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Bulletin: Israel's Agreements With Bahrain And The UAE Signal Shifting Alliances In The Middle East


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Bulletin: Israel's Agreements With Bahrain And The UAE Signal Shifting Alliances In The Middle East

S&P Global Ratings considers that the normalization of relations between Israel and Bahrain and the United Arab Emirates (UAE; not rated) is likely to benefit these sovereigns' economies and contribute to broader geopolitical stability in the region. However, we also believe that risks to geopolitical stability could arise from those opposed to normalization, or from policy missteps by the parties to the new order. At this stage, we do not foresee any rating impact.

Senior officials from Bahrain, Israel, and the UAE signed the U.S. brokered "Abraham Accords," to normalize relations on Sept. 15. This follows the Israeli and UAE governments' announcement on Aug. 13, that the UAE would normalize relations in exchange for Israel suspending plans to annex large parts of the Palestinian territories. Bahrain agreed to normalize relations with Israel on Sept. 11.

Below, S&P Global Ratings addresses investor questions on these developments.

Frequently Asked Questions

What's the background to the Abraham Accords?

Israel's last significant diplomatic breakthroughs with majority Muslim countries took place when it signed peace treaties with Egypt (1979) and Jordan (1994). However, behind the scenes, some Gulf Cooperation Council (GCC) states have reportedly had ties with Israel for a number of years. In the wake of the U.S. policy of disengagement from Middle East conflicts, starting during the Obama administration and continued by President Trump, some GCC states have decided to publicly strengthen ties with Israel, particularly where the countries share concerns over perceived threats, for example, those posed by Iran or extremist religious groups.

What is the potential upside to the Abraham Accords?

It is too early to tell if there will be any material economic benefits. However, with the removal of the UAE and Bahraini boycotts on Israel, we expect these countries will begin direct commercial flights with Israel and significantly increase cooperation in the areas of tourism, security, telecommunications, technology, health, education, financial services, and agriculture.

It is also likely that the parties to the Abraham Accords will establish reciprocal embassies at some point. Diplomatically, Israel's regional isolation has been reduced, while the GCC sovereigns may be able to leverage Israel's significant military capabilities against common threats.

What is the potential downside?

Tensions between Iran and many regional states continue to be elevated. Strengthening ties between some GCC sovereigns and Israel could make Iran (not rated), a regional power, feel more threatened. Changing the power balance in the region could, in our view, lead to a further heightening of tensions. Military or covert action may be carried out directly by disaffected countries or indirectly through proxy actions. For example, in recent years, drone strikes on Saudi Arabian oil facilities have been carried out by Houthi forces in Yemen, but the technology has been widely attributed to Iran, though Iran denies any involvement.

Either Iran, extremist religious groups, or those that view the recent deals as detrimental to the Palestinian cause, could react negatively to recent developments, potentially increasing regional tensions. In this context, we continue to believe that one of the key rating constraints for Israel is its exposure to persistent geopolitical and domestic security risks, including those arising from tensions with Iran and its proxies (see "Israel Ratings Affirmed At 'AA-/A-1+'; Outlook Stable," published May 16, 2020, on RatingsDirect).

Do you expect other GCC sovereigns to follow suit?

It will partly depend on the domestic and regional reaction to Bahrain's and the UAE's recent moves. If largely muted, then other GCC sovereigns might follow the same path. Another important factor is the extent to which the respective governments tie the pace of normalization to resolution of the Israeli-Palestinian issue. If resolution is a prerequisite for normalization, as we believe is the case for Kuwait and Qatar, then normalization is not likely to happen soon. Qatar's position could also be affected by its opposition to the policies of those countries that have boycotted it since 2017, including Bahrain and the UAE.

We believe that Saudi Arabia is broadly supportive of recent developments. However, we expect visible progress on Saudi's normalization of relations with Israel will take time, and might be affected by the transition of power from King Salman bin Abdulaziz Al Saud to his son, Crown Prince Mohammed bin Salman.

Oman is likely to move relatively slowly, given that Sultan Haitham bin Tariq is only in his first year of rule and had indicated a preference for maintaining Oman's traditional role as a mediator between the U.S., the GCC, and Iran, and between the GCC countries.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Trevor Cullinan, Dubai (971) 4-372-7113;
Secondary Contacts:Karen Vartapetov, PhD, Frankfurt (49) 69-33-999-225;
Max M McGraw, Dubai + 97143727168;
Shokhrukh Temurov, CFA, Dubai + 97143727167;
Ravi Bhatia, London (44) 20-7176-7113;
Zahabia S Gupta, Dubai (971) 4-372-7154;
Maxim Rybnikov, London (44) 20-7176 7125;
Additional Contact:EMEA Sovereign and IPF;

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