Introduction
Over the past twenty years, several member states of the Gulf Cooperation Council (GCC) have altered their energy export focus to target emerging economies in Asia, particularly China and India, which have experienced significant increases in oil and gas demand. Additionally, the GCC has increased its imports from regions such as East, South, and Southeast Asia. This change in trade patterns is part of a wider shift. Traditionally reliant on the West for security, leading GCC countries Saudi Arabia and the United Arab Emirates (UAE) are now expanding their geopolitical alliances.
The trend is unlikely to slow. If anything, it will probably accelerate. GCC countries seem keen to continue to decrease their reliance on the U.S. dollar for trade transactions and international assets. In parallel, they are poised to foster closer financial relations with the BRICS nations. These changes present new opportunities as well as potential risks for GCC member states.
Reorienting GCC Trade Eastward
In recent years, the GCC has rebalanced its oil exports, moving away from the West and increasingly toward an emerging Asia. The rebalancing of GCC oil exports has been influenced by various factors, including the growing energy demands of China and India, deepening political and economic ties between GCC countries and Asian nations, greater self-sufficiency in oil production on the part of the United States and Canada, and declining demand for oil from Western Europe.
Growing trade with Asia, particularly China and India, is the most important development in this regard. Asia as a whole now absorbs over 70 percent of total GCC oil and gas exports, with China alone accounting for 20 percent. By 2023, India had already become the world’s second-largest crude oil net importer after China, having increased its imports by 36 percent over a decade to meet rising refinery intake. Today, the member states of the South Asian Association for Regional Cooperation, which includes India, absorb 15 percent of total GCC oil and gas exports. Japan accounts for another 15 percent. The Association of Southeast Asian Nations (ASEAN) and South Korea each absorb around 10 percent of total GCC energy exports.
Asia is expected to remain the largest recipient of GCC oil exports for the foreseeable future. By 2030, India is expected to become the largest source of global oil demand. The increasing adoption of electric transportation, led by East Asian nations such as China, South Korea, and Japan, could potentially slow the growth rate of petroleum usage in the region. However, there is significant uncertainty about the actual pace and scale of the transition from internal combustion engines to electric vehicles. Hybrids offer a middle ground, meaning that the import of crude oil would continue for decades.
At the same time, the demand for natural gas is projected to continue growing in Asia. For one thing, developing countries across the region have an increasing need to generate power. And, for another, the limited scalability of renewable energies beyond a certain threshold, absent the massive investments that are needed to upgrade and digitize legacy power transmission and distribution systems, means that natural gas will continue to play a key role as a transition fuel from coal to renewable resources. Additionally, natural gas is expected to maintain its crucial role as a feedstock for various industries, ranging from fertilizer production to steel manufacturing.
To take just one example, China’s natural gas demand is projected to reach 700 billion cubic meters (bcm) by 2050, nearly doubling from its 2021 level of 360 bcm. This growth is supported by factors such as economic expansion, urbanization, and coal-to-gas conversions. According to the Gas Exporting Countries Forum, the Asia Pacific region as a whole could witness a dramatic increase in natural gas consumption, bringing its total consumption to over 1,600 bcm by 2050, up from its 2021 level of 600 bcm.
Also, the relationship between Asia’s large energy consumers, such as China, and the Gulf states has transitioned gradually from transactional trade to large-scale reciprocal foreign direct investment in conventional fossil fuel assets and renewable energy assets. For example, Saudi Aramco, the world’s largest oil exporter, is pursuing refining and chemical deals in Asia to expand its business and secure long-term buyers for its crude. This involves joint ventures in China with oil-refining and petrochemical companies, both private and state-owned, including Huajin Aramco Petrochemical Co., Fujian Refining & Petrochemical Co., and Sinopec.
In much the same vein, Saudi Arabia and the UAE’s Abu Dhabi National Oil Company have pre-committed dozens of billions of dollars to megaprojects aiming to develop India’s downstream oil and gas sector. Although most of these projects have experienced setbacks, the expanding role of India as an importer of crude oil and as a consumer and exporter of petroleum products continues to attract strong interest from GCC investors. At the same time, Chinese companies have ramped up their participation in renewable energy projects alongside specialized GCC players such as Saudi Arabia’s ACWA and the UAE’s Masdar, both within the GCC and in Central Asian third countries located along China’s Belt and Road Initiative.
Non-oil trade between the GCC and Asia has also grown at a steady pace, particularly on the import side. This reflects a global trend whereby countries increase imports from Asia, particularly China, which has become the GCC’s top import partner. In 2021, China accounted for 11.7 percent of the UAE’s total foreign trade, with the value of non-oil trade exchanged between the two countries amounting to US$58 billion. This represented a growth of 27 percent from 2020 and 19.8 percent from 2019. The main GCC non-oil exported goods to China are chemical products, plastics, rubber, and metals. In addition to the export of such goods, GCC countries have been exporting travel services to China. For example, China was Dubai’s fifth-largest tourist source market in 2019.
