Analysis

Double Whammy Could Cost Israel and Iran Their Key Gulf State Contact

The coronavirus crisis and oil price warfare have given Saudi Arabia and UAE critical leverage on a struggling Oman. It could be the end of Muscat’s maverick independent foreign policy, with repercussions across the Mideast

Sebastian Castelier
Sebastian Castelier
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Oman's newly sworn-in Sultan Haitham bin Tariq al-Said receives condolences from Iran's Foreign Minister Mohammad Javad Zarif. Muscat, Oman. Jan 12, 2020
Oman's newly sworn-in Sultan Haitham bin Tariq al-Said receives condolences from Iran's Foreign Minister Mohammad Javad Zarif. Muscat, Oman. Jan 12, 2020Credit: OMAN NEWS AGENCY/ REUTERS
Sebastian Castelier
Sebastian Castelier

The streets of Muscat, Oman’s capital, are strangely quiet. Public transport, places of worship, tourism sites, gyms, malls and beauty salons have closed. The Omani military is manning checkpoints to deter movement between the country’s governorates. Non-residents have been asked to leave.

Nearly all 250,000 public sector employees (except for essential workers) have been requested to stay home. The government is levying fines of up to OMR 3000 ($7,800) for sharing misinformation about the coronavirus crisis online. The country has confirmed 298 cases of the virus so far, with two deaths.  

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Haredi leaders learn harsh corona lesson as Israel sends in the troopsCredit: Haaretz

Together with the coronavirus crisis, plunging oil prices caused by Saudi Arabia's sudden move to increase output - a questionable tactic to try and weaken the Russian and U.S. oil industries - is a double whammy for Oman. The hydrocarbon sector accounts for almost 80 percent of its national budget. Its already ballooning public debt  - seven consecutive years in the red, so far - is thus expected to soar, leaving the country vulnerable.

A $20 billion stimulus package announced mid-March aims at funding sectors hit by the outbreak as the country tries to shore up its nascent non-oil industries from the pandemic-induced crisis. Despite this, small and medium-sized enterprises could still be decimated. 

"A two percentage point decline in non-oil real GDP is to be expected as logistics, tourism and manufacturing will be impacted," says John Sfakianakis, senior scholar at the University of Cambridge and Chief economist of the Gulf Research Center in Riyadh, Saudi Arabia.

To support its medical response to the coronavirus, Oman’s government is even seeking donations to support its response to the coronavirus: text messages were sent to all Omani citizens urging them to give to two bank accounts, one general - "COVID-19" - and one health care-specific. Those bank details run on a constantly rolling chyron at the top of the Sultanate’s official coronavirus website.

Omani government's official coronavirus website, with chyron calling for donations
Omani government's official coronavirus website, with chyron calling for donationsCredit: Screenshot

But Oman faces more than a significant shock to its economy and employment: the COVID-19 pandemic, in addition to declining oil revenues,  could endanger the unique and sometimes oversized role that this small Gulf kingdom has carved for itself in the region. 

The new Sultan's legitimacy at stake

After he ascended to the throne in 1970, the late Qaboos bin Said Al Said used then-flourishing oil revenues to modernize Oman and build a welfare state, thereby ensuring political and social stability. 

Following the death of the long-serving Omani leader on January 10, 2020, his successor pledged to perpetuate Qaboos’ legacy. But the financial resources at his fingertips are in doubt: oil reserves are running out, with some estimates suggest the kingdom has only 15 years’ supply left. 

And, even more immediately, the global oil price crash may force Sultan Haitham bin Tariq to revamp state-society relations more fundamentally - by introducing unpopular austerity measures to bring the country’s debt under control. That was a move his predecessor rejected to avoid political unrest.

"It seems almost unavoidable not to expect the reconstruction of a leaner welfare state given the economic and fiscal reforms Oman will have to undertake," Sfakianakis told Haaretz.

For Sulaiman al-Rahbi, an Omani IT engineer, "austerity measures should apply to the higher levels of the government first," because the general population "cannot suffer [much] more, as prices are already rising." Fearing social discontent at a time of high unemployment, the government has serially delayed the implementation of a value-added tax, now expected in 2021

During demonstrations during the period of the Arab Spring, Sultan Qaboos was able to ease tensions by promising 50,000 jobs to protestors. But after seven straight years in the red, the cash-strapped Omani leadership can no longer afford to buy social peace by subsidizing employment initiatives. The country's ratio of debt to gross domestic product has multiplied by 12 since 2014. In March, state-run companies and government agencies were asked to lower expenditures

"Our public debt makes us worried, especially for future generations," al-Rahbi told Haaretz. 

