MIDDLE EAST RISK WATCH – ISSUE 7 – JULY 2017
Qatar dispute - the long term implications
Few expected to wake up on 5 June to the biggest political crisis in the Gulf Cooperation Council (GCC) since its inception. There were some signs of rising tensions, with anti-Qatar rhetoric in Gulf media increasing following the hack of the Qatar News Agency on 23 May. However, the measures taken by Saudi Arabia, the UAE, Bahrain, and Egypt on 5 June caught even close observers of the region by surprise.
Despite the tendency of some analysts to treat the Gulf states as a unit, border disputes, leadership clashes and allegations of external interference in internal affairs have dotted the recent history of this region. However, the speed and severity with which punitive measures were implemented on Qatar was unprecedented and caught many businesses in the GCC off-guard
Many with experience in the GCC recognise that these markets have their share of challenges to business, such as local partnership or hiring requirements, understanding who key decision-makers are in a sector, opaque tendering or contracting procedures and under-developed regulatory and legal structures. However, many seemed to assume that the GCC is a secure, politically predictable and increasingly business-friendly place to operate.
Now, at a time of crisis, businesses are facing newfound uncertainty about the political and operating environment in the GCC. This uncertainty has in turn exposed gaps in risk mitigation and planning. Some companies are dusting off business continuity or evacuation plans only to find that they are outdated, with others realising that they don’t have any in place at all in what they thought to be a benign operating environment. Others are more thoroughly considering their level of relative exposure to various GCC markets and how their clients in one country could affect their ability to do conduct business in another. Furthermore, anecdotal evidence suggests that very few companies in the region have political risk insurance; this leaves them financially exposed to issues typically covered by these policies – such as contract frustration, currency controls, political violence, confiscation or expropriation - should the situation continue to deteriorate.
At the time of writing, it is unclear how or when the current crisis will be resolved, though it seems we are increasingly settling into a protracted stalemate. Either way, the dispute is likely to have a significant impact on the business environment in the GCC. Trade between Qatar and the Saudi-led bloc is unlikely to immediately return to previous levels and investor sentiment may dampen. Shareholding arrangements or organisational structures that cross borders will seem less desirable and regional projects that are currently in the pipeline may be delayed or cancelled altogether.
The crisis also highlights the complexities of the business and political environments in the GCC at a time when these countries have been making a concerted effort to attract foreign investment. It has exposed the speed with which the operational environment can change. It has also shown how ambiguous government directives can leave businesses uncertain of whether new ‘policies’ will be implemented or enforced and how this will be done. GCC states may face similar economic, demographic, and security challenges, but they ultimately have different interests and motivations that drive their decision-making.
Having a strong grasp of enterprise risk management, understanding key government stakeholders in each sector and having business continuity plans in place will go a long way toward enabling companies to successfully navigate a crisis such as this one. We also recommend that our clients engage in scenario planning, to understand the different trajectories that the conflict can take and how these would affect their business.
This crisis comes at a time in which Brexit, US President Donald Trump and an ever more belligerent North Korea, for example, make the geopolitical environment increasingly unpredictable. It is therefore worthwhile for businesses to consider what planning and monitoring mechanisms they have in place to understand how they could be affected by such unexpected events.
By: Allison Wood, Consultant