On the other hand, the GCC is India’s largest regional-bloc trading partner. In the 2022–2023 fiscal year, India’s total trade with the GCC comprised 15.8 percent of the country’s total, compared to 11.6 percent with the EU. While oil products account for a significant share of this trade, the GCC is also India’s third non-oil regional-bloc trading partner, after NAFTA and the EU, representing 10.0 percent of the country’s non-oil trade. The UAE is India’s principal trading partner within the Gulf and ranks third overall, with Saudi Arabia in fourth place. A GCC-India free-trade agreement was announced in November 2022—though negotiations over terms have yet to be concluded.
Since the start of the Ukraine war in February 2022, Russia’s participation in the GCC-Asia oil trade has become increasingly significant. The imposition of a Western embargo on Russian energy products has led to an exodus of oil and commodity traders from London and Geneva to Dubai, which maintains dealings with Russian companies. Thus, a network of shared interests encompassing Dubai, Riyadh, Mumbai, Singapore, Hong Kong, Shanghai, and Moscow has established itself. In fact, India’s reliance on the Gulf for energy imports temporarily decreased in 2022, as New Delhi began directly importing discounted Russian oil. In 2022–2023, the Gulf region met 55 percent of India’s total crude oil demand, a drop from 64 percent in 2021–2022.
However, in 2023 and the first few months of 2024, direct Indian oil imports from Russia declined and India’s imports from the Gulf recovered somewhat. This could be related to the no longer especially favorable bargains granted by the Russian oil producers to their Indian customers, as well as the latter’s fear of secondary sanctions applied by the United States and its allies. Yet the figures do not tell the whole story. There are accounts of increased triangular oil trade relations between Russian oil companies, traders in Dubai, and buyers in India, China (Shanghai and Hong Kong), and Singapore. Anecdotal evidence suggests that to evade G7 sanctions and restrictions, Russian oil producers are increasingly using Hong Kong and Dubai-based shell companies for their transactions with India and, presumably, with other Asian customers.
If anything, Western sanctions on Russia have accelerated the development of non-Western oil trade routes and alliances. Moreover, the economics of localization tell us that, regardless of the evolution of the Russia-Ukraine conflict, Dubai has the potential to permanently replace Geneva as the world’s leading hub for oil trading. It takes years to build the complex network of services providers, suppliers, and customers needed for an efficient commodity trade business, but once such a network has been established, it becomes more attractive for newcomers to join. In addition, a trading hub should be sanctions-proof, a status more often than not attained by the host country’s political neutrality. Geneva once fit the bill in this regard, but as Switzerland started to apply the G7 and EU sanctions against Russia, both large and small commodity traders began moving their Russian business to Dubai.
The GCC’s Larger Move Away from a West-Centric World
At the BRICS+ summit in Johannesburg, South Africa, in August 2023, Saudi Arabia and the UAE were invited to join the intergovernmental organization. The GCC as a whole stands to benefit from its two most prominent members joining BRICS+, given the latter’s expansion and growing role within the G20 as a counterbalance to the G7 bloc. The development could give more credibility and influence to the GCC and its member states in shaping global economic and political agendas.
Saudi Arabia and the UAE both have unique reasons for seeking BRICS+ membership. While the UAE may not have a trillion-dollar economy, its invitation to join BRICS+ is a testament to its status as a global trading hub; the country plays a disproportionate role in international energy, trade, and finance. For Saudi Arabia, joining BRICS+ would signify a shift from being primarily aligned with the United States to becoming an independent regional power and de facto leader of the GCC and the Arab world. As of this writing, the UAE has accepted the invitation while Saudi Arabia has not formally accepted or declined it.
Should GCC countries start joining BRICS+, this would help the latter in its stated quest to eventually establish an alternative to the U.S. dollar as the leading global currency. GCC countries could potentially redirect some of their substantial financial reserves away from the dollar to support a BRICS+ Clearing Union and, eventually, a BRICS+ currency. Although such a currency remains a distant prospect, its realization could potentially transform the global financial landscape. In the short term, a less ambitious objective on the part of BRICS+ is to establish a self-sustained wholesale and retail payment system among its members, one in which they use their own currencies instead of relying on the dollar for conversions between local currencies.
This echoes past experiences of International Clearing Unions, such as the European Payments Union, which in the aftermath of World War II successfully sought to facilitate trade clearing and settlement among the involved European countries while reducing reliance on dollar liquidity. Due to the Russia-Ukraine war and the subsequent weaponization of the dollar through comprehensive restrictions on the Russian banking system’s access to dollar liquidity and the freezing of the Central Bank of Russia’s dollar and euro reserves, the de-dollarization agenda has become even more relevant for many countries. If there is no progress at the G20 level in establishing a truly international reserve currency, as was briefly considered following the 2007–2008 financial crisis, the impetus for BRICS+ to establish its own payment and clearing system would be even greater.
