The Peninsula Foundation

Author: Adithya Subramoni

Entrepot Development and Diversification: A comparative case study of Singapore and Dubai

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Introduction

Dubai is a small city-state in the United Arab Emirates (henceforth UAE), which is renowned internationally for being a logistics hub. With hydrocarbon revenues accounting for less than 1% of its GDP, it is the most diversified sheikhdom in the region. Dubai’s development model is considered ideal and is being followed by other Gulf countries in the region. Dubai’s development approach was inspired by the Singaporean development model. Singapore developed by welcoming foreign firms to set up shop for export-oriented manufacturing and thus used its entrepot status to its advantage. The emirate followed a similar approach to development because it was historically an entrepot and housed merchants but not entrepreneurs. Thus, it followed the Singaporean model by opening its borders to foreign firms and sought to diversify its economy by building on its entrepot characteristics. However, the outcome of this approach has been different vis-à-vis Dubai and Singapore in terms of sectoral diversification which is interesting. This paper conducts a qualitative study that reviews literature about their development policies and follows the most similar systems design to explain the outcome in sectoral diversification based on the differences in inputs of their development policies. The study finds that domestic wage policies and initiatives to encourage technologically advanced firms to relocate were key factors that encouraged a service-oriented diversification of Dubai’s economy.

While the author appreciates that Singapore developed without the support from hydrocarbon revenues that Dubai was privileged with, this study questions why Dubai, an emirate blessed with the resources and capability to direct its development narrative, witnessed a different outcome in its diversification experience. This research provides insight into two cases of late development which is not often discussed by late development theorists. This study has the potential to further encourage economic historians and development practitioners in this region’s context to think about how development approaches are affected by factors like history, geographic location, and political conditions. The paper uses primary data sources such as government publications and newspaper reports, and secondary sources such as scholarly work for this study. Following this, the methodology of the study is addressed, after key factors of Singapore’s development are highlighted, then literature regarding Dubai’s development is reviewed, and then the discussion is presented followed by the conclusion.

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March 19, 2022
Small States, Sovereign Wealth Funds and Subtle Power: A study of Qatar and the United Arab Emirates

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Abstract

This paper argues that Sovereign Wealth Funds can be an important foreign policy tool for small states. The author analyzes select investments of the Sovereign Wealth Funds of Qatar, Abu Dhabi and Dubai in the theoretical framework of subtle power. Subtle power is a means of exerting influence behind the scenes. This paper categorically analyzes sovereign wealth fund investments to understand how they contribute to the three sources of subtle power; physical and military protection, branding efforts, and diplomacy. The author does not dispute that these Sovereign Wealth Funds have financial motives, but adds nuance to the literature by arguing that they also hold political motivations. The paper finds that the structural difference in the governance model of Qatar and the UAE has resulted in a variation in the foreign policy roles of their Sovereign Wealth Funds. In the UAE’s case, Abu Dhabi’s Sovereign Wealth Fund takes the lead in matters related to physical security and diplomacy, whereas Dubai’s Sovereign Wealth Fund focuses on national branding efforts. Meanwhile, for Qatar, QIA acts as the primary instrument exuding subtle power across all three categories.

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March 19, 2022
UAE’s industrialization drive and the potential for Sovereign Wealth Funds to unlock value

The United Arab Emirates has renewed its commitment to the fourth industrial revolution recently with an ambitious target of increasing the industrial sector’s contribution from AED133 billion to AED300 billion (US$ 81.7 billion) by 2031. The main objectives of this ten-year strategy are to leapfrog towards knowledge-intensive industries, apply technology-intensive solutions to retrofit current industries, and push manufacturing in industries like aerospace, pharmaceuticals, medical equipment, etc. However, these objectives are not novel. While the early development plans of the emirates’ primarily focused on diversifying the economy from hydrocarbon revenues, the ultimate objective was to expand towards knowledge-intensive industries. In line with this, economic development plans as early as 1991 record the rulers’ interests in building a manufacturing-oriented economy, but the success is yet to materialize. Even in the case of the most diversified emirate – Dubai, the main drivers of the economy as of 2020 were entrepot activities like trade (26.5%), transportation and storage (12.5%), and financial services (9.7%), while manufacturing contributed to 8.8%. These statistics can be further appreciated by recollecting that from the early 1990s, development plans for Dubai were made under the assumption that the annual real growth rate in its manufacturing sector would meet 7%.[1] As of 2020, the growth rate in manufacturing is only 0.3%. While manufacturing-oriented industrialization was to play a key role in the economy, there have been considerable challenges in realizing it. This article first briefly recalls the historical development efforts of the emirate, then discusses reasons which could have hindered the country’s trajectory towards knowledge-intensive manufacturing, and highlights a potential development instrument the country can utilize to realize its objectives in the present day.

