GCC member states look to strengthen global trade ties

For the nations of the GCC, the drop in oil prices highlighted something many already knew: there is a pressing need for economic diversification and to further engage with global partners across different markets. To this end, countries in the region have made efforts to expand their international role and reach in recent years, with trade deals and investments being pursued in the US, China and India. Going forward, relationship building is likely to receive even greater focus, with GCC member states seeking opportunities as well as forging partnerships with other economies.

Looking West

One of the most closely watched international developments in 2016 was the US presidential election. Despite Donald Trump’s “America First” rhetoric, his election had a largely positive impact on the US’ relationship with many GCC member states in 2017, which had frayed somewhat under Barack Obama, who led the US from 2008 to 2016. Trump’s first foreign trip as president in May 2017 began in Saudi Arabia. There he met with 50 Arab and Muslim leaders, including those from the six GCC nations. It was announced shortly before the visit that the US had signed deals worth close to $400bn with the kingdom, including $110bn related to weapons and arms contracts. The following month the US Department of State approved an initial sale of military training programmes and equipment worth over $1.4bn to the kingdom, with the contract including a radar system and education for the Royal Saudi Air Force. Trade relations beyond defence have been enhanced recently as well, with Saudi Arabia’s Public Investment Fund announcing plans to contribute $20bn to private investment firm Blackstone Group, with the funds to be used as financing for infrastructure projects in the US.

It is the UAE, however, that has historically been the US’ largest export market in the Middle East, with sales worth more than $22bn in 2016. According to Sultan bin Saeed Al Mansouri, the minister of economy of the UAE, non-oil trade between the US and the UAE increased from $27.8bn in 2015 to $30.3bn in 2016. Alongside the military deals with Saudi Arabia, the US authorised the sale of $2bn worth of missiles to the UAE.

To The East

China’s engagement with the Middle East has also grown significantly in recent years, with a number of strategic agreements and projects in place. This trend has been aided by China’s Belt and Road Initiative, which was unveiled in 2013.

The aim of the scheme is for China to extend its global reach, and it has found a receptive audience in the GCC. Saudi Arabia and China signed 15 memoranda of understanding (MoUs) during the G20 summit in September 2016, spanning areas such as science and technology, oil storage, water and cultural cooperation. Underpinning these bilateral agreements is a five-year programme of mutual investments, with a timeframe of one year to be set aside to finalise the deals.

At a global exhibition in the UAE in February 2017, another MoU – related to China’s defence sector – was executed between the two countries. The agreement plans to establish a production line in Saudi Arabia for China’s new-generation Rainbow 4 aerial drone, among other projects. In March 2017, during a month-long tour of Asia to increase economic cooperation with the region, King Salman bin Abdulaziz Al Saud oversaw the signing of additional deals worth upwards of $65bn with Beijing. The agreements included an MoU between oil giant Saudi Aramco and China North Industries Group to look into establishing refining and chemicals plants in China, as well as a deal between Saudi Basic Industries Corporation (SABIC) and China’s Sinopec to develop petrochemicals projects in both countries. Sinopec and SABIC already operate a joint chemicals complex in the Chinese city of Tianjin.

China is currently Saudi Arabia’s largest trading partner, with bilateral exchanges amounting to $42.4bn in 2016. During a visit to the kingdom in August 2017 Zhang Gaoli, vice-premier of China, said his country “supports Saudi Arabia in making its 2030 vision a reality, and would like to be a partner as the country diversifies its economy”. A total of 60 agreements and MoUs, worth close to $70bn, were signed during his visit.

Regional Partners

Gaoli also visited Kuwait during his time in the region, becoming the highest-level Chinese official to visit the nation in almost a decade as the countries look to deepen trade relations. Kuwait was the first Gulf state to establish full diplomatic ties with China in 1971 and was also one of the initial Arab countries to sign a cooperation agreement with it under the Belt and Road Initiative. Bilateral trade between China and Kuwait reached $9.37bn in 2016 and rose 28.6% year-on-year (y-o-y) to $5.47bn in the first half of 2017.

