A prolonged Qatari crisis has raised questions about the future of the six-member Gulf Cooperation Council, with some experts claiming it is effectively dead. Sanne Wass investigates the new political environment and the impact on business in the region.


It’s hard to claim it was a success back in December when a planned two-day GCC summit ended just hours after it began. The council’s 38th annual meeting in Kuwait City wasn’t exactly off to a good start: most countries hadn’t bothered sending their heads of state, and on the morning of the first day, the UAE and Saudi Arabia announced they had formed a new economic and military partnership, separate from the GCC.

It was all off the back of what has come to be known as the Qatari crisis – the move in June last year by three of the GCC’s six members, Saudi Arabia, UAE and Bahrain, to boycott a fourth member, Qatar, after accusing it of supporting terrorism.

The rift between Qatar and other Gulf states has opened up a new chapter in the wave of geopolitical disintegration that is sweeping the globe. And it’s not just about politics. The complex environment is also impacting businesses and financial institutions in the region, especially those involved in cross-border trade and investments.

“In general, we’re seeing a slightly more unpredictable political environment,” explains Allison Wood, senior consultant for the Middle East and North Africa at Control Risks. “With what’s happened in Qatar, if you’re operating across different GCC states, it’s worth re-examining your operations and exposure to potential changes and regulation.”

Torbjorn Soltvedt, principal analyst for the Middle East and Africa at Verisk Maplecroft, agrees that the political landscape in the Gulf is “getting more fragmented” and difficult for businesses to navigate.

“Obviously, if the GCC was functioning properly as a regional organisation, it would be a lot easier to deal with, whereas now, in terms of trade, investors have to make sure they are up to speed with the various divisions within the region. It’s a complicated matter that can perhaps slow business down,” he explains.


Towards a Gulf Union?

Free-trade advocates undoubtedly had big hopes for the GCC when it came into effect back in 1981.

It was an ambitious regional enterprise: inspired by the European Union, the GCC was founded to represent the shared economic, strategic and security interests of an intergovernmental union consisting of all the Arab states of the Gulf, except Iraq.

Almost four decades later, the GCC has had some successes: in 2015, for example, the six member states formed a customs union, eliminating tariffs between them and enforcing a common 5% tariff on imported goods across the region. Citizens also have freedom of movement across borders and the right to employment in other GCC countries.

The council has also played a role as a co-ordinating body, explains Wood. For example, the GCC’s Gulf Central Committee for Drug Registration offers a centralised registration procedure and body for the approval of pharmaceutical products.

Closer GCC integration became more relevant after the 2015 crash in oil process, she says: “I don’t think it was ever an extremely effective institution, but it has had a few successes. I think we saw the GCC become somewhat more effective as a co-ordinating body once oil prices declined. You saw a bit more co-ordination between states about things like implementing value added tax (VAT) and re-examining subsidies.”

But an EU for the Gulf it never was. Aspirations to develop into a fully-fledged single market failed, as did efforts to establish a joint missile defence system. The bloc has in the past tried and failed to launch a single currency, while a GCC railway has been mapped out but is yet to gain much traction.

Six years ago, it seemed like a natural culmination of the Gulf unity when Saudi Arabia proposed to transform the GCC into a ‘Gulf Union’. That ambition is now long gone, explains Florence Eid-Oakden, chief economist at Arabia Monitor.

“The GCC was an entity in the making, but it wasn’t much of an entity: it didn’t really have a strong economic union, it didn’t have a common currency as it had set out to create, and it didn’t have a common geostrategic foreign policy,” she says. “And so, the question really is, what was the GCC about at the outset? The answer is that it was hoping to get somewhere. They were creating a customs union, they had created free movement of labour, so they had a few economic features that were valuable. But the GCC was nowhere near the EU of today, for better or for worse.”

Then came the boycott of Qatar. If the GCC was already on the verge of collapse, the Qatari dispute seemed to be the final straw that made experts declare the council effectively dead. In a sudden move in June, the three GCC countries together with Egypt closed all transport links with Qatar, including the country’s sole land border with Saudi Arabia, and all airspace to Qatari aircraft. The quartet gave Qatari citizens 14 days to leave their territory, and urged their own citizens in Qatar to come home.

“The GCC had been struggling for a long time, and so the Qatar crisis was perhaps the final nail in the coffin. It has confirmed that the GCC has in some ways run its course,” Soltvedt says. “It still has a function in terms of the common market, but in the sense of the purpose that it was initially meant to have, you can say it’s pretty much dead.”


Building new alliances

Almost a year after the Qatari dispute broke out, it seems that the affected countries have not, in fact, been affected at all – perhaps a manifestation of the GCC’s limited impact. Before the crisis, the four boycotting nations only accounted for 10% of Qatar’s total exports, 16% of imports. And those Qatari firms that did have supply chains through these countries have now found new ways to conduct business, utilising trading partners outside of the GCC.

“What’s happening is that Qatar is seeking investment from new places and looking to build new economic partnerships,” says Wood. “Turkey has probably been the most obvious one and the biggest growth of trade. Iran is another. But Qatar will increasingly look to build ties with Asia, because that’s always been a big market for LNG, so I think it will look to increase those ties in other sectors as well.”

