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stratEGIC Monthly June 2023 The Gulf is changing . . . Here's how

BY Piercamillo Falasca & Daniela Palumbo

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12/07/2023

stratEGIC Monthly June 2023

This, the 17th edition of our StratEGIC monthly, looks at some of the key issues defining the Euro-Gulf space in June 2023 and focuses on some of the main political, economic and social issues that define their trajectory and underline their possible futures.

The Shifting Dynamics of Israel-Saudi Arabia Relations

By Piercamillo Falasca

It is widely understood that Israel and Saudi Arabia maintain lines of communications, behind the scenes, despite not having official diplomatic relations. This has led to a degree of coordination in policy terms, be them in the areas of security, trade and technology. Still, Saudi Arabia’s highest authorities refrain from any public overtures to Israel due to the unresolved Palestinian conflict. Saudi Arabia was the creator of the Arab Peace Initiative (2002), which stipulates that normalising Arab and Muslim relations with Israel can only occur after Tel Aviv redeploys out of the territories it captured in 1967, and facilitates the construction of a Palestinian state. In other words, Saudi Arabia supports the two-state solution. The Arab Peace Initiative remains the bedrock for Saudi Arabia’s engagement with Israel.

However, the Middle East of 2023 is not the same as 2002. The US-led invasion of Iraq (2003), war in Libya, Syria and Yemen, violence in Egypt, the rise of Daesh (etc) have produced a new region—especially as states grow tired of perpetual conflict. As a result, the states in the Middle East are looking for new partners, new paradigms and new parameters for their relations. This new regional environment has facilitated a string of diplomatic opportunities including the 2020 Abraham Accords that brought Bahrain, Morocco and the UAE to formalise relations to Israel.

This was not lost on Saudi Arabia and Foreign Minister, Faisal bin Farhan, recently stated (June 2023) that normalisation with Israel would bring significant benefits to the region—the closest Saudi Arabia has come to expressing their interest in formal relations with Israel. However, progress on the Palestinian issue is still required and if Israel does not make any concessions to the Palestinians it is likely that Saudi Arabia will walk away from any tabled agreement. After all, time favours Riyadh more than it does Tel Aviv. Washington and Brussels have also begun to eye the potential normalisation of Israel-Saudi Arabia relations as a solution to a host of regional problems ranging from the war on terrorism and Iranian power projections to environmental degradation and supply line disruptions.

Long story short: a constructive Israel, Saudi Arabia relationship has the power to reshape the geopolitical landscape in the Middle East. It can usher in a period of intra-regional prosperity, clip the wings of Iran and its militias and more effectively combat the more acute challenges to the region. But to get there, significant movement needs to be seen on the Palestinian front. All the ingredients are there, it’s time to bake a new regional reality.

The Adaptable Economy of the UAE

​By Daniela Palumbo

​The United Arab Emirates (UAE) recorded impressive economic growth over the past year, with its Gross Domestic Product (GDP) increasing by an incredible 7.9%. This surge is a clear sign of the resilience of the UAE economy, which has been able to adapt and prosper in a challenging global scenario. The UAE’s diversified economy, which includes sectors such as oil and gas, finance and tourism has played a significant role in leading this growth. The push to attract foreign investments, promote innovation and improve pro-business policies have also contributed to the general economic success.

​The substantial GDP growth also demonstrates the UAE’s ability to effectively capitalise on emerging opportunities. The UAE has consistently invested in infrastructure development, providing a strong platform for sustained economic expansion. Moreover, hosting international events, such as the Dubai Expo 2020 (held in 2021 due to COVID-19), was a success both for its impact on tourism infrastructure but also because of the spillover effect on the wider economy; leading to growth in non-oil sectors and reducing dependence on oil revenues.

​And it represents a positive feedback cycle — nothing succeeds like success. GDP increases often generates job opportunities as businesses grow and public budgets increase so that healthcare, education and infrastructure, are further advanced. All in all, the future looks bright for the UAE in trade, economics and, as a result, prosperity for all.

