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N o v m b r 2 7 I s s u N O 3 r s a r c h b u l l t i n This issu of th Gulf-Asia bulltin covrs a wid rang of topics that ncompass th diffrnt aspcts of burgoning Gulf-Asia rlations in th political

Th Gulf countris rlations with India, China, Japan, Australia as wll as Afghanistan and Pakistan ar analyzd.

1 N o v m b r 2 7 I s s u N O 3 r s a r c h b u l l t i n This issu of th Gulf-Asia bulltin covrs a wid rang of topics that ncompass th diffrnt aspcts of burgoning Gulf-Asia rlations in th political and conomic sphrs as wll as th opning of nw avnus in othr aras which is xpctd to tak th rlationship to a highr lvl. Th Gulf countris rlations with India, China, Japan, Australia as wll as Afghanistan and Pakistan ar analyzd. Th importanc of dvloping closr rlations on th political and sociocultural fronts as wll as incrasd coopration in th aras of scurity and countr trrorism is strssd. Th Asian stats proximity to th Gulf Stats and thir dpndnc on oil imports from th rgion has shapd th political and conomic dynamics of thir rlations. With th incrasing dmand for sustaind nrgy supply in th contxt of th rapid conomic growth of Asian giants China and India, th oil-producing Gulf Stats would nd to focus on nsuring long trm scur nrgy supplis. Th articl on Japan s rlations with th Gulf Stats looks at th spcifics govrning ths rlations and maks rcommndations for xpanding tis into othr sctors bsids nrgy. Th articl on Gulf-China tis nots that hindring furthr growth in conomic tis btwn China and th Gulf Stats is China s rluctanc to opn its markts xcpt in som sctors. Though th GCC stats hav bn ngagd in furthring thir rlationship with svral Asian countris, thir links with Australia hav bn affctd by th lack of high-lvl and rgular contact btwn th rspctiv political ladrship. Also in focus in this issu ar th GCC s rlations with Afghanistan. Though som GCC companis lik Etisalat and Air Arabia attmptd to launch oprations in Afghanistan, th scurity situation in th country provd to b a dtrrnt. Howvr, bcaus of th strong Afghan xpatriat prsnc in th Gulf Stats it would b bnficial to both Afghanistan and th Gulf Stats to dvlop this rlationship. On th scurity front, th thrat to Pakistan mrging from th Taliban-al Qada nxus in its bordr aras with Afghanistan has scalatd ovr th past fw months. Th situation in Waziristan, which affcts not only Pakistan but also stability in Afghanistan, could hav an impact in th widr rgion. Though gographically sparatd, both Iraq and Afghanistan ar tsting grounds for US policis and ths could hav political and conomic costs for th rgional stats. It is hopd that th varid prspctivs on th divrs thms dalt with in this bulltin will provid a comprhnsiv undrstanding of issus that could hav a significant influnc in shaping futur Gulf-Asia political, conomic and scurity tis. Faryal Lghari Modrator, GCC-Pakistan Rlations Rsarchr, Scurity & Trrorism Studis Gulf Rsarch Cntr

Editor-in-Chif: Abdulaziz Sagr Editor: Faryal Lghari Assistant Editor: Radhika Mnon Editorial Policy Th Gulf-Asia Rsarch Bulltin sks to documnt rlvant data and addrss th currnt information dficit in

Th Gulf-Asia Rsarch Bulltin is a triannual publication and can b accssd on th GRC wbsit at www.grc.a I n T h i s I s s u N o v m b r 2 7 I s s u N O 3 China-GCC: Lots of Trad, Littl Invstmnt Dr.

No part of this publication may b rproducd, stord in a rtrival systm, or transmittd in any form or by any mans, lctronic, mchanical, photocopying, rcording or othrwis, without th prior writtn

2 Editor-in-Chif: Abdulaziz Sagr Editor: Faryal Lghari Assistant Editor: Radhika Mnon Editorial Policy Th Gulf-Asia Rsarch Bulltin sks to documnt rlvant data and addrss th currnt information dficit in this ara. Th articls in this publication do not rprsnt th opinion of th Gulf Rsarch Cntr, but that of th individual author. Th Gulf-Asia Rsarch Bulltin is a triannual publication and can b accssd on th GRC wbsit at I n T h i s I s s u N o v m b r 2 7 I s s u N O 3 China-GCC: Lots of Trad, Littl Invstmnt Dr.Eckart Wortz 4 Gulf-Asia Intrdpndnc: Exploring th Enrgy Dimnsion Dr. Samir Pradhan 8 Flash Point Waziristan: Th al-qada-taliban Linkags Faryal Lghari Gulf Rsarch Cntr, 27 All rights rsrvd. No part of this publication may b rproducd, stord in a rtrival systm, or transmittd in any form or by any mans, lctronic, mchanical, photocopying, rcording or othrwis, without th prior writtn prmission of th GRC. For information rgarding contributions and advrtising, contact: Faryal Lghari, Program Modrator, GCC-Pakistan, GRC (mail: faryal@grc.a). Publishd by Gulf Rsarch Cntr 187 Oud Mtha Towr, 11th floor 33 Shikh Rashid Road P. O. Box 8758, Dubai, UAE Tl.: Fax: info@grc.a Wbsit: Afghanistan, Cntral Asia & th Gulf: Complmntarity of Intrsts byond th Economic Agnda Dr. Michala Prokop 18 Rbalancing Australia-GCC Rlations Anthony Bubalo 22 Japans Prim Ministr s Visit to th Middl East to Build a Multilayrd Rlationship Akiko Yoshioka 25 GRC Partnrships with Asian Institutions 29 Prominnt Asian Visitors to th GRC 3 Mdia Monitor 3 Programm updats plas visit us at www. ibcgulfconfrncs. com or www. grc. a I s s u N o. 3 N o v m b r 2 7

3 Nowadays, China hyp is all ovr th plac. It is takn for grantd that th workshop of th world is about to bcom th glob s most prominnt conomic powr and its unlimitd growth is xpctd to stay on a samlss path. Th GCC countris ar no xcption; on dos not hav to sarch for long to find a pundit or an xcutiv talking about a Look East policy or a nw Silk Road. Th dramatic incras in trad btwn China and th GCC sms to justify such talk; howvr, a look at th ramifications of th Chins growth modl and th low lvl of cross-bordr invstmnts rais som important qustions. Trad btwn China and th GCC incrasd tn fold btwn 1995 and 25, and th trnd sms likly to continu. China s bilatral trad with th GCC has jumpd to $21 billion in th first six months of 26, rgistring a 34 pr cnt growth ovr th corrsponding priod last yar. Th Chins shar in GCC trad is 6.1 prcnt (26), 5.3 prcnt on th xport sid and 7.6 prcnt on th import sid. Thus, it is still considrably bhind th US, th rst of Asia as a whol and spcially th EU (s figur), but its rlativ importanc has incrasd trmndously. China is dlivring to th GCC manufacturd goods lik lctronics, machinry and txtils, whil th GCC xports nrgy and raw matrial that China nds for its ambitious industrialization driv: crud oil, ptrochmicals, frtilizr and aluminum. China is a nt oil importr sinc 1993 and now nds to import 4 prcnt of its rquirmnts with dpndnc growing. Th sam is tru for various raw matrials ranging from coppr to iron or and timbr. China has China-GCC: Lots of Trad, Littl Invstmnt Dr. Eckart Wortz Program Managr, Economics Gulf Rsarch Cntr Thus, so far China has had to b satisfid with Sinorapidly xpandd its conomic ngagmnt in Africa in ordr to scur supplis of raw matrials, with major invstmnts in Sudan, Angola and Nigria. Th GCC countris hav com into its focus as wll and givn th ris in trad rlations, on would xpct a similar ris in importanc whn it coms to cross-bordr invstmnts. Howvr, this is not th cas du to th prvalnc of portfolio invstmnts in Wstrn scuritis markts and rlativ inaccssibility of both markts for FDI from th othr sid du to protctiv considrations on th national lvl and intrnational powr politics. Dtaild bilatral FDI data for China and th GCC ar not availabl. According to th Chins Ministry of Commrc, howvr, China and th GCC countris signd accumulatd projcts worth $6.6 billion and contracts of labor srvics of $1.3 billion by th nd of 25. GCC countris mad contractual invstmnts of $1.4 billion, and actual allocatd invstmnt was $71 million. FDI, howvr, plays only a minor rol in GCC forign invstmnts whn compard to portfolio invstmnts. Th Institut of Intrnational Financ (IIF) stimats that btwn 22 and 26, only 11 prcnt of GCC forign invstmnts wnt to Asia, 11 prcnt to othr MENA countris whil narly 8 prcnt flowd into Wstrn scuritis markts. Th Chins financial markts ar still at an arly stag of thir dvlopmnt, with limitd invstor protction and small markt capitalization. Th capitalization of its stock markt, for xampl, quals lss than 2 prcnt of th ons in th US or Europ rspctivly and its currncy is not vn fully convrtibl. Givn such limitations, cross-bordr invstmnts naturally focus on FDI. As about two-thirds of GCC countris nrgy xports go to Asia, thir invstmnt intrsts hav focusd on rfining and storag capacity to dvlop stabl customr rlationships. Saudi Aramco has takn up 25 prcnt staks in multi-billion rfinry projcts in Qingdao and Fujian in th last two yars. Kuwait Ptrolum Corporation, on th othr hand, has signd a joint vntur with Sinopc to dvlop th $ billion projct of th Guangdong rfinry. But moving byond rfining, broad-basd GCC stratgic invstmnts in China ar rar so far. Princ Talal Al Wald and th invstmnt authoritis of Kuwait and Qatar hav invstd in th IPOs of Stat Bank and Commrcial Bank of China and thr hav bn som invstmnts in ral stat, but th majority of GCC FDI has flown to Europ in rcnt yars, followd by othr MENA countris and th US. Hops for incrasd cross-bordr invstmnts rcivd a considrabl blow whn Saudi ptrochmical giant SABIC announcd in 26 that it was considring withdrawing a plannd invstmnt of $5 billion bcaus it flt that th Chins sid was stalling ngotiations. Whil China is agr to conqur world markts for its manufacturd goods, it sms to b lss happy about opning its own markts xcpt for th ncssary raw matrials and nrgy fuls to powr its ambitious industrialization driv. Not surprisingly, Chins invstmnt intrst in th GCC has focusd on th nrgy and commoditis sctor lik in Africa and lswhr. Sinopc has got a licns for natural gas xploration in th Empty Quartr of Saudi Arabia, and Chins NFC and stat ownd SINOMACH nvisag a $5 billion aluminum projct with a Saudi partnr in Jizan Economic City, although it rmains Figur 1: GCC Exports Rlativ Shar Prcnt Yar to b sn whthr th projct will ovrcom xisting nvironmntal and political concrns. Nakhl and its Chins partnr Chinamx hav built th Dragon Mart in Dubai, th largst distribution hub for Chins goods outsid mainland China. Whil th Dragon Mart projct looks promising givn th world-wid succss of Chins manufacturing, advancs in th nrgy sctor fac svr limitations. Du to national stratgic prioritis, GCC countris hav mostly closd thir upstram oil sctor to forign participation. Only a fw projcts in th UAE, Qatar and th Nutral Zon ar accssibl, but hr Wstrn intrnational oil companis (Exxon, Chvron, Shll) hav a strong standing, and it is unlikly that th Chins sid will b abl to gt a foot in th door. Oil is a stratgic commodity sinc th British navy switchd from coal to oil on th v of World War I, and political influnc is indispnsabl to acquir oil-rlatd contracts. But it is not th Chins navy that is patrolling th Strait of Hormuz and guaranting scurity of transport routs in this snsitiv part of th world. Apart from a dlivry of short rang missils to Saudi Arabia ovr 2 yars ago, it also has not managd to conclud arms dals in th rgion. Th lattr ar oftn linkd to political backroom dals and kickback paymnts, and crucial to acquir stratgically qually important oil dals. Anothr stumbling block for an incrasd Chins ngagmnt is its clos rlationship with Iran which is incrasingly prcivd as a thrat by th Arab Gulf countris. Although China finally supportd nuclar program rlatd sanctions against Iran in th UN Scurity Council, it has Middl East Asia China nvisagd svral high profil nrgy dals with Iran. Bsids, Iran has obsrvr status in th Shanghai Coopration Council, a loos consultation body btwn Russia, Cntral Asian rpublics and China. EU US I s s u N o. 3 N o v m b r 2 7

Figur 1: GCC Imports Rlativ Shar Prcnt 45 4 35 3 25 2 15 1 5 198 2 25 Yar Middl East Asia China EU USA pc s gas licns in th Empty Quartr, a dal whos conomics was not nticing nough for many Wstrn IOCs

ENI). Cross-bordr invstmnts ar thrfor a highly politicizd issu in th cas of th oil-rich GCC countris.

