“The experience of the past thus clearly suggests that blockades or embargoes do not always produce the results originally sought when the decision for action was made.” —Robert A. Doughty and Harold E. Raugh Jr., “Embargoes in Historical Perspective”1
Centuries of history reveal a simple strategic truth: embargoes and blockades frequently fail to coerce states into making policy changes sought by the embargoing countries and often create unintended consequences.2 Embargoing Qatar was a risky decision without a clear endgame that does not appear to have taken into account the ample—and easily accessible—historical records of the many campaigns that have failed, as well as those that succeeded.3 The reality is that when the target of an embargo or blockade (1) has a small population, (2) is credibly well-resourced, (3) is not substantially dependent on the embargoing countries as trade partners for goods that cannot be obtained from other sources, (4) has access to seaborne commerce, and (5) has had significant time and warning to prepare for exactly such a contingency, the action against it will very likely fail to coerce it into making the concessions sought by the embargoing entities.
Even when the target is vulnerable—such as Saddam-era Iraq—economic embargoes generally take significant time to work. Research by sanctions experts before the first Gulf War suggests that embargoes aimed at achieving “ambitious” goals can take at least two years to succeed, and additional evidence accumulated since then does not undermine their basic conclusion.4 Many of the same countries embargoing Qatar are also blockading Yemen, and after more than two years they have still been unable to force a decisive strategic resolution, despite intensive use of military force. The evidence suggests that even an embargo lasting five years or more would likely still fail to coerce Qatar into making the concessions desired by the embargoing countries.
The list of 13 demands presented in June 2017 by the anti-Qatar coalition— Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates (UAE), or the AntiTerror Quartet (“the quartet”)—suggested a supremely ambitious set of goals behind the embargo, including “red lines” that touch directly on Qatari sovereignty and which Doha will continue to reject.5 The stage is thus set for a contest of endurance, one that with every passing month looks more likely to result in favor of Qatar. The embargo and its slow-motion strategic failure have already unleashed consequences that will haunt the region for decades to come, and more effects will become clear as time rolls on.
This paper provides evidence of the anti-Qatar blockade’s trajectory from initial shock to emerging strategic failure using actual market data. It also discusses potential paths forward, and the economic and security ramifications of those options.
The Initial Shock
A significant portion of the initial shock caused by the quartet’s embargo came through disruptions to Qatar’s food supply, most of which was imported and came by land from Saudi Arabia. These routes were immediately cut off when the embargo began and motivated drastic initial responses, including airlifting dairy cattle to replace milk supplies lost when the Saudis closed the border, as well as shipping food from Iran and Turkey.6
Qatar’s trade patterns bolster its embargo resistance. In 2016, slightly more than 15 percent of Qatari imports came from the blockading countries, a small enough share that building new trade networks to replace those lost imports in a fairly short time is a realistic possibility.
[figure 1 – the blockading countries’ share of total Qatari imports and exports (2000-2016)]
The “rapid rebuild” thesis is enhanced by the fact that Qatar’s imports from its neighbors—food and basic material supplies—are highly fungible and can be procured from many other sources. Less easily replaceable goods—such as gas turbines and critical technology components for liquefied natural gas (LNG) liquefaction plants—are sourced outside the Gulf region and generally lie beyond the reach of the anti-Qatar coalition. Of equal importance, Qatar’s key LNG buyers are located outside the Gulf region, and those that can supply advanced technology goods—such Japan, China, and South Korea—all have compelling strategic interests in seeing Qatar remain a stable baseload global energy supplier.
The embargo’s initial effects on both the personal and economy-wide levels were palpable. Worried residents crowded into grocery stores, while central bank reserves and foreign liquidity declined significantly as depositors from the quartet pulled funds from Qatari banks.7 The average value of properties sold spiked to a near-term high of more than 26 million Qatari riyals (QAR) in June 2017, perhaps reflecting a sellout by wealthy asset owners from Saudi Arabia, the UAE, and other states seeking to reduce or eliminate their real property holdings in Qatar.
