Issue Three

IN THIS ISSUE

In the second quarter of 2017, West Asian and North African (WANA) countries pushed to diversify oil economies, but ongoing security operations continued to impact regional stability. In Trends, we evaluate the outcomes of elections in Iran and Algeria, and the referendum in Turkey, as well as the impact of renewed Saudi-US relations on Saudi Vision 2030 and the Qatar crisis. In Countries, we take a closer look at developments in the economies of Egypt and Iran, with a focus on investment and growth. In our Deep Dives section, we focus on the UAE’s growing defence industry and the status of nuclear power in WANA.

Trends

Across WANA this quarter, elections in Iran and Algeria and a referendum in Turkey consolidated the authority of incumbent governments but highlighted citizens’ calls for economic reform. In the Gulf, following years of friction due to Qatar’s regional policies, tensions reached a crescendo with an economic boycott against the state led by the UAE and Saudi Arabia. The number of regional and international actors involved in the crisis continues to expand, including nations that traditionally have no history of involvement in GCC affairs.

Countries

In re-electing Hassan Rouhani, Iranians have renewed their confidence in his reforms. But his ability to meet economic expectations is in question. After the partial lifting of nuclear-related international sanctions in January 2016, the country has witnessed growth in energy and oil and gas, but new security threats from terrorist groups such as Daesh could further dissuade foreign investors.

While Egypt struggles to improve its economy, security concerns continue to hamper foreign investment and tourism. Reforms to combat inflation and attract foreign investment await parliamentary approval, but the country’s instability makes the impact of any future reforms unclear.

Deep Dives

The UAE has increased defence spending and focused efforts on localising its defence industry. This move will affect the country’s relations with traditional defence partners, creating more opportunities for partnerships. Areas of collaboration include technology transfer and projects that align with the UAE’s aspirations to gain status as an emerging arms producer.

The ‘black elephant’ series explores the fall of nuclear power in Europe and its rise in WANA. Though there are many active nuclear energy projects under way in the region, obstacles line the path to success. But space for political engagement and technical co-operation can further efforts to strengthen the sector.

Elections, Fractures, and Power Politics

Questions on the ballot, power in the presidency

The Turkish referendum on April 16 put to a single ballot a series of historical constitutional changes, including the introduction of an executive presidency. More than 51.4% of the votes went in favour of the new system, a victory for the ruling Justice and Development Party (AKP).

But allegations of electoral fraud combined with the perceivably unequal footing of the country’s opposing parties during campaigning challenged the narrow win, and the opposition umbrella has vowed to appeal. And, as Turkey looks to move on from the result, massive detentions continue on charges of supporting terrorism – in particular targeting the secular media establishment.

Economic indicators have improved since the vote, likely a combination of public spending and incentives given during the campaign trail and perceived stability in the post-referendum period. However, the continuing state of emergency is a concern for the country’s businesses, which have exhibited large foreign exchange deficits.

Algerian elections are business as usual
Parliamentary elections on May 4 left little to the imagination: The National Liberation Front (FLN) dominated votes and turnout was low at 35%, down 5% from 2012. The coalition that leads parliament – an alliance between the FLN and National Rally for Democracy – remains dominant, while the opposition is a hodgepodge of divided political and social movements.

Although the political and economic elite remain in control of national institutions, the elections shed light on the growth of new forms of social engagement. Civil society and youth have turned to social media, humour, and art to express their discontent with the day-to-day.

President Rouhani, the Iranian juggernaut
In Iran, it was political parties that leveraged social media to rally voter bases and engage with those who were undecided. In the end, incumbent moderate President Hassan Rouhani was re-elected, his win welcomed by many with a sense of relief. Having bagged 57% of the ballots – 23m votes in total – Rouhani emerged as the undisputed winner, his nearest competitor, 56-year-old hardline cleric Ebrahim Raisi, taking only 38.5% of votes.

A sizeable turnout of about 70%, according to official data, is evidence of the convoluted nature of Iran’s "undemocratic democracy" in which people spent hours queueing to make their voices heard. It is important to note that the elections were a referendum for Rouhani’s platform. With their vote, Iranians made clear their feelings on the P5+1 nuclear agreement and what it offers: A chance to re-engage with the world and improve their and the country’s future.

“In Iran, the president, who holds little sway, is part of a complicated system in which power is split between the clerical establishment, Islamic Revolution Guard Corps, merchant class, and supreme leader.”

However, although Rouhani’s second term paves the way for further change, he cannot launch the societal reforms his supporters are holding out for. In Iran, the president, who holds little sway, is part of a complicated system in which power is split between the clerical establishment, Islamic Revolution Guard Corps (IRGC), merchant class, and supreme leader.

Regardless, Rouhani now has until 2021 to further entrench Iran in the international community. Even if US President Donald Trump takes a stronger stance on Iran than his predecessor, the nuclear deal remains, and new sanctions he has imposed on a handful of Iranian citizens and entities will not buck the trend.