Elsewhere, the UAE is expected to play a key role in the Belt and Road plan due to its importance as a regional and global trade hub. The country is the gateway for roughly 60% of China’s exports to the region, worth about $70bn annually, according Abu Dhabi Ports. He Song, commercial counsellor at the Chinese embassy in Abu Dhabi, stated that Chinese non-financial foreign direct investment in the UAE rose 352% y-o-y in the first nine months of 2016 to reach $390m. That year China’s COSCO Shipping Ports won a 35-year concession to build and operate a new container terminal at Khalifa Port in Abu Dhabi, with plans to invest over $700m.

Earlier, in December 2015, Abu Dhabi-based Mubadala Investment Company launched a joint investment fund with China Development Bank Capital and China’s State Administration of Foreign Exchange, with each government investing $5bn to be used for projects in both countries. Since 2011, four of China’s state-owned banks have set up operations in the UAE.

Ties With India & Pakistan

Emerging markets in South Asia are also key to outward growth. India is currently the GCC’s largest trade partner, and with the OECD expecting the country’s economic growth to remain above 6.7% through 2019, there are numerous opportunities on offer.

Trade between India and the GCC totalled $137.7bn in 2014-15, up from $6.2bn in 2001-02, according to the International Trade Centre. Ali Ebrahim, deputy director-general of Dubai Economy, said in August 2017 that GCC exports to India had increased by 49% annually over the previous decade – the highest growth rate among the region’s major trading partners – with imports from India growing by 39%. According to India’s Ministry of External Affairs, the GCC currently supplies 60% of India’s total energy imports. Furthermore, with millions of Indians working in the GCC, remittances from those living in the region make up over $35bn per year, representing half of India’s annual total remittances.

While relations between Pakistan and the GCC are not as well established as those with India, a third round of negotiations over a free trade agreement (FTA) between GCC member states and the SouthAsian country are expected in 2018, with the text of the initial framework in place as of early August 2017. The hope is that an FTA will help to develop multilateral trade, with Pakistan’s agricultural potential and energy needs seen as areas of opportunity.

Russia

With Russia a major hydrocarbons producer in its own right, trade between the GCC region and the northern giant has never been as critical as with the US, China and India. Still, there have been strong efforts to boost bilateral trade and cooperation.

The Russian Direct Investment Fund (RDIF) and Mumtalakat, Bahrain’s sovereign wealth fund, signed a mutual investment agreement in 2014, and in February 2016 it was reported that Mumtalakat had made a $250m investment in the RDIF. In June 2017 Mahmood Hashim Al Kooheji, CEO of Mumtalakat, told Reuters that they had an “impressive” pipeline of investment deals in Russia, with $135m worth of projects already approved, while some existing projects already offered double-digit return rates.

Bahrain’s moves followed the November 2015 announcement that Kuwait’s sovereign wealth fund, the Kuwait Investment Authority, had agreed to allocate a further $500m to a number of investment projects in Russia in partnership with the RDIF.

According to Kirill Dmitriev, head of the RDIF, Gulf sovereign wealth funds had earmarked more than $20bn for investment in Russia as of May 2017.

In June 2017 Rosneft – Russia’s largest oil producer – and Saudi Aramco announced they were looking into joint investments in Saudi Arabia. At the same time, the kingdom said it would consider joining Russia’s Arctic liquefied natural gas project.

In May 2017 the PIF also entered in a partnership with RDIF to invest up to $10bn in Russia-Saudi projects, with $1bn already invested in infrastructure, manufacturing, logistics and retail, according to the PIF Programme 2018-20. In the latest development, in October 2017 Saudi Arabia’s King Salman led a delegation to Moscow that agreed joint investment deals worth several billion dollars.

In Oman, Sultan Qaboos bin Said Al Said welcomed a Russian special envoy in February 2017 to review bilateral relations, reinforce a climate of supportive cooperation and activate existing joint agreements between the two nations. Trade between Oman and Russia has risen since 2010, with Russian companies currently engaged in Oman’s energy sector.

If oil prices continue to recover, the GCC is likely to enter further agreements with countries around the world. These deals, whether related to developments in the region or investments elsewhere, will become increasingly important for economic growth and revenue generation for all GCC member states.