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An Empowered Middle East ? Part I

Published by YaleGlobal on 2008-01-10

DUBAI: For Arab leaders of the Persian Gulf, George W. Bush and Mahmoud Ahmadinejad mirror each other: Both are widely disliked for shrill rhetoric, and their visits ? the Iranian president attended the Gulf Cooperation Council in Doha in December, and his American counterpart arrived in the Middle East on January 9 ? are largely unwelcome.

The Gulf leaders ? understanding that both leaders woo them for political and economic reasons that flow from Iranian and American self-interests, with nary a concern for the GCC countries themselves ? play the two men off each other.

"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,'" said Anthony D. Harris, former British ambassador to the United Arab Emirates in an interview for YaleGlobal.

The desire of Gulf leaders to focus on economic growth is underscored by the long-awaited launch of the Gulf Common Market on January 1. The Common Market, in principle, has resulted in the creation of the biggest economic bloc in the Middle East and Africa. The GCC countries ? Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates ? have a combined gross domestic product of $800 billion and account for about 45 percent of the world's proven oil reserves and nearly 20 percent of proven natural-gas reserves.

The launch of the Common Market has supporters and 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. "The GCC's GDP is roughly equivalent to the one of the Netherlands ? hardly a mass market," says Woertz.

Still, US companies cannot afford to ignore the GCC region. According to a new report released this week by the Arab Monetary Fund, private consumption in the UAE, or 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.

Nor can one ignore GCC investment clout. 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. 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, steadily expands investments abroad, with high-profile stakes in Nasdaq and Sony.

Longstanding security relations underpin the growing financial ties.

Conventional wisdom in Washington suggests that Bush will assure the four GCC countries he's visiting ? Bahrain, Kuwait, Saudi Arabia and the UAE ? that the US is committed to protecting them against any hegemonic plans that non-Arab Iran may entertain.

But the GCC leaders have already reached a modus vivendi with Iran. They invited Iran's Ahmadinejad to the GCC summit in Doha, where talks focused on building stronger economic ties to the Persian power. 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. Iran and UAE officials report that Iran has invested more than $120 billion in the UAE economy through various entities over the last decade or so ? considerably more than the US if one sets aside investment in the energy sector.

GCC countries welcome foreign direct investment. In the UAE, for example, FDI last year grew more than 10 percent 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 and the promise of diversification.

Although Iran qualifies as a "Gulf state" and is an Islamic country like the GCC members, the group never before formally invited 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 ?migr?s constitute significant trading constituencies in nearly all of them.

Ahmadinejad remains unpopular with the GCC leaders, not the least because of concerns that Iran might work toward destabilizing the monarchies that govern the six states, whose total population is 40 million, of which 13 million are expatriates. Iran, with a population of 71 million, has long been suspected of harboring hegemonic ambitions, although Iranians point out that the nation in its 2,500-year history has never invaded another country.

Indeed, Gulf security ? including Iran's purported nuclear ambitions ? was on the table at the GCC summit. Ahmadinejad cannot forget that Saudi Arabia supported Iraq's Saddam Hussein during the Iraq-triggered war with Iran over the Shatt al-Arab waterway - an eight year war that took more than a million lives on both sides and cost nearly $500 billion.

In the new era, Iran wants more trade with the GCC.

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

Another pressing issue for the GCC is deciding whether to abandon their pegs to the falling US dollar. Chairman of the Abu Dhabi-based Arab Monetary Fund Jassem Al-Mannai proposed that GCC countries switch to a "managed float," pegging currencies to a basket including the euro, British pound-sterling and the Japanese yen, all strengthening in recent months against the US dollar.

"There is no currency exchange system suitable for all ages and places," Al-Mannai said, adding that the EU is the main trading partner for GCC countries, accounting for 35 percent of their overall foreign trade. Asian countries account for another 30 percent of trade and the US 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 almost half of the world's known proven crude-oil reserves, to switch from fixed-exchange rates to currency baskets.

Of the six GCC countries, Kuwait has already begun pegging its currency ? the dinar ? to a currency basket. De-pegging local currencies has taken on urgency because of vast remittances sent by unskilled workers to their homelands, estimated at $30 billion annually, according to N. Janardhan, UAE-based analyst. A declining US dollar reduces the worth of payments sent home, spurring worker discontent.

In fact, Janardhan said, currency dealers in the region have stopped converting US dollars, anticipating de-pegging of local currencies and revaluation of roughly 5 percent.

But de-pegging their currencies to the US dollar is easier said than done. After all, oil is still traded in dollars, and GCC nations depend on the US for regional security.

Chances are, the GCC has already decided behind closed doors whether or not to de-peg. But it's unlikely to be disclosed until Bush has left the Middle East ? and they may even wait for him to leave office early next year.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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