Arab geopolitics in turmoil: Implications of Qatar-Gulf crisis for business

Abstract

On June 5, 2017 Saudi Arabia, the United Arab Emirates, Egypt and Bahrain (known as the quartet) announced they were breaking diplomatic ties with Qatar, accusing it of destabilizing the region. The more than two-year-old rancorous dispute between Qatar and its neighbors is forging a new Gulf, transforming what was a stable region of the Arab world. This research examines the regional business costs of this blockade which cut off all diplomatic and commercial relations with Doha. We compare the stock market performances of Qatar and its Middle Eastern neighbors before and after the Saudi-led Qatar boycott. We focus our attention on the conditional volatility process of stock market returns and risks related to financial interconnectedness. Our results robustly reveal that this crisis had the most adverse impact on Qatar together with Saudi Arabia and the UAE. Although not to the same degree as these three countries, Bahrain and Egypt were also adversely affected. But the effects seem transitory. Overall, the quartet lobbying efforts did not achieve the intended result. Despite the vulnerability of its business, Qatar has demonstrated remarkable resilience post blockade. The availability of significant external and fiscal buffers and the strong financial sector allow Qatar to successfully withstand an escalation of the siege crisis. Interestingly, the diplomatic efforts of Qatar to circumvent the economic and political embargo on the country by a number of allies in the region seems to be working well, with the US government emphasizing its support for Doha.