The Arab World Has Cut Qatar Off. Beyond How Strange the Affair Itself Is, Here Are 6 Ways It Will Affect the World

For Qatar, this may mean giving up its strategy of playing all sides — and losing out, as a result, on opportunities in the Middle East and in the world beyond.

Qatar — the small, rich country that has topped the world in GDP per head for years running, and that almost nobody can point to on a map — has suddenly become one of the world's hot topics.

Not because the World Cup, which for the first time in history may be played there in winter, has run into fresh trouble; not because the Arab world's most influential news network has landed another scoop; and not because the country is expanding the international airport that handles more than 31 million passengers a year. It is because of a rare diplomatic upheaval.

Starting on June 5, eight countries — among them Saudi Arabia, the UAE, Bahrain, Egypt, Yemen and the Maldives — suddenly announced one after another that they were cutting diplomatic ties with Qatar: restricting and then severing every sea, land and air link with the country, while also expelling its diplomats and giving Qatari citizens on their territory a deadline to leave.

This small country, which reaches from the Arabian Peninsula into the Persian Gulf, was isolated within days: Saudi Arabia, its only land neighbor, cut off 40% of Qatar's food and household supplies; shipping ran into blockades from Bahrain, the UAE and Egypt; and many Qatar Airways flights had to detour through Iranian airspace to land in Doha.

In an international climate that is, on the whole, fairly stable, "severing relations" is an extremely serious phrase. Of all the cases worldwide of countries cutting diplomatic ties over the past decade, four happened in the Middle East, and two of those involved Qatar and Iran, its political ally across the water.

Analysts see this collective break as "the most serious political rift among Gulf states to date."

The Arab countries haven't spelled it out, but it likely comes down to Qatar trying to please everyone — and offending plenty of people along the way

On why they cut ties, Saudi Arabia's statement is fairly representative: "Because Qatar has, over the years, openly or covertly interfered in the internal affairs of Saudi Arabia and other Gulf Cooperation Council member states, and has supported terrorist groups including the Muslim Brotherhood, al-Qaeda and other extremist organizations, Saudi Arabia has decided to sever diplomatic relations with it."

The immediate trigger is thought to be two events last month. An article on Qatar's state news agency quoted the head of state, Al Thani, praising Israel and Iran; afterwards Qatar said hackers had done it. Then, once Iran's election was over, Al Thani phoned President Rouhani to congratulate him on winning another term.

But analysts generally believe the reasons for freezing Qatar out go well beyond what the official statements say. Of the many explanations in circulation, the most dramatic is that the Qatari government once paid al-Qaeda and Iran a ransom of as much as $1 billion to get back royal family members who had been kidnapped on a hunting trip abroad.

Since the previous ruler, Qatar has tried to build a wide network of allies, both in the region and around the world. That is why the country hosts a U.S. military base, flies its own routes to Europe and runs an independent, professional news organization — while also keeping up ties with Iran, Hamas and the Taliban.

Behind this policy of playing all sides, in one of the smallest countries on the Arabian Peninsula, is the "small state, big diplomacy" idea that Qatar's current head of state, Tamim bin Hamad Al Thani, has hoped to pull off: he wants Qatar to act as the Middle East's "balancer," mediating between rival views and conflicts.

But trying to please everyone can mean offending everyone at once.

In an Arab region overwhelmingly dominated by Muslims, the first thing at issue is the long rift between the two great sects, Sunni and Shia. In Iran, Qatar's political ally, Shia Muslims make up more than 90% of the population; in Saudi Arabia, the UAE and most other Arab countries, Sunnis hold power.

Qatar itself is a Sunni country.

A second problem is the murky relationship between the Qatari royal family and the Muslim Brotherhood. As the Brotherhood grew from a religious organization into the largest political opposition in the Islamic world, different countries came to see it differently: several Gulf states, including Saudi Arabia and the UAE, have labeled it a "terrorist organization," and the U.S. has designated al-Zindani, head of its Yemeni branch, a "terrorist."

Qatar, meanwhile, is one of the few countries in the world that openly gives the Muslim Brotherhood money and political cover. Saudi Foreign Minister Adel al-Jubeir cited this directly in a statement after Saudi Arabia announced the break.

Finally, some analysts think Saudi Arabia lined up other countries against Qatar because it wants to warm up relations with Israel. Qatar's support for Hamas and its aid to Lebanon are seen as damaging the interests of Israel, the other major power in the region. To improve relations with Israel, Saudi Arabia has long wanted Hamas reined in, and at one point reportedly considered letting Israel use Saudi aircraft to strike Iran's nuclear facilities.

After the break, America's split foreign policy made things more complicated still — assuming it still has a foreign policy.