4 Figur 1: GCC Imports Rlativ Shar Prcnt Yar Middl East Asia China EU USA pc s gas licns in th Empty Quartr, a dal whos conomics was not nticing nough for many Wstrn IOCs which withdrw from th bidding procss laving th fild to nrgy companis with prsumably ovrarching political intrst of thir hom countris (Sinopc, Lukoil) or smallr ons dsprat for rsrv rplacmnt (Rpsol, ENI). Cross-bordr invstmnts ar thrfor a highly politicizd issu in th cas of th oil-rich GCC countris. Th influnc of conomic factors is furthr diminishd as both partnrs currntly do not nd ach othr s capital: China as wll as th GCC countris command hug currnt account surpluss and cannot accommodat additional invstmnt monis. Against th backdrop of global financial imbalancs, vry dollar invstd with ach othr finally nds up in th US anyway to financ th US dficit. A structur that ld th Nw York Fd rcntly to spak of indirct ptrodollar rcycling. Givn th stp incras in trad and China s acclrating nrgy hungr, it is possibl though that th country will bcom mor assrtiv and that its cross-bordr invstmnts will incras togthr with a growing political rol. China will nd to giv somthing to th GCC countris in xchang, howvr, and opn its markts to rapidly xpanding GCC industris in th filds of ptrochmicals, aluminum and frtilizr. Whil things unfold, it will b intrsting to watch how China s ambitions fac stiff rsistanc from vstd Wstrn intrsts in th rgion. GRC Publication: Gulf Go-Economics Editd by Eckart Wortz Th intgration of th Gulf Coopration Council (GCC) countris into th world conomy is incrasingly multifactd. Although oil and gas rvnus ar still of paramount importanc, th GCC countris hav dvlopd a divrsifid conomic structur with nw sctors mrging in th filds of ptrochmicals, havy industris and srvics. Apart from nw import rquirmnts for ths industris, th focus of th GCC s trading rlations has movd astwards. Th US only accounts for 1 prcnt of imports nowadays whil th Europan Union and Asia ach roughly contribut on third of ovrall imports. Furthrmor, Asia purchass about two-thirds of GCC nrgy xports. This has naturally raisd qustions about potntial political ralignmnts although Asia still lags far bhind Wstrn markts in trms of cross bordr invstmnts. 6 7 I s s u N o. 3 N o v m b r 2 7

Gulf-Asia Intrdpndnc: Exploring th Enrgy Dimnsion Tabl 1: World Oil Consumption by Rgion, 197-26 (million tons, MT) Africa Amrica Asia Europ & Eurasia Middl East World Total 197 35.2 892.2 338.9 93.

5 Gulf-Asia Intrdpndnc: Exploring th Enrgy Dimnsion Tabl 1: World Oil Consumption by Rgion, (million tons, MT) Africa Amrica Asia Europ & Eurasia Middl East World Total , , , ,975.1 Introduction Dr. Samir Pradhan Snior Rsarchr, GRC Th Gulf 1 rgion and th Asian 2 rgion constitut th two stratgic building-blocks of th currnt global nrgy rgim. Th Gulf rgion, having lost its nich xport markt shar in th industrializd Wst, is poisd to rgain global markt salinc on th basis of shr low-cost rsrv profligacy; th Asian rgion, on th othr hand, has bcom th global dmand hotspot du to its growthinducd spiraling consumption of almost vry form of nrgy, and oil and gas in particular. Asia s skyrockting Figur 1: World Oil Consumption by Rgional Shar (%) nrgy consumption coupld with ovrwhlming import dpndnc on th stratgically locatd Gulf rgion and simultanously th Gulf rgion s vital long-trm xport dpndnc on dynamic Asia, has com to dominat contmporary discours on th gopolitics of global nrgy scurity. Hypothtical scnario building by analysts on th basis of this dvlopmnt from th nightmarish scnario of an Islamic-Confucian conspiracy that may triggr a catastrophic gopolitical shift to a bnign cooprativ intrdpndnt framwork of consumrs and producrs which sks to addrss mutual vulnrabilitis prtaining to intrdpndnt nrgy scurity. Nvrthlss, th nrgy dimnsion is at th hart of volving Gulf-Asia intrdpndnc that is not only rdfining conomic ngagmnts, but also rshaping bilatral as wll as rgional gopolitical configurations. This articl xplors th fundamntal connotations of th nrgy dimnsion and proposs a strong cas for institutionalizing intrdpndnc through a marktbasd functional framwork (cooprativ comptition 3 ) among Gulf oil producrs and Asian consumrs in a winwin proposition. Background and Outlook , , , , , , , , , , ,39. 1, , , , , , , , , , ,889.8 Not: Amrica rfrs to North, South and Latin Amrica combind. Sourc: GRC basd on BP, 27. consumption on account of thir burgoning conomic growth; and th ntry of a numbr of non-opec oil and gas producrs in th global oil and gas markt, which has rodd th markt shar of th OPEC producrs, spcially thos in th Gulf. During th priod , world s oil consumption grw at an avrag of 1.6 prcnt annually. Th two oil criss during th 197s had th gravst impacts on th advancd industrializd countris: oil consumption in Europ droppd significantly (by almost 2 prcnt) and now stands at around 97.1 million tons including incras in consumption by transition conomis of th Eurasia rgion. On th othr hand, ovr th sam priod, th Middl East, Africa and dvloping Asia had not bn oil-dpndnt so much as svrly hit by th oil criss and thy xprincd phnomnal incras in oil consumption (s Tabl 1 and Figur 1). Howvr, world consumption of natural gas shows diffrnt trnds (s Tabl 2). Bcaus natural gas is producd narr to consuming aras (i.. lssr trad) as compard to oil, natural gas production trnds ar akin to its consumption pattrns. Th shar of North Amrica in world s natural gas consumption, which was 66.9 prcnt in 1972, fll drastically to 31.8 prcnt in 26, Oil consumption shars (%) Amrica Europ & Eurasia Middl East Africa Asia Ovr th yars, th global oil markt has undrgon substantial transformations owing to th cyclical and sasonal trnds of th global conomy. Th most significant trnds of th contmporary global nrgy rgim ar: th pattrn of nrgy transformation, whrby natural gas s shar in th world s primary nrgy mix is incrasing and that of oil is dclining; th incrasing importanc of th major Asian conomis in th global oil and gas Tabl 2: World Natural Gas Consumption by Rgion, (Mto) Africa Amrica Asia Europ & Eurasia Middl East World Total , , , , , , , , , Th Gulf rgion consists of Iraq, Iran, and th six GCC mmbrs (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE). 2 Th Asian rgion in this articl consists of th countris of all sub rgions in Asia such as South, South East and North East. 3 This is th buzzword of opn rgionalism which provids lvl playing fild for all stakholdrs to compt and hav a fair shar of th pi , ,574.9 Sourc: GRC basd on BP, 27. I s s u N o. 3 N o v m b r 2 7

6 or rgistrd a dclin of mor than half of th 1972 lvl. On th othr hand, in a rflction of advancing oil-togas shifts, th shar of Europ and Eurasia in th world s natural gas consumption ros from 29.8 prcnt in 1972 to 4.1 prcnt by 26. Dvloping countris of Asia, th Middl East, and Africa which hld 1.6 prcnt, 1.6 prcnt, and.2 prcnt shar in 1972, rspctivly xpandd to 15.3 prcnt, 1.1 prcnt, and 2.6 prcnt, rspctivly by th yar 27 (s Figur 2). shars (%) Figur 2: World Gas Consumption by Rgional Shar (%) About 6 prcnt of th world s total oil output is xportd. In othr words, about 6 prcnt of oil consumption is covrd by imports. Of oil imports/ xports, crud oil accounts for 76.7 prcnt and ptrolum products th rmaining 23.3 prcnt (27). It is th US and th rst of consuming aras, mainly consisting of larg dvloping countris of Asia, that rcordd a growth in oil imports in trms of both volum and world shar. US oil imports incrasd by an annual avrag of 4.3 prcnt during th last 25 yars (198-25), with its world shar rising from 2.9 prcnt in 198 to 27.1 prcnt in 25. Oil imports by th rst of world (RoW) consuming aras incrasd by Amrica Europ & Eurasia Middl East Africa Asia Shar(%) an avrag of 4.56 prcnt pr yar during , and its shar wnt up from 25.9 prcnt to 35.8 prcnt ovr th sam priod. Oil imports by ths two aras kpt swlling vn during , th priod of th two oil criss 4. Oil imports by Europ and Japan dclind by 3.9 prcnt and 13.2 prcnt rspctivly during On top of conomic stagnation, nrgy consrvation and oil substitution, th sharp dclin in Europ s oil imports rflctd rising slf-sufficincy thanks to th start of full-scal crud oil production in th North Sa. Th world shar hld by th two (Europ and Japan) alik contractd from 46.7 prcnt and 15.9 prcnt rspctivly in 1972 to 27.3 prcnt in 1982 and to 11.6 prcnt in 22. With ths importsgrowing and imports-falling aras combind, th world s oil imports droppd 13.8 prcnt during But, having risn latr, th growth avragd 1.2 prcnt pr yar throughout th priod , but th growth rat incrasd to 4.3 prcnt pr yar during th Figur 3: Rgional Shars in Gulf Oil Exports, (%), 4 Ths figurs hav bn calculatd from th historical data sris providd by BP Annual Statistical Bulltin Amrica Europ Asia OPEC Not: OPEC shows th shar of Gulf countris in OPEC s total world xports; Sourc: GRC basd on OPEC Annual Statistical Bulltin, priod du to phnomnal growth in imports by dvloping mrging conomis of Asia and incras in imports by othr rgions as wll. 15 Importantly, as a rsult of industrializd consuming countris rsponss 6 45 to th oil criss, combind with th 3 policy of production curtailmnts 15 implmntd by th OPEC, th Middl East and African oil producing countris, spcially th Gulf OPEC countris, cam to hold lss wight in th world s oil xports than bfor. Exports from th formr Sovit Union tmporarily dclind du to th conomic collaps. But, rflcting subsqunt dvlopmnts, lik shrinking domstic consumption and strongr will to arn hard currncy by boosting xports, xports from this ara hav risn sharply in rcnt yars. Exports from th Gulf rgion plungd by 31.2 prcnt during th priod , and in fact rgistrd a sharp dclin of almost 47 prcnt during but latr rboundd to almost prcnt during Its world shar fll from 56.3 prcnt in 1972 to 54.1 prcnt in 198 and furthr to 38.7 prcnt in Howvr, th Gulf rgion s xport markt shar has also changd drastically. This Tabl 3: Rgion-wis Oil Import Dpndnc, (%) Rgion/Yar 25* North Amrica Europ OECD Pacific Dvloping Asia China India Rst of South Asia East Asia Not: * data for 25 is calculatd. Sourc: GRC basd on IEA, World Oil Markt Outlook, 24. Figur 4: Oil Trad Movmnts btwn Gulf and Othr Rgions (26) Gulf oil xports MT() can b substantiatd from th trnds in shar by rgions in th total oil xports by th Gulf rgion ovr th priod , as dpictd in Figur 3. As clarly vidnt, Europ s shar in total Gulf oil xports has dclind drastically from 56.1 prcnt in th yar 197 to a magr 21.9 prcnt in th yar 25, whil that of Asia has doubld from 22.9 prcnt to 45. prcnt ovr th sam priod. Furthr, from a go-conomic point of viw, Gulf-Asia s cntriptal rol in th global nrgy rgim in gnral and Asia s stratgic importanc for th Gulf rgion can b discrnd from th latst trnds of world intr-ara oil trad movmnts. In th yar 26, Asia accountd for mor than 67 prcnt of th total oil xports of th Gulf rgion, in comparison to th paltry 16 prcnt and 13 prcnt shar of Europ and Amrica rspctivly (s Figur 4). As pr markt outlook, 6 it is crtain that rgions which dpnd on imports to mt a significant part of thir oil nds will bcom vn mor dpndnt on imports in th coming yars. Oil import dpndnc in Europ is xpctd to jump from 53 prcnt to 79 prcnt by th yar 22. In OECD Pacific, it is xpctd to incras from an alrady vry high 88 prcnt to ovr 92 prcnt. Dvloping Asia is xpctd to dpnd on imports for 7 prcnt of its oil consumption by 22. Oil import dpndnc in larg oil importing countris lik China, and India is xpctd to b 77 prcnt and 92 prcnt by th yar 22 (s Tabl 3). Manwhil, th Gulf rgion, 5 Ths figurs hav bn calculatd from th OPEC Annual Statistical Bulltin, Th outlook is basd on th IEA forcasts for 21 and 22. Th import dpndncy data for th currnt yar (25) is calculatd from th BP Statistical Rviw of World Enrgy, 27. Import dpndncy is calculatd as th ratio of domstic production lss domstic consumption and domstic production Africa Amrica Asia Europ Othrs World Exports shar Shar(%) I s s u N o. 3 N o v m b r 2 7

