Middle East looking to relations with China and Russia

The past decade has seen substantial changes in the global economy and geopolitics, with the rise of China and Russia’s re-emergence on the global stage being two particularly important trends. These developments are creating new opportunities for GCC member states as they look to diversify their economies and trade, seek investment opportunities in emerging markets, and forge partnerships for regional peace and stability.

Mutual Interests

At the G20 summit in the Chinese city of Hangzhou in September 2016, Saudi Arabia and China signed a raft of agreements covering sectors ranging from construction to energy. Saudi officials said that the two countries have mutual interests, particularly on the topic of security. China’s dependence on oil imports makes security in the Middle East and its shipping lanes significantly important to Beijing, while both nations are committed to battling forms of extremism and terrorism. The two countries have set a time frame of one year to finalise deals laid out in more than a dozen memorandums of understanding that form part of a five-year programme of mutual investments, as well as joint funding of projects in as yet unspecified third nations.

The Saudis and the Chinese have also found mutual interests in their own development programmes, China’s One Belt, One Road (OBOR) and Saudi Arabia’s Vision 2030. Some proposed projects include a Saudi-built oil storage facility in China that would enhance China’s energy security, and Chinese construction of homes in Saudi Arabia that could help ease the kingdom’s chronic housing shortage.

Saudi Arabia’s relations with China are relatively young, dating back to 1990, when the kingdom became the last Arab country to recognise the People’s Republic of China as the legitimate representative of China internationally, having previously recognised Taiwan. Since then, bilateral trade has soared from $1bn to more than $70bn per year as of 2013, according to the international press. China is the world’s largest oil importer and Saudi Arabia is the largest oil producer. Now China is the kingdom’s biggest customer for oil, with Saudi Arabia satisfying around 20% of Chinese demand, more than any other country. China is also a major supplier of arms to Saudi Arabia’s active armed forces. With the US less engaged in the Gulf than in the past, China’s role as a trading and investment partner, as well as a security ally, is increasing.

Chinese Turn

Saudi Arabia is far from the only country courting the rising power of Beijing. The UAE has relations with China that date back to 1984 and which have grown stronger in recent years. Bilateral trade was just $100m when diplomatic ties were established, increasing to $1bn in 1995, $10bn in 2005 and $54.8bn in 2014, according to Chang Hua, the Chinese ambassador to the UAE. The UAE’s investment stock in China totalled around $1.2bn in late 2015, and Chinese investment in the UAE was $1.66bn.

China is a major market for Emirati oil, but also an investor in the UAE’s energy industry, with the China National Petroleum Corporation particularly active. Emirati banks, too, are active in China and vice versa, while increasing numbers of Chinese students come to study in the UAE. In December 2015 Mubadala agreed to a joint fund totalling $10bn with two Chinese counterparts – China Development Bank Capital and China’s State Administration of Foreign Exchange.

Separately, the UAE-China Joint Investment Cooperation Fund will receive $5bn from each of the countries’ governments and invest in sectors of strategic importance for the UAE and China, according to the UAE government. Xi Jinping, China’s president, said the fund would help support the OBOR programme.

In 2015 the first centre for clearing business transactions in Chinese yuan in the Middle East was opened in Qatar. The centre, operated by Industrial and Commercial Bank of China’s Doha branch, is expected to help boost Chinese trade and investment in the MENA region. Over the longer term China may hope that more of its trade with the region – including its huge energy imports from the Gulf – will be denominated in renminbi, reducing trading times and transaction costs.

Silk Ties

The OBOR project – also known as the New Silk Road – is a project intended to strengthen Chinese trade and investment with countries in Eurasia, and lies at the centre of Xi’s foreign policy. It envisages two corridors between China and Europe: one running through Central Asia and the Middle East, and one maritime route along the southern flank of Asia, including the Arabian Peninsula. Both are relevant to the GCC member states, the latter being particularly promising for Oman’s plans to develop as a logistics and transportation centre between the East and West.

As well as direct benefits from OBOR links within the Arabian Peninsula, Gulf countries may be able to benefit from partnerships in other important OBOR countries. For example, Pakistan, a long-time ally of China, is a country with which Gulf states, particularly Saudi Arabia, have close trade and investment ties. Furthermore, Gulf countries could benefit not only from the OBOR’s focus on improved transportation across Eurasia, providing an alternative route for exports to Asia that avoids the bottlenecks of the Strait of Hormuz, but from greater affluence and stability in Central Asia, another major goal of the strategy.

Russian Cooperation

Russia’s own hydrocarbons wealth is one reason that trade volumes from the region have not burgeoned as much as they have to China, but trade and investment ties are growing. In a June 2016 bilateral meeting Russian energy minister, Alexander Novak, called for trade between his country and Qatar to rise to $500m and potentially above, and noted growing interest from Russian energy companies in partnerships with Qatar.

Russian state energy giant Gazprom is working with Qatargas on joint participation in gas markets and purchases of liquefied natural gas (LNG), Qatar’s major export. Novatek, another Russian firm which is rapidly expanding in the LNG business, is also eyeing up business alliances with Qatargas.

Russian companies are also engaging in Oman’s energy sector, and trade between the two countries has risen sharply since 2010, while cooperation on civilian nuclear technology as well as hydrocarbons is on the agenda for Moscow’s relations with the UAE. The Russian Direct Investment Fund (RDIF) also has a mutual investment agreement with Bahraini sovereign wealth fund Mumtalakat. In November 2015 Kuwait’s sovereign wealth fund, the Kuwait Investment Authority, agreed to allocate a further $500m to investment projects in Russia in partnership with the RDIF. The deal follows the launch of a $500m joint co-investment mechanism in 2012, the year after the RDIF was formed.

Engaging with Russia, despite some diplomatic differences, has strong mutual benefits. Russia’s economy has been hit hard by the oil price slump and Western sanctions, thus the country is in need of investment and new trading partners. Russia is also a large emerging market that has substantial promise for outside investors such as those in the Gulf. There is increasing agreement between Russia and the Gulf countries for a political settlement in Syria, which would benefit all parties in the long-run. Russia has also offered to mediate in other regional disputes.

Building Bridges

Bilateral trade between Russia and Saudi Arabia is currently worth $1bn-2bn annually. In September 2016 the two nations agreed to a joint working group on monitoring the global oil market and drafting recommendations for stabilising prices. The partnership immediately buoyed oil prices and is seen as particularly significant after a period in which Riyadh was reluctant to curb production as Saudi Arabia looked to secure market share.

Kuwait and the UAE were among the countries to welcome the deal, which might help boost Gulf governments’ revenues after a period in which the drop in oil prices pushed all the GCC countries into fiscal deficits.. TO THE FUTURE: Despite the slowdown in the Chinese economy in recent years, trade and investment ties between China and the GCC are likely to continue to grow. China’s need for energy imports makes the resource-rich Gulf countries important partners, but cooperation goes beyond selling oil and gas; GCC-based companies are also investing in energy infrastructure in China that should help secure market share in the longer term, while developing Gulf contractors’ international capacity. The OBOR strategy has become a key theme of bilateral relations, and could also create opportunities for partnerships in the many promising emerging markets between the Gulf and China.

Relations with Russia are also positive for many GCC states that see opportunities in the Russian market and the potential for partnership with Russian energy firms that are seeking technological development and marketing partners beyond Europe. Differences in approach on Syria and other regional conflicts are becoming less stark as the importance of finding a peaceful solution becomes ever more urgent, and Russia looks to rebuild its historical and political ties within the Middle East.