But, more crucially for Iran’s future, the magnitude of his victory makes Rouhani a political juggernaut. This next term, coupled with his ability to manage Iranians’ expectations without disturbing the political equilibrium, will decide his future role in the Islamic republic.


2017 Election Results in Algeria, Iran, and Turkey

Source: The Delma Institute, 2017


A surprise Saudi reshuffle with precedent
In late June, Mohamed bin Nayef was replaced by Mohamed bin Salman as Saudi crown prince. Although unusual, the move did not come without precedent, with King Salman ordering Prince Nayef to replace Prince Muqrin bin Abdulaziz as crown prince in 2015. Although it is too early to gauge the impact of the move on Saudi policies, the new crown prince has been a power broker in national affairs since 2015, and his new rank received broad approval from the Allegiance Council, the body that manages royal succession. Along with his other new position as deputy prime minister, Crown Prince Mohamed will continue to hold the kingdom's defence and economic portfolios while pushing forward with Saudi Vision 2030.

Empowered Saudi-US relations
In early May, US President Donald Trump was in Riyadh on the longest stay by any US president to the kingdom. From a Saudi perspective there were three major takeaways from the visit: Advances in the nationalisation programme of the Saudi defence industry, institutional and financial momentum towards Saudi Vision 2030, and the renewal of US-GCC relations.

On May 18, two days before Trump’s visit, the Saudi Public Investment Fund (PIF) announced the launch of Saudi Arabia Military Industries (SAMI), a national military industries company. The company will manufacture products and provide services in four units: Weapons and missiles, defence electronics, land systems, and air systems. Despite early initiatives, Saudi industrialisation remains, for the time being, rhetorical. But the arrival of SAMI signals the kingdom’s long-term determination to increase local defence production stakes from 2% to 50% by 2030, as per Saudi Vision 2030.

“Pressure on defence spending seems inevitable and could undermine the long-term ambitions of a nationalised Saudi defence industry.”

Following approximately $110bn worth of deals signed by Raytheon, Lockheed Martin, General Dynamics, and Boeing during Trump’s visit, foreign defence companies will seek to capitalise on Saudi Arabia’s desire for technology transfer, local production, training, and research and development. Nevertheless, pressure on defence spending seems inevitable and could undermine the long-term ambitions of a nationalised Saudi defence industry.

The deals follow a series of important royal decrees and announcements made in May that gave further momentum to Saudi Arabia’s diversification efforts, with the appointment of Mohamed Al Ghufaili as head of the newly founded National Security Centre signalling the council’s mandate could be closely linked to economic issues. Meanwhile, in the drive to implement Vision 2030, the Council of Economic Affairs and Development identified 10 new programmes to tackle major issues such as affordable housing, youth unemployment, and privatisation of publicly owned enterprises.

“We view Saudi Vision 2030 as more than a national one; it is ours to deliver as well. We are part of the transformation process and proud to have been the first global company to show commitment to the Vision in 2016.”

John Rice, vice-chairman of General Electric and president and CEO of GE Global Growth Organisation

Through a series of deals and heavy-handed words directed at Iran, the Trump visit was a celebration and reinvigoration of US relations with the GCC. Saudi Energy Minister Khalid Al Falih said deals involving US and Saudi companies totalled more than $200bn, including one between Blackstone Group and PIF that will establish a $40bn vehicle to invest in US infrastructure projects. With the financial support in hand, Trump’s public statements focused on Iran’s aggressive stances in the region.

From Tehran, Iranians viewed the visit as having more glitz than substance: Little was promised or said that changes historical precedent, and few believe Trump will tear apart the Iran nuclear deal. While Iranians understand this US administration will remain hawkish, they will have to carefully weigh their responses against alienating squirmish business-hungry allies in Europe.


Deals Made During Trump’s Visit to Saudi Arabia, May 2017 ($)

Source: The Delma Institute, 2017


A crack leads to a fracture in Gulf relations
Tensions in the usually calm Gulf region increased after Qatari Emir Tamim bin Hamad Al Thani allegedly made comments on Iran, Israel, and Hamas that oppose the policies of other GCC states. Friction had been building for years due to Qatar’s regional policies in Libya and Syria, and its support for the Muslim Brotherhood, and the comments triggered an economic boycott led by the UAE and Saudi Arabia and supported by at least five other governments.

The ability of the GCC – until recently the only effective regional organisation in WANA – to function as a council that both provides security, as well as resolves disputes, is in doubt. The Qatar diplomatic crisis will probably clear the way for other states’ involvement in GCC affairs. This includes regional states such as Turkey and Iran, but also powers not traditionally involved such as Russia and Germany. The addition of more political actors impacts the ability of the bloc’s members to work together, and may, over the long term, foster regional instability.


