Heading into 2017, expectations over heightened geopolitical risks may have been overdone.
But as the year has progressed, the recent onset of a crisis in Qatar – which perhaps has broader regional implications – might just be a first warning that geopolitical risks are still ever-present and could easily resurface with a vengeance.
On 5 June, Arab states including Saudi Arabia, Bahrain, Egypt and the United Arab Emirates severed their ties with Qatar, accusing it of supporting terrorism. Diplomatic relations were cut, transport links were shut down, exports halted.
The escalation affirmed an unstable and perhaps toxic mix in our minds currently playing out across the Middle East.
In our view, the crisis between Qatar and its Gulf Cooperation Council (GCC) counterparts looks set to drag on for weeks, if not months.
In part, this seems to be a power play by the new heir to the throne, Mohammed Bin-Salman, who is eager to assert his authority in Saudi Arabia and the broader region, following his promotion and mixed results in Yemen. Recurring rivalries and jealousies across the region do not bode well for regional peace and stability. Qatar sees this as an affront to its very sovereignty and has been steeled in its resolve to hold out by backing from Turkey, Iran and Russia.
We believe Turkish support is critical, as it allows Qatar to deflect any criticism that it is selling out to Shia Iran. We would expect further sanctions from Saudi et al on Qatar, but given its own strong balance sheet and the support of Turkey, the state looks well placed to ride this out for an extended period of time.
Broader implications are that this will cause further divisions across the Gulf, weakening the GCC, and perhaps throwing the spotlight (again) on currency pegs across the region. They remain a cornerstone for economic and social stability, but the longer this crisis lasts (and with lower oil prices), it is no longer inconceivable to imagine their eventual demise.
Maintaining Opec unity will be more difficult, perhaps detracting from prospects of production cuts and keeping downward pressure on oil prices. We believe geopolitical tensions will remain elevated between Saudi Arabia and Iran, while also dragging Turkey into the mix, and even the US. The risk of policy missteps by any of the sides is not insignificant – although military force seems unlikely at this juncture.
For businesses, potential sanctions might force international companies into making the unpalatable choice between small but lucrative markets in Qatar and bigger markets elsewhere in the Gulf.
Despite the somewhat more sanguine market outlook recently, geopolitical risk has a habit of resurfacing when least expected. It might be that the crisis in Qatar can be confined to the Gulf countries, with careful management by forces of moderation like Kuwait and Oman. But the risks for the crisis in Qatar being mismanaged and getting out of control are clear-cut, and could potentially have broader damaging regional implications.