7 Figur 5 & 6: India s Exports of Ptrolum Products (Major Dstinations and Trnds, valus in million USD); Singapor Iran UAE Nthrlands Sri Lanka Npal alrady th biggst xporting rgion, will s xports ris from 22mb/d in 25 to ovr 41mb/d by 22 cntring on Asia s xpctd ovrwhlming import dpndnc. In fact, th gographical proximity of th two rgions, growing Asian supply dficit and absnc of altrnativ sourcs for Asian countris will rsult in an vn largr shar of astrn sals for Gulf oil. IEA forcasts to 23 show th volum of tradd oil from th Middl East into Asia growing quickly to 28mb/d, with som limitd divrsity of supply from Eastrn Russia/FSU into North East Asia. But partly du to gographical location, and partly du to slowr dvlopmnt of its markts, Asia dos not yt bnfit from such divrsity. Thus, with incrasing global consumption, pr capita availability of oil and gas from fixd and xhaustibl stocks bgins to dwindl and an incrasing pattrn of intrdpndnc btwn producr and consumr countris with varying gographic and political conditions has mrgd in th global oil rgim. Gulf-Asia nrgy intrdpndnc pitomizs this critical gopolitical shift signifying thir mutual indispnsability for survival in th rgim, albit xistnc of markt distortions favouring th xportrs. Issus and Concrns in th Emrging Dynamics From th Arab oil mbargo in th 197s through th lowr oil pric scnarios and Asian financial crisis of th 35 Sourc: Ministry of Commrc and Industry Exportimport Databank, Govt. of India s affcting oil rvnu dpndnt Gulf conomis, to rcnt Russian disruption of gas supply to Ukrain during th wintr of 26, nrgy scurity intrdpndnc has bcom on of th cntral lmnts of th global conomy. 7 In th prsnt markt dynamics, both producrs as wll as consumrs of oil and gas hav qual staks in addrssing inscuritis. This is spcially so in th cas of Gulf-Asia nrgy intrdpndnc. As a rsult, th numrous crisscross nrgy invstmnt proposals among Gulf-Asia showcas th importanc of addrssing nrgy markt vulnrabilitis by both producrs and consumrs. Howvr, it is still an arly stag in Gulf-Asia nrgy rlatd links and importantly, th rlationship is not samlss. This is not only du to markt distortions and virtual nonxistnc of an intgratd rgional oil markt, but also du to som prssing issus and markt dvlopmnts that ar considrably influncing th Gulf-Asia nrgy dynamics. In fact, ths issus and implications ar cntral to contmporary analysis ranging from alarmist prdictions such as a nightmarish scnario of Islamic-Confucian bonhomi lading to a grand gopolitical uphaval undrmining wstrn suprpowrs, to a mor plausibl cooprativ intrdpndnt framwork of producrs and consumrs. 8 Currntly ovr 67 prcnt of xports from th Gulf rgion ar dstind for Asian markts, whr thy sll at a prmium popularly dsignatd as Asian prmium. 9 Asian rfinrs hav complaind for som tim about th prmium thy ar chargd on Gulf oil. In th futur it will bcom toughr for producrs to charg this prmium, and also for Asian rfinrs to pay th xtra, bcaus of consistntly poor rfining conomics in th Asia-Pacific rgion, and drgulation in Asian countris xposing domstic rfinrs to harshr conomic ralitis. Anothr important dvlopmnt is th downstram succss of importrs lik India which has not only bcom slf sufficint in ptroproducts but also xports to major dstinations and importantly, to oil xportrs lik UAE (s Figurs 5 and 6). Othr major Asian importrs, spcially China will follow suit. This is going to hav businss implications for th Gulf oil xportrs vying for optimizing th valu chain. Othr issus of concrn includ th rstrictiv nationalistic policis mphasizing nrgy indpndnc rathr than intrdpndnc on th part of Asian consumrs and th status quoist attitud of th Gulf xportrs prptuating markt rigiditis. 1 By all accounts, th nrgy scurity policy spac prtaining to Gulf-Asia is currntly in a stat of flux vincing dilmma btwn markt fundamntals and gopolitics. Whil Asian consumrs ar not fully rlying upon markt solutions for scuring nrgy scurity, th Gulf xportrs ar also not inclind to addrss markt distortions. On th on hand, th global nrgy sctor, spcially th world oil and gas sctor, has transformd into a pattrn of intgratd and intrdpndnt structur in th ambit of markt libralization and globalization; on th othr hand, thr ar clar trnds of nrgy politics in th rgional contxt in Gulf-Asia. With th transformation of th world nrgy markt that contains both major supplirs and consumrs in clos proximity, thy ar yt to xploit th changing gopolitics to mutual advantag. It is to b mntiond that all th fforts towards coopration ar highly fragmntd which maks imprativ an intr-rgional institutional framwork at th arlist. Conclusion and th Way Forward Thus, with incrasing intrdpndnc, Asian countris onc shildd gographically from th turbulnc of th Gulf rgion will no longr b fr ridrs laving th rgion on th margins of thir gopolitical agndas and th Gulf countris, on th othr hand, will no mor lingr on th markt complacncy and short trm advantags instad of scuring long trm stratgic xport markt bas. This implis that thr is dfinitly gratr common caus in th sarch for mutual nrgy scurity. In othr words, nrgy intrdpndnc has th potntial to catalyz coopration and conomic intgration btwn Gulf and Asia by synrgizing complmntaritis nrgy plnty and nrgy povrty. Nonthlss, th ral issu is what approach should b adoptd by th countris. Th long trm stratgy should focus on viabl intrrgional nrgy coopration. In this rgard, an attmpt should b mad to focus on som sort of institutional arrangmnts for facilitating ngotiations on issus. Though thr ar rcnt attmpts of coopration btwn consumrs and producrs at th multilatral lvl lik th Intrnational Enrgy Forum (IEF) hadquartrd at Saudi Arabia, as wll as th various Round Tabl confrncs of producrs and consumrs sparhadd by India, at th intrrgional lvl in Gulf and Asia, yt nothing concrt has com out of such dlibrations. Thrfor, th bottom lin for succssful intrrgional nrgy coopration is adaptability and rcognition of mutual complmntaritis. This bcoms possibl only through adopting out-of-th-box stratgis compatibl with th changing markt dynamics rathr than dwlling on th inhritd lgacis, obdurat mindst and dfnsiv slf-orintd stratgis. Slctd Rfrncs Binks, Adrian, Middl East Crud Pricing: Th Dubai Dbat, MEES, Fbruary 14, 25. British Ptrolum (BP), Statistical Rviw of World Enrgy (27). 7 Th concpt of intrdpndnc in Intrnational Political Economy (IPE) jargon is similar to political intrdpndnc or conomic intrdpndnc having snsitivitis or vulnrabilitis or costs as wll as bnfits for th partnrs. It is concivd as a positiv sum stratgy. Th concpt of intrdpndnc in IPE has bn comprhnsivly analysd by Josph S. Ny Jr. in his book, Undrstanding Intrnational Conflicts: An Introduction to Thory and History (Longman, Nw York: 2). For dtaild analysis of th concpt of nrgy scurity intrdpndnc, s, Samir Ranjan Pradhan, India and GCC: Synrgizing Intrdpndnc in th Global Enrgy Rgim (Acadmic Foundation, Nw Dlhi: 27). 8 Among th main votaris of th conflict school ar analysts lik Knt Caldor and T Clark, whil Danil Yrgin is in th vanguard of th cooprativ hypothsis. 9 Asian oil prmium rfrs to th margin abov th actual markt pric of Dubai crud (crud oil xports from th Gulf) that th Asian oil importrs usually pay in comparison to thir countrparts in th US or Europ. As pr stimats, Asian prmium costs India alon $5 million pr yar, and costs th rgion as a whol an xtra $5 to $1 billion pr yar, dpnding on oil prics. 1 Th structural rigiditis prtaining to Dubai markr is not bing addrssd proprly by major producrs of th rgion. Morovr, a rcnt attmpt of dvloping anothr spot markt markr has not bn so succssful primarily du to liquidity crunch dspit ovrwhlming support by th UAE govrnmnt. I s s u N o. 3 N o v m b r 2 7

