RiskMap 2018

The real risks in the Middle East

  • MENA
In 2018, real risks in the Middle East will manifest where you expect them least

In the search for clarity in one of the world’s most complex regions, it is hard to avoid turning to the long-trodden constructs and contrasts of: Sunni and Shia; democracy and authoritarianism; Israelis and Palestinians; youth and unemployment, Iran versus Saudi Arabia. However, business leaders need to look beyond these appealing but simplistic prisms to identify and isolate the most likely issues that could disrupt business in the Middle East in 2018.

Rhetoric casting the future of the Middle East as an existential battle between the two regional powers has soared – particularly on the Saudi side – over the past year. However, a direct military confrontation between Iran and Saudi Arabia remains unlikely. The scale of destructiveness – both financial and humanitarian – is exactly what makes a direct confrontation extremely unlikely. Iran and Saudi Arabia are both immersed in major domestic economic revival programmes. That work would collapse with the briefest of conflicts.


Saudi Arabia in 2018

Saudi Arabia will have a historic year in 2018. Women will get behind the wheel for the first time, and cinemas will re-open after being shuttered for decades. However, investors and analysts have begun to question whether Crown Prince Mohammed bin Salman bin Abd al-Aziz Al Saud (known as MbS) is moving too quickly, threatening to upend the kingdom’s social and economic order as he pursues his ambitious goals to remake the country.

The government appears to have acknowledged the need to ease up on the pace of change in some areas. The economy tipped into recession this year, and policymakers have now pushed back their target date to achieve a balanced budget and slowed the pace at which subsidies will be removed (though gas prices are still set to jump 80% in 2018). Still, there is no sign that MbS intends to shift the course he has set.

Investors should keep a close eye on the kingdom, but their concerns should focus on medium-term risks, rather than imminent instability or disruption.

In the short term, MbS has efficiently and ruthlessly vanquished his rivals within the Al Saud. He has also initiated a crackdown on Islamists and dissidents that has chilled dissent. The official religious establishment is pliant. The economy will continue to struggle, but Saudis with a limited history of expressing socioeconomic grievances will endure the financial bite for a while longer.

Instead, 2018 offers a test of the government’s ability to begin to deliver on its reform promises. Privatisation is scheduled to proceed. The government will introduce a cash assistance programme to help lower-income Saudis. The private sector will receive government stimulus funds as expectations that it produce jobs and drive growth increase.

The kingdom will thus appear to move in the right direction in 2018, but small initial achievements could mask the fact that these successes need to compound rapidly. The burgeoning youth population will wait next year for jobs, but it will not wait forever. Social conservatives currently cowed by the decisiveness of MbS’s social reform agenda will find ample pretext to argue that society’s values are being eroded and rally opposition. Wealthy Saudis spooked by corruption investigations could continue to squirrel their money out of the country. Meanwhile, MbS has created a raft of enemies within the royal family who currently lack the will or ability to stand up to him, but who undoubtedly would like to displace him.

MbS will thus need to demonstrate continued and increasing success to stay ahead of the tide of discontent and opposition that could otherwise mount. And he will need to do this as he continues to face a region in crisis.

On the external front, observers should expect more of the same from MbS. In foreign policymaking, he has proved to be an ambitious risk-taker, willing to attempt bold gambits even if they occasionally attract international condemnation. Even the administration of US President Donald Trump, which has aligned itself closely with MbS, has begun to express frustration at these disruptive moves. However, MbS is motivated by a perception that Iran seeks regional domination and that the kingdom’s traditional foreign policy has failed to confront this threat. We are likely to witness further assertive Saudi foreign policy moves in 2018, as well as an unwillingness to reverse course in Yemen and Qatar. As with domestic policy, missteps abroad are unlikely to hurt the kingdom in 2018, but they will set the stage for an increasingly challenging 2019 and beyond.]