Federal Structure and overcoming the Inequalities

Being a federation every emirate was offered autonomy which retained the control of resources of the respective emirates’ within respective ruling families. This resulted in vast inequalities amidst emirates with Abu Dhabi and Dubai becoming relatively well off compared to others. The remaining emirates were dependent on the budget provisions from oil-rich Abu Dhabi to maintain the social contract over their respective emirates. This internal dynamic resulted in different approaches being taken for economic development in the country. To briefly summarize some of them – Dubai invested in infrastructure to improve its entrepot facilities and industrialize in sectors associated with hydrocarbon resources, Abu Dhabi began focusing on renewable energy and clean technology from the early 2000s, Ras al-Khaimah benefitted from its low-cost production environment (up to 25-50% lower than in other emirates) to become the country’s manufacturing base, and Fujairah developed a storage and bunkering expertise due to its geographical location beyond the chokepoint of the Strait of Hormuz.[2] The developmental push from the emirates created a boom mainly in industries associated with hydro-carbon, real-estate, logistics, and finance. Although official data on sector-wise contribution to GDP remain unpublished, World Bank data confirms that as of 2019 about 16% of the UAE’s GDP is accredited to hydrocarbon sources. It also confirms that as of 2019, manufacturing value-added as a percentage of GDP stood at 8.7%.

In the context of UAE, the viability of proceeding with labour-intensive industries as a starting point was low as the country has a small Emirati population. Second, while most late developing countries have resorted to wage suppression to make production costs competitive, the UAE is restricted from doing so owing to the social contract it shares with its citizens

Despite the autonomy every emirate has enjoyed, the overarching approach the country has used for economic development is to invite foreign firms to the country by providing business-friendly infrastructure and environment.[3]For the emirate of Dubai, which was most successful in diversification, Singapore’s development model was an inspiration for implementing policies promoting business-friendly infrastructure and environment.[4] Among potential factors that explain the challenge in the uptake of knowledge-intensive manufacturing in the UAE, this article focuses on two – First, the inherent characteristic of firm relocation, and second, the existence of a twin labour market in the country with high wage levels. Helleiner argued that it is easier to scale to knowledge-intensive industries when labour-intensive production processes exist locally, this way, production activities can upgrade vertically. The logic was that direct relocation of knowledge-intensive functions of industries would imply high costs to the firm. His thesis was based on the development of the Asian tigers whose development process benefitted from the vertical up-gradation of industrial activity. In the context of UAE, the viability of proceeding with labour-intensive industries as a starting point was low as the country has a small Emirati population. Second, while most late developing countries have resorted to wage suppression to make production costs competitive, the UAE is restricted from doing so owing to the social contract it shares with its citizens. UAE nationals are instead offered much better employment packages in the public sector which deters their participation in the private sector.[5] As a result, the private sector across all skill levels is significantly dependent on expatriate labour. In addition to this, foreign talents are paid twice as much as their home countries across all skill levels. Tong and Al Awad demonstrate that this is true not only for low-skilled and semi-skilled jobs but also for high-skilled jobs by comparing the average wages of high-skilled expatriates from the US and the UK. They compare their wage levels at home and in Dubai, control for purchasing power parities, and find that the salaries are twice as that in their home countries. Competition for knowledge-intensive industries has predominantly arisen from the global North and as income levels in the UAE are twice as much as that in developed countries, there is an inherent risk on the price competitiveness of products on a global scale.

Development model, SWF, and Top-down Approach

A difference in the UAE’s late development model relative to others in the category is that while the latter was challenged in capital accumulation, it was easily accrued for the UAE. The difficulty for the UAE lies in using accumulated capital to break the dependency. Thus, the way forward for the UAE lies in a radical rethinking of its development model. Where vertical integration by first relocating labour-intensive industries demonstrates a bottom-up approach to development, the UAE is better positioned to approach development in a top-down model of vertical integration having accumulated capital. Although public sector investment and involvement in the economy is high, there exists scope to increase the synergies between industry-leading companies and local producers through the public sector. In this case, a policy instrument with the potential to push economic development is the state’s Sovereign Wealth Funds (SWFs).