Trump, who had just made Saudi Arabia and other Middle Eastern countries the destination of his first foreign trip, chose to claim credit in a tweet:

"During my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar - look!"

But asked about it, Pentagon spokesman Navy Captain Jeff Davis struck a very different tone from the president. Speaking for the Defense Department, he thanked Qatar for its earlier work in building the U.S. air base there, and said the department had no intention of stepping into the conflict.

The U.S. base in Qatar is the command post for American air power in the Middle East, running airstrikes in Iraq, Afghanistan and elsewhere.

U.S. Ambassador Dana Shell Smith, who is still in Qatar, and State Department spokesperson Heather Nauert also said things at odds with Trump's line: that the U.S. and Qatar work well together against terrorism, and that they hoped the warring parties in the Arab world could sit down and talk their differences through.

In short, Qatar may now have to give up playing all sides and pick one openly.

A relatively open attitude toward all kinds of politics and all kinds of capital let Qatar seize more opportunities over the past few decades. It grew fast politically and economically, and, pushed along by its natural gas reserves, became known almost overnight as one of the richest countries in the Middle East. Once it opened up to investing abroad and let foreign money develop projects at home, it even had a chance, for a while, to challenge Dubai as the region's commercial center and transport hub.

That process has now been interrupted. And the effects will not stop at Qatar's borders.

Qatar holds a third of the world's natural gas reserves, and China is one of its buyers

Among the countries that cut ties this time, the UAE and Egypt were among the first to fall in line. But quietly they have left Qatar a way out: the Dolphin pipeline, which runs through the UAE to Oman and delivers 56 million cubic meters of gas a day, is still operating normally; and the Suez Canal, the main route for LPG tankers and under Egyptian control, is still letting Qatari ships through.

Unlike most Middle Eastern countries, which grew rich on oil, Qatar's wealth comes mainly from natural gas. It is the world's largest exporter of liquefied natural gas (LNG), producing nearly a third of the global total. Part of the reason it has stayed close to Iran is that both countries hold drilling rights to the largest gas field yet found anywhere, the North Field–South Pars field, beneath the Persian Gulf.

Bloomberg's analysis argues that the real crisis for world energy markets would come only if the rift escalated and Qatar decided to shut the Dolphin pipeline down. Total, Europe's largest oil company by market value, Occidental Petroleum of the U.S. and the UAE's sovereign fund Mubadala are the pipeline's three big shareholders; if the gas stopped, they could not even cover the electricity that Middle Eastern countries burn each day on air conditioning alone.

The main buyers of Qatari gas shipped by tanker are all in Asia: Japan, South Korea, India and China. As soon as news of the break got out, the Japanese importer Jera Co., which gets 15% of the country's annual gas needs from Qatar, quickly said that LNG business between the two countries would not be affected. In 2010, Qatar held talks with China, hoping to sell it an extra 10 million tons of LNG a year to offset weak demand in Europe and America. That plan fell through, and China still imports most of its gas from Australia.

Qatari tankers can still sail through the Suez Canal. But their usual mid-route refueling stop, the port of Fujairah in the UAE, now restricts what comes in and out. That could force gas tankers to detour around other African countries on costlier sea routes, and in the end push gas prices up.

Energy futures traders have already started rehearsing contingency plans for the various ways Qatari gas exports might be squeezed. The most extreme scenario: Qatar announces it is pulling out of OPEC's production-cut agreement. Once future supply and prices become impossible to predict, world oil and gas prices would almost certainly swing violently.

Qatar Airways, one of the world's seven five-star airlines, has had its routes cut

After news of the break spread, airlines in Qatar and the countries involved quickly stopped flying to each other. Set aside the regional disruption that caused: once Saudi Arabia and the others closed their airspace, flights that used to stop briefly in Doha before carrying on to Europe and other African countries were soon hit too.

On Twitter, Sam Tamiz, an independent political analyst who follows the Middle East, posted an image that captures the situation nicely: Qatar Airways, which once crossed the Arabian Peninsula freely, now has to send most of its flights around through Iran; with limited route capacity, the planes have to queue up to get through.

Nearly 2 billion people live within four hours' flying time of the Gulf, and 4 billion within seven hours. Any two big cities on Earth can be linked through the Middle East with a single stop.

Using aviation to drive trade, financial services and tourism, and so grow the domestic economy, became a shared idea among several Arab countries. The UAE put it into practice first: to make itself an aviation hub, it opened up its visa policy, imposed no airport curfew and kept adding routes. Emirates concentrated on high-quality long-haul flying, with its planes in the air 18 hours a day, which brought Dubai a steadily growing stream of passengers.

Rising close behind was Qatar Airways. After the Qatari royal family sold half the company to private investors and restructured it, the airline's capacity grew 40% a year for 17 years straight. That drove a full expansion of Doha's airport in 2015, which can now handle more than 31 million passengers a year.

