PROJECT REPORT

ON
Arab World Unrest and its Impact on
International Business Environment.

Submitted To: Submitted By:

Mr.Jitender Bhandari Vinod Shankar
2K91/IB/59
 INTRODUCTION

The Arab world refers to Arabic-speaking countries stretching from the Atlantic
Ocean in the west to the Arabian Sea in the east, and from the Mediterranean
Sea in the north to the Horn of Africa and the Indian Ocean in the southeast. It
consists of 21 countries and territories with a combined population of 360 million
people straddling North Africa and Western Asia.

The sentiment of Arab nationalism arose in the second half of the 19th century
along with other nationalisms within the failing Ottoman Empire. The Arab
League was formed in 1945 to represent the interests of the Arabs, and especially
to pursue the political unification of the Arab worlds, a project known as Pan-
Arabism. Today, Arab states are characterized by their autocratic rulers and lack of
democratic governance. The popular protests throughout the Arab world of late
2010 to early 2011 are directed against the authoritarian governments and the
associated political corruption, paired with the demand for more democratic rights.

Overview

The 2010–11 Middle East and North Africa protests (or The Arab Spring) are an
unprecedented revolutionary wave of demonstrations and protests which have been
taking place in the Middle East and North Africa since 18 December 2010. To
date, the wave fomented the Libyan Civil War and the Tunisian
and Egyptian revolutions, while Algeria, Bahrain, Djibouti, Iran, Iraq, Jordan,
Oman, Syria and Yemen have all seen major protests, and minor incidents have
occurred in Kuwait, Lebanon, Mauritania, Morocco, Saudi Arabia, Sudan and
Western Sahara. The protests have shared techniques of civil resistance in
sustained campaigns involving strikes, demonstrations, marches and rallies, as well
as the use of social media such as Facebook and Twitter to organise,
communicate, and raise awareness in the face of attempts at state repression
and Internet censorship.

The demonstrations and uprisings in the region have been called the “Arab Spring”
by several sources, although a number of the countries affected are not part of
the Arab world. The protests began on 18 December 2010 in Tunisia,
following Mohamed Bouazizi's self-immolation in protest at police corruption and
ill-treatment. Due to similar hardships in the region and ultimately successful
protests in Tunisia, a chain of unrest was started which was followed by protests in
Algeria, Jordan, Egypt, and Yemen, and to a lesser degree in other, mostly Arab,
states. In many cases the climactic days have been termed "day of rage" or some
variation thereof. The protests in the region have also affected unrest outside the
region. To date, two heads of state have been overthrown—Tunisia's on 14 January
and Egypt's on 11 February. Tunisia's Jasmine Revolution led President Zine El
Abidine Ben Ali to flee to Saudi Arabia. In Egypt, massive protests began on 25
January, and after 18 days of protests, President Hosni Mubarak, who had ruled
Egypt for 30 years, resigned on 11 February 2011. Around the same
time, Jordan's King Abdullah named a new prime minister and the president of
Yemen, Ali Abdullah Saleh, announced that he would not seek another term in
office in 2013, after what would then be 35 years of rule. During the ongoing
uprising against Libyan strongman Muammar Gaddafi, Sudanese President Omar
al-Bashir announced he would not seek re-election in 2015. Despite Iraqi Prime
Minister Nouri al-Maliki announcing he would not seek re-election in
2014, increasingly violent demonstrations urging him to resign have mounted.
Reason for Arab World Unrest

Numerous factors have led to the protests, including dictatorship, human

rights violations, Wikileaks cables which demonstrated government
corruption, economic downfall, unemployment, and extreme poverty, along with a
large percentage of youth within the population. In all northern African and Gulf
countries, the concentration of benefices in autocrats' hands, their several decades
holding power, too low and too blur share of oil benefits, corruption, and the
refusal of youth to silently accept this previous status quo have been mentioned as
the main motives for the current movements. Increasing food prices and rates
of famine globally have also been a major reason, involving threats to food
security worldwide and prices approaching levels seen during the 2007–2008
world food price crisis. In recent decades rising living standards and literacy
rates and an expansion in higher education have resulted in an improved human
development index in the affected countries. The tension between rising aspirations
and a lack of government reform may have been a contributing factor to the
protests. The place of youth and generation gaps have been underlined. For this
educated and internet connected wave of youth, many having studied in western
countries, autocrats and absolute monarchy are anachronisms. Najma Al-Zidjaly
talked about youth quake.

Tunisia and Egypt, the first to witness major uprising, differ from other gulf
countries, Algeria, Libya by the lack of oil. This gift of oil allowed oil producing
governments to save time by sudden scholarships and subsides. However, it is
unlikely to stop the ongoing ideological switch.
Impact on International Business Environment

Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as
Egypt’s ruler. Now he is gone, overthrown by a display of people power that is
shaking autocratic leaders across north Africa and the Middle East. And oil has
surged above $115. Little wonder. The region provides 35% of the world’s oil.
Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m
barrels a day (b/d).

So far prices have not been pushed up by actual disruptions to supply. Oil hit a
peak even before news emerged that some foreign oil firms operating in Libya
would cut production and that the country’s ports had temporarily closed. As
Adam Sieminski at Deutsche Bank points out, oil prices are driven both by current
conditions and by future expectations.

Oil markets don’t like surprises. The sudden ousting of Mr. Mubarak and the
unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a
tenth of the world’s oil) had added 20% to oil prices by the middle of this week.
The big worry is that spreading unrest will culminate in another shock akin to the
oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.

Oil is more global than it was during those previous crises. In the 1970s production
was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil
has hit markets from fields in Latin America, West Africa and beyond. Russia
overtook Saudi Arabia as the world’s biggest crude supplier in 2009; OPEC’s
share of production has gone from around 51% in the mid-1970s to just over 40%
now.