The channelling of SWFs as a development policy instrument provides an opportunity for greater collaboration between international industry leaders and local businesses. Investing in the economic diversification of the country has been an important objective for the state’s SWFs. Some noticeable instances where the SWFs have built linkages between international companies and local businesses have been in the aerospace sector.[6] For instance, Mubadala entered into strategic partnerships with Airbus and Boeing in 2008 and 2009 respectively and launched Strata Manufacturing as a wholly-owned subsidiary of Mubadala in 2009. Soon after Strata Manufacturing was launched, the company concluded agreements with both Airbus and Boeing to manufacture aircraft parts at its aerostructures manufacturing facility in Al-Ain. This further continued when Strata Manufacturing received a ten-year contract from Boeing for the manufacture of Boeing 777’s empennage ribs and vertical fin rib for Boeing’s 787 Dreamliner. This development model is novel because it demonstrates how embedded autonomy, a key feature in the East Asian development model, can be replicated while collaborating with established international companies for economic development at home. Sovereign Wealth Funds as an institutional investor demonstrate how the state can be at the forefront of national development efforts from a transnational level.

This top-down model of economic development through SWFs is a novel use of the investment vehicle as a policy instrument. It allows the state to direct development from a transnational level, which is an important operational condition for developmental states in an era of globalization

An important lesson from late developers in East Asia and Southeast Asia is that state-directed capitalism is important for economic development. This top-down model of economic development through SWFs is a novel use of the investment vehicle as a policy instrument. It allows the state to direct development from a transnational level, which is an important operational condition for developmental states in an era of globalization. Although the UAE has demonstrated the use of this instrument in some cases, there is great potential to further drive economic development towards the fourth industrial revolution through SWFs. There will likely be more linkages built between local businesses and international companies through SWFs as the UAE moves forward to a knowledge-intensive economy. As the article highlighted above, there will be challenges moving forward in ensuring price competitiveness at a global level when operating in a labour market with price distortions. To this end, the challenge remains in finding innovative financing mechanisms by state investors in the short run and for policymakers to introduce suitable policies for correcting the price distortions in the long run. This ongoing effort in the UAE requires a closer examination from researchers, development practitioners, and policymakers as it is a unique development model and has the potential to deliver promising developmental lessons.

Notes

[1] Euromoney; London”, Periodical, (1997), World Economic Analysis, United Arab Emirates Document no.:198889294, ProQuest One Business.

[2] Ulrichsen, Kristian Coates, The United Arab Emirates: Power, Politics And Policy-Making, p.87-129, Routledge, 2017.

[3] Davidson, Christopher. The United Arab Emirates: A Study In Survival. 1st ed. Lynne Rienner Publishers, 2005.

[4] Sampler, Jeffrey, and Saeb Eigner. Sand To Silicon. Dubai, UAE: Motivate Publ., 2008.

[5] Davidson, Christopher. The United Arab Emirates: A Study In Survival. 1st ed. Lynne Rienner Publishers, 2005.

[6] Ulrichsen, Kristian Coates, The United Arab Emirates: Power, Politics And Policy-Making, p.103-108, Routledge, 2017.

Feature Image Credit: Asharq AL-awsat

December 10, 2021
International Institutions in post-Covid Era
Pandemic exposes inadequacies in the 21st century world

At the Munich Security Conference 2020, the Indian External Affairs Minister stated that multilateralism has weakened, and attributed it to the inadequacy of international institutions, established seventy-five years ago, to cope with the challenges of 21^st century. This was just before the coronavirus became a global pandemic. Today, among other aspects of society that are challenged by the pandemic, its impact on the world has exposed the inability of international organizations to develop a globally cooperative strategy. The September edition of the UNSC meeting held regarding the coronavirus pandemic saw the United States, China, and Russia fight bitterly over responsibility and responsiveness to the pandemic. Instead of building constructive solutions to face the challenge each country focused on accusing others. Similarly, although the Covid-19 global response pledging event secured 7.4 billion euros, their origins (whether new or retargeting of approved grants), method of fund application, proposed call for global research sharing platforms are either ambiguous or not yet set up. Hence, although international organizations have promoted dialogue, the jury is still out on their efforts towards alleviating the crisis or cushioning its impact. The pandemic thus leads to questions about their effectiveness and what post-covid international institutions might look like.

Given the manner in which various nation-states represent, contribute to, and run international organizations it is definitive that the nature of international institutions is susceptible to change.