The emir of Kuwait, seen here in Doha on June 7, 2017 with Qatari Emir Sheikh Tamim bin Hamad Al Thani, is positioning Kuwait as the mediating party in the GCC-Qatar dispute. Al Diwan Al Amiri – State of Kuwait, accessed June 7


As Daesh retreats, realpolitik fills the vacuum
On June 7, Daesh conducted its first successful attack on Iranian soil: Five gunmen and suicide bombers struck Tehran's parliament complex and the mausoleum of Islamic Revolution founder Ayatollah Ruhollah Khomeini, killing 18. The co-ordinated attacks targeted Iranian political rather than religious symbols weeks after Rouhani’s re-election, largely emboldening nationalist feelings and legitimising the IRGC’s argument for engagement in Syria and Iraq as a means to protect the homeland. The IRGC responded kinetically by launching missiles into Syria, and politically by placing blame on Saudi Arabia.

“Local disarmament and de-escalation deals between the government and opposition will likely continue increasing.”

Elsewhere, Turkey, Russia, and Iran reached an agreement on May 4 to establish de-escalation zones in parallel with a six-month truce across Syria’s main flashpoints. The truce has largely held, enabling the army to divert resources to frontlines against Daesh in east Aleppo province and Homs desert, south of Palmyra. Local disarmament and de-escalation deals between the government and opposition will likely continue.

The government and some factions within the opposition have been advancing to secure their spots in areas recently recaptured from Daesh, particularly in south-east Syria near the borders with Jordan and Iraq. Kurdish forces, re-equipped by the US-led coalition with heavy weapons, have surrounded Raqqa in anticipation of a summer offensive to dislodge Daesh from its self-proclaimed capital.

Daesh has suffered irreversible losses in Iraq and is close to being expelled from Mosul. Its senior leadership has fled the city for areas straddling the Iraqi-Syrian border, and high-ranking members in Syria have been killed.

Despite Iran’s stated willingness to reform, and the continued opening of its economy to international companies, foreign investors remain cautious. In Egypt, signs of economic recovery have not dissuaded security concerns, the likes of which continue to hold back investors and tourists.

Iran

Economic recovery, anger, and an election

The last quarter saw Iranians participate in a historic election that, ultimately, served as a vote of confidence in Rouhani and his policies. Securing 57% of the votes – up from his first election – the incumbent was not held back by a slow and uneven economic recovery. Despite growing frustration, Iranians renewed their confidence in the moderate leader, extending his mandate for further reforms. His ability to deliver and satisfy expectations in terms of employment and human rights is, however, in question.

Slow and uneven economic recovery despite lifting of sanctions
According to the World Bank, Iran’s economy “bounced back” with the lifting of nuclear-related international sanctions in January 2016, following years of contraction. The organisation estimates that Iran’s GDP grew 7.4% in the first half of the Iranian fiscal year, compared to the same period the previous year; an “impressive recovery”, according to the IMF.

Some sectors such as the energy industry are booming. Iran’s oil output quickly returned to pre-sanctions levels, and the country progressively regained most of its market share. Despite an ever-changing legal environment and cumbersome bureaucracy, international oil and gas companies lined up to participate in a number of tenders.

“This growth has been visible in areas such as the auto industry.”

Other sectors manifested early signs of dynamism: Many foreign companies established offices in Iran to take part in the renovation of the country’s decaying infrastructure and offer their products and services to Iran’s some 80m citizens. This growth has been visible in areas such as the auto industry: French car manufacturers Renault and Peugeot-Citroen have announced joint ventures with their respective Iranian partners IDRO and Iran Khodro, and even Jaguar Land Rover recently confirmed – despite a difficult history with Iran – rumours it had entered the market through local car dealer Ravanro Khodro.

The tourism industry is also rapidly expanding: A recent World Economic Forum report showed that Iran benefits from being the world’s cheapest place to travel through, an ability to maintain relative security, and cultural and natural wonders.


Iran’s World Ranking in Travel and Tourism, 2017

Source: World Economic Forum, 2017


Although international media only reported the most significant deals made between Iran and foreign investors, such as that with aircraft manufacturer Airbus, the signing of multiple agreements between small and medium-sized enterprises (SMEs) could be more consequential: Smaller contracts require less financial backing from banks, which are still reticent to support investment in Iran. They also have a more direct and immediate effect on the Iranian economy and could, therefore, reduce unemployment. This explains the government’s most recent scheme to allocate $5.3bn to prop up 10,000 SMEs.

A growing frustration among Iranians
By Rouhani’s own admission, providing jobs to the 1.5m Iranians who reach working age each year will require annual GDP growth of 8%. Expectations among the population are high, and a level of frustration is growing, specifically in peripheral provinces with a history of underdevelopment due to the religious and ethnic minorities inhabiting them. And, while the Iranian government promised a tsunami of investors, uncertainty surrounding Trump’s policy towards the country has caused banks and, consequently, companies to adopt a wait-and-see policy.


Nominal GDP Per Capita of Iran, 2002-16 ($)

Source: IMF, 2017


Iranians have continued to use religious as well as secular festivities to voice their discontent. Slogans such as “forget about Syria and think about us” have become frequent. They highlight the expanding rift between the government and most powerful elements of the Iranian oligarchy – the IRGC and supreme leader – who focus their attention on supporting the Syrian government.

“As the Syrian conflict continues to de-escalate, Iran’s direct involvement may also decrease – possibly soothing internal tensions.”