8 Mdia rports hav brought to attntion th incrasing suicid attacks in Pakistan involving stratgic tactics similar to thos usd in Iraq. Ths ar bing rplicatd in lttr though on a smallr scal at prsnt du to thir succss and ffctivnss. Most of th attacks in 27 targtd govrnmnt apparatus, and mainly th scurity forc prsonnl, and ar blivd to b a raction to th govrnmnt s oprations against th Taliban and th al- Qada in th tribal aras bordring Afghanistan. Part of th tribal blt bordring Afghanistan is Waziristan this ara, both North and South, has bn th sat of unrst, and has sn coalition forc air striks from across Afghanistan, armd confrontation btwn th tribals, th Taliban and th govrnmnt which has rsultd in th loss of hundrds of human livs in th last many months. Priods of unasy truc hav bn punctuatd by violnt confrontations nsuing from simmring hostilitis among th local militant tribs and th govrnmnt forcs. Th Taliban and th al-qada, prvasiv and ntrnchd among som sgmnts of th local tribal population, has stalthily bn taking advantag of th situation, crating and xploiting th mistrust in ordr to influnc vnts. Pakistan is in th midst of a difficult scurity situation whr its fforts to ward off intrnational trrorism hav bn thwartd by th activitis of trrorist groups on th domstic front posing a srious thrat to its sovrignty and citizns. Suicid blasts in Islamabad in July, and latr in th adjoining city of Rawalpindi in Sptmbr, undrlins th gravity of th crisis. Racting to th govrnmnt s actions, Baitullah Mhsud and othr Taliban ladrs, as wll as som militant clrics including th Ghazi brothrs, who had ngagd th govrnmnt Flash point Waziristan: Th al-qada-taliban Linkags Faryal Lghari Program Modrator, GCC-Pakistan Rlations, Rsarchr Scurity & Trrorism Studis Gulf Rsarch Cntr forcs in a bloody confrontation in Islamabad at th Rd mosqu/sminary, had thratnd rprisals in th form of suicid attacks. Radical xtrmist organizations hav jumpd into th arna with anti-amrican war cris. Collaboration with th Unitd Stats and coalition forcs in th war on trror has cost Pakistan hundrds of soldirs as wll as unlashd a wav of public mistrust and angr against th stat. Scurity forcs and th stat ar bing targtd for attacks. Ayman al-zawahiri, scond-incommand in th al-qada organization, has calld for th xtrmination of Prsidnt Musharraf and urgd a unifid stanc by th Muslims to fight th nmis of Islam. For th al-qada, Iraq and Afghanistan rprsnt th aras whr thy hav succdd in ngaging th Amrican and wstrn forcs in a confrontation that has hindrd thir goals. Th failur and collaps of Wstrn policy in stats would only srv to strngthn th al- Qada phnomnon. As for th trrorist stratgy and tchniqus bing usd in Pakistan that ar modld on th ons in both Iraq and Afghanistan, it is important to undrstand th dviations and similaritis. Rcruiting Suicid Bombrs: Us of Audiovisual Mdia and Extrmist Propaganda Tools Typically, th rcruitmnt of suicid bombrs in Pakistan at prsnt is basd on a long trm procss whr th focus is on indoctrination of young childrn and tnagrs. Th incrasing us of tnag boys, and thos in thir pr tns, has bcom a horrifyingly common practic. Rcntly, Pakistan s lading nwspaprs rportd about yt anothr vido bing circulatd which carrid footag of tnag boys slaughtring a Pakistani scurity prsonnl who was kidnappd in th Waziristan agncy. Chanting slogans of jihad, th boys hld down th solidr in front of th othr soldirs and on of thm duly cut off his had with a knif. Th vido titld Intqam (Rvng) is bing circulatd to incit furthr such dmonic acts by th xtrmists. Th 35 minut film, rportdly prpard at a studio ownd by th Taliban, was rlasd to th mdia. 1 Th us of mdia to ngndr aw and trror among th public and dtr scurity forcs, who tak part in oprations targting th trrorists in tribal ara, is a typical al-qada tchniqu. In th past, anothr vido of a young boy slaughtring an Amrican spy was widly circulatd and univrsally condmnd. Bsids, pamphlts and booklts inciting popl to hatrd for th coalition forcs prsnc and striks in Afghanistan, th Pakistan military opration in th tribal bordr aras, and th govrnmnt opration in Islamabad against th Rd mosqu sminary ar bing widly usd for th sam purposs. Som radio stations ar now bing run by xtrmist lmnts that ar sympathtic to th Taliban in Pakistan s Frontir provinc; ironically th sam lmnts ar thratning vido and music shop ownrs to shut thir corrupt and anti Islamic businsss. Taliban-al-Qada Linkags Evn a cursory analysis of th prvailing situation would suffic to highlight th linkags that xist ithr and/ or btwn th Taliban, th bannd trrorist militant organizations in Pakistan, and th al-qada. Th vracity and xtnt of ths linkags with al-qada is as yt undtrmind. Th fact rmains that al-qada formd a nxus with th Taliban in Afghanistan and with som xtrmist organizations in Pakistan. Today thir allianc, a marriag of convninc, srvs thm both dspit diffrncs in goals. Al-Qada oprats at th global lvl with th aim of crating an Islamic ordr and dfating wstrn imprialism. Th Taliban ar fighting occupying forign forcs and ar focusd on rgaining thir position in Afghanistan from whr thy wr oustd in 21. Afghanistan is th thatr whr both ar in conjunction and ar proving an ffctiv rsistanc against th Afghan govrnmnt and th intrnational coalition forcs. Thy hav ntrnchd thmslvs in Pakistan s tribal aras, particularly Waziristan Agncy and Bajaur Agncy. Al-Qada oprativs in Pakistan ar blivd to b th ky providrs of training in wapons and xplosivs, fighting tchniqus, assassinations and suicid attacks. In th wak of th Rd mosqu confrontation in July 27 btwn som thousands of xtrmist studnts 1 Th Nation, and Daily Tims, August 27, 27. undr th ladrship of th Ghazi brothrs and th govrnmnt scurity forcs, thr hav bn svral incidnts of suicid attacks across th country including two attacks in th capital Islamabad targting policmn and a judicial rally. Bsids, many districts and major towns in th northrn aras, particularly Swat and Kohat, th Waziristan agncy has also sn priodic suicid attacks. Th army, th Frontir corps constabulary, and th polic all fall undr th ambit of th stat. Th Pakistan govrnmnt, particularly Prsidnt Musharraf, rmains on of al-qada s major targts and has facd multipl assassination attmpts. Th Taliban and th al-qada, prvasiv and ntrnchd among som sgmnts of th local tribal population, has stalthily bn taking advantag of th situation, crating and xploiting th mistrust in ordr to influnc vnts Flash point Waziristan Pakistan has dployd about 88, troops in its tribal aras that hav bn th scn of a massiv military opration in th past two months. Th dcision to launch a military offnsiv was takn with immdiat ffct aftr th govrnmnt s pac agrmnt with th tribals in th Waziristan Agncy fll apart. Th Waziristan accord, though svrly criticizd as having givn th Taliban and al-qada a chanc to rgroup, rcuprat and launch frsh attacks from Pakistani soil into Afghanistan, was a viabl option at th tim. Th Wst has bn unabl to fathom th psych of th tribals of this rgion, dspit historical vidnc of thir particular charactr and thir rsistanc of British occupation bfor partition in Pakistan has maintaind govrnanc undr th fdration within th tribal aras in kping with th tribal customs and ruls following th tradition from th tims of British occupation of th sub-continnt. Fircly indpndnt, loath to b subjugatd by any sort of authority, particularly forign forc, th tribals abid by a strict cod of honor, duty and allgianc. Allgianc to th trib and protction of gusts ar mattrs of th I s s u N o. 3 N o v m b r 2 7

highst importanc. What th Waziristan pac accord aimd at was to consolidat allgianc to th govrnmnt among th local tribs and for thm to rsist th Taliban and th forign trrorist prsnc in th rgion.

9 highst importanc. What th Waziristan pac accord aimd at was to consolidat allgianc to th govrnmnt among th local tribs and for thm to rsist th Taliban and th forign trrorist prsnc in th rgion. Th tribals wr apprisd that by providing protction to th forign al- Qada and Taliban prsnc, thy wr jopardizing thmslvs and xposing th stat to a scurity risk. Th undrstanding aimd at xpulsion of forignrs and stopping all logistical support to thm in xchang for govrnmnt forcs halting all military oprations in th ara. Th promis of conomic dvlopmnt in th rgion was also an addd incntiv. Th opration in South Waziristan whr th govrnmnt forcs supportd th tribals against th Uzbks in lat March-April 27 was a hug succss. Hundrds of Uzbks wr killd and xplld and a succssful pac agrmnt was implmntd. Rcntly, in August, Baitullah Mhsud, who is dubbd th unofficial mir of South Waziristan, dclard th pac agrmnt with th Pakistan govrnmnt void as h claimd that in violation of th agrmnt th lattr had not withdrawn thir military prsnc; bsids, thy had conductd and facilitatd air raids and striks. Tribal ldrs and govrnmnt rprsntativs from th ara maintaind that th dal rmaind valid dspit Mhsud s claims. Th fact rmains that North Waziristan is currntly a hot bd of confrontation btwn th govrnmnt forcs and th Taliban. Not a day passs whn th scurity forcs ar not targtd. Suicid attacks and us of IEDs hav bcom a daily occurrnc. Scurity forcs ar attackd with impunity and takn hostag by th Taliban and local tribs in allgianc with thm. A particularly srious incidnt was th kidnapping of a larg group of scurity forcs, around 15-2 soldirs, who ar bing hld in Waziristan sinc August 3, 27. Othr rports plac th figur at 3; ngotiations to scur thir rlas ar taking plac on a daily basis btwn th tribal ldrs rprsnting th govrnmnt and th Mhsud tribsmn who ar chargd with th kidnapping. 2 Th tribsmn claim that th govrnmnt had violatd thir dal as contrary to th agrmnt, th convoy of 16 trucks 2 At th tim of submission of th articl in th first wk of Sptmbr carrying th soldirs was armd. This incidnt follows anothr kidnapping incidnt of a group of soldirs who wr latr rlasd; on of thm was bhadd in th vido as mntiond arlir. Military opration in th tribal aras is furthr complicatd by cross-bordr striks conductd by coalition forcs from Afghanistan that hav at tims targtd Taliban within Pakistan. This has ld to wid-sprad angr and rprisals by th local tribals. Th Pakistan govrnmnt is in a complx situation; it has vhmntly dnid granting prmission to ithr th NATO or th US to conduct military raids within Pakistan. 3 Yt striks hav bn conductd in th rgion, prhaps without prmission from th govrnmnt. Svral civilian casualtis, including thos of womn and childrn, hav turnd th locals angr into a sthing hatrd of th Pakistan govrnmnt and th stat scurity forcs. No military opration can b succssful unlss it is accompanid by dialogu. Engagmnt is th ky issu that cannot and should not b ruld out. Pakistan s position as th chif contributing stat in th war on trror cannot b dismissd nor its fforts and sacrifics undrmind. Incrasing US prssur in th fac of its own failurs in Iraq and Afghanistan has ld to a downward spiraling of vnts. Conflicting signals and implid thrats manating from Washington against Prsidnt Musharraf s rgim hav ld to a hastily-knittd policy whr vry intllignc tactic and military stratgy is bing trid out. Additionally, som ominous statmnts hav bn issud from Washington in rcnt months rgarding th possibility of conducting air striks against al-qada in Pakistan s tribal aras. 4 As xpctd, this cratd a furor in Pakistan with th govrnmnt racting strongly to such a possibility. This coupld with th thrat of th dradd Prsslr typ sanctions against Pakistan, if it fails to mt th US dmands in countr trrorism bsids othr stipulations, has put incrasd prssur on th Pakistan govrnmnt. Conclusion Th qustion rmains: dos th US bliv that it can dfat trrorism and xtrmism in Pakistan with th dismantling of th prsnt rgim and th rturn of th discrditd politicians who whil lading mainstram political partis also fac svral criminal and political chargs? Incrasing domstic political prssur to rstor dmocracy, a blligrnt judiciary and a worsning scurity situation within th country portnd a dark priod ahad for th Musharraf rgim and, mor importantly, for Pakistan. Thr is substantial vidnc to bliv that al-qada mmbrs ar prsnt in Pakistan in collusion with th Taliban, and thy ar ngagd in armd confrontation with th stat. Thy hav succssfully drawn th Taliban into thir tactical mould. Following in al-qada s footstps, th Taliban has bn using printd and audiovisual matrials in thir propaganda fforts aimd at rcruiting othr xtrmist lmnts through thir rcordings of killings and suicid attacks. Th sprad of xtrmist litratur through bulltins, pamphlts, vido taps, radio stations, and mosqus has provd th prfct tool for influncing public opinion. Suicid attacks using vhicls and high grad xplosivs as in Iraq ar occurring with incrasing frquncy. How far will it go and whr will it nd? Th answr dos not li in a military offnsiv alon; whil a military offnsiv is ncssary it should b accompanid by conomic and social intgration of th local population. Th US has faild to addrss th root causs of th violnt xtrmism it sought to crush with military might and continus to xclud this from its forign policy objctivs. What th Unitd Stats can do is mak larg-scal invstmnt in infrastructur, ducation, and crating mploymnt opportunitis in kping with local and rligious traditions and customs. Th fight against trrorism promiss to b a long on. It is unralistic to assum that th Taliban and th al-qada will disappar in a yar or two. Howvr, by stratgic planning combind with military forc and intllignc, thir powr could b curtaild and rsourcs diminishd. Alongsid, winning th allgianc of th local population by a show of military strngth, firmnss of commitmnt and wilding of conomic incntivs is of primary importanc and this aspct should b incorporatd in th stratgic policy bing implmntd in th rgion. Forthcoming Publication Gulf-Pakistan Stratgic Rlations Editd by: Faryal Lghari Th significanc of th Gulf Stats drivs from thir vast nrgy rsourcs and thir gographic position in th politically volatil and stratgically significant Middl East rgion. Pakistan s stratgic location in rlation to th Middl East, Cntral Asia, China and India coupld with it bing th only Muslim nuclar powr has addd a significant dimnsion to its tis with th Gulf. Bsids, th long-standing rlations btwn th Gulf Stats and Pakistan ar multifactd and ncompass political, conomic, cultural and scurity aspcts. This ditd volum looks at th issus that play a significant rol in Pakistan-Gulf rlations. It covrs th historical tis btwn th rgions, political rlations in th changing go-stratgic landscap with China and India mrging as Asian giants, conomic rlations govrnd by nrgy, trad and manpowr issus, and scurity tis ntailing dfns coopration, countrtrrorism and soft scurity issus. With minnt commntators and analysts prsnting wll-informd insights on bilatral issus, this book aims to addrss th darth of rsarch matrial on Gulf-Pakistan rlations. I s s u N o. 3 N o v m b r 2 7

