September 20, 2018

The Foreign-Policy Tools of Small Powers: Strategic Hedging in the Persian Gulf

Volume XXII


Number 1


Yoel Guzansky

Mr. Guzansky, of the School of Political Sciences, Haifa University, and the Institute for National Security Studies (INSS), Tel Aviv University, is the co-editor of One Year of the Arab Spring: Regional and International Implications (INSS Publication 2012) and author of The Arab Gulf States and Reform in the Middle East: Between Iran and the "Arab Spring" (Palgrave-Macmillan, 2015).

This article analyzes the foreign-policy tools that Kuwait, Qatar, Bahrain, the United Arab Emirates (UAE) and Oman use in dealing with Iran. It argues that a policy of strategic hedging reduces the danger of conflict with Iran in the short term, while preserving contingency plans that address the severity of the threat and the uncertainty of the relationship in the long term. We could have expected that, because of their sense of threat, the small Gulf states would adopt a behavior of balancing Iran's power or, alternatively, of bandwagoning with it. However, these states have consciously chosen to adopt a "mixed" policy that includes elements of both methods. This stands in contrast to the assumption, widespread in the international-relations field, that they would choose to either balance1 or bandwagon as a way of coping with threats.2


The undermining of the regional status quo in the wake of the 1979 Islamic Revolution and the outbreak of the Iran-Iraq War increased the anxiety of Saudi Arabia and the smaller Gulf states. They realized that a regional institution including a framework for security cooperation was needed. The Gulf Cooperation Council (GCC) was the result of processes that had started before the British withdrawal in 1971. Its goal, as declared in its founding charter, was "to effect coordination, cooperation and integration in all fields."3 The GCC was also an expression of common interests: the monarchical character of the regimes, their religious ties as Muslims and as Sunnis, their common Arab origin, and their concerns about revolutionary, Shia, non-Arab Iran. However, the fraternity and public solidarity shown by the organization's leaders somewhat obscured their competing and contradictory interests and differing views of the strategic environment.

An examination of the GCC through the theory of alliances is instructive: the trigger for its establishment was security, and there is a security component in relations among the states,4even if the organization does not easily conform to the existing definitions in this field.5What distinguishes alliances (in the case of the GCC, a defensive one) from other associations, such as alignments and coalitions, is the formal or informal commitment to security cooperation that is given over time and is not necessarily dependent on a specific event or the alliance's security context. It is also important to examine the security frameworks that exist throughout the developing world, as most of the research on this subject is based on observations made in the western hemisphere.

The survey below reflects the basic concerns of Kuwait, Oman, Qatar, the UAE and Bahrain over cooperation with Iran while attempting to preserve the framework of the GCC, which was established to a large extent because of the Iranian threat. The assumption is that contrasting threat perceptions have made it difficult to establish a joint institutionalized security strategy, and that the cracks in their unity weaken the states' ability to act as a united bloc vis-à-vis Iran. Nevertheless, even when the perception of the Iranian threat, with its various dimensions of military buildup, nuclear ambitions, political subversion and terrorism is essentially agreed upon, each state has chosen to hedge in relation to the dimension or level of threat that it anticipates.

Kuwait has a long history of hedging, dating back to diplomatic maneuvering between the British Empire and the Ottomans and between Iraq and Iran. During these times, Kuwaiti leadership attempted to appease the different factions, while preserving local independence and assets.6Kuwait's current approach to Iran is similar to Saudi Arabia's, leavened with considerable caution due to its geographic proximity to Iran, Iran's subversive activities and Kuwait's considerable Shia minority.7

Saddam Hussein's invasion of Kuwait awakened nationalist feelings among the Shiites. Following the country's liberation from Iraqi occupation, they swore allegiance to Kuwait's ruling Al Sabah family, although many continue to have reservations about the move. During the Iran-Iraq War (1980-1988), Iran had attacked Kuwaiti territory, entering its airspace on several occasions; it was also apparently behind both the terrorist attacks in the country in the 1980s and later instances of subversion. The Kuwaiti response has been restrained, as it has sought to contain the incidents and prevent serious damage to its relations with Iran. The Iraqi invasion in August 1990 led Kuwait, along with its more northern GCC colleagues, which shared a fear of Iraq, to seek closeness to Iran, at least temporarily, as a counterweight to the power of Baghdad. The move, however, led to criticism by the more southern GCC states, which perceived Iran as the greater threat. Kuwait still sees Iran-influenced and Shia-dominated Iraq as a potential threat — greater now since the American withdrawal in December 2011. As a result, its steps toward normalization with Iraq remain slow.

Despite Iran's alleged negative activity, Kuwait continues to try to appease Tehran. It hosted the Iranian president in 2006 and openly supported his ambition for civil nuclear capabilities. Kuwait has declared that it will not serve as a base for an attack on Iranian nuclear facilities and that, in principle, it supports Iran's right to obtain nuclear energy for civilian purposes.8Furthermore, in June 2014, Kuwaiti Emir Sabah Al-Ahmad, 30 percent of whose country's population is composed of Shiites, made a historic visit to Tehran, the first visit since the Islamic Revolution. Kuwait, which more than once has assumed the role of mediator and compromiser between the belligerents, regarded the visit as an opportunity to mediate between Iran and Saudi Arabia, but also to reduce the tension between it and Iran and to promote Iranian gas exports to the emirate.9 Kuwait's relations with Iran have been tense in recent years. As mentioned, Kuwait recognizes Iran's right to nuclear energy for peaceful uses, but at the same time, cooperates, with a few exceptions, with the sanctions regime against Iran and even expelled Iranian diplomats from its territory after accusing the "Quds Force" of subversive activity in Kuwait.10

Qatar has not been a target for Iranian subversion and has maintained close relations with Iran over the years, primarily as a sort of insurance policy. The palace coup of 1995 caused a rift between Doha and Riyadh and encouraged the new Qatari ruler, Sheikh Hamad bin Khalifa Al-Thani, to provoke the Saudis on border-dispute issues and by supporting anti-Saudi propaganda via the Qatari-based Al Jazeera network (and changing the tone when the Saudis turned more favorable to Qatari interests). As tensions built with the Saudis, Sheikh Hamad desired Iranian backing to insure the peaceful development of the Qatari natural-gas fields adjacent to Iranian territorial waters, and to break free from Saudi influence. In this sense, hedging with Iran can also be seen as balancing against Saudi Arabia. Iran, for its part, has viewed its relations with Qatar as a sort of bridge to the other Gulf states — to help improve its relations in the Gulf and push back the American sphere of influence while projecting Iranian resolve as a way to try and drive a wedge between the smaller Gulf states and Saudi Arabia.

