For the nations of the GCC, the drop in oil prices highlighted something many already knew: there is a pressing need for economic diversification and to further engage with global partners across different markets. To this end, countries in the region have made efforts to expand their international role and reach in recent years, with trade deals and investment being pursued in the US, China and India. Going forward, relationship building is likely to receive even greater focus, as GCC member states seek opportunities and forge partnerships with new economies.
One of the most closely watched international developments in 2016 was the US presidential election. Despite Donald Trump’s “America first” rhetoric, his first year in office had a largely positive impact on US-GCC relations, which had frayed somewhat under Barack Obama, who led the US from 2008 to 2016. Trump’s first foreign trip as president in May 2017 began in Saudi Arabia. There, he met with 50 Arab and Muslim leaders, including those from the six GCC nations. It was announced shortly before the visit that the US had signed deals worth more than $350bn with Saudi Arabia, including $110bn related to weapons and arms contracts. The following month the US Department of State approved an initial sale of military training programmes and equipment worth over $1.4bn to the kingdom, with the contract including a radar system and education for the Royal Saudi Air Force. Trade relations beyond defence have been enhanced as well, with Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, announcing plans to contribute $20bn to private investment firm Blackstone Group, with the funds to be used as financing for infrastructure projects in the US.
It is the UAE, however, that has historically been the US’ largest export market in the Middle East, with sales worth more than $22bn in 2016. According to Sultan bin Saeed Al Mansoori, the minister of economy of the UAE, non-oil trade between the US and the UAE rose from $27.8bn in 2015 to $30.3bn in 2016. Alongside the military deals with Saudi Arabia, the US authorised the sale of $2bn worth of missiles to the UAE.
To the East
China’s engagement with the Middle East has also grown significantly in recent years, aided by China’s Belt and Road Initiative (BRI), which was unveiled in 2013. The aim of the scheme is for the country to significantly extend its global reach, and it has found a receptive audience in the GCC. Saudi Arabia and China signed 15 memoranda of understanding (MoUs) during the G20 summit in September 2016, spanning areas such as science and technology, oil storage, water and cultural cooperation. These MoUs are part of a five-year programme of mutual investments, with a timeframe of one year set aside to finalise the deals.
At a global exhibition in the UAE in February 2017, another MoU – related to China’s defence sector – was executed between the two countries. The agreement plans to establish a production line in Saudi Arabia for China’s new-generation Rainbow 4 aerial drone, among other projects. One month later, during a tour of Asia to increase economic cooperation with the region, King Salman bin Abdulaziz Al Saud of Saudi Arabia oversaw the signing of additional deals worth upwards of $65bn with the Chinese government. The agreements included an MoU between oil giant Saudi Aramco and China North Industries Group to explore the establishment of refining and chemicals plants in China, and a deal between Saudi Basic Industries Corporation (SABIC) and China’s Sinopec to develop petrochemicals projects in both countries. Sinopec and SABIC already run a joint chemicals complex in Tianjin, China.
China is currently Saudi Arabia’s largest trading partner, with bilateral exchanges amounting to $42.4bn in 2016. During a visit to the kingdom in August 2017 Zhang Gaoli, then-vice-premier of China, said his country “supports Saudi Arabia in making its 2030 vision a reality, and would like to be a partner as the country diversifies its economy”. Some 60 agreements and MoUs, worth nearly $70bn, were signed during his visit.
In order to develop the BRI, China is keen to attract more foreign bond issuers in its interbank bond market. Sharjah became the first Middle Eastern government to do so, issuing an RMB2bn ($297.8m) instrument – a so-called Panda bond – in February 2018.
Gaoli also visited Kuwait during his time in the region, becoming the highest-level Chinese official to visit the nation in almost a decade, as the countries look to deepen trade relations. Kuwait was the first Gulf state to establish full diplomatic ties with China in 1971 and also was one of the initial Arab countries to sign a cooperation agreement with it under the BRI. Bilateral trade between China and Kuwait reached $9.37bn in 2016 and rose 28.6% year-on-year (y-o-y) to $5.47bn in the first half of 2017.