Institutionalism and International Organisations

International Organisations such as the United Nations and its predecessor the League of Nations mark the variety of multilateralism brought to life based on the theory of institutionalism. Institutionalism originated from the thought that if humans are fundamentally good but act otherwise it is because of anarchy in the international system, and through institutions fostering international cooperation anarchy can be countered to promote the fundamental good in human nature. The final goal of institutionalism stood to promote supranational organizations. However, there have been drawbacks in bringing practicality to this theory. These institutions are built on belief (an individual external factor to the institution itself brought by participants) and power in international institutions is extended when states surrender part of their sovereignty. The changes and differences in individual beliefs cause significant changes in institutions in both the way they operate and the consequences of their operations. Given the manner in which various nation-states represent, contribute to, and run international organizations it is definitive that the nature of international institutions is susceptible to change. Hence, better international coordination and responses to the past crisis such as the 2008 financial crisis, controlling the Ebola breakout in West Africa were also a result of the leftist individual beliefs of participants. However, with global politics inclining towards the right, with waves of hyper-nationalism sweeping across nations, efforts towards multilateralism have taken a back seat. Stephen Walt maintained that the pandemic will reinforce nationalism as the world retreats from hyper-globalization to reduce future vulnerabilities and will create a world that is ‘less open, less prosperous, and less free’. The pandemic has put the world on a trajectory towards the right with politicians becoming more authoritative, and thus multilateralism will see significant changes in the post-covid era.

Rise of narrow Nationalism and Right Wing Politics

Despite the rise of right-wing politics globally, the benefits of multilateralism cannot be foregone. Multilateralism in international institutions in past crises followed a model wherein the United States took the lead across various organizations and coordinated the world towards a united response. Since such leadership has been replaced with great power politics, multilateralism has taken an operational role instead of a supervisory role. The main difference between the two roles is that the latter had better potential to progress as a supranational organization while the former traverses as a platform offering supporting services to different countries. Examples of this are efforts led by NATO to use their airlifting capabilities to move vital medical equipment and food supplies, and WHO’s initiative to share guidelines and important research to countries who then took individual decisions. In the current trajectory, these changes in institutional consequences can lead towards three possibilities in the future of multilateralism:

At the risk of sounding highly pessimistic, the institutional belief in multilateralism is likely to see a steep decline and sovereignty surrendered to international organizations will erode. The role of the UN and its organs may change focus on global data collection, analysis, and politically motivated discussions from the current (weakening) narrative of progress, development, conflict prevention, and resolution.
- As Robert Kaplan argues, Coronavirus has become the watershed movement segregating the upcoming era as Globalisation 2.0 with the rise of autocracies, social and class divides, and new emerging global divisions. This image of globalization 2.0 can be used to reflect on what the next era of multilateralism will be. In the continuing trajectory with no clear international leadership, international institutions would reduce to becoming a platform of dialogue in great power politics with the initiative and effectiveness of resolutions substantially watered down. At the risk of sounding highly pessimistic, the institutional belief in multilateralism is likely to see a steep decline and sovereignty surrendered to international organizations will erode. The role of the UN and its organs may change focus on global data collection, analysis, and politically motivated discussions from the current (weakening) narrative of progress, development, conflict prevention, and resolution. For instance, the pandemic-induced embargo on the movement of people would in turn catalyse the degeneration of organs such as the UNHCR as the dialogue focuses on data collection and blame allocation instead of refugee crisis management. The international political narrative will shift from globalism to regionalism for effective conflict resolution.
- As US-China rivalry hampers effective policymaking, relatively smaller powers will lead the narrative in these institutions. The foundations for this possibility are already evident. The United Kingdom and other European countries have been increasingly calling for global summits to promote multilateralism. Their efforts can be theorized to be an enmeshment strategy similar to that used by small states in ASEAN. The objective of this strategy is to alleviate the high risks of major powers directly competing by creating interdependence (if not directly between the great powers) among the various actors in the system through increased multilateral participation to an extent that great powers are tied down in this system and their interests are intertwined such that conflict would become costly. Thus smaller powers prevent the complete breakdown of international organizations by continuing to promote dialogue and ensure the persistence of multilateralism, albeit weaker, but prevent the division into two great-power blocs as with the first scenario. This approach where smaller states remain neutral to great power influences would in turn result in the latter’s effort to win over small states characterized by the exploitation of the cold war by small states. Although the US has so far managed to step away from this, with the oncoming elections it is likely that a change in administration would enable the enmeshment strategy to prevent an extreme global division.
- Taking an optimistic view, the pandemic may catalyse the trajectory towards Ikenberry’s Multilateralism 3.0 where power in the institutions is more reflective of present-day world powers. Given the shift in American foreign policy and lack of initiative, the pandemic could become an important shaper for other Asian powers to get higher representation to balance China’s rise. Although this demonstrates an idealistic situation far from the rightist trajectory, Ikenberry concedes to the fact that in the short-run countries will be nationalistic but in the long run, democracies will break out from the authoritarian, nationalistic regimes to promote a pragmatic and protective internationalism. Ikenberry makes this interpretation based on the enlightenment world leaders had following the destruction and suffering from the world wars. Hence, the pandemic marks the starting point for the butterfly effect which will lead to wartime-like geopolitics, followed by enlightenment to build stronger international institutions with representations reflective of the new world order and better capable of dealing with issues the current institutions struggle to resolve.
Conclusion