Qatar, perhaps more than any other GCC state, perceived the collective-security arrangements attempted by the Arab Gulf states as hollow. Its troubled relations with Saudi Arabia also led to its only minimal participation in the security frameworks that were under Saudi influence. Most of its attention was given to balancing the power of its neighbors by strengthening its U.S. backing, particularly in the field of security. Arguably, the U.S. military presence in Qatar makes it easier for Doha to adopt an active foreign policy because it is confident that its national security will be maintained. Qatar is helping to strengthen its standing in the region through engagement in diplomatic and other forms of activism. This policy — a combination of opportunism, ambition and strategic maneuvering, backed by tremendous economic power and a willingness to use it for political purposes — along with the weakness of former centers of power inside and outside the region, has enabled the emirate to exploit a vacuum and reinforce its political position. By increasing its international profile, Qatar aims to protect itself from the perils of small-state vulnerability.11

Qatar's adoption of an ambitious international policy has alarmed both traditional adversaries and current allies. The role of political Islam and Doha's attitude toward the Muslim Brotherhood have also remained stumbling blocks in relations among the GCC states. On March 5, 2014, Saudi Arabia, the UAE and Bahrain recalled their ambassadors from Qatar because of its support for the organization, which they see as jeopardizing their security and political stability (Kuwait did not join the move in order to serve as a go-between). Eight months later, the sides seem to have reached a modus vivendi that allows them to get past the most recent crisis, at least temporarily; they have agreed not to interfere in each other's internal affairs and not to undermine one another's interests or security.12

While Qatar pays lip service to the Gulf consensus (for example, on the issues of the three UAE islands occupied by Iran and the need to strengthen the joint military force), its policy on various issues, particularly concerning Iran, differs from that of the other GCC states. This independent policy stems from Qatar's desire to increase its regional importance and protect its natural resources.13 Its troubled relationship with Saudi Arabia has resulted in Qatar's minimal participation in every security framework under Saudi influence. Considered the "bad boy" of the Gulf, Qatar keeps one goal in mind: to remove itself as a potential target of Iran.14 It thus extended an invitation to the Iranian president in 2007 to attend the annual GCC summit meeting, held in Doha for the first time since the organization's founding.

Qatar has also avoided criticizing Iran publicly and has even worked to improve relations, including by means of a security-cooperation agreement and reciprocal visits. The two countries, for example, signed a comprehensive memorandum of understanding in 2010 that includes an expansion of cooperation in the War on Terror, and they have held limited joint naval exercises in the Gulf.15 Qatar continues to play all sides vying for supremacy in the Gulf. Although they are on opposite sides of the Syrian civil war, Qatar seeks to smooth things over now with Iran and to reduce any tension between the two countries.16

The UAE position toward Iran has been influenced over the years by geographic proximity, extensive commercial ties, the domestic Iranian population and, above all, Iran's systematic violation of UAE sovereignty over three strategic islands in the Gulf. The UAE strategy has been to draw closer to one of the less-threatening regional powers. During the Iran-Iraq War, it supported the latter, but Iraq's invasion of Kuwait in 1990 led to a measured rapprochement with Iran. The UAE population, mostly comprising foreign workers, is exposed to external subversion alongside escalating Iranian rhetoric and increasing capabilities and ambitions (including the kidnapping and assassination of political dissidents on UAE soil), which are causes for concern in Dubai.17

The UAE favors a diplomatic approach toward Iran, the common interest of both sides being to contain their conflict. Iran also does not wish to attract unnecessary attention: it is already under international pressure. The UAE is aware of the limitations of its own power and wishes to separate the issue of the disputed islands from the other subjects, mainly economic, on the agenda. The UAE, Iran's largest trading partner along with China, sees maintaining open commercial ties with Iran as a sort of insurance policy. But Dubai, which is primarily responsible for trade with Iran, is host to around 400,000 Iranian nationals, and Abu Dhabi has long asserted that that large Iranian-origin community could pose a "fifth column" threat to UAE stability.18 Although Abu Dhabi, the strongest and wealthiest of the seven emirates, has taken a harder line toward Iran, there is a desire to prevent a rift. The UAE went so far as to host President Ahmadinejad in Dubai in 2007, the first visit of its kind by an Iranian president since the Islamic Revolution.

Despite the economic setback it has suffered, the federation supported, with few exceptions, the regime of sanctions against Iran, gave the United States political support (and military support, mainly by providing access to bases in its territory) against the Iranian nuclear program. It even increased the pace of oil production in its territory at various times in order to make up for the removal of Iranian oil from the market. As part of the Iranian "smile campaign," Foreign Minister Javad Zarif visited Abu Dhabi and Dubai in April 2014.19He sought to soothe the federation's anxiety about the agreement between the major powers and Iran on the nuclear question and the reconciliation between Tehran and Washington, which the federation fears is liable to be at the expense of its own relationship with the United States. UAE Foreign Minister Abdullah bin Zayed, who visited Iran in November 2013, went so far as to call Iran a "strategic partner."20

Bahrain has been worried about the Islamic Republic's intentions as a result of the ongoing Iranian claim to sovereignty over Bahrain as one of its districts. Bahrain's proximity to Iran and its sectarian composition — a Sunni minority ruling over a Shiite majority — makes it an attractive target for negative Iranian intervention. There have been periods of tension between the two, especially over Tehran's support for Shiite opposition organizations and attempts at subversion. Bahrain sees Iran as a primary threat to its national security and views domestic and Iraqi Shiite subversion as Iranian driven. Bahrain, therefore, is making efforts to strengthen its alliance networks with the West (including hosting the headquarters of the U.S. Fifth Fleet) as well as bolster the GCC joint stance against Iran. Bahrain's size, location, delicate sectarian balance and depleted energy resources have turned it into a prominent supporter of increased cooperation and integration within the GCC. Bahrain's neighbors, fearing similar problems, particularly among their own Shiite populations, have provided assistance over the years and tend to perceive its struggle as their own.