10 Afghanistan, Cntral Asia and th Gulf: Complmntarity of Intrsts byond th Economic Agnda Dr. Michala Prokop 1 Country Economist, Asian Dvlopmnt Bank 24 - Sptmbr 27 Th nw Look East policy, th growing intrst and r-orintation of th Gulf conomis towards Asia, has rcntly rcivd incrasing attntion. Whil commntators hav focusd on rlations with East Asia (particularly China and Japan), th South-East Asian tigrs or with India and Pakistan, littl attntion has bn paid to rlations of th Gulf Coopration Council (GCC) countris with Cntral Asia and Afghanistan. 2 Many Asian and Europan countris hav bgun to look towards Cntral Asia not only to divrsify thir oil and gas supplis but also incrasingly as invstmnt dstinations and trading partnrs. With continud political volatility in svral Cntral Asian countris and th ongoing conflict in Afghanistan, thir intrst is as much drivn by conomic considrations as by scurity and dfns agndas. 3 Th vnts of 9/11 hav shown that Afghanistan s stability is intricatly linkd with th stability of th rgion and of grav import to th world. Afghanistan s intrnal stability is also closly tid to dvlopmnts in Pakistan, which is a ky ally, important dstination of forign dirct invstmnt (FDI) and sourc of migrant labor for th GCC stats. Th Afghan and Cntral Asian conomis ar small (s Tabl 1 blow) and, apart from Kazakhstan, rlativly poor. Trad and invstmnt links btwn th GCC and Cntral Asian rgions, albit growing, rmain marginal. With rapid conomic growth in both th GCC and th Cntral Asia rgion and ongoing rconstruction and stabilization fforts in Afghanistan, studis hav highlightd th potntial for a rvival of trad. 4 Obstacls to improvd trad and invstmnt ar manifold, yt an incrasing ngagmnt and strngthnd rlations btwn th two rgions could gratly nhanc th chancs of th rgion s stabilization and prosprity. A Long, but Turbulnt History Historically, th Gulf rgion and Cntral Asia hav had clos trad, cultural and rligious tis. Howvr, with th intgration of Cntral Asia into th Sovit mpir, official links btwn th two rgions wr largly disruptd. Gographically and politically, Cntral Asia s focus changd and trad pattrns followd suit. Nw infrastructur, rail and road connctions and latr piplins, bgan to incrasingly link Cntral Asia with its Wstrn Sovit nighbors or among thmslvs. With th Sovit invasion of Afghanistan in 1979 and th nsuing instability and civil war, licit trad via Afghanistan from Cntral Asia to th southrn ports of Iran and Pakistan dclind rapidly. Lucrativ smuggling ntworks btwn UAE-basd tradrs and othr rgional markts prsistd, xploiting th libral trad rgim in Afghanistan. During th Taliban rgim and bfor intrnational sanctions startd biting th country, this traffic was stimatd to b worth $2 billion a yar. 5 Aftr th Sovit invasion of Afghanistan, GCC countris, along with many othr countris, providd gnrous 1 Michala Prokop, Ph.D., was th country conomist for th Asian Dvlopmnt Bank in Afghanistan. Th viws xprssd hr do not in any way rprsnt thos of th Asian Dvlopmnt Bank. 2 Diffrnt dfinitions of which countris constitut Cntral Asia xist. This articl focuss on Afghanistan and its Cntral Asian nighbors (Turkmnistan, Uzbkistan, Kyrgyzstan, Tajikistan) and Kazakhstan. 3 For dtails on th political volatility in th Cntral Asian stats s Cntral Asia s Enrgy Risks, Intrnational Crisis Group, Asia Rport no 133, May 24, Asian Dvlopmnt Bank, Cntral Asia Incrasing Gains from Trad Through Rgional Coopration in Trad Policy, Transport, and Customs Transit, Gulf Stats Nwslttr, Afghan Traffic Hit by Sanctions, Dhow Tradrs Fill th Vacuum, Issu 66, April 3, Togthr with Pakistan, Saudi Arabia and th UAE wr th only countris rcognizing th Taliban rgim. Thy withdrw thir rcognition shortly aftr 9/ support to th Afghan rsistanc. Although a numbr of so-calld Arab Afghans and othr forign fightrs rcruitd from th Muslim world, contributd to th jihad against th communists, financial support to th mujahidn, particularly from Saudi Arabia, was far mor significant. Various Afghan factions rcivd gnrous support not only from official sourcs but also through privat donations, vn aftr th withdrawal of Sovit forcs in Assistanc was also providd to th humanitarian rlif fforts, for rfugs in Pakistan and to support halth and ducation facilitis. During th Sovit ra, with tight stat controls and supprssion of rligious xprssion, cultural and rligious tis btwn th Gulf and Cntral Asia almost casd and only fw, slctd Cntral Asian Muslims wr allowd to visit Saudi Arabia to prform th haj. Aftr th disintgration of th Sovit Union and th indpndnc of th Cntral Asian stats in th arly 199s official diplomatic rlations wr stablishd. Saudi Arabia and othr Muslim countris providd gnrous support to pilgrims and studnts, and hlpd in th distribution of rligious books, and th construction of mosqus, Islamic cultural cntrs, schools and univrsitis. Support to th Islamic rvival in th rgion, in particular to madrassahs in Pakistan and Afghanistan, has bn controvrsial, particularly sinc 9/11. Uzbk officials, for instanc, hav blamd Pakistan and forign financd madrassahs for fulling unrst, particularly in th Frgana Vally. 7 In th aftrmath of 9/11, Saudi Arabia and othr countris hav bgun to tightn controls on th flow of both public and privat funds. 8 Prforming th haj or umra rmains, particularly for nwly lctd ladrs, an important gstur bolstring thir Islamic crdntials. Afghan Prsidnt Hamid Karzai, for instanc, chos Saudi Arabia as th dstination for his first forign trip, rflcting not only th importanc of th rlationship btwn th two countris but also th significanc givn to Saudi Arabia as th guardian of Islam s holist sits. 9 Engaging in Afghanistan s Rconstruction With pldgs from Saudi Arabia ($22 million), UAE ($73.7 million), Kuwait, ($45 million), Qatar ($21 million) and Oman ($6 million) sinc 22, th Gulf countris hav confirmd thir support to Afghanistan s rconstruction. 1 Howvr, whil Saudi Arabia co-chaird th first intrnational donors confrnc for Afghanistan in Tokyo, th Gulf Stats hav kpt a rathr low profil in th various intrnational fora on Afghanistan. 11 Evn considring th contributions of GCC-basd privat organizations, othr countris hav bn far mor gnrous contributors to Afghanistan s rconstruction. 12 Th UAE is th only Gulf stat that has snt a small military contingnt to contribut to th packping fforts in support of humanitarian rlif. It also provids basing support to Opration Enduring Frdom. Incrasingly thr ar calls for th UAE to contribut to th NATO-ld Intrnational Scurity Assistanc Forc (ISAF). An ngagmnt undr th NATO umbrlla could hav important ramifications for th UAE and alinat constituncis in th Middl East, which ar skptical of th intntions of th US-ld Global War on Trror. 13 Nvrthlss, a mor activ involvmnt of th GCC stats, both in trms of th dvlopmnt agnda as wll as th scurity and political discussions and arrangmnts is important, not last to avoid th imprssion that th Afghanistan agnda continus to b primarily shapd by Wstrn prspctivs and intrsts. 7 Th Economist, Th Crusad against th Wahhabis, April 7, 1998, It is ncssary to diffrntiat btwn thos schools that provid ducation and rligious tachings and thos that us rligion to incit hatrd towards othrs and hav bn usd by som individuals or groupings for political aims. Education in madrassahs has bn th main mthod of taching throughout th Islamic world for many cnturis. Som of th madrassahs on th Pakistan/Afghanistan bordr that rcivd funding from Saudi Arabia and othr Muslim stats, diffr from traditional madrassahs. Studnts wr particularly traind and idologically indoctrinatd to bcom political tools in th conflict in Afghanistan, against th Hindus in Kashmir or in othr locations whr Muslim intrsts wr prcivd to b thratnd. For furthr dtails s Jssica Strn, Pakistan s Jihad Cultur, Forign Affairs, Dcmbr 2. 9 Similarly, in April 27, rcntly lctd Turkmn Prsidnt Gurbanguly Brdymukhammdov wnt to Saudi Arabia on his first trip abroad. 1 Ministry of Financ, Afghanistan, Jun 27. Actual disbursmnts ar lowr. 11 This is also in lin with a rport from th Ovrsas Dvlopmnt Institut (ODI) which argus that th incrasing volums of aid of th Gulf Stats hav not translatd into incrasd ngagmnt or influnc in intrnational fora. Divrsity in Donorship: Th Changing Landscap of Official Humanitarian Aid Aid Donorship in th Gulf Stats, Humanitarian Policy Group Background Papr, Sptmbr 25, ODI, UK. 12 For comparison, according to th Afghan Ministry of Financ (s abov) pldgs for dvlopmnt aid (xcluding military xpnditurs) for amount to: Unitd Stats ($13,628 million), th Europan Commission ($1,964 million), Unitd Kingdom ($1,47 million). India, for instanc, has pldgd $75 million, Norway $314 million, Iran $34 million and Swdn $27 million. 13 Agnc Franc Prss, UAE Could B First Arab Nation to Snd Troops to Afghanistan, July 21, 27, and Gulf Stats Nwslttr, Vol.31, no.811, August 3, 27, p.4ff I s s u N o. 3 N o v m b r 2 7

11 Tabl 1 - Economis in Comparison GDP (currnt prics) (US$ billions) GDP growth (constant prics) (%) GDP (currnt prics) pr capita Population (millions) Saudi Arabia % 4.8% 9,216 14, Tabl 3- Exports from Cntral Asia to GCC (slctd countris) US$ million Total (Middl East) Saudi Arabia UAE Kuwait % 3.5% 17,13 29, Afghanistan U.A.E % 8.2% 21,626 34, Pakistan 1, , ,55.81 Oman % 6.% 8,143 14, Afghanistan n/a 9.9 n/a 12.2% n/a 383 n/a Kazakhstan % 9.% 1,229 6, Kyrgyz Rpublic % 6.5% Uzbkistan n/a n/a Kazakhstan , Sourc: IMF, Dirctions of Trad Statistics, 27. Pakistan % 6.5% Tajikistan % 7.5% Turkmnistan % 1.% 1,82 5, Uzbkistan % 7.7% Sourc: IMF, World Economic Outlook, April 27 Trad and Invstmnt Links Afghanistan and Cntral Asia would hav much to gain from incrasd conomic coopration and trad with th Gulf countris. Similar to th Gulf conomis, som Cntral Asian countris, spurrd by th global oil and gas pric riss, hav witnssd rapid growth in th last fw yars (s Tabl 1). Th Gulf countris hav larg, intrnationally mobil capital rsourcs and ar looking for nw avnus to invst and divrsify. Afghanistan and th Cntral Asian conomis rquir th rsourcs to modrniz thir conomic and physical infrastructur. Th GCC is also an xpanding xport markt for mrchandis and srvics, and continus to b an important host to many migrant workrs. Whil th numbr of Cntral Asians working in th GCC is rlativly small, th ptrolum boom in th 197s attractd many skilld Afghans, followd by anothr wav Tabl 2 - Exports from GCC to Cntral Asia (slctd countris) US$ million of Afghans fling th Sovit invasion and th Afghan civil war. Th rmittancs of th Afghan xpatriats constitut an important contribution to th Afghan conomy. 14 As Tabl 2 indicats, xports from th Gulf to Afghanistan and Cntral Asia hav risn significantly btwn 2 and 26, but figurs rmain small, vn considring th small population sizs of th Cntral Asian countris. Exports of Cntral Asian countris to th GCC hav risn mor rapidly. Howvr, many of thir principal xports ar primary commoditis such as oil and gas, which ar of littl intrst to th GCC markt. To dat, th Cntral Asian rpublics participation in global production ntworks and rlatd trad in manufacturd goods is limitd, which mans that thy driv littl bnfits from trad in trms of forign dirct invstmnt (FDI) and knowldg transfr. 15 Thy hav a long way to go to improv thir invstmnt climat and fac firc comptition for Gulf capital from World Total Afghanistan Kazakhstan Pakistan Uzbkistan Saudi Arabia 74, , , , UAE 4, , , , n/a n/a 2 21 othr dvloping Asian countris. Th US and Europ continu to b th main sourc of FDI for most Cntral Asian countris. Kazakhstan, th most succssful of th Cntral Asian countris in attracting FDI, has stablishd a joint intrgovrnmntal commission with Saudi Arabia and a joint businss council with th UAE, its most important trad and invstmnt partnr in th Middl East. FDI inflows in Afghanistan hav bn hsitant, and not only from th Gulf countris. A fw notabl xcptions hav bn Etisalat s launch of its Afghanistan oprations and th announcmnt in April 26 by Sharjah-basd Air Arabia offring rgular flights to Kabul. Howvr, flights wr suspndd again in Sptmbr 26 du to scurity concrns. But Plnty of Obstacls Rmain Th prsistnt scurity concrns in Afghanistan ar only on of th obstacls to trad and ar furthr compoundd by rstrictiv trad policis in som of th countris, lack of adquat transport and transit systms. Most Cntral Asian countris ar landlockd and dpnd on nighboring countris to import and xport thir goods. 16 Rviving Afghanistan s rol as a landbridg, could facilitat th link btwn Cntral Asia, th Gulf and th largr Middl East through th ports of Bandar Abbas and Chabahar in Iran and Karachi and Gwadar in Pakistan. Howvr, Afghanistan s scurity situation has worsnd in th last coupl of yars with th Taliban r-gaining control of many aras, particularly in th South. Th rsurgnc of th Taliban is also closly linkd with th flourishing opium trad. In 26, Afghanistan producd 92 prcnt of total global opium supply; opium cultivation in 27 is likly to rach similar lvls as in last yar s rcord harvst. 17 Th opium conomy with its linkags to insurgncy, crim, corruption and povrty thratns not only th rconstruction of Afghanistan but also rgional stability. Gulf countris ar usd as transit routs for drugs out of Afghanistan. With an incrasing domstic drug abus problm, th Gulf has also bcom an important dstination. 18 Dspit fforts to tightn anti-mony laundring rgims, rumors that part of th profits from th drug trad ar invstd in th Gulf prsist. Existing intrnational and rgional countr trafficking and scurity ntworks ar not adquatly quippd to dal with th growing problm. In 26, Qatar hostd th Scond Doha Confrnc on Bordr Managmnt, which sought to strngthn coopration among th rgional countris to improv bordr scurity. Whil this was a notabl initiativ, many of th rcommndations of th confrnc dclaration rmain to b implmntd, adquatly rsourcd and followd up with incrasing ngagmnt of th rgional countris. Whil most Asian and Europan stats and th traditional powr brokrs in Cntral Asia, Russia and th Unitd Stats, hav rcognizd th complmntarity of conomic, nrgy and scurity intrsts, it would b in th intrst of th GCC stats to mov byond thir rlativly modst dvlopmnt and humanitarian assistanc to a mor activ ngagmnt in th political and scurity fora and arrangmnts in Cntral Asia. Kuwait 18,761 42, , n/a n/a 14 No xact figurs of th numbr of Afghan xpatriats xist but it is stimatd that thr ar svral hundrd thousand. No data on rmittanc flows is availabl. 15 ADB study, s footnot Uzbkistan is also on of th only two doubly landlockd countris in th world. 17 Unitd Nations Offic on Drugs and Crim, Opium Wintr Rapid Assssmnt Survy, Fbruary For gratr dtail and on th problm of human trafficking s also Faryal Lghari, Narcotics and Human Trafficking to th Gulf Stats (Dubai: Gulf Rsarch Cntr, January 27). I s s u N o. 3 N o v m b r 2 7