According to rating firm S&P, which recently downgraded Oman’s long-term credit, Sultan Haitham is heading for "a difficult trade-off in the coming months" to fund a persistent budget deficit, address social concerns, weak growth, unemployment, rising fiscal pressures - and all this was before COVID-19 hit.

Oman’s Ministry of Finance did not reply to Haaretz’s request for comment or an interview.

Mounting pressure on Oman’s maverick foreign policy

Even more is at stake for Oman. For decades, the tiny country - which could never boast the financial or natural resources and thus leverage and influence of other Gulf states - adopted a unique role as mediator in regional disputes.

Netanyahu looks at maps with Sultan Qaboos bin Said during his visit in Oman, October 2018.
Netanyahu looks at maps with Sultan Qaboos bin Said during his visit in Oman, October 2018.Credit: HANDOUT/ REUTERS

It was a role born of both cleverness and necessity: Qaboos wanted Oman at all costs to avoid being caught between the conflicting agendas pursued by regional powerhouses, and thus flagging its neutral diplomacy offered some degree of immunity - as well as access to outsized status on the international stage. "Foreign policy is the strength of Oman internationally," says Houchang Hassan-Yari, head of the department of political science at Sultan Qaboos University.

Oman has forged an autonomous path, mediating between Iran and its adversaries, from Saudi Arabia to the United States, and between Israel, the Palestinians and other states in the region. In 2018, Qaboos hosted Israeli Prime Minister Benjamin Netanyahu in a surprise visit, marking the first visit by an Israeli leader in more than 20 years. Oman was the only Gulf state to keep its embassy in Damascus open throughout Syria's nearly decade-long civil war.

That long-standing independent foreign policy has not always come easy. Oman came under intense scrutiny by Saudi Arabia and the United Arab Emirates when the Sultanate declined to join their military intervention in Yemen in 2015, which is still ongoing, and when it stayed out of an embargo imposed on Qatar in 2017. 

But now, the combination of economic distress and the coronavirus crisis means Oman’s regional and global autonomy may start coming under even more sustained pressure. This year, Oman needs to fund 80 per cent of its projected $6.49 billion deficit by borrowing - both domestically and abroad. As economist John Sfakianakis notes, "All forms of fiscal assistance comes with certain conditionality and political posturing."

The Sultanate knows it can’t count on Arab states to come to its rescue without making painful concessions. So will its fast-rising public debt limit the independence of Oman's foreign policy?

Banner showing Saudi King Salman, right, and Crown Prince Mohammed bin Salman, outside a mall in Jiddah, Saudi Arabia. March 7, 2020
Banner showing Saudi King Salman, right, and Crown Prince Mohammed bin Salman, outside a mall in Jiddah, Saudi Arabia. March 7, 2020Credit: Amr Nabil,AP

"If Oman has to go to the Emiratis or the Saudis, those two countries would obviously expect in return some changes in the country's approach towards regional affairs," Hassan-Yari told Haaretz. 

The most obvious issue requiring a major shift would be Iran: Oman would be expected to dramatically reduce the breadth and depth of its relations with Tehran. Muscat would also be expected to agree to be far more in lockstep with the foreign policy adventurism of Saudi Arabia’s Mohammed bin Salman, and the UAE’s Mohammed bin Zayed - particularly regarding Qatar, which Oman has always resisted.

All these requirements would effectively mean the end - at least for the coming years - of Oman’s traditional foreign policy of facilitation, mediation and neutrality. 

Hassan-Yari notes it would be more advantageous for Oman’s autonomy to lenders who do not pursue "any kind of adventurous foreign policy," such as the Gulf’s northernmost state, Kuwait. But as the International Monetary Fund predicts a global recession in the wake of the pandemic, Muscat’s options will be very limited - and debtors can’t be choosers.

There are theoretical alternatives. They include depleting Oman’s sovereign wealth fund, selling-off state assets to private investors, seeking loans from international organizations - a move which would entail agreeing to strict fiscal austerity, or tapping global high-yield bond markets, a costly option in the long-term.

But whichever option is chosen, Oman is likely to be on the brink of a major reconfiguration of its regional and global autonomy and status, with repercussions for states beyond the Gulf - not least Israel, the U.S. and Iran.

For Omanis, the future looks bleaker than it has for many decades. "We hope our government has a plan," IT engineer Sulaiman al-Rahbi murmurs.

Sebastian Castelier is a journalist who covers Gulf Arab states and labour migration. His work has appeared in several Middle Eastern and international media outlets. Twitter: @SCastelier

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