This is especially true of Saudi Arabia, with which the House of Khalifa is closest geographically and historically, as well as by ties of intermarriage. It was, therefore, unsurprising that, in March 2011, the Saudis dispatched the majority of the "joint Peninsula Shield" forces — along with some from the UAE and a token naval force from Kuwait — to protect Bahrain during its encounter with what is commonly known as the Arab Spring. These troops were meant not only to prevent Shiite rebels from threatening the Khalifahs' rule, but also to signal to Iran that Bahrain is in Saudi Arabia's sphere of influence. Bahrain, for its part, recognizes Saudi protection and appreciates the fact that the kingdom has been supplying it with oil since its domestic resources have been depleted. Bahrain's behavior, however, more closely represents a policy of balancing against Iran or, alternatively, bandwagoning with Saudi Arabia, and is not a true example of hedging. Nevertheless, although it follows a pro-Saudi foreign policy in order to avert Iranian aggression, Bahrain allows Iranian businesses to operate in its territory, avoids criticizing Iran publicly, and frequently announces it will not allow its territory to be used for an attack on Iran's nuclear facilities. Bahrain has also signed a substantial gas deal with the Iranians, investing approximately $4 billion over the course of the next 25 years in the hope of solidifying and normalizing its relations with Iran.21

This tiny kingdom advocates a more aggressive line than its fellow Gulf states towards Iran, accusing it (usually not explicitly) of supporting the Shiite opposition in its territory and even of subversion and attempted terrorist attacks.22These accusations were supported to some degree by the U.S. State Department, which cited in an April 2014 report Iranian attempts to deliver weapons to Shiite groups in Bahrain.23 Bahrain's policy towards Iran is affected not only by the Sunni royal house's problematic relations with the 70 percent Shiite majority in the country, but also by the influence of Saudi Arabia, Bahrain's regional patron and Tehran's main ideological and geopolitical competitor, on Manama. Bahrain publicly supports Iran's right to nuclear energy for peaceful uses and has expressed support in principle for the interim agreement between Iran and the major powers on the nuclear issue (November 2013). The tiny monarchy has, however, expressed concern that the agreement signed with Iran will bolster the latter's influence on the Shiites in its territory and reduce the American commitment to its security.24

Under Sultan Qaboos, Oman has managed to maintain cordial and fruitful relations with seemingly all parties in the region. It was the first to accept an American military presence in 1980, while refusing to ostracize Iran, claiming that "a nation of 65 million cannot be isolated."25 Unsurprisingly, Oman's relations with Iran are relatively close, with extensive commercial ties and even security connections that have grown in recent years. The sultanate generally maintains a policy that stands outside the GCC consensus. It was, for example, the first GCC state to establish commercial ties with Israel and enjoys American military hardware and technology. Sultan Qaboos prefers to "sit on the fence" while displaying a strong sense of cautious pragmatism.26

Sultan Qaboos's unique foreign policy reflects Oman's strategic location, sharing the Strait of Hormuz with Iran, and its relatively modest economic and military capabilities. Another factor is the culture of "conservatism and tolerance" represented by the Ibadi, who identify themselves as Muslims but are neither Sunni nor Shia.27 In recent years, as Iran has increasingly projected an image of strength in the Gulf, a trend toward further rapprochement between Oman and Iran has become evident, perhaps a hint of the behavior that can be expected from other states in the Gulf if and when Iran obtains a nuclear capability. In this context, Sultan Qaboos even made an official visit to Iran in August 2009 after Ahmadinejad was sworn in for his second term, the first by the Omani sultan since the establishment of the Islamic Republic. The two parties signed a number of agreements, including one regarding security cooperation (another was signed in August 2010). In addition, the sultanate has held joint maneuvers and exercises with Iran, and Iranian ships sometimes dock in Omani ports.28

Rouhani's visit to Oman in March 2014 was his first official visit to an Arab country since becoming president. In August 2013, the ailing Sultan Qaboos made the first visit of any head of state to Iran after Rouhani was elected. During his visit, Qaboos again offered the "good services" of his country, this time in secret mediation between the United States and Iran on the nuclear issue. Oman has maintained closer ties with Iran than its neighbors ever since Iran helped Qaboos consolidate his rule and crush the rebellion against him in Dhofar. Oman — home to a small Shiite community, making it difficult for Iran to intervene there — is also exploiting its relations with Tehran as a lever against Saudi Arabia, whose political and religious influence Oman wishes to restrain. Oman and Iran, which jointly hold the key to the Persian Gulf and the world's most important chokepoint — the Strait of Hormuz — further tightened their political and economic relations after Rouhani was elected. In December 2013, a letter of understanding was signed for Oman's imports of Iranian gas. Talks about laying a gas pipeline between the two countries were restarted, and the possibility of building a bridge connecting the two countries over the strait was mentioned.29

Oman, like Qatar, is engaging in the highest level of hedging among the smaller Gulf states. It believes that its ability to maneuver diplomatically, its maintenance of open channels of communication with all parties, and its close ties with the countries that threaten it, have led to recognition of its regional and international status, thereby reducing the risks to its national security. It has been aided in this by its opposition to aggressive measures against Iran and its efforts to tone down GCC decisions against the Islamic Republic. Oman's role as a mediator in the negotiations between Iran and the West is derived from its conflict-avoidance approach. Its seemingly neutral posture reinforced the importance of the sultanate as a unique geopolitical actor and a bridge between the different aspirations of regional and global powers.30

The trust of both sides allows Oman, perhaps more than any other actor in the arena, to play these decisive roles and pass messages between the sides on various issues. However, the rest of the GCC states may try to interfere with Qaboos's will to compromise with the Iranians.31Furthermore, the Saudi initiative to turn the GCC into a union has come up against resistance, principally from Oman: "We are against a union," Foreign Minister Yusuf bin Alawi said on the eve of the thirty-fourth GCC summit. "We will not prevent a union, but if it happens we will not be part of it," Bin Alawi added.32 This rare public refusal, as well as the fact that, to date, progress has not gotten off the ground, indicates the deep divisions among the six states, three-and-a-half decades after the establishment of the GCC. Moreover, when the last GCC summit was held, Saudi Arabia was already angry at Oman because of its role in mediating between the United States and Iran behind the scenes and in jumpstarting the negotiations with Iran.33


The GCC's security is closely connected to the dependence of the Gulf states on outside protection and the necessity for foreign actors to have access to the Gulf economy. Since their independence, the Gulf states have been buyers, rather than suppliers, of security. Their lack of strategic depth, built-in military weakness and hostile neighbors have led the Gulf states to increasingly rely on British, and later, American military presence for deterrence and defense. U.S. involvement in the Gulf has included regular arms sales, the prepositioning of equipment, ongoing training and preparation, the establishment of central bases and even direct military intervention. "Passing the buck" to Washington has made it easier for the Gulf monarchies to adopt a policy of hedging toward Iran.