[figure 2 – monthly property sales in Qatar]
New car registrations—a proxy for car sales—also declined sharply in the wake of the blockade, falling from 2.8 per 1,000 residents in May 2017 to 1.8 per 1,000 residents in June and 1.6 per 1,000 residents in July of the same year. These levels were the lowest seen in more than two years and indicated dented consumer confidence, since new vehicles are big-ticket items that often require a household to commit tens of thousands of dollars—a material portion of household disposable income, even in a wealthy society like Qatar’s. Vehicle sales had already been on a gradual downward trend prior to the blockade as the local car market matured and roads became saturated with traffic. Nonetheless, the sharp departure from the trend after the embargo was imposed suggests that it impacted consumer confidence, at least in the short term.
[figure 3 – new vehicle registrations per 1,000 residents in Qatar by month]
Announcement of LNG Capacity Expansion
Since Qatar is the lowest-cost global LNG supplier, its July 2017 announcement that it would expand LNG export capacity to 100 million tons per year (up from 77 million) was largely a warning shot across the bow of competing exporters. But it also served other strategic purposes by (1) affirming the country’s systemic importance to global gas markets and (2) demonstrating that even in a low-price environment, the country’s revenue generation potential would continue to be capable of underpinning its sovereignty and economic capacity to withstand exogenous financial pressures, including embargoes by neighboring powers.
To put the planned capacity expansion into a strategic perspective, consider the following: Qatar plans to expand LNG output by 23 million tons per year. At a sale price of $5 per million BTU and with each ton of LNG containing 51.7 million BTU of energy, this would translate into nearly $6 billion per year in incremental revenue from gas alone. Condensate and natural gas liquids produced alongside the methane (the principal component of natural gas) would likely add significant additional revenues, since these products are generally more valuable than natural gas on an energy content basis.
In 2016, Qatar imported about $5 billion in goods and services from the countries now embargoing it and exported roughly $5.6 billion of goods and services to them. This suggests in purely economic terms that the incremental revenue gains from the planned LNG capacity expansion could offset more than half of the combined loss of bilateral trade caused by the embargo. The offset effect is enhanced by the fact that a material portion of Qatar’s trade with the embargoing bloc comes through its gas sales to the UAE via the Dolphin Pipeline—the region’s first cross-border gas supply project, which can supply approximately 2 billion cubic feet of gas per day to the UAE. The Dolphin project is integral to UAE energy and water supply security and, despite the embargo against Qatar, continues supplying gas to the UAE.8 Future demand for Qatari gas could be reduced by domestic discoveries and alternative energy supplies, such as the 2,400-megawatt Hassyan coal power station now under construction in Dubai.9
Furthermore, even without an increase in LNG exports, the “lost” trade volumes caused by the embargo do not just disappear. Rather, they are likely temporary disruptions that will be replaced over time as Qatar builds relationships with new trading partners.
[Figure 4 – Qatar and Russia five-year CDS spread vs. Brent Crude oil prices]
More Signals of Failure: Commodity Prices vs. Embargo
Financial markets recognize Qatar’s fundamentally strong position, and traders are pricing a future that sees Doha successfully resisting the embargo. Credit default swap (CDS) prices for five-year Qatari sovereign debt (basically, insurance payments in case of default that serve as a proxy for economic stress) spiked in early July 2017 immediately after the embargo was imposed. The cost of insuring $10 million of five-year Qatari debt rose from an annualized rate of approximately $88,000 per year in June 2017 to a high of $125,200 per year in early July 2017. This cost has since fallen back to approximately $102,000 per year (101.89 basis points).10
Yet this upward bump pales in comparison to how markets priced default risk in the wake of the global oil price collapse in late 2008 and early 2009, when it cost as much as $381,000 per year (annualized) to insure $10 million in five-year debt against default. The historical context provided by the credit default swap data— particularly when compared to other resource exporter countries such as Russia— reveals three important facts:
- First and foremost, global investors do not view the Saudi-led embargo as an existential threat.
- Sudden, sharp commodity price drops impact markets’ perception of Qatari credit-worthiness much more than trade warfare by regional actors.