Although international cooperation would be the sensible means to navigate through the pandemic and other crisis induced by the pandemic, due to factors external to the institution, such as domestically controlled participant change – multilateralism will see considerable weakening. Among the three possibilities identified for the future of international institutions, only time can tell which path the world will take. However, a combination of the second possibility in the short run progressing to the third over the long run is the most optimistic option to work upon for a better pathway to navigate through this crisis.

Image: Pixabay
October 22, 2020
The Catalysing Effect of Covid-19 on the Changing World Order

Contrary to the realist belief, international states co-exist in a world order of hierarchy rather than anarchy. Ikenberry presents this hierarchical world order and the cyclical rise and fall of hegemonic powers. Early 20^th century witnessed the shift from Pax-Britannica to Pax-Americana that was complete by 1945, from which point the US defended its position during the Cold War with the erstwhile USSR. It exercised its hegemonic influence even more aggressively after the Cold War. However, US dominance of the world order has been diminishing owing to the Trump administration’s isolationist approach to foreign policy, and the increasing influence of China in world politics. This article examines the catalysing effect of Covid-19 and the rise of China on the current World Order.

Trump’s policy of disregarding multilateralism and imposing its unilateralism on the world has catalysed into an involuntary retreat, protectionism, and isolationism for the USA with dire consequences for its foreign policy effectiveness.

Trump’s policy of disregarding multilateralism and imposing its unilateralism on the world has catalysed into an involuntary retreat, protectionism, and isolationism for the USA with dire consequences for its foreign policy effectiveness. The net result is that the world is witnessing an abdication of leadership by America in a world disrupted by the Covid-19 pandemic. A clear pattern of isolationism can be seen in various actions of the Trump Administration since it’s assumption of the Office. In 2017, the US withdrew from the Paris Agreement, in 2018 it unilaterally reneged from the JCPOA, re-imposed sanctions on Iran and threatened sanctions on allies who supported Iran. In 2019, it withdrew troops from Syria, which led to subsequent Turkish incursion on Rojava Kurds, and in early 2020 it negotiated with the Taliban to enable withdrawal of US troops from Afghanistan. With the onset of Covid19 global pandemic, the Trump administration has accused the WHO of protecting China. In a unilateral action not endorsed by its allies, USA first stopped its funding for WHO and then terminated its relationship with the UN institution. This comes as a blow to multilateralism since the US was WHO’s largest donor, contributing about $440 million yearly. In addition to this, the US has failed to provide the lead in the global response to tackle the virus despite its initiatives in the past pandemics such as H1N1, Ebola and the Zika virus. The US was absent from the WHO initiative – Global Coronavirus Response Summit (before its withdrawal from the association). In addition, the US has been unable to provide external aid to combat the virus due to domestic shortages, which explains its restraint to guide an international response in the absence of a coherent domestic plan of action. Thus, the coronavirus pandemic has acted as a catalyst in increasing the pace of US isolationism from world politics.

China has turned the tide on its previous missteps in containing the virus by publicising its governance model as the most effective way to combat the pandemic.

Meanwhile, the pandemic has established firmly China’s rise in the international stage. Though China is facing backlash for suppressing details about the virus, it is battling to overcome this criticism by providing international aid and stepping up to lead a global response using Beijing’s success as a template to overcome the novel virus. China has contributed significantly to the global response by providing materials such as ventilators, respirators, masks, protective suits and test kits to Italy, Iran, Serbia, and the whole of Africa. Grabbing its opportunities to lead international responses, China hosted Euro-Asia conference, participated in the Global Coronavirus Summit where it pledged an emergency funding of $20 million to WHO, and pledged $ 2 billion to the WHO (equalling its annual budget) to be disbursed over the next two years, thus contrasting sharply with the US behaviour of withdrawing from the WHO. China has turned the tide on its previous missteps in containing the virus by publicising its governance model as the most effective way to combat the pandemic. It continues to highlight the inadequacies and shortfalls in healthcare systems of the western world as against the success of its governance model, Beijing Consensus, and variations of it in East Asia. It is clear that China has seized the Covid-19 pandemic as a huge opportunity to establish its global leadership.