Four years into the Arab Spring, self-interested elites are willing to support each other, believing that this will reinforce the rule of (Sunni) monarchies. The competition between Iran and Saudi Arabia set the Gulf's security agenda, with the smaller Gulf monarchies maneuvering between them.34Indeed, this policy reflects these states' need to balance their desire to avoid direct confrontation with Iran against their fear of Saudi domination. The Gulf states are concerned that Saudi Arabia is attempting to increase its influence over the small sheikdoms and force them to fall into line with Saudi foreign policy. (Bahrain tends to side with Saudi Arabia, particularly because Iran foments tension between Bahrain's Shiite majority and the Sunni royal house, but also because of historical, geographic and familial ties.) As a result, Saudi Arabia has not yet succeeded in promoting this or previous initiatives to unite the monarchies — such as turning the GCC into a "single entity"35or bringing Jordan and Morocco into the GCC36 — due to opposition from the other members, whether because of the economic burden involved or because of possible harm to their status in the organization.


Between total defection and full cooperation, a sphere of maneuver exists that states can exploit in order to improve their security situation. Because they cannot be fully convinced as to the intentions of their allies and because their interests will never overlap entirely, they often use strategic hedging. Less than full cooperation with an ally and a certain amount of independence in foreign relations is likely to be a beneficial course for the small power, if it is seeking to create the impression that it might reconsider its policy toward a state that its ally perceives as a real or potential competitor. In the weak player's view, this is enough to create a lever against its stronger partners and improve its situation. However, in many cases, this is merely an attempt to manage and contain perceived threats.

The disadvantages of the hedging strategy are, nevertheless, considerable. It is liable to impair the effectiveness of the balancing process and, subsequently, that of alliance management. The states had the intention, even if it was not declared, to enter into a joint security venture. When the security of the region and the stability of the monarchies were endangered, this was necessary. For more than 33 years, the GCC maintained a considerable degree of coordination. In addition, a certain amount of cooperation has existed alongside an almost built-in lack of agreement among members who were working to maximize their individual security, impeding the establishment of an effective collective-security institution on the western side of the Gulf.

An important question in this context concerns the factors that allow this policy of hedging to continue over time. If the country harmed by such a strategy is a dominant player, it may force its weaker ally to reveal its intentions; that is, it may insist that it take costly action in order to clearly demonstrate which side it is on. In fact, this strategy is not without a price, as was demonstrated by relations between Saudi Arabia and Qatar and Saudi Arabia and Oman. However, in a situation of high uncertainty with a narrow margin for error, an attempt to avoid harm and survive becomes primary, even if it comes at a high price and impairs the effectiveness of the alliances.

The smaller Gulf states do, to varying extents, hedge in dealing with Iran, sometimes even when the level of external pressure is high and alliance literature predicts high levels of cooperation. In spite of the advantages that the monarchies may gain from this strategy, the desire to maintain as many options as possible is likely to be more costly. It requires resources to be sent in opposite directions, both bandwagoning with Iran and balancing against it. Furthermore, the gain may be small; if the inputs are not invested in the best way, the investment can go down the drain. The argument behind the strategy of hedging is that it contributes to the security of states as individual units, even if indirectly it could actually weaken the effectiveness of alliances.

The rationale behind this strategy is understandable. As noted, it allows the five to maintain much of their overall relationship with the actor most threatening to them. They thereby reduce the danger of conflict in the short term (preventing a self-fulfilling prophecy), while maintaining contingency plans that respond to the level of the threat from this actor and the uncertainty concerning relations with it in the long term. Additional findings also fit with this strategy: an unwillingness to use military force could be fed by an approach to security using other means, primarily diplomatic and economic, and by other outside actors. The GCC, as a regional institution, has lasted precisely because of this freedom of action given to its members, though it does harm its cohesion and, hence, its balancing effectiveness.


While the concept of hedging is not completely foreign to International Relations (IR) theory, it has yet to be sufficiently developed.37 It is a situation in which states seek "to strike a middle ground."38 A strategy of hedging is suited to an anarchic system; it allows a small power, interested in immediate gain, to offset risks and improve its situation in relation to the rising power while avoiding a major confrontation. In the present context, the strategy makes it possible to maintain significant ties with the threatening force and, at the same time, to form alliances to balance the impending threat.

A strategy of hedging is more than sitting on the fence in order to extort concessions from allies and maintaining ambassadors in each other's capitals. Qatar and Oman, which have considerable economic and security cooperation with Iran, are seen in the eyes of their allies as making active efforts to undermine Saudi Arabia's position, strength and even security. This policy includes taking active measures; in this, it is different from a policy of mere neutrality, which includes commitments not to help, directly or indirectly, an adversary of an ally in the event of conflict between them. To the same extent, it is different from pure opportunism. It is a systematic strategy that focuses on the state's survival. For a weak state that adopts a policy of hedging, the ability to influence its senior partner is secondary to the security gained against the adversary.

The importance of the Gulf is well known because of the frequency and intensity of conflicts there, and it can serve as a laboratory for examining IR theories and various assumptions concerning the nature of global politics. However, for various reasons, the international relations of the area have not been adequately studied. The rationale behind strategic hedging appears simple and intuitive, but it must be refined and adjusted to the accepted terms in the field. This attempt to formulate a conceptualization and impose regularity on the subject was intended, therefore, to deal with a certain gap in the theory and to help clarify the strategic preferences of small powers.


1 Stephen Walt, Revolution and War (Cornell University Press, 1996), 33.

2 Randall Schweller, "Bandwagoning for Profit: Bringing the Revisionist State Back In," International Security 19, no. 1 (1994): 75-78.

