City skyscrapers stand on the skyline in Doha, Qatar. (Photographer: Gabriela Maj/Bloomberg)

U.S. Arab Allies Spar as Saudis Lead Push to Isolate Qatar

(Bloomberg) -- Four U.S. Arab allies led by Saudi Arabia pushed ahead with plans to isolate Qatar in an unprecedented escalation designed to punish one of the region’s financial superpowers for its support of Islamist groups and ties with Iran.

Qatari stocks plunged the most since 2009 after Saudi Arabia, Bahrain, the United Arab Emirates and Egypt said they will halt air, sea and land travel to and from the Gulf Cooperation Council member. Saudi Arabia immediately banned Qatari planes from landing in the kingdom and said it will prohibit them from using Saudi air space as of Tuesday.

The crisis pits some of the world’s richest nations in a power struggle over regional dominance. Their target is a country with a population smaller than Houston, but with a sovereign wealth fund holding stakes in global companies from Barclays Plc to Credit Suisse Group. It’s also a home to the forward headquarters of CENTCOM, the U.S. military’s central command in the region.

While Monday’s escalation is unlikely to affect energy exports from the Gulf, it threatens to have far-reaching effects on Qatar and raises the political risk for the Middle East, a region grappling with wars from Syria to Yemen. Secretary of State Rex Tillerson said the U.S. stands ready to help defuse the tension.

“It’s not in the U.S.’s interest to see the GCC sort of unravel,” Allison Wood, an analyst with Control Risks in Dubai, said. “That would be very destabilizing in a region that’s already very unstable. There are limits to the U.S. giving tacit approval to the kind of pressures that are being applied.”

Defiance

Qatar’s first response struck a defiant tone. The Foreign Ministry called the accusations “baseless” and said they were part of a plan to “impose guardianship on the state, which in itself is a violation of sovereignty.”

Qatar’s QE Index for stocks tumbled 7.3 percent at the close in Doha, the most since 2009. Qatar’s credit risk, measured by credit default swaps, climbed the most globally. Saudi Arabia, Egypt and Dubai were also among the worst six performers on the day, according to data compiled by Bloomberg.

“There are going to be implications for people, for travelers, for business people. More than that, it brings the geopolitical risks into perspective,” Tarek Fadlallah, the chief executive officer of Nomura Asset Management Middle East, said in an interview to Bloomberg Television. “Since this is an unprecedented move, it is very difficult to see how it plays out.”

The Saudis also accused Qatar of supporting “Iranian-backed terrorist groups” operating in the kingdom’s eastern province as well as Bahrain.

While Qatar maintains diplomatic and economic ties with Iran, it’s not clear how close the two countries are, and none of the statements issued on Monday offered evidence of deep cooperation. Saudi Arabia also accused Qatar of supporting “terrorist groups aiming to destabilize the region,” including the Muslim Brotherhood, Islamic State and al-Qaeda.

Iran’s Comment

Iranian Foreign Minister Mohammad Javad Zarif stepped into the fray, saying on Twitter that “coercion” would not lead to a solution.

“Neighbors are permanent, geography can’t be changed,” he said.

The five key countries involved in the dispute are U.S. allies, and Qatar has committed $35 billion to invest in American assets. The Qatar Investment Authority, the country’s sovereign wealth fund, plans to open an office in Silicon Valley.

Read More: Why Tiny Qatar Angers Saudi Arabia and Its Allies: QuickTake Q&A

Tillerson, speaking at a news conference in Sydney, said it was important that the Gulf states remain unified and he encouraged the parties to address their differences. He said the crisis won’t undermine the fight on terrorism.

“What we’re seeing is a growing list of some irritants in the region that have been there for some time,” Tillerson said. “Obviously they’ve now bubbled up to a level that countries decided they needed to take action in an effort to have those differences addressed.”

Monday’s actions escalate a crisis that started shortly after President Donald Trump’s trip last month to Saudi Arabia, where he and King Salman singled out Iran as the world’s main sponsor of terrorism.

Verbal War

Three days after Trump left Riyadh, the state-run Qatar News Agency carried comments by Qatari ruler Sheikh Tamim bin Hamad Al Thani criticizing mounting anti-Iran sentiment. Officials quickly deleted the comments, blamed them on hackers and appealed for calm.

Saudi and U.A.E. media outlets then launched verbal assaults against Qatar, which intensified after Sheikh Tamim’s phone call with Iranian President Hassan Rouhani over the weekend in apparent defiance of Saudi criticism.

Past Crisis

Disagreements among the six GCC members have flared in the past, and tensions with Qatar could be traced to the mid-1990s when Al Jazeera television was launched from Doha, providing a platform for Arab dissidents to criticize autocratic governments in the region --except Qatar’s.

The Gulf nation also played a key role in supporting anti-regime movements during the Arab Spring, and acted against Saudi and U.A.E. interests by bankrolling the Muslim Brotherhood’s government in Egypt. Qatar also hosts members of the exiled leadership of the Iranian-backed Hamas militant group that rules the Gaza Strip.

In 2014, Saudi Arabia, the U.A.E. and Bahrain temporarily withdrew their ambassadors from Qatar. That dispute centered on Egypt following the army-led ouster of Islamist President Mohamed Mursi, a Muslim Brotherhood leader.

This time, Saudi Arabia, along with Bahrain and the U.A.E., gave Qatari diplomats 48 hours to leave.

The crisis comes shortly after Moody’s Investor Service cut Qatar’s credit rating by one level to Aa3, the fourth-highest investment grade, citing uncertainty over its economic growth model.

Read More: Qatar Wealth Fund’s Expansion Undeterred by Brexit, Trump

“Qatar is economically and socially most vulnerable from food and other non-energy imports,” said Paul Sullivan, a Middle East expert at Georgetown University. “If there is a true blockade, this could be a big problem for them. Rules stopping citizens of the U.A.E., Saudi Arabia and Bahrain from even transiting via Qatar could cause significant disruptions.”

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