The real sources of insecurity in 2018

Iran and Saudi Arabia’s struggle for regional influence will however remain a primary driver of regional developments. Direct and indirect Iranian involvement in conflicts across the region is a significant driver of this concern for Gulf states, which have responded in kind to exert hard and soft power from Yemen to Lebanon. This rivalry will continue to play out indirectly, not face-to-face. Look for that simmering, rather than boiling, animosity in almost all the other regional flashpoints. Prominent among them are Lebanon, Iraq and Oman.

■ Lebanon
Lebanon map

Israel and Lebanon are the focal point of the anti-Iran alliance in the region. Lebanon’s Shia Hizbullah movement – backed by Iran – and Israel have long viewed each other as mortal enemies, and tensions are rising. Hizbullah has begun to build weapons factories in Lebanon’s south, producing munitions that would allow it to carry out strikes well within Israeli territory. While Israel has not hesitated to conduct airstrikes on Hizbullah weapons convoys in Syria, it knows a similar pre-emptive manoeuvre in Lebanon would almost certainly spark retaliatory attacks by the Shia movement.

For the moment, Hizbullah is focused primarily on its engagement in Syria. While that continues, the situation with Israel could carry on at a stalemate – with Israel keeping a close eye on the developing factories. But Hizbullah’s influence in Lebanon has grown on the back of successful operations to drive Islamic State (IS) out of the country, something the Lebanese government couldn’t do. As the conflict in Syria winds down, Hizbullah will turn its financial and military resources back toward its homeland. Increased finances and manpower in Lebanon mean increased risk of a confrontation with Israel, at least in part because Israel views the movement as an agent of its arch-enemy, Iran.

The convergence of anti-Iran sentiment in defence of Israel and its interests is considerable, and manifesting in increasing interference in Lebanese politics. Of late, the most recent source of that interference was Saudi Arabia, from where Lebanese Prime Minister Saad Hariri unexpectedly resigned in November 2017 only to rescind his resignation one month later. The kingdom appears to have withdrawn its support for Hariri in an effort to strip Hizbullah of the veneer of legitimacy provided by the prime minister and engineer the movement’s ouster from the government.

Israeli Prime Minister Benjamin Netanhayu, meanwhile, will feel emboldened by the clear anti-Iran sentiment stemming from the US and President Trump’s recognition of Jerusalem as the capital of Israel. But sources of anti-Iran hostility aren’t just in Washington. Increasing evidence suggests that mutual concern over Iran has sparked closed-door conversations between Israel and the Gulf states, enabling them to coordinate manoeuvres against Hizbullah. Look to Lebanon as the focal point for regional anti-Iranian antagonism.

Despite the mounting hostility all around, Hizbullah enjoys significant support in Lebanon – in no small part because it has kept the conflict in neighbouring Syria at bay. Any confrontation between Hizbullah and Israel could quickly escalate into a war. While it would likely remain contained to a relatively small geographic area, it would almost certainly damage infrastructure in Lebanon and Israel – not to mention dampen investor confidence across the region.

■ Iraq
Iraq map

Stability and security in Iraq will also continue to be put to the test in 2018. While tension between the Kurdistan regional and federal governments has been a mainstay of Iraqi politics over the past decade, the September 2017 independence referendum and subsequent resignation of longstanding Kurdish president Massoud Barzani have turned tension into turmoil. Once a pocket of relative calm in the Iraqi security environment, the risk of clashes between federal and Kurdish armed forces will increase as both sides seek to assert their control over disputed territory. But divisions in Kurdistan about how best to deal with the referendum outcome will also increase the possibility of violence between rival Kurdish factions. IS will capitalise on the chaos, stepping up attacks against security forces as it seeks to sow discord among groups that were once united against it.

Kurdish tensions come at a time when ever more parties are seeking to influence the Iraqi government. Iranian-backed militias and military advice have undoubtedly played an instrumental role in the campaign against IS, cementing Iran’s broader political influence in the country. The UAE and Saudi Arabia have renewed their own diplomatic engagement with Iraq in an effort to exert their own influence. The US has clearly instructed Iranian militias to “go home” once the campaign against IS concludes. Iraq will be reluctant to alienate any of these external powers, given that it relies on all of them in one way or another for economic or security support.

