Embattled Qatar Is Rich Enough to Get By for Another 100 Years

(Bloomberg Businessweek) -- It’s been a year since Saudi Arabia and three of its Arab allies hit Qatar with an economic embargo over ties to Iran and the alleged funding of terrorism. To listen to the Saudis, the embargo has been a great success, so much so that Crown Prince Mohammed bin Salman has dismissed his Gulf neighbor as too insignificant to bother with.

The standoff is something for a junior minister to deal with, a royal court adviser tweeted in March, citing the prince. “We have not been deprived of anything,” the adviser said. “Qatar has been deprived of everything.”

Not exactly. By most metrics, the embargo that closed Qatar off from major air, sea, and land links has failed. The country’s imports and exports are up, according to the International Monetary Fund. Qatar, the world’s richest country per capita thanks to massive reserves of natural gas, is on track to post a budget surplus in 2018. Its economy is growing faster than most of its peers.

“It’s difficult to see how the blockade succeeded,” says David Roberts, assistant professor at King’s College London. “Qatar didn’t capitulate, and no important international states joined in.”

The initial impact was severe. The stock market fell more than 7 percent in one day as foreign capital began pouring out of Qatar. Imports declined 40 percent that June. Growth stalled, food prices rose, and the excess supply of real estate and hotels, Qatar’s main economic vulnerability, was exacerbated as tourism from Saudi Arabia dried up, says Ziad Daoud, chief Middle East economist for Bloomberg Economics. “Qatar is paying more for its imports,” says Daoud. “But it has deep pockets and can afford that.”

Qatar soon stabilized by opening its hefty wallet. It shifted imports and shipping routes through countries such as Turkey and Iran. Defiant Qataris found ways around the sanctions, importing food from Turkey and flying in cows from the U.S. Saudi Arabia and the United Arab Emirates pulled as much as $30 billion from Qatari banks, but that proved easy enough for the state’s $320 billion wealth fund to make up.

The Qatar Investment Authority repatriated $20 billion to prop up domestic banks. Qatar then boosted its economic ties with global powers, confirming its plan to invest $35 billion in the U.S. by 2020 and increasing its stake in Russia’s biggest oil producer, Rosneft PJSC, which is led by Vladimir Putin’s longtime associate Igor Sechin.

The country has spent billions on weapons from France, Italy, the U.K., and the U.S., buying up fighter jets, missiles, and warships. And it kept building roads and stadiums to host the World Cup soccer finals in 2022. “We realized that we need to go beyond our immediate surroundings and strengthen relations,” says Lulwah Rashid Al Khater, Qatar’s foreign ministry spokesperson. “This is more than rhetoric. It’s been actualized through projects and trips, through many agreements.”

From the beginning the embargo has been a tricky subject for the U.S. to navigate. The Saudis announced it a few weeks after Donald Trump visited the kingdom on his first trip abroad as president. Trump initially supported the embargo, though the issue divided members of his administration given Qatar’s long-standing alliance with the U.S. Then-Secretary of State Rex Tillerson had to scramble to reassure the Qataris that they remained close allies, particularly as the country is home to a key U.S. military base in the region. Trump has since gone from defending the embargo to praising Qatar’s Emir Sheikh Tamim bin Hamad Al Thani at the White House for his country’s anti-terror policies.

The concern is that the effort to isolate Qatar played into the hands of Iran, Saudi Arabia’s adversary in the struggle for dominance in the Middle East and the target of more sanctions by the U.S. after Trump walked away from a multilateral nuclear deal in May. It forced Qatar to rely on Iranian airspace and shipping routes. Now Qatar sees Iran as a potential partner because it is its only outlet. “Iran stands as the sole victor” from the fracturing of the Gulf, says Michael Greenwald, the former U.S. Treasury attaché to Qatar and Kuwait. “This new power dynamic for Iran is the most troubling implication of the standoff.

According to a senior White House official, the Trump administration agrees with this assessment that the embargo has pushed the two countries closer together, and that as a result Iran has emerged as the biggest beneficiary of the effort to isolate Qatar. The official says the administration has pushed the Saudi-led coalition to end the embargo and restore its diplomatic relationship with Qatar as part of a broader package aimed at resolving the situation, but that so far, the Saudis and their Arab allies have not shown a willingness to do so.

The most lasting impact on Qatar might be cultural: how a small, confident Arab nation lost its swagger. A Qatari banker said he switched his vacation to a small town in Switzerland from a planned visit to London and Paris to reduce the odds of running into a Saudi or Emirati. Amid the anxiety, there’s been a psychological need for a constant stream of good news.

The Qatari stock market declined more than half the trading days in the past year. The government news agency, which sets the agenda for most local media, almost exclusively blasts reports of gains. (The Qatar market recovered from seven-year lows reached in November but is still down about 10 percent since the embargo began).

Official publications cherry-pick good economic news. The Ministry of Finance released a statement with the 2018 budget that showed higher spending for schools and hospitals. It neglected to include a 25 percent increase in the 2017 deficit, something it disclosed in a prospectus seen by Bloomberg News for a $12 billion bond offering.

It also revealed that most of the new spending in 2018 would be on defense and security. Even so, Qatar has enough assets to finance deficits until the year 2133, according to Daoud of Bloomberg Economics. “Having rushed to action last June without necessarily having a Plan B if their initial ‘shock and awe’ didn’t produce the desired outcome, the Saudis and Emiratis seem unwilling to consider backing off and risking loss of face,” says Kristian Coates Ulrichsen, Middle East fellow at Rice University’s Baker Institute for Public Policy in Texas. “And the Qataris have shown that they can live with the status quo.” —With Glen Carey and Lisa Fleisher

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