Background

On June 5^th, Saudi Arabia, the United Arab Emirates, Bahrain and Egypt released a joint statement, announcing their severance of all diplomatic and trade ties with the gulf state of Qatar. This announcement came on the heels of rising tensions between Qatar and their fellow Arab states. The official reason given for the severance of ties was Qatar’s alleged connection to terrorism, and their funding of extremist groups. Qatar has long been accused of funding Islamist groups such as the Muslim Brotherhood in Egypt, and rebel Islamist factions in Libya and Syria. Islamist groups in the region oppose the autocratic and monarchist regimes of the region, and these rulers have not taken kindly to Qatar’s alleged support of their political rivals.

Aside from funding these groups, Qatar also uses their state sponsored news network, Al Jazeera, as an instrument of foreign policy, using the network to vocalize support for these rebel groups, and to criticize the regimes of their neighboring countries. These issues have long been points of contention between Qatar and its neighbors, but there have been no new developments that would have caused such a drastic action as the severance of all ties with Qatar.

Causes of the Crisis

To better understand what lead these four states to take such strong action against Qatar, we must consider the latter’s relationship with Iran. Unlike its gulf counterparts, Qatar has maintained diplomatic relations with Iran. Iran and Qatar share claim to the world’s largest natural gas field, and maintaining an economic relationship with Iran is key to Qatar’s access to this vital source of wealth. However, Iran is the regional rival of the Arab gulf states, and if one had a flair for dramatics, one may even say they’re Saudi Arabia’s arch nemesis.

This growing source of tension with Iran is more likely the cause for gulf states’ actions against Qatar. One action in particular likely drew their ire, and that is Qatar’s alleged payment of a $1 billion ransom to forces linked to Iran, after the capture of a Qatari falconry party in southern Iraq, that included members of the royal family. Knowledge of these payments ending up in the hands of Iranian officials is likely one of the triggering events that lead to the crisis that Qatar finds themselves in today.

While we can only speculate as to what lead to these events, what does become immediately evident is that this embargo on Qatar will have immediate repercussions on the regional economy.

Economic Consequences

Qatar is a relatively small country, spanning less than 5,000 square miles in size, and boasting a population of barely 300,000. But Qatar is one of the wealthiest countries in the region, hosting over 2 million migrant workers year-round. Its economic weight has given it power in the region disproportionate to its size, and now its isolation has the potential to cause equally disproportional upheaval to the regional economy.

Of Qatar’s total population of approximately 2.5 million, 88% are migrants living in Qatar on work visas. The migrant labor not only supports Qatar’s own industry and development, but the remittances these workers send home to their native countries are integral parts of the economies of many states in the region. As travel and transport services to Qatar are cut off, many of these migrant workers will be forced to go home, or will be unable to get money back to their families, interrupting the flow of remittances out of Qatar. Egyptians alone make up 8% of Qatar’s migrant population, and while Egypt may be able to withstand the economic hit, smaller countries like Jordan that rely on remittances, and are caught in the crossfire, may not.

Within Qatar itself, migrant labor is a cornerstone of their plan for economic expansion. Qatar is aiming to establish themselves as a tourist destination. Migrant workers are vital to building up the infrastructure that Qatar needs to attract the wealthy western guests they’re looking for, and migrant workers make up nearly the entirety of the Qatari service industry. The loss of these workers would bring many development projects to a standstill, and cause Qatar’s foreign investors to flee.

Another important aspect of the local and regional economy that is at risk is Qatar Airways. Qatar Airways is a state sponsored company that brings in billions of dollars of revenue for Qatar every year, and is a key component to Qatar’s efforts to grow their tourist industry. The airline now likely faces banishment from key airport hubs in the Middle East, are their international investments are at risk. As of now, Qatar Airways has managed to minimize the impact of the new restrictions on their business, but they are a strong source of Qatari economic development, and will likely become a target of the Saudi led bloc if relations in the region are not normalized quickly.

Conclusion

Only a month into the diplomatic split in the GCC, it is still too soon to determine what industries will be most affected by the crisis with Qatar, but we can already see where cracks have begun to form in the fragile foundation of the regional economy. Only time will tell how Qatar will respond to these events, but if relations continue to deteriorate as they have, the likelihood of avoiding major economic recession in the region is low.