Touring Saudi Arabia

By Daniela Palumbo

Saudi Arabia’s ambitious investments for developing its tourism sector is a significant departure from its more traditional focus on petroleum (and its many byproducts) and is inline with its economic diversification strategy, reflected in the Saudi Vision 2030. Saudi Arabia has lofty goals and the means — and leadership — to achieve them. However, there are some issues that need to be addressed, including to push to attract significant numbers of international tourists which will require a sustained public relations campaign since many people in Europe and the US are guided by misperceptions about the country, its norms and culture. While it will be necessary for Saudi Arabia to strike a balance between preserving its cultural heritage and meeting the expectations of modern tourists, it may be more important to showcase — where — and whenever possible — the many treasures and exciting options Saudi Arabia has to offer in terms of tourist sites and facilities such as the Red Sea Project[1], NEOM[2] and Al Ula, not to mention the rapidly-transforming cities of Jeddah and Riyadh.

Saudi Arabia has already implemented reforms to alleviate visa restrictions and introduced an easy-to-acquire tourist visa. Constant efforts to improve the visitor experience, such as providing multilingual assistance, is becoming the new normal in the country. Saudi Arabia is en route to becoming a major tourist destination — and it is important to understand how doing will change it and the region around it.

GCC States Explore De-Dollarisation Amid Growing Concerns

By Piercamillo Falasca

In March 2023, China made history by completing its first-ever purchase of liquefied natural gas from the United Arab Emirates using the yuan, on the Shanghai Petroleum and Natural Gas Exchange. This transaction sparked speculation that the hydrocarbon-exporting states of the Gulf Cooperation Council were moving towards de-dollarising oil and gas sales. While Iran has long sought to de-dollarise energy transactions to bypass US financial sanctions, the GCC states, which have historically supported the dollar-based international system, are now considering alternatives due to concerns over the US’s use of export controls, financial sanctions, and oil price caps against Russia.

The GCC states, having strategic partnerships with the US since the 1970s, are alarmed by the dangerous precedents set by the US and its recourse to such measures. As a result, they are taking steps to reduce their reliance on the US dollar and exploring alternative arrangements with regional trading partners like China and India. However, it is unlikely that the Gulf states will completely abandon the dollar, as they recognise the absence of a credible alternative. Rather, they seek to limit their dependence on the US and its currency by expanding their options.

It is crucial to note that the GCC states are not the primary drivers of the move away from the dollar. Instead, countries heavily sanctioned by the US, such as Russia and Iran, lead the way. The GCC states, known for their compliance with global economic systems and preference for stability, are not interested in contributing to upheaval. Therefore, if a transition away from the dollar occurs, they should be considered secondary or tertiary actors rather than leaders. according to Dr. Omar Al-Ubaydli, President of the Bahrain Economists Society. However, the GCC states are pragmatically responding to de-dollarization and if a new system is emerging, it makes sense for the GCC to engage with it as a matter of economic prudence. Saudi Arabia’s Minister of Finance, Mohammed al-Jadaan, has already expressed an openness to improving trade by using non-dollar currencies, and there have been discussions about potentially selling oil to China in yuan. While some analysts believe these statements were meant to exert leverage over the US, they highlight a growing trend towards de-dollarisation in the region.

The gradual decline of the US dollar, while not at all implying collapse, is a noteworthy development. Over the past 25 years, the dollar’s market share has decreased from more than 70% to less than 60%. In terms of global reserves, the share held in US dollars has declined from 73% 2001 to 58% at present.

In today’s interconnected global economy, the dominance of the US dollar and unilateral decisions made by certain countries have far-reaching implications. Dependence on the US Federal Reserve’s policies and the need to align with US monetary policy often pose challenges to other countries’ economies. The GCC states’ exploration of de-dollarisation reflects a growing desire for economic independence and increased stability.

Given these factors, it may be time for the GCC countries to consider establishing a common currency. By inviting countries like Egypt and Jordan to join, they could reduce dependency, enhance economic stability, and strengthen regional integration. This move would also consolidate Saudi Arabia’s and the UAE’s positions as global leaders, given their robust economic, social, and political foundations. The euro in Europe serves as a successful example of breaking free from the dollar’s dominance, offering greater autonomy and domestic control over economic factors within the eurozone. It is a lesson that may be imparted on the GCC.

Notes:

  1. The new project involves the creation of a tourist attraction that will be completed in 2030. It will be able to set up 50 hotels with 8000 rooms, sports and entertainment facilities. Moreover, the real innovation will be that the entire transport system, including the airport, will be powered by renewable energy.
  2. NEOM is a 170 km long city project that also includes an industrial zone, railway lines, ultra-luxury districts and a ski resort in the desert. The aim is to built a skyscraper far from the eyes of everyone, with mirror walls 500 m high. It will be one of several mega works designed to showcase Saudi Arabia’s role as a financial power to the world’s elites.