Khalifa bin Zayed Al Nahyan with then President of Russia Vladimir Putin on 10 September 2007.
© Wiki Commons
Khalifa bin Zayed Al Nahyan with then President of Russia Vladimir Putin on 10 September 2007.
Last updated: August 4, 2014
What the Ukraine crisis will do to the Middle Eastern economy

"The role of sanctions imposed on Russia could have a ripple effect far beyond what meets the eye"

Banner Icon Sarosh Zaiwalla discusses the impact on business in the Middle East from the intensified Ukrainian crisis.

In the aftermath of the tragic plane crash of MH17, where 289 people tragically and senselessly lost their lives, the US along with the European Council have declared more severe sanctions on Russia targeting the oil sector, defence equipment and sensitive technologies. Earlier in the month, the political crisis in the Ukraine had already made headlines and led to the West taking up a strongly supportive stance in favour of sanctions by enforcing an asset ban and travel freeze on selected Russian officials and fast-tracking $1 billion USD in aid to Ukraine.

It was already prior to the tragic incident that targeting Russian industries with larger and more powerful sanctions would be ‘disruptive to the global economy’ and that more severe sanctions would deepen Russian isolation. These consequences have now materialised and they are likely to present implications for the Middle Eastern economy.

"More powerful sanctions would be ‘disruptive to the global economy'"

The reasons for this are three-fold. While Gulf States including Saudi Arabia, Qatar, Kuwait and the UAE generate almost all of their income from the sale of hydrocarbons, sanctions on Russian oil imports by the USA and EU will initially translate into a huge price hike for Middle Eastern oil exporters.

This will lead to increased export receipts for the Middle East that will generate an overall gain in national income for these regions. However this positive is off-set by the fact that the US must remain sensitive to the Iraqi economy, which is still hugely distressed as a result of its own recent conflict and more recently, the advance of Islamist militant group, ISIS, towards Baghdad.

Should more severe sanctions be imposed on Russia in the hydrocarbons industry, the resulting price fluctuations on oil in the Middle East could completely destabilise an already unstable Iraqi economy. In addition, both Russia and the Ukraine are also major agricultural producers and exporters and the Middle East is the most dependent on imported wheat, after Sub-Saharan Africa, with more than 50 per cent of Russian wheat exports going to Egypt, Lebanon, Jordan and Yemen.

Should sanctions be intensified, countries in the Middle East may be subject to higher prices set by alternative wheat exports. Indeed, the role of sanctions imposed on Russia could have a ripple effect far beyond what meets the eye.

The Middle East could also be facing the consequences of a lack of cooperation between the USA, EU and Russia over further hostilities in the wider Middle East region soon. Whilst the most recent development in the Ukraine proves an urgent problem to address, further issues exist including religious tensions in Iraq, the presence of chemical weapons in Syria, resolving the Syrian crisis itself as well as Iran’s nuclear programme and relations between the Gulf States themselves must also be handled sensitively.

"This may in fact mark the beginning of what could become a complicated geopolitical chess game"

The US has indicated to Russia that the Syria crisis requires a resolution after President Obama announced the closing of Syrian diplomatic activity in the US. However the recent tragedy will only have caused tensions to run higher indicating a new and tougher approach rather than a resolution to the conflict.

Given that this heightened crisis comes at a time when President Bashar al-Assad has given his undivided support to Russia’s recent actions, it appears that this may in fact mark the beginning of what could become a complicated geopolitical chess game.

Therefore despite the sad circumstances, sanctions and their potential effect do need to be viewed with some perspective. It is important to remember that the imposition of any extensive and severe sanctions on vital industries such as agriculture, funds and foreign direct investment (FDI) could have an immediate effect not only on the Middle East, but also on the global economy with many Western nations dependent on Russian energy and financial resources.

Given these circumstances, it is still unlikely that the West will adopt a similar phase of sanctions imposed on Iran. The West cannot afford to isolate Russia as it did Iran, which is why the only credible course of action to resolving the current crisis is active, genuine diplomatic efforts.

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