By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Saudi Arabia’s foreign aid bill is mounting. Egypt Jordan, Bahrain, Oman and Yemen – the Arab spring has elicited a string of pledges of loans and grants from the oil-rich kingdom to its troubled, resource-poor neighbours.

Charity is a key tenet of Islam and the kingdom is an established donor. The Saudi Fund for Development supports infrastructure projects, predominantly across the Islamic world. The Saudi central bank reported that foreign aid totalled $3.7 billion or 0.8 percent of GDP in 2010. That’s roughly in line with the United Nations’ target.

The real cost of the foreign aid bill is likely to be much higher. That now includes bilateral pledges related to unrest that will come to more than $12 billion, assuming the Saudis contribute one quarter of the $20 billion package promised by Gulf countries to Oman and Bahrain. Outsiders have little knowledge about the timing and nature of such aid; economists treat Saudi’s helping hand as an off-balance sheet item.

Saudi’s expensive foreign policy probably isn’t too unpopular at home. The aid is a clear expression of Arab solidarity while also shoring up support for the region’s club of kings. And while GDP per capita is lower in Saudi than in other, less populous Gulf countries, the kingdom has pledged massive domestic spending that should be sufficient to deal with its own chronic housing shortage and help tackle high unemployment. At the current oil price, and with low debt, Saudi can afford to be generous with its wealth.

The recipients are more of a worry. Aid funnelled through the International Monetary Fund typically comes with conditions – a fiscal plan that is supposed to lead to financial self-sufficiency. Even if the bilateral aid to Egypt is meant to be temporary and funds for Bahrain and Oman are designed to boost vital capital spending, Saudi’s largesse could easily encourage poor fiscal discipline and, in turn, greater financial dependence.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Iran’s yuan-for-oil payments won’t catch on, yet. Tough sanctions from the United States have pushed the Islamic Republic to accept the Chinese currency as part-payment for crude exports to the People’s Republic. But while the yuan should play a bigger role in the world’s energy settlements by the end of the decade, Iran’s shift won’t be the catalyst.

It makes sense for China to use its own currency to pay for oil imports. The move transfers foreign exchange risk away from the world’s second largest oil consumer and supports the government’s long-term drive to establish the yuan as an alternative global reserve currency to the dollar.

For Iran, the yuan trade is more a matter of necessity than desire. Sanctions have made it hard to deal in freely convertible dollars or euros – the currency of Chinese oil payment to Iran since 2006 – so it has been forced to let its largest customer pay in its own non-convertible currency, just as it let India pay in non-convertible rupees.

The Chinese might like the Iranian deal to start a trend in the Middle East, but less politically squeezed producers will be reluctant to follow Tehran’s example. While China might be more willing to buy oil denominated in yuan, Gulf producers have other considerations.

They peg their currencies closely or entirely against the dollar and hold most of their foreign reserves in dollar assets. Although the tie to U.S. monetary policy is not ideal, the choice is rational for economies dominated by a single commodity mostly priced and traded in dollars – and for governments which still rely on U.S. military support.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Saudi Arabia’s call for Gulf nations to combine into a single entity appears to lay the ground for some kind of union with Bahrain. King Abdullah first highlighted the security issues facing the region when its leaders met in December – nine months after the kingdom sent tanks to tame a pro-democracy movement in Bahrain. Speculation is now swirling about how the relationship between the strongest and weakest members of the six-nation bloc could evolve, ahead of a meeting of the Gulf Cooperation Council this week.

The old idea of a Gulf union has taken on a new meaning after the Arab uprisings. Saudi Arabia hasn’t given any details on what it envisions beyond the existing cooperation on security and selected financial issues. But the six Gulf countries won’t easily set aside their political differences just to please each other. And plans for a Gulf monetary union, loosely based on the European model, appear to be stuck following the intention of the UAE and Oman to opt out.

That leaves the focus on Bahrain and Saudi Arabia, which already share strong links. As well as underwriting security of the island state, the house of Saud already partially bankrolls its finances. Bahrain gets roughly 150,000 barrels per day of oil from the offshore Abu Safah field, operated by Saudi Aramco under a decades old agreement. The revenues generated from its share of the field accounted for as much as 70 percent of Bahrain’s budget revenues in 2010.

A full fiscal union would help Bahrain lower its borrowing costs. Even with current Saudi support, it may run a budget deficit at four percent of GDP this year. The IMF estimates Bahrain’s gross public debt is around 40 percent of GDP. Total foreign debt is almost 15 percent. Bahrain’s gross domestic product is barely five percent of that of the two kingdoms taken together.

But a union formalising the status quo carries risks that don’t make it worthwhile. A pre-emptive move would pour fuel on the flame of the protests. It would also antagonise Iran, which once laid claim to the majority Shi’ite island. Any transfer of Saudi social austerity would also kill Bahrain’s raison d’etre among the Saudi businessmen and expatriates who escape to Manama to relax. Saudi rhetoric paves the way for a stronger union in the event that Bahrain’s regime is overwhelmed – but in that case, union would be just a name for annexation. In the meantime, the move isn’t worth the bother.