But, as the Syrian conflict continues to de-escalate, Iran’s direct involvement may also decrease, possibly soothing internal tensions. Moreover, its military operations are also paying off. Syria is becoming a market for Iranian companies, the latter of which benefit from preferential access to the country’s reconstruction efforts. By way of example, in April, Iran announced agreements to introduce a mobile licence operator in Syria, the right to operate phosphate mines, the transfer of 5,000 ha of land for the creation of a petrochemical terminal, and the transfer of another 5,000 ha for farmland.

The government understands development of its economy requires the normalisation of relations with the GCC. However, Trump’s vocal West Asian policy might disrupt already fragile ties, possibly forcing Tehran to rely even more on its Asian partners, despite a growing anti-Chinese sentiment used against Rouhani in the recent electoral campaign.


Pro-Rouhani Iranians hold up campaign posters during a rally in Tehran, Iran, May 17, 2017. Tima/Reuters/phocal Media

Rouhani’s re-election, a plebiscite for his actions and ambitions
Rouhani’s re-election, coupled with a 70% voter turnout, are an endorsement of his first-term policies, especially considering the significant opposition he faced as an incumbent president. Despite lacklustre economic results since the lifting of sanctions, with their vote, Iranians demonstrated a strong attachment to the P5+1 agreement.

During his campaign, Rouhani promised the lifting of all remaining international sanctions against Iran. Despite his efforts, those resulting from the US designation of Iran as a ‘state-sponsor of terrorism’ or the Iranian ballistic missile programme will remain, as Tehran cannot afford, for strategic reasons, to lose Hizbollah and its deterrence capabilities. However, Iran has already attempted to diminish or remove EU sanctions related to its human rights record. Because the country wishes to normalise relations with Europe and benefit from the expertise of primarily French and German companies, it will promote marginal reforms such as the recent diminution of executions.

“Rouhani’s re-election is a clear mandate for societal changes. However, the president is a moderate, not reformist.”

Rouhani’s re-election is a clear mandate for societal changes. However, the president is a moderate, not reformist. Should he be pushed into reform, it is doubtful the Iranian clerical establishment would allow liberalisation, something they perceive as an existential threat to the Islamic Revolution.

The necessity to maintain social cohesion and avoid Rouhani voters taking to the streets will force the president to focus on the economy, with the primary objective of reducing unemployment. While ongoing international sanctions hamper the economy’s development, there are other reasons that explain companies’ apprehension to invest: Bureaucracy, endemic corruption, and lack of co-operation from local banks. Rouhani will likely attempt to create a pro-business environment by removing these hurdles: An important systemic reform that could transform many exploratory testings into contracts.

Lastly, though the June 7 Daesh attack targeted two potent Iranian symbols, the Imam Khomeini mausoleum and parliament, its impact has so far been relatively limited: Rouhani has only benefitted from a temporary 'sacred union' between conservatives and moderates, and international companies continue to carefully weigh possible investments.

Egypt

Cautious economic progress despite security challenges

Despite a handful of positive indicators, Egypt’s economic recovery remains rocky. Within the political sphere, little has changed that would pose a challenge to the continued presidency of Abdel Fattah El Sisi. Internationally, Egypt is shoring up its alliances with Gulf friends while building bridges with the Trump administration. Meanwhile, Daesh and other terror groups continue to launch attacks both in the Sinai Peninsula and mainland Egypt despite an ongoing state of emergency, deterring tourists and potential investors.

Economic reforms bolster international confidence
International confidence was seen in Egypt’s May 25 sale of $3bn in eurobonds at lower interest rates than previously offered. However, following its decision to allow the pound to float, rampant inflation as high as 31.5% persists. This will continue to prove difficult for Egyptian policy-makers working to untangle the Gordian knot of interrelated economic effects: A weaker currency may have led to a rise in export orders for the first time in two years, but has had the knock-on effect of raising prices for Egyptian consumers and businesses that require imported manufacturing inputs.


Inflation in Headline CPI Vs E£ to $

Sources: Central Bank of Egypt, Xe.com, 2017


Contraction in non-oil sectors such as manufacturing and tourism continues – with weak, underlying demand – but has slowed. An IMF-recommended rise in interest rates may help combat inflation and stabilise the currency, but could also pose challenges to local businesses seeking to borrow to finance growth. Parliamentary approval of a long-delayed investment law that offers incentives to investors and cuts down on bureaucracy may encourage foreign investors, but it is too soon to judge its impact.

“Each new economic measure has the potential to stave off problems and support economic growth, but with painful short- and medium-term consequences.”

Each new economic measure has the potential to stave off problems and support economic growth, but with painful short- and medium-term consequences: Subsidy reforms, for example, are helping balance the budget, but will impact the affordability of staple foods for some Egyptians; and well-intentioned steps like interest rate and currency changes executed without notice can generate uncertainty that, in turn, impacts investment. Egyptian policy-makers will have to walk a knife’s edge between following through with needed reforms and off-setting the resulting economic impacts that could generate significant social, and possibly political, pressure.