Yet the globalization of oil supply has not diminished OPEC’s clout as the
marginal supplier of crude. Markets are tight at the moment. Bumper inventories,
built up during the downturn, are running down as the rich world recovers and Asia
puts on a remarkable growth spurt. Demand rose by a blistering 2.7m b/d last year,
according to the International Energy Agency, and is set to grow by another 1.7m
b/d this year by Deutsche Bank’s reckoning. Many other producers are already
running at full capacity; OPEC has its hands on the only spare oil (see chart).

If Libya’s oil stopped flowing importers would look to Saudi Arabia to make up
the shortfall. The oil could probably flow to fill the gap in Europe, Libya’s main
market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but that looks
wishful. Analysts think the true number is nearer 4m-5m b/d, with 3m-3.5m b/d in
Saudi hands. That is ample to plug a Libyan gap but would hasten the day when
growing world demand sucks up all spare production capacity. Analysts at Nomura
reckon that it would only take a halt of exports from Algeria as well to absorb all
the slack and propel oil to a terrifying $220 a barrel.1

1
http://www.economist.com/node/18233452
Despite saying it stands ready to produce more oil, Saudi Arabia has so far been
reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with
oil and seems content with a price around $100 a barrel. Traders hope that Saudi
Arabia will boost production stealthily or that OPEC will call a special meeting to
raise quotas and calm markets.

The worst-case scenario for oil prices would be some kind of disruption to Saudi
supply itself. That concern has become livelier given the unrest in neighbouring
Bahrain. The tiny island kingdom produces little oil but is of vital strategic
importance in the Persian Gulf, a seaway that carries 18% of the world’s oil.
America’s 5th Fleet uses the country as a base.

The Saudis may also fear that protests by Bahrain’s Shia population could spill
over their own borders. Saudi Arabia’s eastern provinces are home to both its oil
industry and most of its Shias, who may also have cause for grievance with their
Sunni rulers. The king this week announced $36 billion in benefits for his people.
One crumb of comfort is that oil facilities across the region are generally located
far from the population centres, where protests tend to be concentrated, and are
well defended against anything but a concerted military assault.

What might be the effects of a more general supply crisis in the Middle East and
north Africa? The oil shocks of the 1970s spurred the world to build stockpiles,
such as the 727m barrels of crude oil in America’s strategic petroleum reserve, to
be drawn on in the event of upheaval in the Middle East and elsewhere. China is
building up a strategic reserve of its own. America’s Energy Information
Administration puts total rich-world stocks in the hands of governments and
industry at 4.3 billion barrels, equivalent to nearly 50 days of global consumption
at current rates.
The impact of a crisis would therefore depend on how much oil production was
lost and for how long. Even seismic shocks in oil-producing countries might not
cut off supplies for very long. Yet the example of Iran shows what can go wrong.
Leo Drollas of the Centre for Global Energy Studies, a think-tank, points out that
pre-revolutionary Iran pumped 6m b/d. The new regime ditched Western oil
experts and capital, and it has never come close to matching that level of output
since; it now produces just 3.7m b/d. Middle Eastern oil is largely state-controlled
but, as Amrita Sen of Barclays Capital observes, foreign investment remains vital
to north Africa’s oil industry. If new regimes emerged that were more hostile to
outsiders, that might have a lasting effect on production.

The world could probably weather a short-lived crisis. But the damage if oil prices
spiked and stayed high for a long time could be severe for the recovering
economies of the rich world. As for the prospects of reducing the importance of the
Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean
that OPEC’s share of oil production rises again as it pumps extra output eastward.
A troubled region’s capacity to cause trouble will not diminish.

Impact on world Financial Market

The stock markets of the world are incredibly complacent in the face of unrest
across the Arab World. This is a threat to the security of the whole world and in
particular the vital energy supplies of the Gulf.

Oil shocks

In the past even the possibility of a minor disruption to oil supplies sent oil prices
north and stocks sharply south. Now investors are worrying about missing the next
uptick on the Dow, and they have become smaller and smaller, rather than noticing
the bigger picture.

Of course it is much easier for the Arabian investor. We are bound to be feeling the
heat while others think they are safe and secure in the West or East.

It is not all bad for us either. Abu Dhabi could still open its check book yesterday
and swallow Spain’s largest oil refinery for $5.4 billion. But the local situation is a
major worry.2

Even for the oil rich UAE, with its stable and mainly expatriate population, there is
a downside to the disruption of trade as a major transportation and distribution hub
for the region. The multinationals of Jebel Ali will have plenty of angst in the
boardrooms this week.

Potential upside

On the other hand, the UAE seems a likely beneficiary from a flight of capital and
wealthy residents from the troubled lands of the region. GCC tourists have already
diverted to Dubai and Abu Dhabi in substantial numbers making this year’s Dubai
Shopping Festival unexpectedly successful.

Will Bahrain now cease to be a financial centre and the institutions based there
pack up and move to the gleaming, and mainly empty, new infrastructure of the
Dubai International Financial Centre? It could well happen.

After 9/11 the UAE also looked poorly placed for foreign investment, and even
tourism ground to a halt. But then came the Arab money returning from the US and

2
http://www.arabianmoney.net/islamic-finance/2011/02/17/financial-markets-incredibly-
complacent-about-arab-world-unrest/
Europe to avoid being frozen. That set off the famous boom of the 2000s until it
stopped in late 2008.

However, it is probably just too early to be sure that another potential geopolitical
disaster has a silver lining for the emirates, and in the meantime most investors are
just concerned about the outlook for the rest of the Arab World, and that hardly
looks good.