3Charter of the GCC, GCC Secretariat General,

4 Joseph Kechichian, "The Gulf Cooperation Council: Search for Security," Third World Quarterly 7, no. 4 (1985); R.K. Ramazani, The Gulf Cooperation Council: Record and Analysis (Virginia University Press 1988); and David Priess, "Balance of Threat Theory and the Genesis of the Gulf Cooperation Council,"Security Studies 5, no. 4 (1996).

5 Glenn H. Snyder, Alliance Politics (Cornell University Press, 1997), 4; and Stephen Walt, "Alliances in a Unipolar World," World Politics 61, no. 1 (January 2009): 86.

6 Jill Crystal, Oil and Politics in the Gulf: Rulers and Merchants in Kuwait and Qatar (Cambridge University Press 1990), 107.

7 "Iran Cell Planned Attacks in Kuwait, Minister Says," Reuters, April 21, 2011,

8 Gregory Gause, The International Relations of the Persian Gulf (Cambridge University Press, 2010), 36.

9 "Kuwait Discusses Gas Imports with Iran," Kuwait News Agency (KUNA), June 2, 2014.

10 "Iran Cell Planned Attacks," Reuters, April 21, 2011.

11 Lina Khatib, "Qatar's Foreign Policy: The Limits of Pragmatism," International Affairs 89, no. 2 (2013): 418-419.

12 "Saudi, UAE and Bahraini Envoys to Return to Qatar," Al Arabiya, November 16, 2014,

13 Steven Wright, "Qatar," in Christopher Davidson, ed., Power and Politics in the Middle East Monarchies (Colombia University Press 2011), 127-131; and Allen Fromherz, Qatar: A Modern History (Georgetown University Press, 2012), 96-100.

14 Author's interview with a consultant to the emir of Qatar, Doha, May 2012. Also see Yoel Guzansky, The Arab Gulf States and Reform in the Middle East: Between Iran and the "Arab Spring" (Palgrave-Macmillan, 2015), 66-79.

15 "Iran, Qatar Discuss Implementation of Security Pact," Fars News, April 15, 2014,

16 "Qatar Backs Syria Political Solution on Iran Visit," Al-Arabiya, February 27, 2014.

17 Willian A. Rugh, "The Foreign Policy of the United Arab Emirates," Middle East Journal 50, no. 1 (1996): 58-59.

18 Kenneth Katzman, The United Arab Emirates (UAE): Issues for U.S. Policy (Congressional Research Service, 2014), 19.

19 "Zarif Meets with UAE Prime Minister in Dubai," Daily Star (Lebanon), April 16, 2014,

20 "UAE Foreign Minister Hails 'Strategic' Relations with Iran," Middle East Monitor, April 16, 2014,

21 Kenneth Katzman, Bahrain: Reform, Security, and U.S. Policy(Congressional Research Service 2012), 9.

22 Frank Gardner, "Iran 'Set Up Bahrain Militant Cell,'" BBC News, February 20, 2013,

23Country Reports on Terrorism 2013, U.S. Department of State, April 2014,

24 Kenneth Katzman, "Bahrain: Reform, Security, and U.S. Policy," Congressional Research Service, July 31, 2014, 31.

25 Majid Al-Khalili, Oman's Foreign Policy: Foundation and Practice (Praeger Security International, 2009) 101.

26 Author's interview with a senior official in the Omani foreign ministry, Masqat, April 2011.

27 Jeffrey A. Lefebvre, "Oman's Foreign Policy in the Twenty-First Century," Middle East Policy 17, no. 1 (2010): 110.

28 Al-Khalili, Oman's Foreign Policy: Foundation and Practice, 107-8.

29 "Oman, Iran Plan Causeway over Hormuz," Gulf News, March 6, 2014,

30 Shashank Bengali, "U.S. Iran Thaw Began with Months of Secret Meetings," LA Times, November 24, 2013,,0,2689052.story#axzz2leZ1wZy0.

31 Dahlia Kholaif, "Oman: No Gulf-wide Union for Us," Al Jazeera, December 15, 2013,

32 "Oman Will Withdraw from GCC If a Union Is Formed: Foreign Minister," National, December 7, 2013,

33 "Secret U.S.-Iran Talks Cleared Way for Historic Nuclear Deal," The Telegraph, November 24, 2013,

34 Gregory Gause, "The International Relations of the Persian Gulf," 7; and Joseph Kostiner, Conflict and Cooperation in the Gulf Region (VS Verlag Wiesbaden, 2009), 244-245.

35 "Saudi King Abdullah Calls for Formation of Gulf Union," Asharq al-Awsat, December 19, 2011,

36 Sara Hadman, "Gulf Council Reaches Out to Morocco and Jordan," New York Times, May 25, 2011,

37 Evan S. Medeiros, "Strategic Hedging and the Future of Asia-Pacific Stability," Washington Quarterly 29, no. 1 (Winter 2005-06): 164.

38 Brock Tessman, "System Structure and State Strategy: Adding Hedging to the Menu,"Security Studies 21, no. 1 (2012), 192-194.

September 19, 2018

CHINA: Credit Risk Shifts to LGFVs

Bart Carfagno and Allen FengSeptember 19, 2018

Local government financing vehicles (LGFVs) have been central to the credit-intensive growth model China has followed since 2009, but new regulations have restricted local government support for these entities this year. Though a recent relaxation of funding conditions signaled by the State Council may stabilize infrastructure investment and improve LGFV access to financing at the margin, the headwinds facing local government-linked firms are significant.

Outstanding LGFV debt levels are over twice as large as government data would imply, based on a comprehensive examination of public records of bond filings. Interest payments on LGFV debt consume significant proportions of some provinces’ overall new credit. We expect the first-ever LGFV bond defaults to emerge soon, which could test market expectations of government support in many other asset classes as well. How Beijing manages this stress will be a crucible for commitments to financial reform and the deleveraging campaign.

Local government financing vehicles (LGFVs) have been the primary channel through which authorities in China have delivered new infrastructure investment and generated growth over the last decade. But in the first half of 2018, Chinese authorities took decisive steps to restrict government guarantees of these vehicles, the collateral they can use, and the scope of LGFV business activities. These policies come amidst regulatory tightening elsewhere in the financial system; funding sources for trust companies and other non-bank financial institutions (NBFIs), which are important lenders to LGFVs, are drying up. Moreover, local governments are increasingly under strain, in part because they are being forced to assume and repay implicit debts from LGFVs and other local government state-controlled entities.