By Una Galani and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Iran offers Egypt a limited lesson in reform. The International Monetary Fund says the Arab state should look to the Islamic Republic as a model for how to cut subsidies. Iran ventured where few of its regional rivals dared in 2010 when it raised fuel prices. But the vast differences in wealth between these two countries make the comparison unhelpful.

Iran and Egypt share a common need to reform. An overhaul of subsidies had been debated in Iran for years before Tehran took action to address its $60 billion bill – under the pressure of necessity, after the United States tightened sanctions. Egypt, similarly, has long considered trimming energy subsidies, which now gobble up 20 percent of the budget. The matter is becoming more urgent after the revolution left the country with a double-digit fiscal deficit, increasing debt and shrinking foreign reserves.

Egypt may learn a thing or two from Iran’s extensive public relations campaign prior to the raising of prices. Iranian media went to great lengths to emphasise the social inequity of subsidies. To minimise social unrest, Cairo must ensure the country’s poor understand that they are not the main beneficiaries of the current, absurd system – if only because they live without air conditioning and drive old cars, if any.

The real reason that Iran’s reforms were a political success comes down to a model that Egypt cannot afford. Tehran raised fuel prices and handed out a cash equivalent to the majority of the population. That may have achieved the aim of reducing energy consumption. But it also increased inflation, and it is still unclear whether Tehran actually saved any money.

The Iranian model is inappropriate for a country like Egypt that needs to quickly rein in its spending and cannot afford to keep paying subsidies to everyone, including the wealthy, like Iran. In the end, Egypt’s model of subsidy reform will be a pick n’ mix of swapping expensive fuel oil for gas, raising the price of the most expensive diesel, and establishing a system that weans industry off cheap fuel. For that, Egypt needs a single, multi-pronged comprehensive plan that will look nothing like Iran’s simple formula.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Egypt and Israel’s energy ties have come unstuck. The Arab nation has terminated its long-term contract to supply gas to its neighbour in a payment dispute. In post-revolutionary Egypt, it was only a matter of time before the opaque gas deal fell apart.

The two sides have been quick to insist that the fallout is a business rather than a diplomatic dispute. Israel has supposedly held back payments, in retaliation for the slow restoration of supplies after repeated pipeline attacks. Prior to the uprising, Egyptian gas supplied 40 percent of Israel’s gas needs.

While the business dispute may be real, the timing suggests a political motivation that helps the ruling army shore up popular support ahead of an expected handover of power to a civilian government. There is barely a month until presidential elections and it was expected that the new government would review existing export deals.

A crony of the former president, Hussein Salem, is already accused of illegally profiting from the contract, originally signed in 2005 and renegotiated in 2009, which many Egyptians believe provides gas to Israel at below market prices.

The oddly-timed break in the fragile relationship suggests Egypt is unlikely to be willing to settle one aspect of the current dispute without a solution that addresses all of the concerns – including the conditions in which the original deal was set.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Formula One has failed to see the red flag in Bahrain. The prestigious sporting event won’t gain much from holding a fixture on this tiny Gulf island still in turmoil from its Arab uprising, amid sharp condemnation of human rights abuses. Pushing on with the weekend event looks like a stubborn and risky miscalculation.

Emerging markets do offer major sporting events a chance to grow their fan base and ensure a stronger financial future. The F1 racks up an annual revenue of $2 billion through 20 events. The Grand Prix is now held in India and China. Gulf countries have tiny populations, but they are cash-rich. Bahrain’s sovereign fund owns part of the McLaren team. Abu Dhabi has a Ferrari World theme park, and a race car even decorates the lobby of one of its plush government offices.

Yet abandoning the Bahrain race for a second consecutive year would not have amounted to an exit from the Gulf. The F1 already has another foot in the lucrative market with the Yas Marina circuit in the UAE, one of Bahrain’s richer and more stable neighbours. Without too much trouble, the F1 could have relocated the race without losing out on the revenue or regional brand building provided by the events.

As it stands, the Bahrain F1 race is a shadow of itself. Major sponsors of the sport include Royal Dutch Shell, Vodafone, Unilever, Total, Siemens, UBS, News Corp, Hugo Boss, ExxonMobil, Deutsche Post, Daimler and Thomson Reuters. Some of these companies are sufficiently wary of how the turmoil might impact the weekend’s event to pare back usual efforts to entertain clients around the race.

All of the above makes the F1’s decision to stick with Bahrain high-risk and low-reward. While the situation in the Gulf state has calmed somewhat since Saudi Arabia sent in its tanks last year, life in many poorer suburbs is now a new normal of tear-gas and running battles with the police. Bahrain is a divided Shi’ite majority country where even the Sunni-monarchy is split. This week-end’s F1 bet could misfire badly, and then it will be too late to realise that it wasn’t worth taking.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Qatar is playing merger-maker for Glencore-Xstrata. The Gulf state’s sovereign wealth fund has already proved it can act as a successful arbitrageur in M&A situations. It hasn’t revealed its intentions for the 5.5 percent stake in Xstrata built in the two months since Glencore agreed to merge with the Anglo-Swiss miner in a $90 billion deal. But the bold $2.7 billion investment could be another win.

