IP86

ACIS IRAN PULSE Numner 86 ● December 5, 2018

Media attention around the Middle East was riveted in late October by striking video footage from Oman's state news agency showing Israeli Prime Minister Benyamin Netanyahu's October 26 2018 meeting with Omani leader Sultan Qaboos bin Said in the sultan's palace in Muscat. Without any visible signs of an Israeli-Palestinian peace process, Qaboos went much further than any other Arab leader in the Gulf by meeting so openly and warmly with Netanyahu, even signaling his willingness to normalize relations with Israel. The deep motivation for Oman's gesture rests in its need to preserve its expanding economic ties with Iran in the face of stiffening Saudi and Emirati opposition. 

Oman's long-serving monarch has often played the role of a behind-the-scenes conciliator, relaying messages for those nations who cannot or will not speak to one another. Indeed, much of the preliminary communication between Iran and the United States that eventually lead the to 2015 nuclear deal, formally the Joint Comprehensive Plan of Action (JCPOA), occurred through an Omani channel. Observers of Netanyahu's Muscat visit immediately began to speculate about the possibility of Oman mediating between Israel and Iran. However, this time Oman has much more at stake in calming the waters of the region – the economic and political survival of Oman itself.

Oman's economy was rocked during the period of slumping oil prices. According to Moody's, Oman's net external asset position – the difference between its foreign assets and liabilities –plummeted from 55% of GDP in 2014 to less than 10% in 2017. As a result Moody's has placed Oman's bond rating just above junk status while Standard & Poor's downgraded Oman's bond rating to junk status in November 2017. Unlike its fellow GCC members Saudi Arabia and the United Arab Emirates, Oman is cash-strapped and to the chagrin of Riyadh and Abu Dhabi, Muscat has needed to expand its economic relations with Tehran. In Iranian year 2017-2018, the Omani and Iranian Chambers of Commerce organized 25 private sector trade delegations. During the first half of the Iranian year 2018-2019 (March 21-August 22, 2018), Iran's trade in non-oil commodities with Oman increased by 126% and was worth $659.8 million.

At the forefront of expanding economic ties between Muscat and Tehran is the undersea Iran-Oman gas natural pipeline. The $1.2 billion pipeline is intended to supply Oman with at least 20 million cubic meters per day over the course of 25 years. Worth a total of $60 billion, the agreement would not only supply Iranian natural gas to Omani consumers but also to Oman's liquified natural gas (LNG) plants enabling Iran to sell its gas in global LNG markets via Omani re-export. The addition of Iranian gas would advance Oman's ambition to become an energy hub, exploiting its Arabian Sea coastline that provides easy access to Asian markets where LNG is in high demand. However, the construction of the pipeline would likely require Oman to secure a waiver from U.S. secondary sanctions against Iran. Full diplomatic recognition of Israel, or something approaching it, could help Muscat blunt Washington's opposition to the pipeline.

Oman also seeks to be part of a mutli-modal, commercial transit corridor with Iran that could service Indian Ocean-to-Europe trade. Taking advantage of Oman's strategically located coasts at the eastern entry to the Strait of Hormuz, the north-south transit corridor would link Omani ports to Iranian ports and then to overland railroad links from Iran to Turkmenistan and Kazakhstan, from where commercial rail cargoes can reach Russia and the European Union. The commercial transit corridor was one of the topics of Oman's Minister of Foreign Affairs Yusuf bin Alawi two-day visit to Tehran in mid-March 2018 aimed at the two Gulf neighbors expanding their investments in each other's countries. The discussions also covered Iranian investments in Oman's Duqm special economic zone on its Arabian Sea Coast and Omani investments in Iran's Chabahar port across the Gulf of Oman. 

As a result, Oman increasingly has garnered the suspicion of its more powerful GCC allies Saudi Arabia and the United Arab Emirates, even more so with Oman's failure to support their effort to contain the expansion of Iranian influence in Yemen. Muscat's inability or unwillingness to stop Iran's weapons shipments to Yemen's Houthi rebels delivered via Omani overland routes has caused consternation in Riyadh and Abu Dhabi, as well as in Washington. While previous U.S. administrations have valued the 'Omani channel' to Tehran, President Donald Trump and his team of senior foreign policy and defense advisors composed of Iran hard-liners may look askance at Oman's relationship with Iran.

The early June 2018 revelations that the U.S. Treasury Department under President Trump's predecessor Barack Obama had issued a license in February 2016, which the Obama administration never disclosed, for Oman's Bank of Muscat to convert $5.7 billion worth of Iranian deposits from Omani rials into U.S. dollars has furthered undermined Oman's position in Washington. While technically not illegal, the Obama administration's action went well beyond what the U.S. was required to do under the terms of the JCPOA. For the current administration, Oman's association with Obama-era policy toward Iran, its increasing economic dependence on Iran, and its failure to clampdown on arms shipments to Iranianbacked rebels in Yemen all add up to the impression in the White House that Oman may be a liability for President Trump's hardline policies toward Iran.

Oman needs at least Washington's tacit support for its deepening economic relationship with Iran which Oman regards as the means solve its economic woes. Beyond this, Oman will need U.S. support to ensure the stability of the country and the continuity of governance during its impending succession process. The 78-year old Sultan Qaboos, who has ruled Oman since 1970, has been suffering from terminal cancer since 2014. Still, Oman's monarch has not publicly named his intended heir. With Saudi Arabia and the United Arab Emirates keen to see a change in Oman's policy orientation toward Iran, it is not beyond the realm of possibility that Riyadh or Abu Dhabi will attempt to intervene in Oman's succession process. Muscat will need Washington's help to keep their neighbors' meddling at bay. Being the first and only Arab Gulf nation to have open, formal relations with Israel may incline Washington to become a stakeholder in Oman's regime continuity, despite Oman's deepening economic reliance on Iran. In the long term, Oman's growing economic dependence on Iran will alter the strategic calculus in the Gulf and across the Middle East. At least in the short term, the closer Oman moves to Iran, the more Oman feels the need to move closer to Israel.

 *Dr. Micha’el Tanchum is a senior fellow at the Austrian Institute for European and Security Studies (AIES), a fellow at the Truman Research Institute for the Advancement of Peace, the Hebrew University, Israel, and non-resident fellow at the Centre for Strategic Studies at Başkent University in Ankara, Turkey (Başkent-SAM).  @michaeltanchum 

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