By Raymond Barrett
Two years after the demise of Lehman Brothers and the subsequent deepening of the global credit crisis, the petro-sheikhdoms of the Gulf have shown a degree of economic fortitude that finance minsters in the western world could only dream of.
If ever proof was needed to highlight the current disparity between east and west, one need look no further than Saudi Arabia’s $60bn arms deal currently winding its way through the US Congress. As Riyadh stuffs its Christmas stocking with an assortment of F-15 aircraft and Apache helicopters, the venerable British RAF has come under pressure to justify both its budget and (in some quarters) its existence.
Undoubtedly, oil is the lubricant that has protected such countries as Saudi Arabia, Kuwait and the United Arab Emirates from the more abrasive side-effects of the recession. Together, these three possess more than a third of the world’s known oil reserves while accounting for less than 1% of its population. The emirate of Abu Dhabi produces nearly 3m barrels of oil per day alone.
Thus, even though crude prices are now trading around 50% down from their 2007 peak of $147 a barrel, there is still plenty of cash to spread around, be it for high-end military equipment or pricey footballers.
With wealth comes power and, through their sovereign wealth funds, the various Gulf states have also become major players on global capital markets. Whereas much of the oil revenue generated during the boom times of the 1970s was exhausted on a combination of necessary infrastructure projects and somewhat dubious investment schemes, the wealth generated over the last decade has been better managed.
Kuwait directs 10% of its oil revenue to a “future generations fund” to provide for a post-petroleum economy. Ascertaining the exact size of these funds has always involved a large amount of guesswork but, in recent years, Abu Dhabi’s overseas investments have been valued at $300bn-$600bn.
Of course, if you play with the big boys you have to be able to take the inevitable knocks. Both the Kuwait Investment Authority and the Abu Dhabi Investment Authority took large (and, at the time, apparently sensible) positions in global financial institutions such as Citigroup in 2008, only for the bottom to fall out of the market over the following year.
The most immediate impact from the decrease in oil and equity prices has been the postponement of some major infrastructure projects, primarily in the private sector. Yet the delays surrounding many large-scale public projects in Kuwait have as much to do with political squabbles over cost and accusations of irregularities in the tendering process.
The poster child for post-crunch penury in the region is Dubai, whose diversified and debt-fuelled service economy was the very antithesis of the economic models outlined above – one dependent on continual inward investment and a market convinced that prices only ever went in one direction.
That said, the “Dubai dream” was always dependent on attracting outside capital, so in the current climate Dubai will continue to serve its traditional regional function as a business and leisure hub, while its “global vision” will have to take a back seat until the world economy picks up again.
While the fiscal effects of these new realities can be readily quantified, their long-term political reverberations demand a more qualitative analysis. The fragility so embarrassingly demonstrated by Dubai should strengthen the status quo across the region when it comes to politics – hereditary rulers who enjoy absolute power with little or no interest in real democracy – as the ruling families from Riyadh to Doha can now point to the pain suffered by those who tried “western” models of development.
Despite Dubai’s epic profligacy, the tiny local population is well taken care of, thus minimising the possibility of political unrest. The main political blowback of Dubai’s debt crisis is more likely to be a reshuffling of the pecking order within the ruling Maktoum family (particularly those tainted by the crash), rather than some great upheaval.
It is no coincidence that Bahrain – the one country in the region that has a genuine indigenous economic (and religious) underclass – is also the most politically charged. While the current ruler, Sheikh Hamad bin Isa al-Khalifa, has been praised by the west for its attempt to appease dissidents and bring them into the political fold, this is a policy that appears to have unravelled of late.
For the foreseeable future, as long as the Gulf rulers continue using these abundant oil reserves as “rivers to their people”, providing a cradle-to-grave, gold-plated welfare state, their tribal autocracies will prevail. And even if the local people of Abu Dhabi have to suffer the indignity of downgrading their Porsches for BMWs some day in the future, it’s probably not going to send them racing to the barricades.
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