The fund’s track record in special situations has improved. Interventions in UK retailer Sainsbury and London Stock Exchange in 2007 both backfired. But when Qatar bought 10 percent of European Goldfields last year and offered the cash-strapped miner cheap financing in return for warrants over more of the company, its interest teased out a premium bid for the entire company – and a quick buck for Qatar. The emirate is also in the money on the Volkswagen shares purchased when the car group was trying to marry with Porsche in 2009.

Qatar is doubtless betting that Glencore will raise its offer for Xstrata. Institutions that hold at least 8 percent of Xstrata shares are holding out for more, and Qatar’s stake potentially gives these naysayers more leverage over Glencore to bump up the terms. The deal can be blocked by just 16 percent of Xstrata shareholders because Glencore can’t vote its own 34 stake when the deal is put to a scheme of arrangement. Qatari opposition would almost certainly kill the deal.

In reality, the situation is more probably nuanced. Qatar wouldn’t want to get a reputation for being difficult by voting down a deal. Equally, Glencore would doubtless be keen to get it on board as a supportive long-term investor.

Qatar may have paid an average price of 1,144 pence per share for its stake, based on the average price of Xstrata shares in the last two months. Xstrata shares currently trade at 1,098 pence. But if Glencore ups its proposed share exchange ratio only to 2.9 from the current 2.8, Qatar could be more than made whole at current share prices.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Investors searching for financial logic to Qatar’s raft of high profile foreign investments risk coming unstuck. Within recent weeks the tiny Gulf state’s sovereign fund has made moves on France’s Total, conglomerate Lagardere and luxury house LVMH. The Qataris’ rapidly expanding pick n’ mix portfolio has led bankers to compare the strategy to the one that led Dubai into crisis.

Unlike the debt-laden emirate, Qatar is investing at the bottom of the cycle and its cash is in search of a home. Hydrocarbons are forecast to generate revenue just shy of $100 billion in the 2012, according to a Reuters poll. The current account surplus is expected to hit 29 percent of GDP, or $54 billion. It’s not clear how much goes to the sovereign fund. But in a country with one of the highest GDP per capita in the world, the picture is one of plenty.

Qatar’s headline-grabbing punts are concentrated in western Europe. That, bankers say, reflects the top-down decision-making process of a still young sovereign fund where a small circle of individuals are focusing on a region they know well and in which they are welcome. Europe is the number one destination, both financial and touristic, for rich Arabs seeking to escape the hot sweltering summer months.

Aside from geography, the assets bear little in common. Some investments look opportunistic, like the bet in Barclays, others strategic like the recent move on European Goldfields. But it is hard to say what owning Harrods, live French domestic football rights, or shareholdings in floundering Greek banks bring to the state of Qatar beyond a sense of prestige and influence.

Tiny Qatar appears to want many conflicting things. To be seen as a reliable investor and energy partner, to be profitable as well as an influential regional power – alongside Saudi Arabia, Turkey and Egypt. Stakes in Europe’s big names – especially those that come with board seats – give Qatar direct access to key movers and policymakers. That might generate financial returns along the way but calling it a focused investment strategy would be overkill.

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Iran’s oil revenue could halve. Top buyers are moving to cut imports of crude from the Islamic Republic amid a coordinated effort by the West to tighten sanctions. If Tehran has to sell the oil it does manage to shift at a discount, it may soon face the pinch.

The republic generated $100 billion in oil revenue last year, assuming exports of 2.5 million barrels per day and an average Brent price of $111 per barrel. That is roughly 20 percent of GDP and 80 percent of general government revenue, based on estimates by the International Monetary Fund for 2011.

Sanctions could cut Iran’s oil exports by as much as 1 million barrels per day, or 40 percent, from the middle of the year, according to the International Energy Agency. That’s when both the European Union embargo and U.S. sanctions on third countries which don’t significantly cut their imports from Iran come into force. America’s threat to cut off central banks of countries that don’t play ball is already causing Asian countries to reduce their purchases: a fall of between 10 and 20 percent in exports to these nations seems reasonable.

Assuming Iran’s exports fall by 1 million barrels per day and it can sell at current prices of $125 per barrel, the government’s oil revenues will still shrink by one third in the subsequent full one year period to July. The actual outcome could be much worse. It’s not clear whether Iran has started discounting its crude but many analysts believe that will be necessary as financial sanctions complicate payment.

A Reuters poll forecasts the average price of Brent in 2012 at $115 per barrel. If Iran has to offer a 20 percent discount on top of that price and was still only able to sell 1.5 million barrels a day, then revenues would halve, shrinking by $50 billion.