Egypt re-asserts its international political role, consolidates domestically
Sisi has acknowledged that economic reforms may have negatively impacted his popularity. However, this has not stopped him repeatedly emphasising his commitment to the measures. Currently, there is no unified political opposition either outside or within government, and the 2018 presidential election is likely to result in Sisi’s re-election unless opposition parties are able to rapidly organise and mobilise support.

Egypt’s relationship with Saudi Arabia appears to have bounced back after a brief period of tension over the former’s stance on regional issues including Syria and Yemen. Visits by Sisi to Saudi Arabia and the UAE in April, and the Egyptian leader’s inclusion alongside Saudi King Salman and Trump at the opening of the Saudi Global Centre for Combating Extremist Ideology, appear to have been intended to clear the air and renew relations.

“Saudi Arabia and the UAE have invested heavily in Egypt’s recovery, and Egypt has played an important role in ongoing mediation efforts to resolve the Libyan crisis.”

Saudi Arabia and the UAE have invested heavily in Egypt’s recovery, and Egypt has played an important role in ongoing mediation efforts to resolve the Libyan crisis. Egypt was also quick to side with Saudi Arabia and the UAE in May following a dispute with Qatar over alleged comments made by its leader, Sheikh Tamim bin Hamad Al Thani. Like its GCC allies, Egypt moved within a day to block a number of websites, including Al Jazeera and Huffington Post Arabic, for “supporting terrorism”. Egypt will also rely on increased domestic gas production and other sources to reduce its LNG imports from Qatar. The crisis, however, continues to loom over the significant remittances sent home by Egyptian workers in Qatar. For Egypt, the strength of its relationship with Saudi Arabia and the UAE is significant as both a financial backstop and validator of its regional role.


Egyptian President Abdel Fattah El Sisi, Saudi King Salman, and US President Donald Trump inaugurate the Global Centre for Combating Extremist Ideology in Riyadh, Saudi Arabia, May 21, 2017. The White House/Flickr


Egypt struggles to stem pattern of terror attacks
Despite some progress, security in Egypt remains poor, with significant implications for foreign investment and tourism. Daesh attacks continue almost unabated, and the group is able to exert some level of control over parts of North Sinai. The fact that local tribes, including the major Tarabin, have directly taken up arms against Daesh in the area is an indicator that security forces have been unable to resolve the issue on their own. Daesh has further begun a campaign of attacks against Egypt’s Coptic Christian community, including targeted murders in Sinai and major attacks in Cairo in December 2016, in Alexandria and Tanta on April 9, 2017, and near Minya on May 26, 2017, resulting in dozens of civilian casualties.

Daesh attacks have drawn the most headlines, but other groups such as the Muslim Brotherhood-aligned Hasam Movement have also carried out assaults of reasonable sophistication, such as the May 2 attack on a Cairo checkpoint that left three policemen dead. The group directly threatens elements of the security forces and judiciary. Attacks in and around Cairo and Alexandria demonstrate that the problem of terrorism has not been constrained to Sinai.


Significant Security Incidents Vs Tourist Arrivals, 2015-17 (thousands)

Source: Central Agency for Public Mobilisation and Statistics, The Delma Institute, 2017


With tourism numbers just starting to recover at the beginning of the year, a drumbeat of attacks could significantly dampen any growth in the sector. Also significant is the news that at least one major multinational company cancelled a planned trip by executives over security concerns. The ongoing state of emergency will make the country appear ‘risky’ for investors and could deter much-needed inflows of foreign capital, and pressure is likely to continue growing on the Sisi government to take new steps beyond the repeated activation of such measures. Following the incident in Minya, Egypt’s military launched airstrikes against Al Qaeda-linked militants in Derna, Libya. Such moves acknowledge the difficulty Egypt faces in securing its long border with Libya, similar to the difficulty it has faced in securing the increasingly dangerous Sinai.

In our third deep dive, we take a look at the UAE’s growing defence industry, and how and why foreign companies should take advantage of the country’s plans to expand and strengthen this sector. In our ‘black elephant’ series, we explore the fall of nuclear power in Europe, and its rise in WANA.

An Indigenous UAE Defence Industry

Opportunity strikes for defence contractors

Understanding the underlying developments of the UAE’s defence industry offers win-win opportunities for defence contractors operating in the local market.

Over the years, the UAE has significantly increased defence spending, with estimates of more than $22.7bn going towards the sector in 2015, up 135% from 2005. Today it is the world’s third-largest arms importer, behind India and Saudi Arabia, with most imports over the last four years coming from the US, France, and Italy.

Despite budget pressures, defence spending has increased in line with growing regional threats and could hit $41bn by 2025. The UAE’s military participation in the Yemen war requires logistics spending and has renewed the country’s determination to obtain high-tech arms to support its troops.