We expect to see more credit stress and actual defaults on bonds issued by these local government-backed firms for the rest of the year, even though recent policy guidance from the State Council for banks to maintain financing to infrastructure projects in progress will probably marginally improve LGFV financing. Defaults on bonds issued by LGFVs would be a watershed event, weakening the credibility of the long-held assumption that firms with state backing would never ultimately default because support would always be forthcoming.  While state-owned enterprises have defaulted in the bond market already, LGFVs have not.

Widespread implicit and explicit government guarantees have limited the effective pricing of capital throughout the Chinese financial system, as credit risk in the corporate bond market was generally priced based on the nature of the government guarantor, rather than the underlying financial performance of the issuer.  The strength of these implicit guarantees and the assumption of government intervention in cases of widespread financial stress has therefore preempted the need for institutional methods of managing distressed, quasi-governmental debt, meaning that even a small number of defaults among LGFV bonds could cause significant turbulence in China’s debt markets.

Moreover, the debt burden of LGFVs is likely larger than what is being declared publicly in government audits.  An analysis of financial data provided by LGFVs within their filings tied to bond issuance points to an estimated 41.8 trillion yuan in total interest-bearing debt as of July 2018, or around 51% of China’s 2017 GDP.  This compares to only 16.5 trillion yuan in explicit local government debt acknowledged by the Ministry of Finance as of the end of 2017.  Moreover, LGFV borrowing is classified as corporate debt, and carries higher interest rates than government debt (which explains the original Ministry of Finance plan to refinance a portion of it).  As a result, many provinces are using more and more new credit simply to manage the interest burden of LGFV debt.

Compounding these financial stresses is the unequal distribution of credit growth across provinces under Beijing’s deleveraging program.  Because some provinces—mainly those in China’s interior—relied more heavily upon informal financing channels in the past, they have been hit disproportionately by the funding squeeze on NBFIs.  Placing these trends together—rising LGFV debt and an unequal distribution of provincial credit—reveals that certain provinces are facing significant financial stress from LGFV debt, and are likely to require additional central government assistance soon.

A Heavy Debt Burden for Many Provinces, Especially Tianjin

LGFVs have been a key driver of infrastructure investment and growth at the local government level for the past decade, even beyond the post-crisis stimulus program for which they were originally designed. Localities were forbidden from borrowing or running fiscal deficits, and in response to these pressures, Beijing allowed localities to create off-balance sheet entities known as local government financing vehicles which could borrow without a revision of the underlying budget law, functioning essentially as local state-owned enterprises, but with clean balance sheets as they were newly created.

Local governments and their banks have distributed or otherwise guided enormous volumes of credit through LGFVs into local government projects.  Most of these projects involve infrastructure or the property market, as Figure 1 illustrates. The top three categories reflect more than half of our total estimate of national outstanding LGFV debt.  However, because these projects typically see low operating cash flows, banks must carry the burden of refinancing those obligations for localities.

To estimate the overall volume of LGFV debt we relied on public financial statements for LGFV bond offerings available on EastMoney, which is a China-focused information service provider that classifies LGFVs as firms whose shareholder is a local government and whose business includes local infrastructure and public utilities. LGFVs list bonds on different markets and then are required to file annual reports on these exchanges with financial data. Within these annual reports, LGFVs list their total outstanding debt in both interest and non-interest-bearing terms.

For the figures below, however, we limit our calculations to interest-bearing debt, applying a weighted average interest rate of bonds as issued and average PBOC lending rates over the past 10 years, since most LGFV borrowing is classified as corporate debt.  The weighted interest rate is sourced from the PBOC’s own quarterly monetary policy reports, with an average rate used from 2009 to 2018.  To account for LGFVs which do not have any bonds listed, we adopt estimates from the work of Bai, Hsieh, and Song, who have estimated that debt accrued by non-issuing firms amounts to about 25% of debt listed on platforms.[1]  The data available on these financial platforms is a relatively new resource, and the totals are much higher than official figures for local government debt. Markets are therefore likely underestimating the risk associated with LGFV debt at present. Figure 2 shows estimated interest-bearing debt, in bonds and loans, by province.

We estimate that total interest-bearing debt among these vehicles (including the 25% adjustment mentioned above) is 41.8 trillion yuan as of July 2018, which is 46.8% of combined provincial GDP over the past four quarters. The annual interest burden on this debt totaled an estimated 2.1 trillion yuan, or 2.32% of the last year’s output, but the total repayment burden doubles to 4.65% of GDP when accounting for non-issuing LGFVs and maturing bonds.  Filings also cite non-interest-bearing debt at an additional 17.1 trillion yuan, a large sum that will only increase the overall repayment burden of these vehicles.

Figure 3 clearly highlights the extent to which the need to service outstanding LGFV debt is absorbing new funding across provinces. Annual interest totaled over 20% of total new credit (TSF) in eleven provinces over the previous four quarters, not even accounting for the need to roll over a large portion of maturing LGFV bonds, which totaled 1.56 trillion yuan over the past year. The worst-off provinces are concentrated in less developed regions in the northeast and southwest, with Tianjin as a notable concern.  Interest on debt accrued by Tianjin LGFVs is over 100% of the new credit extended in the province over the past four quarters, meaning that every yuan of new credit in Tianjin is repaying interest on LGFV debt.  This is primarily because TSF growth in Tianjin is rising at only 2.5% y/y, according to PBOC provincial credit data released early in August.

The reason to be increasingly concerned about the possibility of LGFV bond defaults in particular is the unequal distribution of this annual interest burden across provinces.  Some provinces relied upon LGFVs far more extensively than others, particularly those in China’s interior. Corporate bond defaults this year have resulted from weak credit availability, rather than the underlying financial performances of the firms involved.  And these vulnerable regions are seeing particularly slow credit growth in 2018. There is a significant overlap among provinces with higher LGFV interest-to-TSF ratios and those which experienced the highest levels of defaults and risk warnings issued within China’s bond markets so far this year (See May 29, “A New Era in Credit Risk”).

