Economic risks for the MENA region

In addition to the new political costs that Putin’s war against Ukraine imposes on the EU in its southern neighborhood, there are other significant financial costs. Europe’s southern neighbors, particularly Morocco, Tunisia, Egypt, Jordan and Lebanon, will need additional funds to make up for lost revenue from lost tourists from Russia and Ukraine and increased world prices for importing wheat, petrol and diesel.

Since the outbreak of the Covid-19 pandemic, these middle-income Arab countries have already suffered from the additional debt they have had to take on to pay for the rising costs of caring for the sick and unemployed, as well as economic collapse. In Tunis, for example, inflation is galloping to 6.6% and the government debt ratio is over 90%. The potential for social unrest and migration is increasing. Brussels should support these neighboring countries through international financial institutions such as the IMF, the World Bank and the EBRD, as well as using its own relief funds.

The Gulf States and Europe

Saudi Crown Prince Muhammad bin Salman and his Emirati counterpart Muhammad bin Zayed both spoke with Putin before reaffirming their commitment to an OPEC+ format production plan agreement signed in 2020 by Russia and members of the Organization of the Petroleum Exporting Countries (OPEC). Back then, Riyadh forced Moscow to the negotiating table by flooding the oil market with offers to crush prices – and even by selling directly to Russia’s traditional customers in Eastern Europe. The deals Saudi Arabia signed earlier this year with Polish company Orlen and Danish company Kalundborg Refinery would now put Riyadh in an even stronger position to access markets in Poland, the Czech Republic, Lithuania and Denmark .

But Riyadh now claims it does not want to politicize oil and upset the balance within OPEC+. It has rejected several calls to increase oil production in order to lower prices. Britain’s Prime Minister Boris Johnson has also joined the fray, traveling to both the UAE and Saudi Arabia in hopes his personal ties with the country’s rulers will be enough for a favorable deal.

Russia is not the strategic partner for the Gulf

Despite the Gulf monarchies’ reluctance to change course, they do not see Russia as a strategic partner. These states have four main interests associated with Russia:

  • Cooperation in energy policy
  • Access to military technology
  • Investment and coordination in geopolitics.

Russia has reduced its capacity to act in all of these areas by launching its all-out war against Ukraine. Moscow is an important interlocutor for Qatar in the Forum of Gas Exporting Countries and for Saudi Arabia in OPEC+, but at the same time it is a competitor. If the energy transition, as is widely predicted, shrinks the oil market in the coming years, Russia and Saudi Arabia face a long-term battle for market share.

Despite signing strategic agreements with Saudi Arabia and the United Arab Emirates, Russia is unable to replace the US as a regional security guarantor or strategic defense partner. While Russia seeks to use the Iran nuclear deal as leverage against Western sanctions, it has long resisted Saudi attempts to geopolitically contain Iran. Indeed, the refusal of the Gulf monarchies to side with the US and Europe against Russia is not about Russia. It is about navigating the new multipolar world order, pursuing a transactional approach to protecting national interests and avoiding the possible additional costs of a strategic realignment.

The Gulf States view the US as determined to back down from its traditional role as the Middle East’s security guarantor – which means they believe Washington has less to offer and therefore less leverage than it once had.

The Gulf and Europe’s dilemma

In view of the considerable additional costs that Europe will also incur as a result of the war, these considerable additional financial burdens from EU sources can hardly be borne alone. Brussels will have to look around for financial partners. The oil and gas-rich Arab states of the Gulf region have not only become political heavyweights in the European neighborhood in recent years, they have also significantly increased their own investment funds.

The EU should invite Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman to jointly launch an emergency fund to ensure emerging economies in their shared neighborhood can bear higher food and energy import costs. In addition, these Gulf Cooperation Council (GCC) member countries should be encouraged to provide more financial and technical support to UN refugee, childcare and food agencies such as UNHCR, UNICEF and WFP. In return, they can demand more political respect from the EU for their positions in the Yemen war and in the Iran conflict.

The European Union and the Middle East – A stocktaking in 2022 / Part 1

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