Estimated Military Budgets of GCC States, 2000-16 ($bn)

Source: SIPRI Military Expenditure Database, accessed 2017

Trend Indicator Value of Arms Exports to the UAE, 2012-16

Source: SIPRI Arms Transfers Database, accessed 2017


From a business perspective, to automatically assume that an increase in the defence budget equates to ‘business as usual’ oversimplifies the matter. Without a more thorough examination of the UAE’s defence sector, the long-term interests of foreign defence contractors will not be served. While attention is focused on the UAE’s skyrocketing budget and increased arms imports, one recent and increasingly important aspect of the sector is often overlooked: The development of the local industry.

“Armed with appropriate information, foreign companies will not only be able to distinguish themselves from fierce competition but will also be able to offer the UAE military tailored products and services.”

As the UAE seeks to gain status as an emerging producer of arms, its commercial relationship with traditional defence partners should no longer be framed as one of provider-client but rather that of a strategic partnership. Armed with appropriate information, foreign companies will not only be able to distinguish themselves from fierce competition but will also be able to offer the UAE military tailored products and services.

Seize the moment
Over the past decade, the UAE has developed its defence base to decrease its reliance on traditional arms exporters. Such moves have not just been made to counter growing regional threats: They also reflect the UAE’s greater ambitions to become a regional and international actor. Focus on this sector also aligns with Vision 2021's objective of economic diversification and job creation.

The creation of Emirates Defence Industries Company (EDIC) in December 2014 consolidated previous initiatives and signalled the UAE’s determination to invest in its defence industry. Integrating assets owned by Mubadala Development Company, Tawazun Holding, and Emirates Advanced Investment Group, EDIC is made up of 15 companies that provide “manufacturing, autonomous systems, mapping, maintenance, repairs and overhauls, communications, logistics, and technology development”.

In total, more than 120 local public and private companies support the country’s nascent defence industry.


Basic Stakeholder Map of UAE Public Defence Actors

Source: The Delma Institute, 2017


Most companies deliver parts, components, and services to local or international clients. However, some local companies have managed to co- or fully produce their own products using technology procured from international partners. During the 2017 Abu Dhabi International Defence Exhibition and Conference (IDEX), NIMR Automotive, a subsidiary of EDIC, was awarded a contract to supply more than 1,765 armoured vehicles to the UAE Armed Forces. In addition, caracal pistols are the first small arms to be produced in the UAE, and are now the official sidearms of the armed and security forces.

Elsewhere, Abu Dhabi Ship Building Company (ADSBC) bought the rights to the BR70 70m corvette, designed by France’s Constructions Mecaniques de Normandie. Using the template to create the Baynunah-class corvette, ADSBC now exports to Kuwait, Oman, and, potentially, Saudi Arabia’s naval force.


A visitor walks by a poster at IDEX 2007 in Abu Dhabi. IDEX takes place every two years and attracts thousands of defence companies from around the world. Mohamed Salem/Reuters/phocal Media


The UAE has increasingly asserted itself as a credible military actor; one that knows its wants and needs. Given its small pool of citizens (out of the approximately 9.2m people living in the UAE, about 1.1m are Emirati) and educated labour force, the UAE is aware that, for the time being, it must rely heavily on foreign highly skilled workers.

“A desire to increase R&D spending is visible in the UAE’s push to accompany any arms deal with local investment, thereby generating local knowledge and capabilities.”

Nevertheless, the transient nature of the UAE does not suit its long-term plans. The country needs to foster local talent by increasing research and development (R&D) spending, which currently represents 0.49% of GDP, far below the 2.4% average among OECD countries. Here, a desire to increase R&D spending is visible in the UAE’s push to accompany any arms deal with local investment, thereby generating local knowledge and capabilities.

The UAE is also taking steps to formalise its procurement process to more effectively assess its needs and better communicate them to traditional suppliers. However, it appears efforts have essentially been unintentionally put on the backburner by the Yemen conflict.

Act strategically and listen first
Traditional defence suppliers should capitalise on this moment, especially if they want to keep up with fierce competition from, among others, Chinese defence companies, whose significant presence at IDEX 2017 suggests their increasing influence in the local market.

Traditional partners need to rethink their relationship with the UAE. They must realise that the UAE’s military leadership better understands its own mission and long-term vision for the country. There is a growing recognition of what is needed to achieve these goals and incubate the local defence industry. According to a source working in the defence sector, “foreign companies need to learn how to listen first; to produce better-tailored products and services that would fit UAE requirements”.

“While the UAE has started to localise some aspects of arms production, long-term timelines are unclear, creating opportunities for foreign companies to help the country clarify and sustain its ambitions.”

While the UAE has started to localise some aspects of arms production, long-term timelines are unclear, creating opportunities for foreign companies to help the country clarify and sustain its ambitions. Historically, traditional defence suppliers have already helped the UAE develop its local defence industries: Many local defence companies such as AMMROC, ADASI, Al Jaber Group, and Tawazun Dynamics started as joint ventures with foreign companies and have since gone on to become standalone operations. However, defence suppliers need to continue and expand such efforts to help the UAE overcome its limitations.