- Although default risk is generally inversely correlated with oil price movements in major exporters—even in the event of major commodity price declines—Qatar’s credit risk profile changes much less per dollar-decline in oil prices than is the case for other major exporters such as Russia or Mexico.
The price spread between Qatar’s 10-year term treasury bonds and 10-year US Treasury bonds also reflects market perceptions of risk. And once again, this metric also supports the notion that crude oil and commodity prices have a far stronger effect on Qatar’s international financial risk profile than adverse actions by its neighbors.
[Figure 5 – spread between Qatari 10-year bonds and 10-year US treasury bonds vs. brent crude oil prices]
What it Takes for an Embargo to Work in the Gulf Region
The most recent successful use of economic warfare in the Gulf region was the US-led sanctions campaign that helped bring Iran to the nuclear negotiating table and ultimately culminated in the Joint Comprehensive Plan of Action signed in Vienna in July 2015.11 The sanctions regime ultimately worked for three fundamental reasons:
- The United States and the European Union—whose members are collectively a cornerstone market for Iranian oil—presented a united diplomatic front, and EU members agreed to embargo Iranian crude shipments.
- Nearly all crude oil traded globally is priced in US dollars, which means that there must be a dollar-clearing function in order for transactions to occur. The pecunia franca status of the dollar gave the United States enormous jurisdictional leverage and allowed it to cut off dollar-clearing transactions for Iranian oil that touched US soil.
- The United States’ massive global financial heft—both from the size of its domestic market and its financial power projection through the omnipresence of the dollar in oil markets—allowed it to present buyers of Iranian crude oil, and financial institutions that facilitated such transactions, with a stark choice: either cease doing business with Iran, or face exclusion from the United States and associated portions of the global financial architecture.12
Unlike the United States, quartet members lack capacity for projecting offensive global financial power. The recent Saudi anti-corruption actions are prima facie evidence of this, as the Saudis had to apprehend the person first in order to capture the money. In contrast, the United States can track, freeze, and interdict financial assets around the world with the alleged perpetrator in absentia. As such, Qatar’s opponents will likely find it extremely difficult to exert offensive financial pressure anywhere beyond the immediate geographic region.
A lack of extraterritorial reach may help explain a recent surge in quartet members’ lobbying activities in Washington, DC, where successful influence over US legislation could effectively harness American power to serve their own narrow strategic goals.13 Some quartet lobbying efforts appear to be influencing certain legislators, as suggested by the text of House Resolution 2712, a.k.a. the “Palestinian International Terrorism Support Prevention Act of 2017,” which specifically names Qatar as a supporter of Hamas.14
Quartet lobbying efforts against Qatar are likely to fail. Chairman of the US Senate Committee on Foreign Relations Bob Corker (R-Tennessee) has been deeply critical of the quartet’s blockade of Qatar, noting that “when you live in glass houses, you shouldn’t throw stones,” and is unlikely to support Senate passage of House bills aimed at sanctioning Qatar.15 Sen. Corker has also publicly pledged to block further US arms sales to GCC countries until there is a clear diplomatic path to resolving the crisis.16 Finally, as with the blockade itself, time is not on the quartet’s side on Capitol Hill either, since additional time provides more opportunities for members of Congress to properly comprehend Doha’s strategic importance to US interests across the broader Middle East. The upside of all this is that despite the dogfight in Washington, Qatari assets and financial activities in Europe, Asia, Australia, and North America are likely safe—even if the quartet seeks to escalate its economic warfare campaign.
Economic and Security Implications
When embargoes prove ineffective, this forces the embargoing countries to either back off, maintain an ineffective campaign, or escalate their efforts, often using military force.17 Such an outcome can ultimately undermine the embargoing countries’ diplomatic influence. In the current case, rivalry between Arab neighbors has likely permanently damaged the GCC, creating a large set of strategic openings that Iran can exploit.