Qatar Airways now flies to about 150 cities worldwide, including six routes to mainland China — Beijing, Shanghai, Guangzhou, Chengdu, Chongqing and Hangzhou — plus one to Hong Kong. Its healthy margins have let it keep buying new aircraft even through an industry-wide slump, holding and even improving its service.

Now routes to its main neighbors have been canceled indefinitely and passengers connecting to Europe are spending longer in transit; Qatar's standing as a "super-hub" clearly faces a hard test. Bloomberg calculates that Qatar Airways will lose at least 52 regular routes, costing it more than 30% of its profit.

The World Cup, a $200 billion construction program that has already worked hundreds of people to death, has fallen behind schedule

Hundreds of trucks loaded with building materials are stuck at the now-closed border between Saudi Arabia and Qatar. They were meant to supply the main venues going up for the 2022 World Cup; work on every site in Qatar has now ground to a halt.

FIFA says it is watching closely, but it has not extended the construction deadline. Earlier, given how extreme Middle Eastern summers are, it had already made an unprecedented decision to let Qatar move the tournament to November, in winter — which effectively handed the venue builders, who at the time had nothing but blueprints, an extra six months.

It is not just the stadiums. When Doha, Qatar's capital, won the bid in 2010, it had money and almost nothing else in the way of supporting infrastructure. By Deloitte's estimate, Qatar would have to spend nearly $200 billion building everything from scratch for the tournament: $140 billion on new airports, roads and a subway system; $40 billion on stadiums; and the rest on hotels and other tourist facilities.

That far exceeds what Brazil spent on its World Cup, or what Russia is spending on its own. It also turned Qatar, overnight, into the most attractive construction site on Earth — with little domestic labor, it has to outsource almost all of its infrastructure work, and contracts worth hundreds of millions of dollars are routine.

More than 90% of the workers who actually do the building come from abroad: India, Nepal, the Philippines and elsewhere.

Britain's Guardian has accused Qatar of letting large numbers of migrant workers die from accidents and health problems caused by tight schedules and brutal conditions. In the three years after 2010, more than 700 workers died; if Qatar did not take the problem seriously, the paper said, the toll could reach a staggering 4,000 by the time the 2022 World Cup kicked off.

After a careful review of what the venues need and how the work is going, Hassan Al Thawadi, the Qatari official in charge of the World Cup project, told CNN in early April 2017 that they would cut the infrastructure budget sharply: from 12 stadiums down to 8, taking 40-50% off the total.

Even before that, Qatar had begun to feel what all this building was doing to its finances: hit by swinging oil prices, the country ran a deficit of more than $12 billion in 2016, and budgeted for another $7.7 billion shortfall in 2017.

Qatar has the world's 14th-largest sovereign fund, and it can still spread money around abroad

"The thinking behind Middle Eastern sovereign funds is much the same everywhere: these countries turned abundant oil reserves into a lot of money. To hedge against oil prices falling, they have to hand that money to professional managers, who put it into other countries, industries and financial products, so that more of it eventually reaches the next generation," an economist at a Middle Eastern sovereign fund told QDaily.

At his firm, attention since the break has also settled on the single most important question — natural gas — and the view there is that things still look fairly good. He asked not to be named because his employer is effectively a state-owned enterprise, and staff are not allowed to show sympathy for Qatar's situation; violators can face 3 to 15 years in prison.

By the Sovereign Wealth Fund Institute's estimate, Qatar's assets worldwide should top $335 billion, and its sovereign fund, the Qatar Investment Authority (QIA), ranks 14th in the world by size. But as the economist sees it, with no law forcing it to disclose anything, the QIA's actual operations are, like those of most sovereign funds, "not very transparent."

"My impression, though, is that they like investing in famous, high-profile things — the Empire State Building in New York, CITIC Capital in China, Deutsche Bank in Germany. If that is the style at the top, the investment team below it may take a few liberties too."

Bloomberg once listed the QIA's ten largest holdings by market value: Qatar National Bank and the local telecom company Ooredoo, plus energy companies such as Rosneft, Royal Dutch Shell and the Swiss miner Glencore. The rest of its portfolio is more varied, spanning finance (Barclays, Agricultural Bank of China), carmaking (Volkswagen) and retail (Tiffany, and Sainsbury's, Britain's second-largest supermarket chain).

In Europe and the U.S., QIA money has also spread widely through real estate. In China, besides CITIC Capital and Agricultural Bank of China, it has invested in a number of large listed companies, including Alibaba, ICBC and Lifestyle International (the parent of Hong Kong's Sogo department stores).

Since no other country has imposed economic sanctions on Qatar, and Middle Eastern funds rarely hold each other's shares or back the same companies, most of the money the QIA has already committed will not be touched by the Arab break in relations.