The GCC countries’ interest in such a system coincides with their recent moves toward settling payment of their oil and gas shipments to China and India in the Chinese renminbi (often referred to as the yuan) and the Emirati dirham, respectively. Admittedly, the prospect of a “petro-yuan” analogous to the historical “petro-dollar” might never materialize, given the inward-looking nature of China’s financial system, the diversification of GCC oil exports to other Asian countries, and fears associated with Chinese hegemony over the BRICS+ grouping. Yet a gold- and petro-backed BRICS+ currency could become a viable alternative to the dollar as a unit of account, medium of exchange, and, ultimately, as a store of value.
Digital technologies, especially central bank digital currencies (CBDCs), could be utilized to facilitate the development of a BRICS+ currency and strengthen economic ties among member countries, including the UAE and Saudi Arabia (provided the latter confirms its accession). “Proofs of concept” to demonstrate the feasibility of such undertakings are already in progress. They include the first cross-border Multiple Country CBDC Bridge (mBridge)—which was designed by the Central Bank of the UAE together with the Hong Kong Monetary Authority, the Bank of Thailand, and the Digital Currency Institute of the People’s Bank of China. The mBridge platform, which directly connects the CBDCs of different jurisdictions, underwent successful testing over six weeks from August 15 to September 23, 2022, through a pilot involving real-value transactions focused on international trade.
In light of all these developments, an important question to address is the potential evolution of the exchange rate monetary regime used by the GCC countries. Except for Kuwait, which reestablished a managed float regime in 2007, the other five GCC countries are among the few in the world that are still officially pegged to the U.S. dollar. There are arguably some advantages associated with maintaining such a peg, as it provides stability and visibility to investors, but it also constrains monetary policy choices and limits a country’s ability to respond effectively to changing domestic and external economic conditions. In addition, Saudi Arabia’s ambition to become a manufacturing hub could potentially require more flexibility in its exchange rate regime, especially during periods of dollar appreciation. Transitioning to more adaptable monetary policies, such as a crawling peg or a managed float, could benefit the GCC nations in an increasingly multipolar world. Considering their substantial official reserves and financial assets held abroad, which total a net amount of $3 trillion (equivalent to China’s official reserves), this shift could speed up the global diversification of foreign exchange reserves away from reliance on the dollar and serve as a catalyst for de-dollarization.
Challenging the status quo from a political economy perspective is never easy. However, Kuwait’s experience with adopting a managed peg against a basket of currencies that better reflects the composition of its trade partners suggests that a shift in the exchange rate regime for other GCC countries may not only be feasible but also advisable, even for commodity exporters. Kuwait briefly adopted the dollar peg between 2002 and 2007, as mandated by the transition arrangements toward a single GCC currency. Due to the loose monetary policy followed by the United States during that period, the country faced challenges such as rising inflation and the impact of the dollar’s depreciation on its current account. When the GCC currency project was suspended, Kuwait returned to its managed peg regime.
Perhaps more tellingly, by challenging the status quo, the GCC could revive the single currency project and emulate Singapore’s successful experience. Singapore’s managed float regime has functioned as an effective anti-inflation tool and helped the city-state mitigate the adverse effects of short-term volatility on its real economy. Due to Singapore’s dynamic business-friendly regulatory environment, this approach has also attracted foreign investors in advanced manufacturing and services.
Conclusion
For decades, the GCC countries have enjoyed a privileged relationship with the United States. However, the new political and economic elites in these nations are now more assertive and mindful of a shifting global landscape. Even as they seek to maintain good relations with the United States, they are keenly aware of the world’s transition away from unipolarity. The limitations of the U.S.-GCC strategic partnership—which has not evolved into a full-fledged military alliance or security pact—along with an understanding that regional security must be managed by local actors themselves are prompting the GCC countries to reconsider their diplomatic alliances and economic policies. Their growing relationship with BRICS+ may enable them to participate in the shaping of new trade and financial instruments that could eventually replace the existing dollar-backed international monetary and financial system.
However, there are risks associated with such a move, especially when it comes to potential geopolitical and economic impact. As the GCC nations work to diversify their economies in anticipation of a post-oil era, they will increasingly require imports of advanced existing technologies and joint development of new ones. The global geopolitical evolution toward a more confrontational stance, with a Western and non-Western bloc facing off at the international level, could pose a threat to the economies of GCC countries if the latter are forced to choose sides. In such a globally confrontational scenario, it may be advantageous for these countries to shift their efforts toward enhancing regional cooperation and integration, participating more actively in shaping endogenous regional security agreements, and adopting a policy of multi-alignment on the global stage.
This work is licensed under a Creative Commons Attribution 4.0 International License. For more details regarding the license deed, please visit: CC BY 4.0 Deed | Attribution 4.0 International | Creative Commons