Taking advantage of the global disarray due to the pandemic, China has taken strong actions to deflect global criticism of its initial handling of the virus. Two prominent examples of this being, European Union watering down the report on Covid19 disinformation owing to pressure from Beijing, and the passing of the controversial Hong Kong security law. While the US has taken initiative in cracking down on China by repealing the special privileges to Hong Kong, other countries were cautious in retaliating against China significantly and limited their actions to sympathetic support for pro-democracy protestors. The exception to this was Britain, which offered UK citizenship to British National Overseas Passport holders in Hong Kong, despite seriously offending China. Despite the global backlash against Chinese diplomacy in the form of generous aids, international actors have expressed limited concerns through action against Chinese domination. This is due to the circumstantial mismatch in global balancing against China’s rise. The US uses unilateral actions and ‘expects’ its allies to follow, while its allies despite their serious concern over China’s rise, remain vary of following in the American footsteps. This is because US allies treat coronavirus as an immediate threat as opposed to China’s rise. The US being a status quo power is more threatened by China’s rise since it posits as a revisionist state. However, in view of China’s proactive efforts in leading global contributions to battle the coronavirus, US allies remain tolerant of China’s dominance.

The passive and fractured response to China’s aggressive exploitation of the pandemic to establish its global leadership is a concern for India. The recent setting up of Chinese military camps in Indian controlled territory of Ladakh is a manifestation of China’s complex strategy. India has, true to its traditional policy, opted out of involving the United Statesin the ‘bilateral issue. However, it would be beneficial to be united in balancing against China’s rise. While it is necessary to work together to utilise Global Supply Chains (GSC) during the pandemic to battle the coronavirus pandemic, it is equally important to look at global balancing against China to ensure its compliance to rules-based world order. Since China’s power is derived from its economic strength, balancing strategy against China should focus on trade and economy. Chinese foreign policy depicts a pattern of economic coercion to reward or punish its counterparts. This can be tackled through concerted global action. India is, as one of the largest producer of pharmaceuticals, playing a crucial role in global efforts to fight the pandemic by providing Hydroxychloroquine globally. However, given that most raw materials are sourced from China, balancing against China requires a favourable movement of GSC diversification. US-China trade war has, encouraged companies to move production out of China and into Asian countries such as Vietnam and Taiwan. As a result of the coronavirus crisis and the global backlash, companies look to further diversify their resources and supply chains. India and other Asian countries could benefit from this if they adapt their policies suitably.

Global backlash against China’s handling of the virus in Wuhan is still a challenge for China’s geopolitical strategy. Its foreign policy is seen more as displaying aggressive and coercive approach than persuasive diplomacy.

It is difficult to estimate whether China would aspire for hegemonic leadership. Global backlash against China’s handling of the virus in Wuhan is still a challenge for China’s geopolitical strategy. Its foreign policy is seen more as displaying aggressive and coercive approach than persuasive diplomacy. Given the current volatile scenario most countries have, in the absence of US leadership, increased their dependence on China as it is now the largest provider of aid. While all this tips the scale in China’s favour, it’s hegemonic ambitions can be countered through trade strategies as its weakness stems from the fact that it is a hugely export driven economy. Global diversification of supply chains would reduce the world’s increasing dependency on Chinese manufacture and products. The world will need to be cautious as the pandemic has provided China an opportunity to tighten its grip on the global economy as the world’s workshop and technology provider. Here on, international efforts to bandwagon or balance will become a decisive factor in determining China’s rise to apex position in the world order.

August 3, 2020
American Sanctions on Iran and the Underlying Oil War

Adithya Subramoni June 24, 2019/Analysis

In a shocking turn of events, America in 2018 announced its withdrawal from the Joint Comprehensive Plan of Action 2015. This came as a surprise to the international community for good reason, because subjecting Iran under harsh sanctions when they kept up their end of the bargain seemed like a punishment from the US for keeping up this good behaviour. President Donald Trump, calling towards the international community and specifically ‘like-minded countries’ for a team effort, said it was time to curb Iran’s state-sponsored terrorism. But his idea to get Iran to re-engage on this field was through the ‘maximum pressure campaign’. This strategy is unlikely to find takers owing to the fact that the nuclear issue and state sponsored terrorism are two completely different issues, and hence need to be dealt with separately. To charge Iran with state sponsored terrorism is completely misplaced. Iran has not caused any damage to US or its citizens in the last twenty five years. On the other hand terrorist acts affecting the US and its allies have almost always had a link to Sunni Islamic fundamentalism with its links to Saudi Arabian Wahabi organisations. The real motive is USA’s geopolitical targeting of Iran. Trump’s recent designation of the Iranian Islamic Revolutionary guard corps (IIRGC), a unit of the Iranian army, as a terrorist outfit defies all logic and may become counterproductive to the US interests, the very issue that Trump wants to safeguard.

