Call it the first response to the Abdullah-Brehznev doctrine.
The FT reports Tuesday that Bahrain has declared a state of emergency and asked the military to reassert its control over the capital, Manama, as clashes between Shia and Sunni groups spread across the country.
This follows escalating — if fractured — opposition protests and the arrival in the country of 1,000 Saudi Arabian troops and 500 UAE policemen on Monday. Bahrain is just a little too close to Saudi oilfields and would-be protestors in eastern province Shiite communities, it seems.
And then there’s the Iranian connection.
Ali-Akbar Salehi, Iran’s foreign minister, unsurprisingly criticised the Saudi move, referring to it as the “worrisome and unexpected intervention of foreign forces”. Hilary Clinton, equally unsurprisingly, kept up the US incrementalism, saying, “security challenges cannot be a substitute for a political resolution.”
Fitch Ratings downgraded various Bahrain ratings on Tuesday on the back of this further instability (excerpts from the release below, emphasis ours):
Downgrading
Fitch Ratings-London-15 March 2011: Fitch Ratings has downgraded Bahrain’s Long-term foreign currency Issuer Default Rating (IDR) to ‘BBB’ from ‘A-’, local currency IDR to ‘BBB+’ from ‘A’; and Country Ceiling to ‘BBB+’ from ‘A’. The agency has simultaneously downgraded the Short-term foreign currency IDR to ‘F3′ from ‘F1′. In addition, the agency has put the Long-term IDRs on Rating Watch Negative (RWN).
“The two-notch downgrade reflects further material escalation in political risk in recent days, following significant violent domestic protests, military intervention by Gulf nations and the imposition of a state of emergency by the Bahraini royal family,” says Purvi Harlalka, Director in Fitch’s Middle East and Africa Sovereign Ratings Group.
The downgrade also reflects the risk that the political instability may harm Bahrain’s attractiveness as an international financial and business centre, which plays an important role in Bahrain’s economic model. Financial services make up 25% of Bahraini output.
The combination of these developments has also further weakened the outlook for an already deteriorating fiscal position – debt doubled to 33% of GDP in 2010 from 16.4% in 2008. While debt will remain below the forecast ‘A’ median even at these elevated levels and Bahrain has a demonstrated track record of fiscal prudence, Fitch believes that the worsening political climate is likely to result in greater populist spending demands on the budget. However, budgetary expansion is more affordable given increasing oil prices and rising oil production.
The announcement from Fitch came as five year CDS spreads on Bahrain debt were widening (see chart below, courtesy of Markit).
Expect to see further upward moves early Wednesday.
The near-term endgame here is more uncertain than ever. In a note out Tuesday Eurasia Group analysts Ayham Kamel and Cliff Kupchan provide two broad scenarios with (we assume, highly tentative) probability estimates. Extracts below.
A prolonged standoff (60%)
In this scenario GCC intervention exacerbates tensions between the opposition and the regime. The presence of foreign troops unifies opposition forces which become less inclined to accept any compromise. While Saudi forces do not overtly participate in curbing protests, their presence adversely affects confrontations on the ground. The Saudi regime confirms its commitment to the al Khalifas by offering to send in reinforcements.
On the opposition side, while the situation has escalated, most protestors will not take up arms. But some attacks, like the killing today of a Saudi soldier, will occur. In the short term, more limited attacks against GCC forces are also likely.
The regime continues to use force to disband demonstrators, but there are significant impediments to this strategy; protestors have become more resilient and less fearful of confronting authorities. The regime fears that excessive force will lead to further radicalization of the Shia population.
While the Iranians don’t intervene directly they expand covert support and indicate willingness to arm and train Bahraini Shia.
A reform package (40%)
A less likely but still credible scenario is that broad reforms are enacted in Bahrain. In this scenario the US plays an active role in convincing the Bahraini leadership that reforms are needed to secure the long term viability of the al Khalifa regime.
Moderates in both camps exploit recent developments to quickly promote a compromise agreement as the alternative to escalation. On the regime side, moderates use recent escalation to convince the hardline camp that absent a negotiated settlement Bahrain will remain unstable.
Unlike other GCC states, Bahrain has limited hydrocarbon reserves and needs stability to promote economic growth. The royal family begins to view regional intervention as a catalyst for reform rather than a safeguard against regime change. The al Wifaq party is able to deliver a deal negotiated with the moderate camp of the al Khalifa family. They point to GCC military intervention as a sign that escalation does not help improve the status of the Shia population
We’re not Bahrain experts, of course, but the above scenarios don’t seem to account for the full range of options. It’s not clear how their standoff situation ends, for example. (Surely even in a stand-off, someone usually budges in the end.)
This excerpt from a cogent piece of analysis from CFR fellow Ray Takeyh is illuminating:
Saudi rulers have made a major mistake in casting the crisis in Bahrain as a sectarian conflict in which Iran’s Shia proxies are battling a benign Sunni ruling class for sake of Persian aggrandizement. The rebelling in Bahrain, as indeed throughout the region, is about a disenfranchised and impoverished majority seeking political representation and economic justice. The proper path for Bahrain’s al-Khalifa dynasty is to renegotiate its national compact and appreciate that as the Middle East finally joins the twenty-first century it has limited options beyond a constitutional monarchy.
Bribes and violence, we’ve noticed recently, can only go so far. The structural factors here — ageing Saudi leaders and religious schisms — seem too great to promise quiet without reform for very long.
Related links:
Bahrain declares state of emergency – FT
GCC launches a Sovereign Health Fund for Bahrain and Oman – FT Alphaville
Bahrain’s strategic importance, graph du jour - FT Alphaville