Meanwhile, Saudi Arabia and the UAE are seeking closer collaboration with each other. With the decision to boycott Qatar, it was perhaps a “natural time” for the two countries to try to make progress on their own, says Soltvedt about what he calls “a tentative new alliance”.

“For now, they have talked about this new union – including closer co-operation in terms of military, political and economic affairs – but they haven’t really provided specific stamps as to how that’s going to succeed where the GCC failed. It would be interesting to see if Saudi and the UAE can make greater progress, perhaps in some kind of expanded union that would maybe also involve Bahrain,” he says.

The implementation of VAT could be one sign that Saudi Arabia and the UAE are ready to move forward on their own. Its introduction was supposed to be the next big move for the GCC as a union, with all six countries agreeing in December 2015 to introduce the tax at a common rate of 5%.

Yet, in January, Saudi Arabia and the UAE alone implemented VAT in their local regulations. According to Wood, the Qatari crisis may have given other states “an excuse to delay it, at least for a while longer, if not indefinitely”.

“Countries like Kuwait and Oman, where there has been more pushback from local populations, in particular against austerity and taxes, I think are quite happy to now have an excuse to delay implementing the tax,” she says, but emphasises that there is still “a good chance” the remaining countries will implement it, which they have a year to do.

Meanwhile, Soltvedt argues that the introduction of VAT is a clear sign of progress in the Saudi-UAE alliance. “If you look at the top leadership of the two countries, especially Mohammad bin Salman and the ruler of Abu Dhabi, Sheikh Khalifa [Al Nahyan], they have a close personal relationship, and that in itself is probably something that lends greater credibility to the project of trying to come up with an alliance between those two countries. VAT and stronger efforts to counter Iran are probably two areas where there has been some concrete progress.”

Yet, he notes, there’s still “good reason to be a little bit sceptical” about a new emerging union, pointing to the fact that regional integration has proven difficult in the past, and even Saudi Arabia and the UAE will find it difficult to agree on most matters.


Oman’s succession challenge

Another dynamic that is drawing renewed attention in the region is the situation with Oman. The country has so far not taken sides, maintaining good relationships with western allies and other Middle Eastern countries, including Iran. Meanwhile, it has benefited hugely from the Qatari boycott, with most of Qatar’s supply chains now being re-routed through Omani ports.

The country’s stability and neutral course are of huge importance to the region and are, to a large degree, tied up with its leader, Sultan Sayyid Qaboos bin Said, who has governed Oman for no less than 46 years. But Sultan Qaboos is in declining health, meaning that the country’s neutrality is at risk. It is still not clear who his successor will be.

“There is concern in Oman that they are going to feel pressure to come more into the fold of Saudi Arabia and the UAE,” says Wood.

The sultan’s illness is not new news. Omani and international news outlets began reporting that the sultan was suffering from terminal cancer back in 2014. But, Wood says, it has become “a somewhat greater concern” than it was four years ago, and something Control Risks increasingly advises their clients to plan for.

“Everyone knew that it was going to result in a certain level of uncertainty in the business environment, but now the stakes are a bit higher, because of the broader contentions. The rise of this Saudi-UAE partnership and their increasing anti-Iran rhetoric, the dispute with Qatar, the war with Yemen, amidst Oman’s fiscal problems – I think that convergence of issues has caused people to become increasingly concerned that it could be destabilising,” she says.

Her comments are echoed by Soltvedt at Verisk Maplecroft, who is already seeing signs of a Saudi Arabia seeking to increase its economic influence in Oman.

“It seems that Saudi Arabia has stepped up its economic co-operation with Oman recently. There have been a few key investments, it has lent some money to Oman and made investments in infrastructure projects. It seems like it is a priority to try and make sure it retains as much influence as possible with Oman,” he says.


Expelling Qatar from the GCC

Experts also have their eye on what else the boycotting nations have in store for Qatar. While some have predicted that Qatar would be expelled from the GCC, this seems increasingly unlikely.

“Technically, and legally, it’s quite difficult to kick Qatar out of the GCC,” Wood says.

Soltvedt agrees. “Perhaps before they would take the step of kicking Qatar out of the GCC or disbanding it, a more natural step would be to first showcase the new alliance as a viable alternative to the GCC.” He suggests keeping close tabs on any concrete actions taken by Saudi Arabia and the UAE.

Wood expects that, at least for a while, the GCC will continue to exist “but just be something of a defunct institution”.

“The GCC may remain intact in name, because there’s a certain reluctance, at least for now, to let it completely fall by the wayside as an institution. But I’m not particularly optimistic that you will see a GCC emerge as a constructive co-ordinating body.”

Meanwhile, the boycott of Qatar continues, bringing with it real changes for the region. Wood says it is unlikely that the involved countries will go back to old trading routes, even if the dispute is resolved tomorrow.

According to Eid-Oakden at Arabia Monitor, the most significant impact is reputational.

“The reputation of the GCC as an investment destination was very hard work over the past few decades. The world looked to it as an island of stability, and a destination where one found harmony in politics. That has changed. The image of the GCC has been altered,” she says.

While the future of the GCC might not be as bright as it seemed four decades ago, there remains some hope that members may breathe new life into the entity. In March, reports emerged that the GCC states plan to set up a company to facilitate direct money transfers without having to rely on international currencies among all six members, including Qatar. This intention to co-operate may well be the next big test of unity in the region.