Iran’s support to Hamas is fundamentally a regional and geopolitical struggle with Israel, while the Sunni vs Shia conflict is a manifestation of the regional power struggle between Saudi Arabia and Iran. If the USA wanted to pressurise Iran on its support to militant outfits like Hamas, it should have ensured it has support of its allies and multilateral institutions. USA’s unilateral action on Iran does not have the support of other members of the P5 +1(Germany) as well as other oil-dependent countries. With the latest round of sanctions, countries with economies having exposure to Iranian trade industry are gearing up to take a major hit. This brings us back to the subject of concern, why take such hasty decisions impacting the global economy without consultations from other members of the P5 + 1?

The exit strategy

In 2018 shale oil catapulted America to the leading position amongst the oil producers. As companies in Texas adopted fracking technology to good use in optimising their oil production, America climbed up to the first position in the oil producers list, surpassing major oil producers such as Saudi Arabia,Russia, Iran and the UAE. Climbing up the oil ladder came at a cheaper price for America considering the OPEC countries, excluding Iran, and Russia had agreed to reduce their oil production to protect the free-falling price of oil. This gave America a free hand at capturing the oil market especially where the demand from emerging economies was increasing rapidly. The only barrier to becoming the largest oil exporter was qualms from the emerging economies and other countries who found the American alternative to be an extremely expensive replacement for their oil needs. With emerging economies deeply dependent on Middle Eastern oil sources, one of the options for America to increase the demand for its oil was by blocking Iran’s oil exports through sanctions. This could give multiple advantages to the US: one is to create economic pressure on Iran; second is to boost American oil exports by eliminating Iran’s oil supply from the market; and third is to strengthen its ally Saudi Arabia’s pursuit of regional domination by squeezing Iranian oil-based economy.

America’s play on executing its exit and sanctions in such a speedy manner may be rooted in the fact that the major countries dependent on the Iranian oil are in the Asian continent. European countries such as France, Greece, Italy and Spain all combined import close to 500,000 barrels a day as opposed to China and India who import close to 600,000 barrels per day and 500,000 barrels per day respectively. With America limiting its oil imports primarily from Canada and Saudi Arabia, and the European Union sourcing two-thirds of its oil requirements from Russia and Saudi Arabia, American sanctions on Iran do not impact the energy requirements of the western power bloc significantly. Hence, it may have been an American expectation that other members in the JCPOA (P5+1) would support Trump administration’s move to scrap the JCPOA and resume the earlier hard line approach of sanctions on Iran. This, however, has not happened.

Unfortunately for America, other members of the JCPOA did not see any justification in the logic and accusation given by the Trump administration and hence, there was no support forthcoming from them. Trump’s disdain for allies and his unilateral approach, virtually demanding complete acceptance from European allies bordered on disrespect and insult to the member countries’ sovereignty and pride. Reaction to Trumps position was one of disbelief and contempt, as his actions displayed, in their opinion, disregard and contempt for international norms and credibility. Quite clearly USA has sought to bulldoze its way through with utter disregard for international institutions and multilateralism, exploiting its domination of the global financial institutions, banking system, and the fact that the US dollar is still the world’s reserve currency.

UK, France and Germany together set up Instex – Instrument in Support for Trade Exchanges, to facilitate the trade of medicines, medical devices and food supplies, which trades in Euro through a financial channel having zero exposure to the American financial intermediaries. This marked a milestone in the chapter of American supremacy, where its European allies took a stance against its imposing regime. Though the volume of trade is negligible, the all important European message is that it will not support the American unilateralism. In the absence of any European support, Trump administration should have recognised its folly of trying to impose its decision on its allies, but on the other hand it made it even worse by virtually threatening diplomatic ties with those countries. Others in the P5, such as China and Russia have agreed with the European counterparts to re-examine and review if necessary the terms of the 2015 JCPOA deal and look for ways to deflect and overcome the US sanctions. Iran too, has welcomed the idea and agreed to keep its end of the 2015 deal. Time however, is running out as Iran has demonstrated its loss of patience over the lack of progress on the issue, and has stated on more than one occasion, in the last six months, that it will recommence its nuclear fuel reprocessing and enrichment activities.

Asian approach to the Iranian issue

Asia is the largest customer of crude oil, importing 53% of the global total oil imports, translating to an approximate amount worth $628.2 billion. One major reason for this huge oil influx is the fact that Asia is home to the fastest developing economies such as China and India. Though China and India have maintained that they will continue to import oil from Iran, one issue that concerns all the countries importing Iranian oil is the availability of insurers willing to take up the risk for oil supply from Iran. Most insurers will be cautious to take up projects for fear of losing business and financial access in the West.

