Regional Fallout:

What are the Repercussions of the War in Ukraine for the Middle East? (Panel Discussion)
Regional Fallout:
March 9, 2022

In light of recent developments with the war in Ukraine, and in order to better understand the Middle East’s political, security, and economic stakes in this war, InterRegional For Strategic Analysis held a discussion panel entitled “Regional Fallout: What are the Repercussions of the War in Ukraine for the Middle East?” The panel was led by Dr. Li-Chen Sim, a professor at Khalifa University in Abu Dhabi and a non-resident scholar at the Middle East Institute in Washington, D.C., and included researchers based in both Abu Dhabi and Cairo. Dale Sprusansky, Assistant Editor at the Washington Report for Middle East Affairs, moderated the panel discussion.

Regional Repercussions

The war in Ukraine has had various economic consequences for the Middle East, which can be summarized as follows:

1. Marked decline in tourism: The participants in the panel observed that the usual influx of tourists to the Middle East will be significantly affected by changes implemented by airlines.For example, some airlines in the region have halted flights to Russia. It is expected that very few Russian and Ukrainian tourists will come to the region, which poses a significant problem, particularly for countries that depend on income from the tourism sector. There will be a significant drop in tourist activity and corresponding revenue, particularly given the decline in the value of the Russian ruble (which has now fallen by 40 percent). Potential Russian tourists will therefore struggle with overseas expenditures, particularly when using debit cards, due to the Central Bank of Russia’s policy limiting exchange of foreign currency. This could become a major problem for many tourists.

2. Negative impacts from Western sanctions: The panel participants felt that in the long-term, Russian tourists would likely return to the region. However, it is necessary to take into account the effects of Western sanctions. It is also worth noting that it took about five years for the global tourism sector to recoverafter the economic crisis of 2008—and that was without sanctions. This is a matter of concern for countries in the Middle East that rely on the tourism sector.

3. Costs of foodstuffs likely to spike: The panel participants stated that foodstuffs were one of the most important non-petroleum sectors that would be gravely affected by the war. Russia and Ukraine together comprise the largest supplier of agricultural products to the Arab world. The Middle East makes up 70 percent of Russia’s agricultural export market: it is a huge market for Russia, especially when it comes to certain kinds of wheat.

4. Supply chain disruptions for some cereals: The participants observed that Russia and Ukraine had a strategic stockpile of cereals, but that this would not last for more than a year (and most likely three to five months). Although this leaves some space to maneuver, if the war should continue, then there will be supply chain disruptions for cereals and fertilizers, or even a shortened season for wheat cultivation this spring in Ukraine and Russia.

5. Implications for food security in some countries: According to the panel participants, the Middle East relies on cereal imports from Russia and Ukraine. Some countries in the region import up to 40 percent of their barley from Russia, which is an important grain for feeding livestock. The conflict in Ukraine could therefore also affect the price of meat in the Middle East. In the short term, these imports will continue to be a source of concern.

6. Uncertainty in energy markets: The participants stated that Russia is an important player in hydrocarbon energy markets and is a country of strategic importance for oil production. Russia will retain enormous influence in this regard, even if it faces sanctions in its energy sector, particularly because oil is the lifeblood of the global economy. Western sanctions have so far not included the Russian energy sector, but markets are extremely nervous about this possibility. We have already seen spikes in prices at the beginning of this year from 80 to 100 dollars per barrel. The Middle East, and especially oil-exporting countries in the Gulf, are expected to benefit tremendously from this situation. The HSBC bank estimates that if oil rises to 100 dollars per barrel, these countries will make a profit of up to 50 billion dollars.

However, the downside of rising energy prices is that it could negatively affect the global aggregate demand for goods, because the price of commodities rises when the price of oil rises. This is why the price of oil has implications for many other sectors, including petrochemicals, foodstuffs, and transportation. Increased oil prices could lead to decreased demand for goods, including decreased demand for shipping and aviation, or even for fuel in general. This would ultimately result in lower demand for oil exports as well. Middle Eastern markets, especially the Gulf, are commodity-importing countries, and therefore could experience massive inflation in the price of goods.

