From our analyst in Istanbul…
The Middle East continues to be a quagmire, our attention focuses on the latest developments in the region and the implications for commodity prices and geopolitical alliances.
Saudi Arabia has stitched together an impressive coalition in its armed assault on the Houthis in Yemen, ranging from Morocco, Sudan, traditional Gulf allies, and Senegal. Pakistan was also initially meant to join the coalition, however its parliament refused to ratify the decision, and decided to provide only material aid.
Saudi strategy is pretty straightforward. It prefers stability to anarchy, while also looking to douse Iranian backed Shi-ite movements – such as Hezbollah or the Houthis – or political Islamist movements – such as Hamas or The Muslim Brotherhood. These factors combined mould Saudi foreign policy, particularly with regards to Iran which it sees as the ‘Other’ in the region, not only due to its Shia Islam, but its aggressive proselytising of Shi’ism, and its Iranian culture. The question is how far will Saudi go in order to achieve its geopolitical aims in neutralising Iran? Truncated oil prices have the effect of deepening the recession in Russia, and further retarding Iran’s growth prospects. This is something that, Turkey and other nations (including the US) looking to do business in Iran once sanctions have been lifted, will have no qualms about as it will merely enhance their bargaining power. Furthermore the US has been boosted, as frackers seem to have been resilient to the prolonged drop in oil prices, and thus it seems the US would not be averse to a sustained period of depressed prices.
War in the Yemen
The War has several aspects, first and foremost it is an effort to contain Iranian power. Secondly there is a real reality that Yemen, may split into two; a Houthi Shia dominated north, and a Sunni south. This is merely a historic reality, however it would have ramifications for the plethora of artificially created nation states, which mushroomed across the Middle East after the collapse of the Ottoman Empire. Most notably it may fan secessionist flames from The Kingdom’s Shi’a minority in the Eastern provinces.
Iraq & Syria
While IS’s recent advance into Ramadi and Palmyra is worrying, particularly with regards to the latter, which hosts innumerable Greek, Roman and Nabatean ruins. It would truly be a crime against human civilisation if they were to follow through with threats and level these ancient buildings. Palmyra is an exemplar of Syria’s magnificent past, but also a stark reminder and potent symbol the regime, home of the notorious Tadmur prison, which has seen thousands of political activists imprisoned and executed without trace. In short Palmyra is important to the Assad regime, therefore could this mean the imminent collapse of the Ba’athist power? There is no doubt that the regime is under renewed pressure, perhaps the revulsion of allowing IS to further occupy the power void, will force regional and world powers to act to form a representative unity government with a view to stabilising the region. Perhaps the terrorist attack by IS within Saudi Arabia – the first of its kind – will renew political will in the region to bring an end to this cancerous conflict.
Regional Economies feeling the Pinch
Secrecy surrounding Gulf governmental budgets makes it impossible to discern details, but it is apparent that patterns of state spending have shifted in the past nine months across the Gulf. There is less capital being poured into high-profile investments abroad and there is a renewed emphasis on developing the domestic economy, while simultaneously some domestic projects – particularly vanity projects – which are viewed as less vital are being delayed or, in a few cases, cancelled. Indeed the IMF has revised down GCC growth forecasts once again.
Belt-tightening in a low oil price environment is normal, and it seems the days of aggressive spending overseas are paused for the moment. Regional real estate markets – such as Dubai – are also showing signs of slowing (the residential property sales price index in Dubai fell in April 2015 compared to a year earlier, as asking prices for apartments and villas registered negative growth). In contrast, London’s real estate market continues to be buoyant with property prices continually on the rise. Indeed we have seen some non-GCC investors move from Dubai into London.
Saudi Arabia which is best placed with the depth of reserves to withstand an extended period of low crude oil prices, themselves have ambitious infrastructure and spending projects, which means that it will look to extricate itself from key regional conflicts sooner rather than later.
There are several scenarios, which we envisage would impact oil prices. Disruptions in Iraq, the South China Sea and Venezuela are less of a concern – and have been ongoing for so long that the market seems to discount them – as Saudi has stepped up to the plate. Furthermore the resilience of frackers, and decreased Chinese demand will continue to dampen prices. There is the possibility of OPEC manoeuvring to cut supply, however they are still as divided as ever. Furthermore if we take a long term view, with Iranian sanctions looking to be eased, a new supply glut with envelop the market (if and when this happens of course). All this points towards lower crude prices and continual knock on effects on regional economies overly reliant on energy markets.
Still expect the regional to be sharply divided along sectarian lines, however can foresee Yemen re-organising itself as two autonomous states, while President Assad will continue to be under pressure as is the Iraqi central government. Though we feel The Assad Regime will not receive a ‘knockout’ blow from IS, perhaps due to reticence from The West and its Allies, as they see themselves stuck between The Devil and The Deep Blue Sea.
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