Oman – Balancing Act Becoming More Challenging

Under the leadership of Sultan Qaboos, Oman has historically served as a mediator in disputes among the member states of the GCC, and, especially over the last decade, between the GCC and the Iran. However, the sultanate’s continuing effort to remain on good terms with its feuding neighbors has become more challenging as Saudi Arabia and the UAE have become embroiled in an escalating battle for regional supremacy with Iran, and demanded that their junior partners in the GCC choose sides.

Saudi leaders have begun to voice criticism of what they perceive to be Oman’s overly cozy relationship with Iran, in general, and its work as a mediator in the Yemen conflict, in particular. Foreign Minister Yousef bin Alawi bin Abdullah is Muscat’s point man for the Yemen negotiations, but the Saudis have suggested that Gen. Sultan bin Mohammed Al-Naamani, a top aide to Qaboos, is working to tip the scales in favor of Iran. Whether the allegation is valid or instead is part of a campaign on the part of Saudi Arabia to force Oman into line, the claim represents an unmistakable warning to officials in Muscat that their diplomatic activities are being scrutinized in Riyadh.

Increased trade and investment with Iran is a cornerstone of Oman’s long-term strategy for reducing the sultanate’s dependence on exploitation of a shrinking supply of oil, but the restoration of US sanctions on Iran has cast doubt on the efficacy of that plan. Rising tensions between the Gulf powers and Iran create a possible opportunity for Oman to bargain for economic favors from Saudi Arabia and the UAE in return for its loyalty. However, such a ploy could easily back-fire, if Riyadh and Abu Dhabi instead press their point by halting their own investments in Omani projects.

The uncertainty surrounding the remaining duration of Qaboos’ reign only heightens the risks in that regard. The sultan has no doubt alerted the Omani Royal Court to expect stronger pressure for a shift in diplomatic posture following his death, but it is far from clear that whoever inherits the throne will possess either the diplomatic acumen or the political capital required to respond in a manner that is beneficial for the sultanate.

Oman raised $3 billion in the international debt markets in July, just four months after Moody’s downgraded the sultanate’s sovereign bonds to junk status, a step previously taken by both Fitch and Standard & Poor’s. Demand was strong among investors, fueling speculation that many may have acted on the assumption that Oman’s neighbors will come to its rescue, if necessary. For its part, Standard & Poor’s has indicated that it is poised to downgrade Oman’s rating further into junk territory in the absence of more aggressive action to narrow the budget deficit.

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