The chances of a negotiated settlement appear low for the foreseeable future. The blockade against Qatar is on the wrong end of powerful diplomatic and strategic dynamics and is likely to weaken as time progresses. Yet escalating pressure against Qatar also does not seem a realistic option, since moving the embargo from its current footing into a bona fide blockade backed by military force would likely trigger a strong reaction from Washington. The September 28, 2017 meeting between US Secretary of Defense James Mattis and Emir of Qatar Sheikh Tamim bin Hamad Al Thani at the Al-Udeid Air Base highlights Qatar’s strategic importance to American interests. It also carries important symbolic weight, given Mattis’s apparent influence with President Donald Trump.18 Likewise, Al-Udeid remains deeply enmeshed in the fabric of US air campaigns in the region, with video footage from November 2017 showing a B-52 bomber taking off from the base to bomb heroin production facilities in southern Afghanistan.19
At this point, it is difficult to envision Qatar making unilateral concessions that could lead to the embargo being lifted. The worst of the post-blockade capital flight is likely over. The country is rebuilding its trade links and food supply chain to bypass imports previously obtained via Saudi Arabia and the UAE, and LNG exports remain robust, underpinning Qatari cash flow.
The embargo could remain in place for years and Qatar could very likely withstand the effects with decreasing impact each year as it increasingly emphasizes economic relationships outside the Gulf region. For instance, Qatar is net self-sufficient in steel production (including rebar, which is critical for construction as the country prepares for the 2022 World Cup).20 Likewise, the new Hamad Port—capable of storing enough cereal grains to satisfy multiple years of local consumption, handling more than 3.5 million 40-foot shipping containers per year, and accepting 1.7 million tons per year in general cargo—is already replacing import trade that formerly came by land from Saudi Arabia and by sea from the United Arab Emirates.21
To the extent that incremental supplies of cement, certain steel products, and other goods may be needed for World Cup 2022 and other projects, seaborne supplies procured from India, Iran, and Turkey—among other potential partners—can very likely fill any gaps left by the cessation of land shipments from Qatar’s neighbors.
The embargo is now passing from the phase in which original motivations mattered into a new realm that is much more about hard, cold, long-term consequences. As the anti-Qatar coalition’s campaign grinds on, these consequences will begin to reveal themselves more fully.
We do not know how the embargo will culminate and precisely what the long-term consequences and ramifications will be. But past uses of economic warfare demonstrate a range of unpleasant and unanticipated surprises ranging from the loss of influence of a failed embargoing country, to potential domestic political instability, to escalation as one or both sides seek to break out of a strategic stalemate. As the embargo continues, diplomatic and political relationships between many Arab countries will likely suffer further damage, and Iran’s relative influence in the region could rise as a result. The ultimate consequences of increased Iranian influence across the region remain debatable, but from the perspective of the countries embargoing Qatar as well as that of the United States, this is clearly an unintended consequence.
Acknowledgments: The author thanks Nosa James for research assistance and support of this analysis, as well as two Middle East experts who offered commentary.
This paper was first published by the Baker Institute, Rice University, on January 22, 2018. It is reproduced in the current volume by mutual agreement
1 Col. Robert A. Doughty and Maj. Harold E. Raugh Jr., “Embargoes in Historical Perspective,” Parameters 21, no. 1 (Spring 1991): 21-30
2 See Doughty and Raugh. Also see Carla Anne Robbins, “Why Economic Sanctions Rarely Work,” Bloomberg Businessweek, May 24, 2013, https://bloom.bg/2FTj28b; and David T. Cunningham, “The Naval Blockade: A Study of Factors Necessary for Effective Utilization” (master’s thesis, Army Command and General Staff College, June 1987), https://bit.ly/2GCIC2E, which show the record of a broad sample of physical blockades over a period of multiple centuries.
3 See, for instance, Gary Clyde Hufbauer et al., Economic Sanctions Reconsidered, 3rd ed. (Washington, DC: Peterson Institute for International Economics, 2009).
4 Kimberly Elliott, Gary Hufbauer, and Jeffrey Schott, “The Big Squeeze: Why the Sanctions on Iraq Will Work,” The Washington Post, December 9, 1990, https://wapo.st/2GBatAe.