Given the UAE’s need for technology transfer, training, and corporate R&D funding, there are sizeable opportunities for foreign companies to create attractive packages. Traditional defence companies should also aim to maximise the impact and scope of offset programmes, which require foreign defence contractors that sign deals worth more than $10m over a five-year period to ensure 60% of the total value of the contracts is invested locally. Traditionally, foreign suppliers would embark on a joint venture with an Emirati partner or provide technology transfer for a particular subsystem, specific piece of equipment, or maintenance of software. Today, they need to look beyond this and offer transfer on niche technology and capacity-building investments.

Due to the importance the UAE places on fostering local talent, foreign suppliers should consider funding more R&D research within local universities or industrial parks. They should also consider collaborating with local defence companies to introduce high-tech training, starting with conscripts.

Racing for Reactors

WANA countries vie to join the nuclear power club

Al Barakah, the UAE’s first nuclear power plant, is due to begin operations anytime from now until 2020. L. Potterton/IAEA


With global demand for power expected to double by 2030, the hunger for nuclear power is rising. At present, 15 countries have 59 reactors under construction. While growth in nuclear energy is led by Asian economies like China, which accounts for nearly one-third of new construction, multiple emerging markets in WANA are attempting to initiate nuclear power projects of their own. Here, Europe’s experiment with nuclear power provides lessons on the headwinds facing the creation of successful nuclear energy programmes. Indeed, for WANA countries, while there are large obstacles on the path to success, these hurdles are not insurmountable.

In 2009, the UAE became the first country in the region to break ground on its civilian nuclear programme after signing a $20bn agreement with a consortium led by South Korea’s KEPCO for the construction of four 1400-MW APR-1400 pressurised water reactors at its Al Barakah site. With the first of its reactors already complete, the UAE will likely be WANA’s first nuclear operator.

“Turkey’s roughly 40-year-long ambition to start a nuclear programme only bore fruit in 2010.”

Close behind is Turkey, whose nuclear energy programme is arguably the most advanced. Turkey’s roughly 40-year-long ambition to start a nuclear programme only bore fruit in 2010: A $20bn build-own-operate contract with Russia’s Atomstroyexport for the construction of four 1200-MW VVER-1200 pressurised water reactors at the Akkuyu site on the Mediterranean coast.

There are also plans to construct in two more sites in Turkey: Sinop and Igneada. For the former, on the country’s northern Black Sea coast, Turkey signed a $22bn build-operate-transfer deal with Franco-Japanese consortium Areva-MHI in 2013 for four 1200-MWe Atmea-1 reactors. The project, which had been expected to begin in 2018, is already behind schedule. For the Igneada site, 12 km from the Bulgarian border in the north-west, Turkey has held talks with two procurers – China’s State Nuclear Power Technology Corporation and the Japanese-American consortium Toshiba-Westinghouse – for a four-unit nuclear power plant. With the latter’s bankruptcy last March, however, the future of the project is uncertain.

Another country with nuclear power plans is Jordan. By 2030, Amman aspires to have 30% of its electricity originate from nuclear sources and have transformed from a net energy importer to a net electricity exporter. In mid-2008, the country entered an agreement with Atomic Energy of Canada (AECL) for a feasibility study on a 740-MWe Enhanced Candu-6 reactor. Later that year, talks were held with France’s Areva for an 1100-MWe unit, likely of the Atmea design that Turkey is planning to build at its Sinop site, and KEPCO for a site selection and feasibility study.

In 2011, Jordan held talks with Areva-MHI, AECL, and Russia’s Atomstroyexport, inking a deal with the latter in 2013 for two VVER-1000 reactors that Russia's State Atomic Energy Corporation Rosatom will operate in a joint venture with the Jordan Atomic Energy Commission. The reactors are scheduled to enter service in 2025.

“While the UAE, Turkey, and Jordan have been making material progress, they could be overtaken by Saudi Arabia.”

While the UAE, Turkey, and Jordan have been making material progress, they could be overtaken by Saudi Arabia. By 2032, Riyadh plans to have spent more than $109bn adding 17 GW of energy capacity – enough to provide 15% of the country’s power requirements. Riyadh aspires to enter 16 nuclear reactors (at a cost of more than $80bn) into service by 2040, adding 17 GWe of nuclear capacity. The Saudis are already in talks with two Japanese-American consortia, GE-Hitachi and Toshiba-Westinghouse, for Generation III+ reactors. France’s Areva-EDF has also partnered with a Saudi company to undertake a feasibility study for its Evolutionary Power Reactor model.

Riyadh is working on building smaller units too: It has already signed a $2bn deal with South Korea’s Korea Atomic Energy Research Institute for the construction of two small, 330-MWe nuclear reactors and a 90-MWe reactor-integrated desalination plant. There are also ongoing efforts with Argentina’s Invap to build a small modular reactor based on its existing CAREM design, and with China Nuclear Engineering Corporation for the construction of a high temperature, gas-cooled, pebble-bed reactor. These projects will help build indigenous expertise and pave the way for more complex, large-scale projects.

