MENA: Playing Both Sides
Bottom line: Most Middle East countries will likely try to stay neutral on the Ukraine war, as they seek to play both sides. Additionally, countries in the region will also be reluctant to be drawn into choosing sides in the strategic competition between the U.S. and China. This is all designed to muddle through economically and politically.
Most Middle East Countries have stayed neutral on the Ukraine war except for Iran and Syria who supported Russia, but could geopolitics evolve and see countries taking sides?
Figure 1: Proven Gas and Oil Reserves (% of Middle East Total)
Source: BP Statistical Year Book 2021
Ukraine War
Iran supply of drones to Russia is seeing western pressure to increase sanctions against Iran. However, this is unlikely to sway other Middle East countries to directly support the U.S. and Europe on Ukraine. New acute sanctions against Iran are unlikely, both as Europe is measured in spreading tensions from the Ukraine war globally and as Europe sees Iran as a potential major gas supplier in the future – Figure 1 shows that Iran and Qatar are the big alternative long-term gas supplier to Russia. Additionally, the West also wants to avoid the Iran regime being cornered, which could reduce the prospect of some eventual reforms for protesters in Iran.
Even if major new sanctions were implemented against Iran, then this would be unlikely to sway Middle East countries from their neutral stance. Saudi Arabia wants to improve relations with the U.S., but also wants to work with OPEC and Russia to support oil prices. The autumn OPEC+ decision to cut production quotas annoyed the U.S., but Saudi Arabia was willing to support such a move to ensure that oil prices did not fall further. Additionally, Saudi Arabia also knows that it could have a Republican U.S. president in two years that could see a better working relationship than the current Biden administration. Moreover, though the U.S. and the West are the main arms suppliers to most Middle East countries, Russia is a useful alternative on a long-term basis. Saudi Arabia and UAE also remain concerned that the U.S. is not providing enough support against Houthi backed rebels in Yemen. Finally, support for Ukraine from Gulf countries could risk increased Russia military support for Iran, which could fuel pressures in the region.
Could a regime change in Iran alter the geopolitical balance in the region?Potentially as it could produce a path back to the global oil and gas market for Iran. However, the Iranian revolutionary guard are interlinked with the fortunes of the Islamic republic and will likely continue strongly defending the current government in the face of protests. An olive branch of some domestic reforms is possible in 2023, but is far from certain and the next few months will likely see the tensions remaining.
Economically and politically it pays most Middle East countries to stay neutral on the Ukraine war and get some trade and military benefits from playing both sides. Oil prices will likely remain above 2021 levels during 2023, both as the U.S. and Eurozone recession will likely be mild and only modestly hit demand and as supply remains tight with OPEC+ production cuts and strategic oil releases from the west ending. Iran will remain the main exception, given that the nuclear talks are dormant with the U.S. and this is unlikely to change in the next few years.
How will Middle East countries navigate the strategic competition between the U.S. and China?
U.S.-China Strategic Competition
The Biden administration technology restrictions on China show that the long-term goal is to try to restrain China economic, political and military rise. However, Saudi Arabia and Gulf countries want to avoid getting drawn into strategic competition against China. Economic interests remain towards trading with China, given long-term oil/gas and hydrogen demand. Though Russia is currently taking market share from the Gulf countries in oil exports to China, this may not last.
Additionally, President Xi visit to Saudi Arabia in December shows that China interests are across the Middle East rather than mainly focused on Iran. Iran has a geographical advantage in that it can work with China to extend belt and road infrastructure through Pakistan to China and help reduce China long-term dependence on seaborne imports, given Iran’s close proximity to Pakistan. However, China understands that Iran could be isolated by a future U.S. administration and is playing the long game by seeking to work closely in economic terms with other Middle East countries.
Figure 2: China Belt and Road Initiative
Source: Council on Foreign Relations