But SoftBank's $100 billion technology fund, raised from many sources, has been talking to several Gulf state funds at once. Money from Saudi Arabia's sovereign fund and from Abu Dhabi's Mubadala is already in. SoftBank has been in talks with the QIA as well.

The Middle East is still the luxury brands' most promising new market

In Europe, the luxury business is usually tied to so-called "old money" — family wealth passed down through inheritance. But what it earns from customers is mostly "new money," and nowhere more so than in the Middle East, where fortunes were made overnight from oil and gas.

In an earlier piece, we worked out just how strong buying power is here:

The Middle East accounts for about 3% of global luxury spending, growing 10% a year — five times the world average. Given what Muslim communities require of clothing, and the slow spread of Western fashion ideas, the region's clothing industry alone will be worth $327 billion within three years, more than Britain, Germany and India combined.

Among Arab countries, Qatar has the most relaxed social atmosphere: women mostly wear a black robe out of the house without covering strictly; the divorce rate is 37%, and women file for most of them; drinking and partying are banned in name, but on weekends high-end hotels often host private parties; and even at the Asian Games it hosted in 2006, Doha did not drop swimming, diving and other events that are contentious in other Muslim countries.

Its feel for fashion showed up first in what Qatari funds bought: Mayhoola, a fund closely tied to Qatar's emir, is a major shareholder in Valentino, Anya Hindmarch, Balmain and other labels; the QIA holds 1% of LVMH, is the largest shareholder in Tiffany, and owns stakes in two retail landmarks, Harrods in Britain and Printemps in France.

Luca Solca, head of the luxury division at BNP Paribas, believes Qatar is now one of the most powerful sources of money in global fashion, after LVMH and Kering.

But because Qatar's own urban infrastructure is thin and it lacks suitable retail space, luxury and fashion brands have not gone deep there. Most enter the Middle East through Dubai, the better-known tourist city, and then reach Qatar and other Arab countries through distributors.

To fix the shortage of space for good retail brands, Qatar has already been building on a large scale across the country. By Cushman & Wakefield's figures, Qatar's retail space will grow 220% by 2019, most of it in mixed-use complexes and malls suited to high-end brands. Those already signed up include not only big luxury names such as Prada and Dolce & Gabbana but also department-store formats like Galeries Lafayette.

With the UAE among the countries cutting ties, and the import-export channels that go with it severed, Qatar's consumer market is bound to go cold for a while.

Finally, Al Jazeera, the most distinctive voice in the Arab world, may be abandoned

In its running coverage of the break, The Wall Street Journal reports that these countries are drawing up a list of conditions Qatar must meet before relations can be restored.

Alongside cutting off funding to extremist groups in the Middle East and breaking with the Muslim Brotherhood, one item on the list is "sharply scaling back Al Jazeera's operations."

Al Jazeera has existed for barely two decades. Its name is officially glossed as "the island of freedom in a vast ocean"; in Arabic it also carries the sense of "the opinion and the other opinion."

With the Qatari royal family behind it, the first privately owned television station in the Arab region has broadcast news around the clock in Arabic, English, Turkish and other languages. Built around a core team from the BBC's Middle East channel, it gradually set up bureaus around the world, with staff numbers passing 4,500 at its peak. It borrowed Western media's operating model, took a distinctive angle and stayed close to contentious subjects, and came to be called "the CNN of the Middle East."

It first became famous among Western media in 2002, on the first anniversary of 9/11, when it was the first to broadcast what was taken to be an internal speech by Osama bin Laden before the attacks, along with an exclusive interview its London bureau chief conducted with two former al-Qaeda leaders. After that, most of al-Qaeda's audio and video material also went out on Al Jazeera first.

Through the Iraq War that followed, Al Jazeera was still seen as the voice of the Arab world, and it went on to follow Syria, Yemen and other war-torn countries closely. Go back over its early reporting and you find plenty of errors, and a consistent tilt toward whoever was fighting authority — but it really was the fastest voice out there.

Then, after political turmoil erupted in Tunisia in 2011 and grew into the Arab Spring, Al Jazeera came to be seen much the way the social networks and text messages carrying rumor and public feeling were: leaning too far toward the protesters, and questioning the legitimacy of what officials and the military did.

Once the Arab Spring subsided, Egypt arrested Al Jazeera journalists for spreading fake news; and even before it formally cut ties with Qatar, Saudi Arabia had closed the station's office in the country and revoked its license.

If Qatar finally decides to overhaul the station's stance and the way it works in order to restore relations, it will mean dismantling the one piece of its "small state, big diplomacy" strategy that let it punch far above its weight: its media.

Cover image from visitqatar and Pixabay