Perhaps more importantly, the referendum will continue to distract government attention and resources from reconstruction efforts, as negotiations between the two sides – and jockeying among external actors – become a way for candidates to position themselves ahead of federal and local elections in May 2018. In areas claimed by both governments, authorities are likely to look for ways to assert their authority, which may call into question the regulations and contracts governing business operations in these areas. This will add to the burdensome regulations already faced by companies that operate in Iraq, increasing the cost of compliance and operations – and stymying efforts to attract the foreign investment the country desperately needs to spur growth and support reconstruction.

■ Oman
Oman map

Succession is a perennial risk in the Gulf. A change in leader almost always threatens change at numerous other levels, including ministerial appointments, state spending and foreign policy priorities, and the fortunes of local businesses. This will be twice as risky in Oman, where Sultan Qaboos bin Said Al Said effectively centralises all decision-making responsibilities in the country and has no clear successor in line. Add to this the recent volatile relationships within the GCC and the broader Gulf and you have a succession which could have an outsized impact on the country’s foreign policy and the broader balance of power in the region.

Sultan Qaboos has ruled for 47 years. He is well respected domestically and internationally for delivering remarkable economic and social development to his country. Oman’s longstanding neutrality on a number of issues has allowed it to act as an important mediator in regional and geopolitical issues – the sultanate under Qaboos has successfully balanced the agendas of the Gulf Cooperation Council (GCC), Iran and the West. Yet it remains unclear who will succeed the 76-year-old Qaboos amid mounting concerns about his health.

Whoever the new leader is, he will be faced with rapidly deteriorating state finances triggered by persistently low oil prices, and will have less popular legitimacy and experience than the current ruler. Oman will increasingly need to look for foreign investors to grow its economy, and will no doubt have many suitors seeking political influence in return for economic support. The UAE and Saudi Arabia have already been quietly pressuring Oman to move more resolutely into their economic and political embrace. These calls have become somewhat less subtle of late: Oman has become a major hub for transit and shipping into Doha since June 2017, when Saudi Arabia, the UAE, Bahrain and Egypt cut diplomatic ties with Qatar and restricted the movement of goods and people to the country. Qatar will not want to lose Oman as an economic and political ally, and Iran will also not stand by without getting involved.

To compound the problem, any instability in Oman could provide opportunities for militant groups in neighbouring Yemen to infiltrate the country and in theory pose threats to other Gulf Arab states – making the question of succession more serious than one may think.

Absentee arbiter

All this comes at a time when the traditional arbiter in the Middle East – the US – is increasingly disengaged from the region. On the surface, it looks exactly the opposite. US President Donald Trump chose Saudi Arabia as the destination for his first visit abroad. His son-in-law Jared Kushner has a budding relationship with other young power brokers in the region. And the US has stepped up military engagement in the fight against militants through both drone strikes in Yemen and Libya, and increased ground forces in Iraq and Syria.

But Trump and US Secretary of State Rex Tillerson have had few genuine diplomatic victories. They have been unable to broker a compromise in the conflict with Qatar, and were similarly unable to prevent the Kurdistan regional government from going ahead with the independence referendum. The Trump administration’s close relationship with Netanyahu, exemplified by the recognition of Jerusalem as the capital of Israel, has worsened already dismal prospects for progress in peace negotiations between Israelis and Palestinians, while tensions between the US and Iran keep raising.

With limited candidates to broker compromise from within the region, it seems unlikely that the web of the Middle East will be significantly untangled in 2018. It will therefore be all the more important for companies to focus on planning for the issues and scenarios that would be most likely to impact their operations.

Control Risks CORE

The essential online platform for monitoring risks, evaluating threats and identifying opportunities around the world

RiskMap 2018

Risk, rhetoric and reality: the challenge for 2018. How can our experts help you?