Egypt, Iran, and Israel are also slated for future nuclear development. After more than three decades in the works, Egypt signed an agreement with Russia for the construction of four 1200-MWe reactors at its Al Dabaa site, financed by a 35-year, $25bn loan. The plant is expected to enter service in 2025. Iran plans to expand its Russian-made 1000-MW reactor at Bushehr with four Generation III+ reactors, along with plans for small reactor projects like the 300-MW indigenous light water reactor at Darkhovin and the $10bn deal signed in 2016 for two Chinese-made, 100-MWe reactors at Makran. Israel is believed to be undertaking a feasibility study for a nuclear power plant at its Shivta site in the Negev desert.


WANA Nuclear Projects: Current Progress

Source: The Delma Institute, 2017

Steeplechase, not sprints
Many of WANA’s nuclear aspirants, however, face large hurdles. Jessica Jewell of Central European University suggests only Saudi Arabia and the UAE are likely to successfully build nuclear energy programmes. Turkey and Egypt, she says, face challenges with regards to political instability, budget constraints, and government effectiveness, while Jordan, Bahrain, Yemen, and Qatar have barriers to nuclear power development such as small economies and weak governments.

Another major hurdle is cost, the likes of which could prevent some of these aspirants from joining the club. On average, the ultimate cost per KWh for nuclear power generation is nearly three times greater than original estimates suggest. Additionally, some aspirants, such as Turkey and Saudi Arabia, have opted for untested designs that will almost certainly drive up costs and delay construction. Even in countries with long-established nuclear energy programmes, such as the US, average construction costs for a plant are double initial estimates. Saudi Arabia and the UAE, both of which have the financial wherewithal to absorb these high costs, are unlikely to tolerate such surcharges, especially with oil prices at an all-time low.

“WANA’s nuclear aspirants lack prior nuclear energy experience, the needed system infrastructure, or a sufficiently developed human capital base.”

Furthermore, WANA’s nuclear aspirants lack prior nuclear energy experience, the needed system infrastructure, or a sufficiently developed human capital base. In most of these countries, electricity grids are not suited for nuclear power, meaning they would have to be significantly revamped. Developing a capable workforce is also a tough hurdle. Plant operators, regulators, and government personnel all require expertise, which, in turn, requires an adequate academic base and devoted funds. This is a time-consuming process: Nuclear specialists require nearly a decade of training.

Lastly, siting is a significant obstacle. Turkey’s Akkuyu is located by a popular resort town, with residents worried the project could hurt local tourism. For Saudi Arabia, the issue is water scarcity. The country’s Gulf Sea coastline is seismically active and poses security risks should tensions with Iran escalate. Siting the plant inland, however, requires the construction of water pipelines, another expense. Jordan, too, faces similar difficulties. Its prospective site, Qasr Amra, is a UNESCO World Heritage site and home to the powerful Beni Sakher tribe, which opposes the project. On top of this, the nearest water source is 70 km away.


Japanese Prime Minister Shinzo Abe and then-Turkish Prime Minister Recep Tayyip Erdogan during the signing ceremony for the construction of a second nuclear power plant in Sinop, Turkey, May 3, 2013. Umit Bektas/Reuters/phocal Media


Teamwork matters
To overcome these challenges, co-operation is at a premium. Indeed, multilateral co-operation can aid these countries not only in their nuclear energy pursuits but also in managing other critical resources, like water. In this regard, Europe offers a telling example: Through transboundary resource co-operation schemes like the European Coal and Steel Community and Euratom, Europe was able to achieve regional security and usher in a new era of prosperity.

Although regional integration on the same scale in WANA is difficult, countries can work to increase political engagement and technical co-operation in areas like grid interconnection, industrial knowledge-sharing, and multinational infrastructure projects. This June, for example, the first large-scale scientific co-operation in WANA, Synchotron-Light for Experimental Science and Applications in the Middle East, entered service in Jordan. Projects such as this offer a template for future co-operation efforts. While such steps are small, co-operative resource pooling at this level could serve as the necessary framework, enabling WANA countries to get their fledgling nuclear energy programmes off the ground.

Postscript


Over the last three months, cracks between Qatar and its neighbours have developed into a deepening fissure, with the UAE and Saudi Arabia leading an economic boycott against the country following years of frustration over Qatar’s regional policies. The diplomatic crisis has wide-ranging implications for the region. But how far will it go and how long will it last?

Outside the Gulf but still in WANA, elections in Iran, Turkey, and Algeria have consolidated the authority of sitting governments while highlighting the importance of economic considerations to national security, as evidenced by Trump’s visit to Saudi Arabia, Egypt’s focus on stabilising its economy, and Iran’s push to attract foreign investors. Will the economy be a boon or a trap for these states?

The UAE’s growing defence industry demonstrates the country’s push for diversification, the likes of which should prompt companies in the sector to rethink their traditional relationship with Abu Dhabi. On a greater scale, countries across the region must begin tackling the challenges they face if they are to complete the nuclear power projects that will diversify their energy portfolios.

And so, the region continues to strive for diversification and sustainability all the while dealing with uncertainty and increasing tensions.

Research for the report concluded on June 25, 2017.