Anthony Bubalo Having srvd in th mid-199s as an Australian diplomat in th Gulf, I find it nothing short of rmarkabl to witnss th chang that has takn plac in Australia-GCC tis.

12 Anthony Bubalo Having srvd in th mid-199s as an Australian diplomat in th Gulf, I find it nothing short of rmarkabl to witnss th chang that has takn plac in Australia-GCC tis. A littl ovr a dcad ago Australia was struggling to mak itslf visibl in th rgion. Today it is possibl, for xampl, for a UAE citizn to rturn from his annual holiday in Australia, flying an airlin whos CEO is an Australian, travl from th airport in an Australian-built taxi to his apartmnt built by an Australian construction company. Yt today, Australia-GCC rlations ar also at a crossroads. Trad is halthy, if not booming, whil nw stratgic connctions ar bing forgd btwn Australia and crtain Gulf stats. What is missing, howvr, ar commnsurat, rgular, high-lvl political contacts btwn Australian and Gulf ladrs, a shortcoming that is limiting th potntial of th rlationship, if not ndangring its currnt gains. In short, an urgnt r-balancing of tis is rquird. Trading Shp for Cars Rbalancing Australia-GCC Rlations Anthony Bubalo, Program Dirctor, Wst Asia Lowy Institut for Intrnational Policy, Australia Trad has traditionally bn at th hart of Australia-GCC tis, but in just ovr a dcad vn this has bn radically transformd. Onc largly dominatd by Australian xports of what and livstock to th rgion, th Gulf has bcom Australia s singl largst xport markt for automobils vn if thy ar sold undr an Amrican badg. A car markt that was worth around $11 million to Australia a dcad ago is now worth som $2 billion. Likwis, som of Australia s largst construction companis and financial srvic providrs ar now oprating in th rgion. Today Australian companis ar vn slling sand minral sands to th Gulf. Som 15, Australians now liv and work in th UAE alon, clos to a trbling in numbrs ovr th last 1 yars. Australians ar travlling to and through th rgion on holidays with th dramatic xpansion in dirct flights in rcnt yars, with a numbr of Gulf carrirs now flying to Australia, including Emirats, Etihad, and mor rcntly Qatar Airways. Thr hav bn major incrass in th numbr of GCC citizns travlling to Australia ovr 5, last yar for a holiday or an ducation (or both). It is tru that to dat th commrcial rlationship has bn a littl on-sidd. Australia has not bn a big purchasr of th Gulf s main xports such as oil and gas - indd it has abundant supplis of th lattr, and is a major comptitor for GCC producrs. But if Australia is not yt a major dstination for th rgion s rsourcs it is crtainly kn to tap into its rsourc walth. Australia is hoping that th burgoning rsrvs of sovrign walth funds in th Gulf will vntually had its way. What Australia offrs is a mans for ths funds to divrsify thir portfolio away from traditional invstmnts in th US, with gratr transparncy and lss risk than in othr parts of Asia, such as China. Of cours, th Gulf is a highly comptitiv trading nvironmnt and for this rason Australia has joind th Yt today, Australia-GCC rlations ar also at a crossroads. Trad is halthy, if not booming, whil nw stratgic connctions ar bing forgd btwn Australia and crtain Gulf stats list of thos countris sking a Fr Trad Agrmnt. Ngotiations hav only rcntly bgun and will tak tim to bar fruit. Th GCC has a limitd numbr of ngotiators and thr ar a numbr of agrmnts ahad of th Australia-GCC agrmnt in th quu. Nvrthlss, such an agrmnt would add anothr strong strand to a trading rlationship that has yt to rach its full potntial Nw Stratgic Horizons In stratgic trms, Australia and th Gulf countris hav tndd to viw ach othr largly through th prism of thir major allianc rlationship with th Unitd Stats. That is, Australia s military dploymnts to th Gulf for xampl, during th 1991 Gulf War and in subsqunt sanctions-nforcing naval dploymnts wr mainly Morovr, partly as a consqunc of th Iraq war and th prsnc of Australian military forcs in th rgion, th lvl of military-tomilitary contact and coopration with GCC mmbr stats has incrasd drivn by its rlationship with th Unitd Stats. Likwis, Gulf countris hav tndd to viw Australia as an allianc partnr of th US rathr than an indpndnt stratgic actor in thir nighborhood. This is unlikly to chang dramatically in coming yars. Australia was on of th fw countris to play a significant military rol in support of th Unitd Stats in th invasion of Iraq in 23 and rtains a small military contingnt in Iraq and th Gulf. Whil this involvmnt has drawn strong criticism domstically, it has not provd th politically chastning xprinc that it has for othr allid govrnmnts such as in th Unitd Kingdom not last bcaus of th absnc of major Australian casualtis in th conflict to dat. Evn undr a chang of govrnmnt lctions ar schduld for latr this yar a nich forc of Australian troops is likly to rmain in Iraq for som tim yt. Yt for all this fundamntal continuity thr ar still important, if mor nuancd, changs taking plac in th stratgic rlationship btwn Australia and GCC mmbr stats. In Australia thr ar th bginnings of rcognition that th Gulf is important to its national scurity byond its allianc commitmnts to th Unitd Stats. Thus th most rcnt updat to th Australian govrnmnt s Dfns Whit Papr also rcognizd th importanc of th Middl East in th fight against transnational trrorism and as a sourc of nrgy including to many of Australia s major trading partnrs. Morovr, partly as a consqunc of th Iraq war and th prsnc of Australian military forcs in th rgion, th lvl of military-to-military contact and coopration with GCC mmbr stats has incrasd. From a GCC prspctiv, Australia is nvr going to rival th Unitd Stats or othr major stratgic playrs in th rgion. Yt it could still b a sourc of high-quality training for GCC countris wishing to divrsify thir military rlianc away from th Unitd Stats. Indd, in rcnt yars a small numbr of military prsonnl from th GCC hav attndd Australian dfns collgs and training institutions. A similar logic applis to dfns sals. Onc again, Australia is nvr going to b a major providr of military hardwar to th rgion. Yt it dos produc crtain nich capabilitis such as air-conditiond troop carrirs uniquly suitd to th rgion, givn th climatic similaritis btwn Australia and th Gulf. Partly as a rflction of this, th Australian Dfns Ministr rcntly announcd a major, and mor coordinatd ffort to markt and sll Australian-mad dfns quipmnt to GCC stats. Ladrship Dialogu Lagging For all th currnt strngth and potntial in th rlationship it has on major waknss th lack of rgular and substantiv contact btwn political ladrs of Australia and GCC mmbr stats (or vn btwn Australia and th GCC as an institution). It usd to b th cas that th only tim an Australian Ministr visitd th Gulf was usually in transit to somwhr ls. This has changd somwhat of lat. Rgular visits to Australian troops in Iraq by th Prim Ministr, th Dfns and Forign Ministrs hav providd gratr opportunitis for mtings with countrparts in som Gulf countris. But vn ths opnings hav not always bn takn up or xploitd to thir full potntial. Manwhil, visits by Ministrs from GCC stats to Australia hav bn rarr still. Thr ar two risks inhrnt in this lack of ministrial contact. Firstly, it lavs both Australia and GCC mmbrstats lss abl to dal with th nasty surpriss that can occasionally crop up in any bilatral rlationship. As th Danish found in th cartoon scandal, such surpriss can hav srious commrcial consquncs. Strongr ministrial contacts will not always stop such criss from occurring. But thy crtainly put a country in a much strongr position to rspond to thm and amliorat thir consquncs. On wondrs, for xampl, how Australia I s s u N o. 3 N o v m b r 2 7

might hav dalt with any commrcial boycott had its rol in th Iraq war had a highr profil in th rgion. Scondly, th absnc of rgular ministrial contact limits th potntial of th rlationship.

As alrady notd, Australia is nvr going to b an indpndnt or dcisiv actor in th rgion. It has no choic but to act in concrt with allis with which it shars common stratgic intrsts.

This would b prudnt on slf-intrst grounds alon. It would also, howvr, mak Australia a mor valuabl allianc partnr, bttr abl to influnc vnts through its own indpndnt contacts in th rgion.