7. Looking for regional alternatives to Russian gas: The participants felt that in the medium- and long-term, the war could have positive ramifications for the hydrocarbon and energy sector, especially for Qatar’s natural gas prospects. Because of the war, Europeans will think twice about their dependence on Russian gas. This was also what happened during the Russian annexation of Crimea in 2014. The current war might lead Europe to look for alternative sources of liquefied natural gas, which would be good news for Qatar and perhaps also for other countries in North Africa.

Ramifications for Non-Oil Sectors

It is likely that non-oil sectors in the Middle East will be hit hard if the war in Ukraine continues. Participants discussed the following points:

1. Negative impact on regional efforts to shift towards renewable energy: Russia is a very important supplier of materials for non-oil sectors in the Middle East. The region has stepped up efforts to move towards renewable energy, especially solar and wind power, but the Russian-Ukrainian war could disrupt the timeline for this important regional shift. This is because Russia controls 17 percent of imports of nickel and has high-quality nickel deposits. Nickel is a key component for batteries used in solar energy generation and storage units because of its contact resistance. The war in Ukraine could therefore affect plans for expansion of renewable energy in the Middle East.

2. Green hydrogen potential in some countries: In the medium-term, the green hydrogen market is likely to experience growth as a result of the war. Europeans will not be able to rely upon Russia in reducing their dependence on fossil fuels. This will open the door for Gulf countries to sell hydrogen, particularly green hydrogen, to Europe, which will become a major market. If the Gulf is able to demonstrate that its hydrogen is produced using clean energy, it will be able to significantly mitigate the loss of Russian hydrogen in Europe.

3. Aluminum supply chain disruptions: Panel participants affirmed that aluminum is also of great importance in producing frames for solar energy units and wind turbines. The supply chain for this raw material could be negatively affected by the war, particularly if it goes on for a while. This is because Russia plays a major role in supplying aluminum to Europe. Russian aluminum is produced using hydroelectric power and therefore uses less carbon.

4. Challenges for countries dependent on agriculture: The participants observed that recent sanctions on Russia and Belarus pose a problem for agricultural fertilizer markets. These two countries are among the most important fertilizer suppliers and exporters, and produce 20 percent of the world’s fertilizer. This market will be affected by sanctions and supply chain problems, particularly with regard to payment and financing issues. Countries in the Middle East that depend upon agriculture will be negatively impacted by these problems. In the medium-term, this could provide an opportunity for regional suppliers of fertilizers to pitch their exports to the global market, including the US. In sum, the Middle East stands to both win and lose in this regard.

5. Opportunities for the steel sector in some countries: Although Russia is not a key supplier of steel globally, Russian steel has been crucial for European markets, which import almost a third of their steel from Russia. Regional exporters of steel, particularly Turkey, could now have an opportunity to expand their operations in European markets. However, the problem is that Turkish steel relies on gas-powered furnaces,and Turkey imports gas from Russia, which could result in restrictions from European importers. This exemplifies the complex interactions among global supply chains. In other words, some countries might benefit as a result of the war, while others will not.

6. Restrictions on electronic conductors and semiconductors: According to the panel participants, there are two other sectors that will be affected by the war. The first of these is electronic conductors and semiconductors. There are restrictions on US exports to Russia, which also apply to companies operating in the US. However, this sector will be hit less hard because Russia is not a key consumer of semiconductors. Secondly, the real estate sector is likely to be affected in various countries in the region if the war goes on, either because of sanctions or defaulting on payments.

Political and Security Fallout

Given Russia’s growing role in the Middle East, the war in Ukraine looms large over political and security considerations in the region, particularly with regard to the following:

1. Middle East-US relationship unlikely to change: According to the panel participants, it is unlikely that there will be a shift in relations between Middle Eastern countries and the US as a result of the war in Ukraine. By contrast, the war will significantly affect US-European relations. Thus far, the war has strengthened relations between Europe and the US.However, the US is expected to try to pressure certain countries in the region to join in sanctions against Russia.

2. US pressure on Israel regarding the war in Ukraine: The participants stated that Israel has avoided directly condemning the Russian war on Ukraine. During the Russian war in Crimea in 2014, Israel did not comment on the UN resolutions against Russia. The US tried to convince Israel to take part in the UN Security Council’s joint statement, and to support the draft UN resolution against Russia. During the meeting of the UN General Assembly, Israel voted yes on condemning the Russian invasion, breaking significantly from its previous stances. These developments should be closely followed, particularly in light of the importance of US-Israel relations.