The UAE is also expected to play a key role in BRI due to its importance as a global trade hub. The country is the gateway for roughly 60% of China’s exports to the region, worth about $70bn annually, according Abu Dhabi Ports. He Song, economic and commercial counsellor at the Chinese embassy in Abu Dhabi, stated that Chinese non-financial foreign direct investment in the UAE rose 352% y-o-y in the first nine months of 2016 to reach $390m. That year China’s COSCO Shipping Ports won a 35-year concession to build and operate a new container terminal at Khalifa Port in Abu Dhabi, with plans to invest over $700m in the facility.
Earlier, in December 2015, Abu Dhabi-based Mubadala Investment Company launched a joint investment fund with China Development Bank Capital and China’s State Administration of Foreign Exchange, with each government investing $5bn to be used for projects in both countries. Since 2011, four of China’s state-owned banks have set up operations in the UAE.
India & Pakistan
Emerging markets in South Asia are seen as key to outward growth. India is the GCC’s largest trade partner, and with the OECD expecting its economic growth to remain above 6.7% through to 2019, there are likely to be further opportunities. Trade between India and the GCC totalled $137.7bn in 2014-15, up from $6.2bn in 2001-02, according to the International Trade Centre. Ali Ebrahim, deputy director-general of Dubai’s Department of Economic Development, said in August 2017 that GCC exports to India had risen by 49% each year over the previous decade – the highest growth rate among the region’s major trading partners – with imports from India rising by 39%. According to India’s Ministry of External Affairs, the GCC also currently supplies 60% of India’s total energy imports. Furthermore, with millions of Indians working in Gulf states, remittances from the region are worth more than $35bn per year, representing roughly half of India’s annual total income from this source.
While relations between Pakistan and the GCC are not as well established as those with India, a third round of negotiations over a free trade agreement (FTA) between the GCC and the South Asian country is expected by the end of the first quarter of 2018. The hope is that an FTA will help to further develop multilateral trade, with Pakistan’s agricultural potential and energy needs seen as areas of opportunity.
With Russia a major hydrocarbons producer in its own right, trade between the GCC region and the northern giant has never been as critical as with the US, China and India. Still, there have been strong efforts to boost bilateral trade and cooperation. The Russian Direct Investment Fund (RDIF) and Mumtalakat, Bahrain’s sovereign wealth fund, signed a mutual investment agreement in 2014, and in February 2016 it was reported that Mumtalakat had made a $250m investment in the RDIF. In June 2017 Mahmood Hashim Al Kooheji, CEO of Mumtalakat, told Reuters that they had an “impressive” pipeline of investment deals in Russia, with $135m worth of projects approved. Bahrain’s moves followed the announcement in November 2015 that Kuwait’s sovereign wealth fund, the Kuwait Investment Authority, had agreed to allocate an additional $500m to investment projects in Russia. These funds furthered an initial $500m joint investment mechanism that was launched in 2012. According to Kirill Dmitriev, CEO of the RDIF, Gulf sovereign wealth funds had earmarked more than $20bn for investment in Russia as of May 2017. In June 2017 Rosneft – Russia’s largest oil producer – and Saudi Aramco announced they were looking into joint investments in Saudi Arabia. At the same time, the kingdom said it would be evaluating joining Russia’s Arctic liquefied natural gas project. In Oman, Sultan Qaboos bin Said Al Said welcomed a Russian special envoy in February 2017 to review bilateral relations, reinforce a climate of supportive cooperation and activate existing joint agreements. Trade between Oman and Russia has risen sharply since 2010.
If oil prices continue to recover at their current pace, thereby generating additional revenue for the region’s sovereign wealth funds, it is likely GCC member states will enter into additional agreements with countries around the world. These deals, whether related to developments in the Gulf or investments elsewhere, will become increasingly important for the economic growth and revenue generation across the region.
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