With the ongoing trade war with America, China is fighting a dual war. For America, the opponent has been weighed down with two hurdles co-incidentally and conveniently. With the trade war impacting the export industry and sanctions on its oil supplier indirectly hitting the Chinese economy, China may chose well to hit back on America by disregarding the sanctions on Iran. Iran might just have earned itself a powerful ally because of American hegemony. Chinese imports of crude oil from Iran have surged to record levels in April and May. Iran is set to become China’s 2^ndlargest supplier of crude oil.

Steering the wheel of attention towards India, Iran is its third largest oil source. Particularly being an oil dependent emerging economy, the sanctions on Iran will force India to look at more expensive oil options. The six month credit line and insurance included price for Iranian oil made it the most lucrative oil supplier in the business. Another issue that has come to India’s doorstep is the longevity of the rupee account based trading system with Iran using the UCO Bank. UCO Bank being the only bank with no exposure to American financial channels is the only means for continued Iran-India trade relations. In light of the US sanctions, India reduced its oil imports to turn eligible for a sanction waiver. This sanction waiver came to an end on 02May 2019, and oil imports stopped owing to the election period as well. Now the primary concern for the new Indian government is to prioritise the Iran issue. Iran is accountable for thirty percent of India’s exports, and given that the rupee account is fuelled by the INR deposited in favour of oil imports from Iran, the systematic reduction of oil import also creates a proportional fall in demand for Indian exports, owing to the curb of Iran’s purchasing power. Since the end of the sanctions waiver, India has stopped import of Iranian oil, hopefully only as a temporary measure.

At the same time, a diplomatic concern that arises for India is its interest over the Chabahar port. Chabahar Port is a major investment arena for India to create a transportation corridor connecting Asia as well as the land-locked Afghanistan with the rest of the world. Though India plans on disregarding the US Sanctions and continuing business through the UCO Bank and Iran’s Pasargad Bank, attention needs to be paid to resolve the reducing Iranian imports, not only to secure India’s exports but also to show Iran the commitment India has towards its diplomatic ties with them and its vested interest in operating the Chabahar Port. Going ahead with the possibility that China would disregard the sanctions on Iran, a reduction in Iranian imports could weaken Iran’s ties to India and pave the path to strengthen Iran-China ties. This would particularly be drastic for India, if Iran were to give China operational rights to the Chabahar port. Needless to say, this would bring in interference from Russia, who wouldn’t be thrilled with the loss of regional trade autonomy to China.

Approaching the dénouement

From a bird’s eye view, the rising conflicts in the West Asian region, with Saudi Arabia and the UAE being the main champions who support the efforts for a change in Iran’s regime, Iran finds itself in a cornered situation amongst its neighbours. If cornered, both strategically and economically, Iran could resort to using its strategic location to choke the Strait of Hormuz by planting sea mines or through any other obstruction mechanism. Though unlikely, as it would put Iran in a very hostile situation with rest of the world, it cannot be ruled out as an extreme last resort measure. This could create major international crisis. It would, as a start contribute to the run up in oil prices and owing to supply security – it is possible that USA stands to benefit immensely in such a crisis.

On the other hand, by imposing sanctions on Iran, America has pushed India to an uneasy corner. Owing to regional ties, it plays to India’s strength to take care of her interests by dealing with Iran and securing operation of Chabahar port. On the other hand it is essential to keep India’s ties with America on an even keel. If it refuses to acknowledge India’s ground interests and resorts to the muscle power of sanctions, China may end up as the beneficiary with a fortuitous win with Chabahar port, leading to an ultimate strategic loss to India and the US.

The situation calls for global introspection into imposing sanctions by a country due to its phenomenal control over the world’s financial channels and the domination of the USD international trade. But this round of sanctions just might be the one where countries figure out alternate solutions together; considering the European initiative of Instex, Asian methods such as the trade using rupee account, Russian and Chinese support towards Iran; to finding a more cooperative and equitable solution that enables the world to trade outside the control of America. The sanctions may have just provided the edge to catalyze the changing world order, but the question is who’ll sit on the throne of the high table when the rubble settles? Or will it be, as it seems more likely, a more cooperative and less competitive, multi-polar world order?

Adithya Subramoni is interning at ‘The Peninsula Foundation’. She has a Bachelors degree in Commmerce from Christ College, Bangalore.

Photo Credit under a Creative Commons Attribution 4.0 International License.: english.khamenei.ir

June 24, 2019