5 Zainab Fattah, “Qatar’s Emir Defiant as Dispute With Saudi-led Bloc Drags On,” Bloomberg, October 30, 2017, https://bloom.bg/2gMW700. For the 13 demands, see Patrick Wintour, “Qatar given 10 days to meet 13 sweeping demands by Saudi Arabia,” The Guardian, June 23, 2017, https://bit.ly/2swYtXR.
6 Mohammed Sergie, “Qatar crisis: First batch of dairy cows airlifted to sidestep Saudi-led blockade,” The Independent, July 12, 2017, https://ind.pn/2GAsheT; see also “Qatar receives 3000 tonnes of food products from Turkey through Hamad Port,” The Peninsula, July 5, 2017,https://bit.ly/2q8dFZL.
7 Zahraa Alkhalisi, “Qatar burns $38 billion in reserves as boycott bites,” CNN Money, September 14, 2017, https://cnnmon.ie/2x2c5ef.
8 Tom Finn and Rania El Gamal, “Qatar has no plan to shut Dolphin gas pipeline to UAE despite rift: sources,” Reuters, June 6, 2017, https://reut.rs/2GB0uqq.
9 “DEWA begins construction of 2,400MW Hassyan clean coal power station,” Power, November 9, 2016, https://bit.ly/2q7ZW5n.
10 For reference, 100 basis points equal 1 percentage point. To demonstrate how basis points translate into dollar amounts when assessing credit default swap payments, 100 basis points or 1 percent of $10 million is $100,000.
11 “Joint Comprehensive Plan of Action,” Vienna, Austria, July 14, 2015, https://bit.ly/2g8EmIn.
12 Juan C. Zarate, Treasury’s War: The Unleashing of a New Era of Financial Warfare (New York: PublicAffairs, 2013).
13 See, for instance, Theodoric Meyer and Nahal Toosi, “Lobbyists cash in on dispute between Qatar, Saudi Arabia,” Politico, July 19, 2017, https://politi.co/2ABCq2I.
14 The text of the bill can be found at https://bit.ly/2q7gfP1.
15 Joe Gould, “Corker chides Saudi Arabia, UAE over terror ties amid Qatar row,” Defense News, June 30, 2017, https://bit.ly/2GBlEJc.
16 Text of Sen. Corker’s letter to US Secretary of State Rex Tillerson, dated June 26, 2017, is available at https://bit.ly/2GUHPt4.. Editor’s note: Senator Corker lifted his block on these sales in February 2018; see https://bit.ly/2F5L25M.
17 Consider, for instance, the 2003 invasion of Iraq, which came after more than a decade of sanctions and an embargo maintained through multiple channels, including periodic military force, failed to coerce Saddam Hussein into renouncing Iraq’s weapons of mass destruction development programs.
18 “Secretary of Defense Jim Mattis visits Al Udeid Air Base,” Defense Video Imagery Distribution System, September 28, 2017, https://bit.ly/2JnCzN2. Al-Udeid is a large air base in Qatar that hosts more than 10,000 US personnel and is a hub for US military air operations in Southwest Asia.
19 See, for instance, Aubrey Griffin, “The BUFF Load And Go From Al Udeid Air Base,” Youtube video, 3:32, A B-52 Stratofortress assigned to the 379th Air Expeditionary Wing, Al-Udeid Air Base, Qatar taxis and takes off, posted by Airboyd, https://bit.ly/2IuSkQT. Editor’s note: Since September 2017, there have been numerous meetings between American and Qatari officials that culminated in the signing of four MOUs related to areas of mutual concern during the US-Qatar strategic dialogue discussions in January 2018. See https://bit.ly/2FwqIJI.
20 See “Steel Statistical Yearbook 2017,” World Steel Association, https://bit.ly/2q5mqD4.
21 “Hamad Port set to open tomorrow,” The Peninsula, September 4, 2017, https://bit.ly/2W3KWlW. See also John Davison, “Gulf crisis a ‘blessing in disguise’ for Qatar seaport,” Reuters, June 15, 2017, https://reut.rs/2GZKx0v.