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Sanctions on Qatar: What to know

Blog, Checkpoint, Global Trade, ONESOURCE July 21, 2017

The diplomatic crisis in Qatar is a case study on just how connected diplomacy and trade are.

To review: Six Gulf states in June abruptly cut off all diplomatic ties with Qatar, the small, oil-rich nation on the northeastern coast of the Arabian Peninsula, accusing the state of financing terrorism. (Qatar formally denied the allegation.) This disruption hit Qatar Airways, the state-owned airline that provides an essential link to more than 150 destinations across virtually all of the rest of the world, substantially hard: the airline had to cancel and reroute flights to the nations that issued the sanctions, including Saudi Arabia, Bahrain and the United Arab Emirates.

Buying panic in supermarkets ensued, as consumers anticipated shortages, according to the publication of the Chartered Institute of Procurement and Supply (CIPS). “The disruption from the closure of neighbouring airspace and cessation of carrier services to Qatar has ensured the shockwaves of the sanctions are being felt immediately,” Duncan Brock, director of customer relationships at CIPS, said.

A month after the sanctions began, the two sides were still refusing to talk to each other, prompting U.S. Secretary of State Rex Tillerson to say the dispute may last “quite a while,” according to Bloomberg. This would drive Qatar to in the short turn seek assistance from other countries, most notably Iran and Turkey, for enhanced trade ties. Over time, a bond could take shape.

Tillerson is in the mix because the diplomatic spat has pitted several close allies of the United States against each other, and his take on the situation matters because of his diplomatic role and also because of his background. He was CEO of ExxonMobile until his appointment to the State Department in January, and, having worked in the oil and gas sector since the mid-70s, his outlook is grounded in business experience in that sector.

If the sanctions devolve into something more serious, the energy markets would be incredibly volatile.

Eighty-five percent of Qatar’s exports are oil — petroleum gas, crude petroleum, or refined petroleum. Of note, Qatar is the largest exporter of liquefied natural gas, which it sends primarily to Japan, South Korea, India, and several European countries. While the sanctions have not yet substantially disrupted maritime routes for Qatari LNG vessels, this is not the only concern.

Turkey, playing the role of regional mediator, tripled exports to Qatar in response to the sanctions. Qatar imports most of its food through Saudi Arabia, a major Turkish ally, and Turkey’s assistance risks further instigating Riyadh.

More broadly, the geopolitical risk is the still-remote but increasingly realistic chance that the application of soft power falters and countries involved turn to hard power instead. Military action would substantially impact oil markets.

“If the conflict develops into a military confrontation … I would expect a very large spike in prices to around $150 a barrel of oil,” from below $50 per barrel now, said Jean-Francois Seznec of the US-based Atlantic Council’s Global Energy Center, as quoted by Al Jazeera. He also predicted gas prices would increase several-fold if the sanctions snowball into a military conflict.

The nations that applied the sanctions also risk losing out. “It will not be easy for Saudi Arabia and the UAE to find alternative clients in the Gulf region for lost sales from products and services that they provide to Qatar,” wrote Nader Kabbani, director of research at the Brookings Doha Center. “Even more crucial is the possibility that multinational businesses may hesitate to invest or locate their hubs in countries that place political considerations above business concerns.”

Qatar is considering action through the WTO, a process that can take years. There are many players in the mix and companies that do business in or through the Gulf region should be monitoring these developments closely.

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