monarchies that govern the six states, whose total population is 33 million (of which 13 million are expatriates). Iran, with a population of 71 million, has long been suspected of harboring hegemonistic ambitions, even though Iranian leaders frequently point out that in their 2,500-year history, Iran - also known historically as Persia - has never invaded another country.

Indeed, Gulf security - including Iran's purported nuclear ambitions - was among the issues on the table at the GCC summit, according to the organization's secretary general, Abdul Rahman bin Hamad al-Attiyah of Qatar. And while Ahmadinejad did not make any reference to it, he was surely mindful that Saudi Arabia supported Iraq's Saddam Hussein during the Iraq-triggered war with Iran over the Shatt al-Arab waterway. That war lasted from September 1980 to August 1988, took more than a million lives on both sides, and cost nearly $500 billion.

But the Gulf states know that the United States will continue to be the ultimate guarantor of their security against Iranian hegemonic ambitions - if indeed such ambitions truly exist. While some Arab Gulf leaders may relay expressions of concern to Washington, in private their assessments of Iran's ambitions are savvier. Still, US pressure on Gulf countries to cut back their trade with Iran is mounting. Recently, Deutschebank closed its operations in Iran, reportedly under American pressure.

On Iran's side, trade will be an issue that Ahmadinejad is increasingly likely to bring up in the coming months. Iran has proposed a regional free-trade pact with the GCC: Of Iran's global exports of $100 billion annually, about $2 billion go to the UAE - mostly agricultural products, including pistachios - while Iran imports more than $10 billion worth of electronic and other manufactured goods from the UAE, mainly through Dubai. But since Iran, like most of the GCC countries, is primarily an exporter of crude oil and natural gas, it is difficult to see how a wider trade arrangement can be fashioned regionally that would benefit both sets of players. After all, GCC countries have very little by way of indigenous manufacturing; their outbound non-oil trade tends to consist mainly of re-exports.

Still, if the US and the European Union impose economic sanctions on Iran on account of its nuclear program, Iran may seek to import more goods from the GCC countries, which would welcome such enhanced trade, according to observers such as Ambassador Harris. And while the may feel diffident about doing an end run around Western-imposed sanctions, goods can always be smuggled across the Persian Gulf to Iran in the time-honored practice sustained by the sturdy dhows that regularly ply the waters.

The other pressing issue for the GCC summiteers concerns the growing pressure for them to abandon their pegs to the falling US dollar. The chairman of the Abu Dhabi-based Arab Monetary Fund, Jassem Al-Mannai, said that the GCC countries should switch to a "managed float" or peg their currencies to a basket, including the euro, British pound-sterling and the Japanese yen, all of which have been strengthening in recent months while the value of the US dollar has declined by more than 10 percent since 2000.

"There is no currency exchange system suitable for all ages and places ... In the past GCC economies were negligible and now they have to adopt polices that suit their economic progress," Al-Mannai said, adding that the EU was now the main trading partner of the GCC countries, with some $165 billion in trade annually, or 35 percent of their overall foreign trade. Asian countries accounted for another 30 percent of trade, and the US only about 10 percent.

In fact, the UAE, the second largest economy in the GCC after Saudi Arabia, has called for all Gulf oil producers - which possess 38 percent of the world's proven crude-oil reserves of 1.3 trillion barrels - to switch from fixed exchange rates to currency baskets.

"Revaluation will not be in the interest of Gulf countries, and it will not help solve the problems that they are facing, because nobody can give us guarantee for the dollar not to fall further," Al-Mannai said. "It will not give these countries the freedom to fight inflation which is posing a growing threat to their economies."

Of the six GCC countries, Kuwait has already begun pegging its currency - the dinar - not to the US dollar but to a currency basket.

The question of de-pegging local currencies has taken on urgency because of the vast remittances by unskilled workers to their homelands, mostly in Asia. According to N. Janardhan, a UAE-based analyst, these remittances amount to more than $30 billion annually. But the decline in the value of the US dollar has reduced the net worth of the money they send home. Holiday plans are being canceled, and many unskilled workers have sent their families back home because the cost of living has become unaffordable.

In fact, Janardhan said, in the last few days, currency dealers in the region have stopped converting US dollars in anticipation of what would amount to a revaluation of roughly 5 to 8 percent of local currencies through a de-pegging to the dollar.

But the GCC leaders surely would know that de-pegging their currencies to the US dollar is easier said than done. After all, oil - which provides their livelihood - is still traded in dollars. Moreover, the OPEC countries have more than $4 trillion invested in various projects globally, not to mention in US treasury bills, which helps the US cope with nagging trade and budgetary deficits. And there's the political reality that, in the final analysis, the US is the guarantor of the security of GCC countries - and that it may be politically unwise to challenge Washington.

The chances are that a decision on GCC going ahead with de-pegging has already been made behind closed doors, but it's unlikely to be disclosed until Bush has come and gone from the Middle East. It may even wait for him to leave office early next year.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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