13 might hav dalt with any commrcial boycott had its rol in th Iraq war had a highr profil in th rgion. Scondly, th absnc of rgular ministrial contact limits th potntial of th rlationship. From an Australian prspctiv, rgular contact would nabl its political ladrs to gain a far gratr insight into a highly fluid rgional stratgic situation. As alrady notd, Australia is nvr going to b an indpndnt or dcisiv actor in th rgion. It has no choic but to act in concrt with allis with which it shars common stratgic intrsts. But, as th Iraq war has dmonstratd, it also nds a gratr capacity to mak its own judgmnts about rgional dvlopmnts, particularly whn its main ally again asks for military support som tim in th futur. This would b prudnt on slf-intrst grounds alon. It would also, howvr, mak Australia a mor valuabl allianc partnr, bttr abl to influnc vnts through its own indpndnt contacts in th rgion. For th GCC thr would b valu too in having a rgular dialogu with a clos US ally, similar to th clos contacts that Gulf countris maintain with th Unitd Kingdom. Morovr, Australian political ladrs can provid valuabl prspctivs on Asia, a rgion of incrasing conomic importanc to th GCC. In particular, Australia has a long-standing and robust rlationship with China, an incrasingly important conomic and political playr in th Gulf and in th long trm, potntially a stratgic actor as wll. Th insights of Australian political ladrs on China would prov valuabl to th ladrs of GCC mmbr stats whos own rlationships with th Chins ar, in many cass, still in thir infancy. Araa - Th GRC Magazin Launchd in 24, Araa focuss on conomic, political, social, and dfns issus rlvant to th gopolitical Gulf rgion Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, th UAE, Iraq, Iran, and Ymn. Araa is part of GRC s attmpt to rdrss th lack of adquat rprsntation of r-gional opinions and intrsts and fulfill its mission of knowldg for all. This influntial publication rflcting th viws of stablishd acadmics and columnists has gaind in rputation ovr a priod of tim. Araa writrs com from acadmia, businss and industry, and occasionally th public sctor. Araa Radrship Profil 12% 15% 13% 25% 35% Govrnmnt Educational Sctor Businss Sctor Diplomatic Sctor Othr Th Gulf In-Dpth Excutiv Larning Program Undrstanding th forcs shaping th Gulf rgion from a rgional prspctiv Th Gulf Rsarch Cntr is holding an xcutiv larning program ntitld Th Gulf In-Dpth to provid a dtaild focus on th ky stratgic aspcts of th Arab Gulf rgion. Whthr on is nw to th rgion or alrady stablishd, participation in Gulf In-Dpth is ssntial and lads to a comptitiv advantag that is unmatchd. For furthr information plas call Ext.435, visit th wbsit or mail dirctly to gulfindpth@grc.a. Final dadlin for applications is Fbruary 15, 28. Tim to R-balanc A dcad ago, infrqunt political contacts btwn Australian ladrs and thir GCC countrparts wr an undrstandabl rflction of rlativly modst commrcial and practically non-xistnt stratgic tis. But today, as th commrcial and, to a lssr xtnt, stratgic rlationships surg ahad, th absnc of mor rgular ladrship contacts is a liability. Indd, today th Australia-GCC rlationship can b liknd to a thrlggd stool with conomic, stratgic and political lgs. Th problm is that whn on lg is significantly shortr than th othr two, kping th stool balancd is likly to prov xtrmly difficult. Araa ditorial plan July 26: GCC watr criss August 26: GCC -govrnmnt Sptmbr 26: Ymn Octobr 26: GCC aviation Novmbr 26: Iraq Dcmbr 26: Ral stat & construction January 27: Dfns Fbruary 27: Tlcom/satllit channls March 27: Enrgy April 27: Gulf scurity May 27: Iran Muscat, Sultanat of Oman March 17 to 2, 28 I s s u N o. 3 N o v m b r 2 7

Japans Prim Ministr s Visit to th Middl East to Build a Multilayrd Rlationship Akiko Yoshioka Rsarch Fllow, JIME Cntr-IEEJ Visiting Rsarchr, Gulf Rsarch Cntr Japan s Prim Ministr Shinzo Ab visitd

14 Japans Prim Ministr s Visit to th Middl East to Build a Multilayrd Rlationship Akiko Yoshioka Rsarch Fllow, JIME Cntr-IEEJ Visiting Rsarchr, Gulf Rsarch Cntr Japan s Prim Ministr Shinzo Ab visitd svral Middl Eastrn countris from April 28 to May 2, 27. Visits by Japan s prim ministrs to th Middl East hav bn rar in rcnt yars. Formr Prim Ministr Junichiro Koizumi did visit Saudi Arabia and Egypt four yars ago, but no Japans prim ministr had bn to ithr Qatar or th UAE for narly 3 yars, and this was th first vr visit by th had of th Japans govrnmnt to Kuwait. If w considr Japan s growing conomic tis with th rgion, spcially in th fild of nrgy, and th incrasing numbr of Japans companis and xpatriats that hav movd into th rgion, th prim ministr s visit should hav happnd much arlir. Although it was a vry quick tour, covring six citis in six days, Prim Ministr Ab hld top-lvl mtings in vry country that h visitd such as thos with King Abdullah in Saudi Arabia and Prsidnt Hosni Mubarak in Egypt. Tabl 1: Th numbr of Japans Expatriats and Companis Expatriats Companis U.A.E Egypt Saudi Arabia Qatar Kuwait Sourc: Th Ministry of Forign Affairs, Japan and othrs. This visit was notworthy for two rasons. Th first was th nrgy and conomic aspct which has always bn, and will continu to b, th most important factor in Japan s rlationship with th rgion. This rgion has significantly grown in importanc in rcnt yars bcaus of rising oil prics. Howvr, th prim ministr s visit may also b viwd as an xprssion of th activ forign policy of Japan, which is attmpting to position its rlationship with th rgion in a mor multilayrd way. Both ths aspcts ar basd primarily on th prim ministr s initiativ. Growing Enrgy and Economic Tis Th Fdration of Economic Organizations (known as Kidanrn) arrangd a dlgation to accompany Prim Ministr Ab, which consistd of mor than 18 businss ladrs from a wid varity of sctors, including oil, trad, banking, ptrochmicals, construction, lctricity, automobils and othrs. This was th scond such dlgation to join Ab on a forign tour; th first dlgation accompanid him on his visit to Vitnam in Th ida, initiatd by Ab himslf, was inspird by th Amrican and Europan styl of top sals diplomacy, in which political and businss ladrs visit forign countris togthr, hoping to crat synrgistic ffcts that will xpand thir prsnc in th political and conomic sphrs. Th ladr of th dlgation and th chairman of Kidanrn, Fujio Mitarai, said aftr th visit, In Saudi Arabia, w had th plasur of both th King and Crown Princ joining us for dinnr. This was unusual and rmindd us of thir high xpctations from Japan. I also bliv that our nthusiasm must hav rachd thm. 2 Sinc th dlgation was formd on short notic, or owing to th busy tour schdul, som qustiond th nd for and th rsult of th businss mission. Howvr, this hug Figur 1: Japans Export (22-26) dlgation at last succdd in crating a Japans prsnc, and should b viwd in a positiv light. Th third oil-boom ra in th Gulf countris has nabld thm to undrtak normous dvlopmnt projcts. To xpand infrastructur for mting th nds of th incrasing population, many projcts, such as in th filds of transportation, watr, lctricity, swag and construction, ar in progrss, and Japans companis hav found attractiv conomic opportunitis to b involvd in thm. On such xampl is th Dubai Mtro (an urban rail systm that runs along a crk and links Dubai Airport and Jbl Ali Port), schduld to bgin oprations in Sptmbr 29. In addition to xpanding its involvmnt in th dvlopmnt activitis of th rgion, Japan is also rapidly incrasing its xports. Exports to th countris Ab visitd, consisting primarily of machinry and transport machins, balloond in fiv yars from 933 billion Japans yn in 21 to 1.68 trillion Japans yn in Bfor and during Ab s visit to th rgion, th UAE-Japan Businss Forum was hld in Tokyo and Abu Dhabi, and th Saudi-Japan Businss Forum was hld in Riyadh. Th numbr of participants, which xcdd 3, in Tokyo, rflcts th incrasing attntion bing paid to th rgion by Japans businssprsons and th clos conomic rlationships that xist byond th nrgy sctors. Egypt Kuwait Qatar Oman Saudi Arabia UAE Sourc: Japan Tariff Association It is common knowldg that Japan is dpndnt on th rgion for a hug shar of its oil rquirmnts. In 26, dpndncy on Middl Eastrn countris for Japan s oil imports rachd as high as 88.9 prcnt, and four of th fiv countris Ab visitd Saudi Arabia, UAE, Qatar and Kuwait togthr mad up 74.8 prcnt of imports. 4 Compard to th 197s, whn xtrmly high oil prics svrly affctd th Japans conomy at last twic, th ngativ ffct of high oil prics has bn mitigatd by th divrsification of nrgy sourcs, th diffusion of nrgy consrvation tchnology and th apprciation of th Japans yn. Howvr, thr is no doubt about th importanc of th rgion from th viwpoint of nrgy scurity, spcially in light of th rising oil dmand from Asian countris. Du to ths circumstancs, th joint statmnts issud during Ab s visit rfrrd to scuring th oil supply. Qatar statd that thy, would kp supplying oil and natural gas, including LNG, to Japan at an accptabl rat for both sids in a stabl mannr 5 and th Saudi sid xprssd its intntion to continu stabl oil supply to Japan, and th Japans sid xprssd its apprciation for this. 6 During th visit, Ab proposd to Saudi Arabia s King Abdullah that Japan las som stat-ownd oil storag tanks in Okinawa, th southrn islands of Japan, and 1 Aftr th Middl East tour, mor than 2 businssprsons joind Ab again on his visit to Indonsia, India and Malaysia in August Asahi Nwspapr, May 3, Calculation basd on data from th Japan Tariff Association. 4 Ptrolum Association of Japan. 5 Joint statmnt with Qatar, Ministry of Forign Affairs, Japan. 6 Joint statmnt with Saudi Arabia, Ministry of Forign Affairs, Japan. I s s u N o. 3 N o v m b r 2 7

15 Figur 1: Japans Oil Import (26) both sids agrd to closly xamin th proposal on a practical lvl. If implmntd, this could allow Saudi Arabia to cut down th shipping priod for oil to North Amrica and to hav a commrcial bas in Asia, and would giv Japan prfrntial rights to purchas th oil in th tanks, in cas of an mrgncy. 7 In addition, th Japan Bank for Intrnational Coopration (JBIC) and Abu Dhabi National Oil Company (ADNOC) rachd a financial agrmnt according to which ADNOC will borrow $1 billion from JBIC on th condition that it nsurs scur oil supply to Japans oil companis. ADNOC will invst th mony in oil xploration, product xpansion projcts and infrastructur dvlopmnt. Japans companis may hav an opportunity to contribut in ths invstmnts. 8 Japan s Activ Diplomacy UAE Saudi Arabia Nutral Zon Kuwait Qatar Oman othrs Sourc: Japan Tariff Association Th prim ministr s visit also showd that th rlationship btwn Japan and th rgion has mbarkd on a nw ra that gos byond th filds of nrgy and conomics. Th joint statmnts issud aftr th mtings touchd upon othr nw topics such as nuclar issus both in th Middl East and East Asia, and climat chang. For th first tim as incumbnt prim ministr, Ab visitd mmbrs of th Slf-Dfns Forc (SDF) in Abu Dhabi and Kuwait, who ar ngagd in ovrsas missions. Ths nw trnds rflct Japan s rcnt activ forign policy. Formr Prim Ministr Koizumi, wll known for his strong ladrship, advocatd stratgic diplomacy in th middl of 26 by dispatching ministrs a fw months bfor his rsignation particularly to countris thy had nvr visitd bfor. This was aimd at making Japan s position undrstood and gaining support in th intrnational community. Ab, who succdd Koizumi in Sptmbr 26, follows his policis and top-down styl in xtrnal as wll as intrnal affairs. Ab, th first Prim Ministr of Japan to b born aftr World War II, has challngd th post-war rgim and lays mor mphasis than his prdcssors on diplomacy and national scurity. In January 27, a law passd by th Japans Dit lvatd th Dfns Agncy to th Dfns Ministry and rdfind th primary mission of th SDF to includ intrnational pac-kping oprations, which prviously had scondary status. It was natural for Ab to visit and ncourag mmbrs of th SDF during his Middl East tour. Th Middl East is now on of th major arnas for SDF s ovrsas activitis. In Abu Dhabi, Ab told th crw of Maritim SDF, which rfuls vssls of coalition mmbrs as part of th anti-trrorism opration in Afghanistan, that it was ssntial for Japan to contribut to th intrnational caus. In Kuwait, Air SDF maintains airlift srvics undr th framwork of th Iraq rconstruction mission basd in Ali al-salim Air Bas, though Ground SDF withdrw from Iraq in July 26. Ab told thm that h was proud of thir work and xhortd thm to kp trying hardr for th sak of th intrnational community. Most of th joint statmnts with th fiv countris brought up th issu of wapons of mass dstruction, mphasising th importanc of urging all th stats in th Middl East to accd to th Traty on th Non-Prolifration of Nuclar Wapons and making th Middl East a zon fr of wapons of mass dstruction and thir dlivry mans in conformity with rlvant intrnationally lgitimat rsolutions. 9 Th statmnts with Saudi Arabia, Qatar and UAE dirctly mntiond Iran. Th two sids placd a grat mphasis upon th importanc of a diplomatic solution to th Iranian nuclar issu, and urgd Iran to implmnt th Unitd Nations Scurity Council Rsolutions 1696, and 1747, and suspnd all nrichmnt-rlatd and rprocssing activitis accordingly. 1 What is notworthy is that all th statmnts rfr to North Kora, following th WMD and Iranian nuclar issus, saying On th situation rgarding th Koran Pninsula, th two sids concur that th agrmnt rachd at th Six-Party Talks on 13 Fbruary 27 should b xpditiously implmntd by all partis, spcially by North Kora. 11 Prolifration of WMDs is now an issu of global concrn, and th Iranian nuclar issu is not unrlatd to th on in North Kora, thus dmonstrating that th Gulf and Japan ar facing a common problm. Th statmnts supportd an arly rform of th Scurity Council of th Unitd Nations and an arly rsolution of th abduction issu. Th whrabouts of dozns of Japans abductd by North Kora in th 197s and 198s ar unknown, and th joint statmnts rflct th prviously citd activ Japans diplomacy. In addition, th significanc of climat chang as an imminnt univrsal challng cannot b xaggratd. Th joint statmnts with th Gulf countris statd that both sids shard th viw that th intrnational community as a whol not only industrial countris but also nrgy supplying countris should advanc a stratgy to manag th currnt global warming trnd 12 and th Japans sid xprssd its willingnss to dvlop its coopration in both lvls of govrnmnt and privat sctors to promot th clan dvlopmnt mchanism (CDM) that contributs to combating th possibl global warming as wll as achiving sustainabl dvlopmnt 13 in th UAE, Kuwait and Saudi Arabia. Japan is trying to build a mor multilayrd rlationship with th Gulf and th Middl East that gos byond shard common intrsts in th filds of nrgy and conomics. National scurity and climat chang hav spcially bcom mor and mor globalizd in rcnt yars and cannot b tackld only through a rgional approach. A broad-basd and multilayrd rlationship btwn Japan and th Middl East will not only scur Japans nrgy nds but will also nabl Japan to play a mor pivotal rol in th rgion. GRC Partnrships with Asian Institutions Collaboration with think-tanks and rsarch organizations is a vital part of th Gulf Rsarch Cntr s mandat. Th coopration agrmnts that th cntr has signd with a numbr of institutions worldwid aim to support ach othr in th aras of rsarch, policy facilitation and implmntation of long-trm conditions for pac, scurity and sustainabl dvlopmnt. In partnring institutions of intrst, w hop to work in pursuit of crating gratr national, rgional and intrnational awarnss on issus prtaining to scurity and stability in th Gulf rgion and byond. Th aras of coopration ncompass joint rsarch; dissmination of findings; convning confrncs; facilitating xchang of scholars; translation, rpublication and distribution of slctd publications; as wll as sharing of rlvant databass. Th following is a list of Asian institutions that th GRC ithr has a formal coopration agrmnt with or ntrd into a working rlationship in mutually agrd aras. Jun 12, 27 Th National Maritim Foundation (NMF), a Nw Dlhi-basd think tank, signd a MoU with th GRC to work towards crating gratr national, rgional and intrnational awarnss on issus prtaining to scurity and stability in th Gulf and Indian Ocan rgions. Th NMF is a non-govrnmntal and non-political maritim think tank that undrtaks studis and analyss across th various dimnsions of maritim domain rlating to India vis-à-vis th Indian Ocan countris and also global actors in ordr to formulat policis and prsnt options. 7 Kyodo Nws, April 29, Asahi Nwspapr, April 29, Joint statmnt with Egypt, Ministry of Forign Affairs, Japan. 1 Joint statmnt with UAE, Ministry of Forign Affairs, Japan 11 Joint statmnt with Kuwait, Ministry of Forign Affairs, Japan. 12 Joint statmnt with UAE, Ministry of Forign Affairs, Japan. 13 Joint statmnt with Saudi Arabia, Ministry of Forign Affairs, Japan. I s s u N o. 3 N o v m b r 2 7