Higher provincial debt burdens also correspond to anecdotes of LGFV financing stress. Yunnan State-Owned Capital Operation Co., for example, missed payments worth almost 1 billion yuan in January this year.  The LGFV financing platform Tianjin Municipal Development failed to repay half of a 500 million yuan trust loan that matured in late April. Even if credit growth stabilizes on a national level, there are likely to still be regional governments facing significant financial stress.

We expect to see further signs of stress in the top provinces on this chart later this year, but how authorities will handle credit these events is yet unclear. The first LGFV bond default may not prompt an immediate response, but subsequent defaults may trigger some sort of government action to attempt to stabilize the markets. Given the extremely high ratio of interest to credit availability, there should have already been a multitude of defaults among these firms, at least in Tianjin if not elsewhere.

Indeed, there has not been a single instance of default on an LGFV bond so far, despite 7 trillion yuan in outstanding notes; most reported payment difficulties have been on trust or asset management products. It is likely that de facto defaults on other obligations have occurred, but that the companies and local authorities have attempted to find third-party guarantors or lobby the central government for support to avoid explicit bond defaults. It will be increasingly difficult to conceal this stress as repayment difficulties pass through financial institutions, which own LGFV debt, and limit the credit they can offer to other corporates and households.

Refinancing Difficulties Rising

As Beijing’s deleveraging program has progressed, banks have been pulling back funding from NBFIs, which have been key lenders to LGFVs and buyers of LGFV bonds as they search for the higher yields these securities offer.  As a result, LGFV bond yields have risen around 200 bps over the course of Beijing’s deleveraging program.  They have rallied, however, after the PBOC recently offered medium-term funding for banks willing to purchase lower-rated bonds (See July 19, “The PBOC’s Visible Hand”).

While funding costs have eased in recent weeks, higher rates and regulatory restrictions have significantly reduced LGFVs’ ability to acquire funding in the bond market over the past 18 months (See Figure 5). There are currently about 7 trillion yuan in outstanding LGFV bonds, according to Eastmoney data. And so far this year, maturing bonds have outpaced new issuance. In 1H 2017, total net LGFV bond issuance was 195 billion yuan, a record low, and issuance in 1H 2018 actually contracted by about 22 billion yuan.

Looking at bond issuance by province, less developed provinces that have nevertheless disproportionately relied on LGFVs, like Inner Mongolia, Guizhou, Chongqing, and Yunnan, have issued very few bonds in net terms this year.  The picture becomes more worrisome when comparing this marginal issuance to the interest burden on existing bonds.  Tianjin, for example, only issued a net 10.9 billion yuan worth of bonds in 1H; we estimate the province’s 6-month interest burden, on bonds only, to be 13.3 billion yuan.

There will be 672 billion yuan in LGFV bonds maturing over the remainder of 2018. Given that several provinces are unable to even issue enough bonds to keep servicing existing debt, it is highly unlikely they will be able to repay or roll over the principal coming due, at least through the corporate bond market.

The Crying Baby Gets the Milk, But From Whom?

As mentioned previously, new restrictions limit the ability of local governments to guarantee LGFV debt and these vehicles are forbidden from using public assets as collateral. But even if localities were allowed to support LGFVs directly through fiscal outlays, it is doubtful that they would be able to do so without receiving central government support themselves. Indeed, the financing restrictions from new asset management rules and the ongoing implicit local government debt audit are aimed at placing official limits on the degree to which localities are liable for LGFV borrowing, in part to limit the growth in already enormous levels of local government debt (See July 30, “The PBOC-MOF Battle Over Local Government Debt”.)

Figure 6 compares the outstanding LGFV debt burden to provincial GDP, which is a rough proxy of the extent to which provinces have relied on these vehicles to generate growth over the past decade. More importantly, it approximates the ability of provincial economies to withstand the burden of LGFV debt. Interestingly, Beijing comes out on top, likely reflecting that many LGFVs that do not operate in Beijing report as being based there, meaning that the city itself is probably not responsible for this debt. The debt burden is clearly outsized in less developed provinces of Guizhou, Qinghai, Gansu, and Xinjiang. It is remarkable that interest payments alone, not even accounting for the principal of existing debt, amount to over 4% of GDP in nine provinces.

Moreover, many of these provinces have already borrowed at official levels close to their provincial debt quotas from the Ministry of Finance. This means that official local government bonds are unlikely to be available tools to refinance LGFV debt, for most of the most heavily indebted provinces.  These quotas can be lifted, but the central government will need to do so affirmatively, in contrast with the current direction of policy to encourage localities to pay down implicit debt.  Some central government assistance in the form of fiscalization or emergency liquidity will probably be necessary.

Separating the Sheep from the Goats

In the near term, Beijing is worried about financial contagion causing investors to sell or shy away from new purchases of LGFV debt. To address this, the State Council recently emphasized that financial institutions should meet “reasonable” funding demand from LGFV projects currently under construction to avoid them being abandoned, which would generate immediate fiscal costs for localities. The PBOC at the end of last month released one of the largest injections of medium-term lending (MLF) in the facility’s history, over 500 billion yuan, targeted at improving liquidity within the lower-rated corporate bond market. Markets have responded to this PBOC move, buying bonds of LGFVs that have operating cash flows, such as toll roads.  Other LGFVs without such cash flows are still likely to face refinancing difficulties.

There has been conjecture among analysts concerning whether these moves indicate that authorities are relapsing into the old model of stimulating credit and investment-fueled growth. A return to expedited investment through these vehicles would indeed be a blow to macroeconomic restructuring, not just the deleveraging campaign. But Beijing’s overarching goal in implementing restrictions has been to separate local government revenue and funding channels from those of local government financing vehicles, not to deprive all LGFVs or local governments of funding. Overall, regulatory tightening persists consistent with the deleveraging campaign, and continues to limit credit growth.  The PBOC’s recent support for the corporate bond market also coincided with a State Council announcement precluding the possibility of “opening the flood gates” of fiscal spending in a fashion similar to the 2009 stimulus.

[1] Bai, Hsieh, and Song, “The Long Shadow of Fiscal Expansion.” National Bureau of Economic Research Working Paper 22801 (2016).

BSF jawan hacked to death by Pakistani forces along International Border near Jammu

By Zee Media Bureau | Updated: Sep 19, 2018, 14:55 PM IST

JAMMU: In an unpleasant development which may further escalate tension between the two nuke-powered countries, a Border Security Force (BSF) jawan was hacked to death by the Pakistani forces along the International Border (IB) near Jammu, said reports on Wednesday.