3. Iranian support for Russia in the war against Ukraine: According to panel participants, Iran has taken a stance in support of Russia on the principlethat the US cannot be counted on. As the US has attempted to isolate Russia, Iran has continued to offer its support. This is important for Iran particularly because of Moscow’s support in its nuclear talks. It is therefore unlikely that the war will have a negative impact on Russian-Iranian relations.

4. Some positive fallout for Iran’s nuclear talks: The main speaker in the panel stated that there had been speculation that the nuclear talks would be cut short as a result of the war and the energy issue. If the talks wrapped up and Iran was allowed to export its oil,this would significantly impact the price of oil worldwide, because the presence of Iranian oil in energy markets would drive down prices. It is expected that Tehran producesbetween 500,000 and 1 million barrels per day, while Russia produces around 10 million barrels daily and exports approximately 6 million. The influx of Iranian oil into the market would therefore not fully replace the absence of Russian oil. In other words, although Iranian oil is important, it should not be viewed as the only or the most important variable shaping the Vienna talks.

5. Turkish-Russian relations will not change as a result of Ankara’s stance on Ukraine: The panel participants noted that Turkey’s stance on the war has been ambivalent. President Erdogan stated that the war was “unacceptable” and that he would close the Bosphorus strait to Russian ships. However, this move did not significantly impact Russia, which moved its warships through the Bosphorus to the Black Sea. Turkey has also sent many Bayraktar drones to Ukraine, which are effective combat aerial vehicles and have been used recently by Ukraine. It has also offered Ukraine a coproduction dealfor these drones, which has not yet been carried out because of the ongoing conflict.However, these dealings with Ukraine will not significantly affect relations between Turkey and Russia, because Turkey greatly depends upon Russian energy, including natural gas imports, which are necessary for steel production and the construction sector. Turkey also depends on Russia for nuclear energy projects which it wants to carry out as part of Turkey’s centennial celebrations next year. It is therefore unlikely that the war will significantly alter Turkish-Russian relations.

6. Small countries should balance relationships among major world powers: The participants noted that smaller countries such as Singapore have stated that international law should be applied in the context of the war in Ukraine, and that countries cannot impinge upon each other’s sovereignty. Smaller countries tend to invoke tenets of international law, but it is hard to apply such principles in practice, particularly because Russia is very powerful. Smaller countries should therefore aim to maintain a flexible equilibrium in their relations with the US, China, and Russia.

7. Moscow will hold onto its influence in Syria: The participants noted that although Russia is focusing its military efforts on Ukraine, it has sufficient resources to also remain involved in the war in Syria if it wants to. Russia is expanding the use of its non-military forces, such as security companies like the Wagner Group. Russian’s military engagement in Ukraine does not mean that it will turn away from Syria, which is a cornerstone of its current involvement in the Middle East. The Syrian regime will remain strongly aligned with Russia, while Israel and Turkey will likely become more anxious about the expansion of Syrian power.

8. Challenges for separatist states in the Middle East: According to the panel participants, the situation for separatists in Ukraine is different from that of their counterparts in the Middle East. Ukrainian separatists rely upon Russian support, whereas in the Middle East there is not a single regional or international power that plays the kind of role that Russia played in Georgia. Given the absence of a powerful patron, a similar scenario would not play out in the Middle East.

The panel participants concluded by saying that Russia has many tools by which it could counter Western sanctions. The Central Bank of Russia will be able to control Western capital and currency and prevent it from being withdrawn from Russia. Russia is also no stranger to sanctions, which it has already dealt with since 2014. It has significant capacity to withstand such economic pressures and has extensive experience in dealing with these previous sanctions. For example, it was able to locally manufacture many products that it imported prior to sanctions. Russia also has reserves totaling 600 billion dollars that it can draw upon, as well as gold reserves that it can sell. In other words, it has the hard currency to buy what it needs. Furthermore, although a significant portion of Russian arms production is subject to sanctions, the full sector would not be. The participants also observed that the US and Europe have begun to try to navigate a multipolar world order, in which these powers could have comparatively less clout than they did during the previous decade. Nevertheless, they remain major powers, and it is likely that there will also be a major resurgence of NATO, as we have already witnessed with Germany coming out strongly against Russia.


Key Words:
https://www.interregional.com/en/regional-fallout/