Prominnt Asian Visitors to th GRC Sptmbr 5, 27 A thr mmbr dlgation from th Ministry of Forign Affairs as wll as th Consul Gnral of th Rpublic of Singapor in Dubai, UAE, Dilp Nair visitd th GRC and

16 Prominnt Asian Visitors to th GRC Sptmbr 5, 27 A thr mmbr dlgation from th Ministry of Forign Affairs as wll as th Consul Gnral of th Rpublic of Singapor in Dubai, UAE, Dilp Nair visitd th GRC and discussd th prvalnt situation in th Gulf, and conomic coopration btwn Singapor and th Gulf Stats bsids othr mattrs of mutual intrst. Singapor s Ambassador to Iran, Gopinath Pillai, th Scond Prmannt Scrtary, Bilahari Kausikan and th Country Officr, Middl East, North African and Cntral Asian Dirctorat, Brni Ho Siak Khong, wr th dlgats rprsnting th Ministry of Forign Affairs, Singapor. August 28, 27 Profssor Ryoji Tatyama of th National Dfns Acadmy, Japan, spcialist in national scurity and intrnational politics, spcially th Palstin-Isral conflict, discussd th ky scurity issus in th Gulf Stats. May 22, 27 A group of 35 studnts and two faculty mmbrs from th School of Social Scincs division of th Singapor Managmnt Univrsity, who wr on a tour of th UAE and Qatar as part of a Businss Study Mission, wr brifd about th political, conomic and scurity dimnsions of th Gulf rgion. Visiting Scholars Akiko Yoshioka was a visiting rsarchr at th Gulf Rsarch Cntr from May to Octobr 27. Akiko is a rsarch fllow of JIME Cntr, IEEJ (Th Institut of Enrgy Economics, Japan). Hr spcialty is contmporary Iraqi politics and sh has authord a numbr of articls on th transitional political procss of Iraq aftr th war. Hr rsarch aras includs conomic and nrgy issus in th Gulf and Iraq as wll. Mdia Monitor Th following ar th highlights of important vnts prtaining to rlations btwn th Gulf and Asian countris during th last fw months. Japan April 3: Japan and UAE ladrship agr to acclrat fforts to rach a fr trad agrmnt with th Gulf Coopration Council. Discussions to this ffct took plac on th occasion of Prim Ministr Shinzo Ab s two-days visit to UAE. South Kora April 29: Qatar xprsss th intrst of th Suprm Council for th Environmnt and Natural Rsrvs (SCENR) in stablishing pacful nuclar coopration with th South Korans. Participants of th 22nd Confrnc on pacful nuclar applications hld in Kora in th prcding wk xprssd radinss to cooprat in this rgard. North Kora Sptmbr 18: UAE stablishs diplomatic tis with North Kora at th lvl of ambassadors. Australia May 4: Oman will join hands with Australia and Britain to stablish its first Military Tchnological Collg which will train both army and civilian prsonnl and is xpctd to start functioning in 29. July 3: UAE and Australia sign two tratis on xtradition of criminals and mutual lgal assistanc on criminal mattrs. Th tratis covr xtradition coopration btwn th two countris for crims such as popl (human) trafficking, mony laundring, corruption and trrorism. Sri Lanka August 11: Sri Lanka has announcd its intnt to rvamp its missions in Saudi Arabia in viw of th 55, strong Sri Lankan xpatriat workrs in of whom mor than 8 prcnt ar womn. Bangladsh August 1: Saudi Arabia snds $ 5m in aid including mdical rlif, basic rquirmnts and food to Bangladsh to allviat suffring of thousands of flood victims Malaysia May 27: Th Prim Ministr of Kuwait Shikh Nassr Al-Mohammad Al-Ahmad Al-Sabah, visits Malaysia to participat in th Third World Islamic Economic Forum (WIEF) that was hostd in Kuala Lumpur btwn May 27 and 29, and to also hold mtings with Malaysian officials. May 3: Malaysia s AlBukhary Foundation will provid 1, scholarships to Saudi studnts ovr four yars according to th trms of an MoU with th Saudi Arabian Gnral Invstmnt Authority. Indonsia Sptmbr 1: Shaikh Khalifa City, a gstur of gnrosity by th Prsidnt of th UAE, Shaikh Khalifa bin Zayd Al Nahyan to allviat suffring of tsunami victims, opns in Indonsia s Banda Ach. Th projct consists of 1,33 houss and was built at a cost of Dh 18 million. Philippins April 8: Th UAE Ministr of Labor, Dr Ali bin Abdullah Al Kaabi bgins his wk-long visit to Manila to sign a MoU with Philippin Labor and Employmnt Scrtary Arturo Brion in ordr to stramlin and improv coordination btwn th labor agncis for a mor systmatic mthod of bringing in workrs from th Philippins. China Sptmbr 7: UAE Forign Ministr, Shaikh Abdullah bin Zayd Al Nahyan signs an MoU with th Ministr of Forign Affairs, Li Zhaoxing in Bijing to st up a tam that will boost bilatral rlations btwn th two countris. Anothr MoU prtaining to tourism was signd by othr officials of th two countris. April 1: And Omani dlgation ld by Prsidnt of th Stat Council, Dr Yahya bin Mahfoudh Al Manthri mts th Chins Vic-Prsidnt Zng Qinghong. Th rcnt stablishmnt of His Majsty Sultan Qaboos bin Said Chair for Arab Studis at th Bijing Univrsity is laudd by th Chins sid. India Th UAE Forign Ministr, Shaikh Abdullah bin Zayd Al Nahyan arrivs in India to participat in th Indo-UAE convntion bing hld aftr 13 yars. Ky issus such as labor, nrgy, scurity, civil aviation and tourism ar on th agnda Jun 6: Two Indian Naval warships, INS Rajput and INS Btwa arriv in Kuwait on a frindly goodwill visit on th occasion of India s Indpndnc Day. Pakistan Jun 12: Th Forign Ministr of th UAE, Shaikh Abdullah bin Zayd Al Nahyan, calls on Prim Ministr Shaukat Aziz in Islamabad to discuss mattrs of mutual intrst. July 5: Th scond political consultation mting btwn th forign ministris of Oman and Pakistan is hld at th Forign Ministry in Oman. Th nd to intnsify joint action and co-opration in combating trafficking and smuggling among othr issus is also discussd. Npal Sptmbr 15: Thr is a 65 prcnt incras in th numbr of Npals travling to th UAE sinc th signing of an MoU btwn th UAE and Npal aftr a job fair was hld in Npal on Jun 6 this yar. Vitnam Sptmbr 4: Vic-Prsidnt and Prim Ministr of th UAE and Rulr of Dubai, Shaikh Mohammd bin Rashid Al Maktoum, mbarks on a twoday visit to Vitnam in th hop of stablishing constructiv bilatral conomic, rlations. Sptmbr 5: Vitnam hops for a bilatral labor agrmnt with UAE in th nar futur to promot th wlfar of Vitnams nationals working in th mirats. Sri Lanka Sptmbr 1: Th Dputy Forign Ministr of Sri Lanka, Hussain A. Bhaila concluds his thr-day visit to Kuwait. Th transfr of prisonr agrmnt btwn Sri Lanka and Kuwait that is currntly awaiting ratification by Kuwait is in th last stags of bing finalizd. I s s u N o. 3 N o v m b r 2 7

Basd in Dubai, UAE, th Gulf Rsarch Cntr (GRC) bgan its activity in 2 as a privatly-fundd, non-partisan think tank, ducation providr and consultancy spcializing in th Gulf rgion.

17 Basd in Dubai, UAE, th Gulf Rsarch Cntr (GRC) bgan its activity in 2 as a privatly-fundd, non-partisan think tank, ducation providr and consultancy spcializing in th Gulf rgion. Th GRC producs rcognizd rsarch from a Gulf prspctiv, rdrssing th currnt imbalanc in Gulf ara studis, whr rgional opinions and intrsts ar undrrprsntd. Th GRC blivs that th Gulf Coopration Council has transcndd th initial rasons for its stablishmnt, to bcom a fundamntal right of its citizns in th dvlopmnt of th rgion. Th GRC sks to furthr this blif by bing an institution of distinction and innovativ rsarch that advancs diffrnt aspcts of dvlopmnt to ultimatly bnfit th popl of th rgion. 187 Oud Mtha Towr, 11th floor l 33 Shikh Rashid Road l P.O. Box 8758, Dubai UAE Tl. No.: l Fax No.: Wbsit: l info@grc.a Copyright Gulf Rsarch Cntr 27 l All rights rsrvd

Introducing. CHAPTER TWELVE Aggregate Demand in the Open Economy: The Mundell-Fleming Model LM* Equilibrium exchange rate. IS* Income, Output, Y

Introducing. CHAPTER TWELVE Aggregate Demand in the Open Economy: The Mundell-Fleming Model LM* Equilibrium exchange rate. IS* Income, Output, Y CHAPTER TWELVE Aggrgat Dmand in th Opn Economy: Th Mundll-Flming Modl 1 Introducing LM* Equilibrium xchang rat Equilibrium Incom 2 1 Start with ths two quations: Assumption 1: Th domstic intrst rat is