The slain BSF jawan's throat was slit by the Pakistani troops along the international border (IB) near Jammu on Tuesday, news agency PTI quoted an official as saying.

After the ''brutal'' and "unprecedented" incident, which took place in the Ramgarh sector, the security forces have issued a "high alert" across the entire IB and the Line of Control (LoC).

Meanwhile, the Border Security Force has lodged a strong complaint with its counterparts - the Pakistan Rangers.

Official sources said the body of Head Constable Narender Kumar also bore three bullet wounds and it could only be retrieved from a spot ahead of the Indo-Pak fence after over six hours as the Pakistani side "did not respond" to the calls to maintain the sanctity of the frontier and ensure that the BSF search parties were not fired upon.

The Pakistan Rangers, the sources said, was asked to take part in a joint patrolling to trace the missing jawan, but they only came up to a point and cited water-logging issues in the area that prevented them from undertaking a coordinated action.

The BSF then waited for the sun to set and launched a "risky operation" to bring the jawan's body back to the post.

Officials in the security establishment said the incident of brutality with the jawan, probably a first at the IB, was taken "very seriously" by the Government and the Ministry of External Affairs.

The Director General of Military Operations (DGMO) is also expected to take up the issue with its Pakistani counterparts.

They said since the BSF patrol party that went ahead of the fence to cut the tall "sarkanda" grass to clear the field was first fired upon at 10.40 AM on Tuesday, hectic phone calls and communication exchanges went on throughout the day from the Indian side to across the border in order to locate the body of the jawan, who was first declared missing. r Security Force (BSF) jawan was hacked to death by the Pakistani forces along the international border near Jammu, PTI quoted an official as saying on Wednesday.

Interestingly, Defence Minister Nirmala Sitharaman had on Monday said that the heads of Pakistani soldiers are being cut-off, but they are not being displayed.

"Kaat to Rahe Hain, Display Nahin Kar Rahen (heads are being cut off, but are not being displayed)," she said.

Sitharaman made these remarks during an interview to a television news channel.

Pointing that during election campaigns for 2014 Lok Sabha elections, the BJP had said that if Pakistan cut off heads of two Indian soldiers, India in retaliation would behead 10 Pakistani rangers, the interviewer asked, "During election campaigns, it was being said that if they (Pakistan) cut off heads of two Indian soldiers, we will behead heads of 10. Is it really happening?"

To which, Sitharaman said that the neighbouring country was once taught a lesson in 2016 when Indian Army carried out a surgical strike on terrorist launch pads across the Line of Control (LoC) in Pakistan.

The terrorists are not allowed to infiltrate into the country. They are being eliminated right at the borders, she added.

However, this is not the first time that the Pakistani forces had given an ''inhuman and barbaric treatment'' to the Indian soldiers.

Last year, the Pakistani forces had killed two Indian soldiers and mutilated their bodies after a targeted attack on frontier posts in Jammu and Kashmir - an act which was described as ''despicable'' by the Indian Army.

The slain soldiers were identified as Naib Subedar Paramjit Singh, a junior commissioned officer (JCO) with the Army’s 22 Sikh Regiment, and Head Constable Prem Sagar of the BSF’s 200 Battalion.

The 42-year-old Singh was from a village in Punjab’s Tarn Taran district, while Sagar was a native of Deoria in Uttar Pradesh.

The Government of India strongly condemned the barbaric act and said the country has full confidence and faith in its armed forces, which will react appropriately.

September 18, 2018

`UN must act tough against Pak to protect rights of Baloch people`

Baloch activists in Geneva

By Ravi Khandelwal (ANI) | Updated: Sep 19, 2018 05:04 IST

Geneva [Switzerland], September 19 (ANI): Human rights activists from Balochistan have asked the United Nations to act tough against Pakistan to protect the rights and lives of the Baloch people.

Speaking after the side event on Human Rights in Pakistan co-organised by Baloch Voice Association during the 39th Session of UN Human Rights Council, a prominent Baloch activist, Mama Qadeer Baloch said, 

"People in Balochistan are being targetted because they are opposing  CPEC(China Pakistan Economic Corridor). They are demanding Pakistan to leave their occupied territory, which they are not agreeing with. It is because Pakistan's survival depends on Balochistan's resources. There is nothing in Punjab. Pakistan is exploiting resources from Balochistan and also sharing it with China."

"In Saidak, there are gold and copper reserves and its 90 per cent share will be taken by Punjab, 8 per cent share will be taken by PakistanArmy whereas two per cent share will be given to Baloch. Although, the resources are of Baloch they are not even getting 2 per cent share of their resources. Punjab is taking the entire resources," Mama Qadeer, who lives in Balochistan added.

Mama Qadeer has been invited for the United Nations Human Rights Council Session and he held a meeting with the Working Group on Enforced or Involuntary Disappearances, who made a visit to Pakistan in 2012 to take stock of growing incidents of enforced disappearances in the country.
He said, "Our demand to the United Nations is that as per its charter, it should put pressure on Pakistan to stop human rights violations in Balochistan and all their demands should be fulfilled."

Naela Quadri Baloch, a prominent woman activist from Balochistan, who now lives in Canada also participated in the event and raised the issue of enforced disappearances. She said, "As per the existing population, every day 10 to 50 people (in Balochistan) are getting disappeared which will result in the elimination of Baloch people".

She added, "They did the same with Bengalis, but their population was huge. Our population is less. They not only want Baloch resources including ports, gold, gas and natural resources but even the parts of our body including kidney and heart. They are kidnapping our children and women so that they get killed and their organs to be sold. Pakistani and Chinese armies are doing it together. You get the cheapest organ transplant in China. Where do they get all these organs? They have implemented the same in their country and have live blood banks. They are doing the same in Balochistan and Sindh. They are raping women and throwing their mutilated bodies. When will the UNlisten to their voice?"

"We don't want CPEC as this has brought devastation in the region. Pakistan Army was doing atrocities for the past 70 years which has seen 100 per cent rise since the launch of CPEC. Our death is attached with CPEC", Naela further said.

The event was attended by many human rights activists including Munir Mengal and exiled Kashmiri leader Shaukat Ali Kashmiri. (ANI)