China and Iran recast Pakistan's ties to Saudi Arabia

Subject Pakistan's ties with Saudi Arabia. Significance Prime Minister Nawaz Sharif visited Saudi Arabia last week -- for the second time in two months. Much attention focused on Pakistan's potential role in the Riyadh-led counterterrorism alliance, with the kingdom looking for a concrete commitment. With Iranian President Hassan Rouhani due in Pakistan at the end of March, Sharif sought to calm Saudi concerns about deepening Pakistan-Iran economic ties. Both relationships are bound to be complex balancing acts. Impacts Pakistan's army is unlikely to send troops for Riyadh's overseas military campaigns for fear of stoking sectarian tensions within Pakistan. An excessively pro-Iran attitude by Sharif's government would annoy Pakistan's military. Sharif will avoid this, in large part to ensure his own administration lasts its full term to mid-2018. Pakistan's reluctance to join Saudi-led military operations will increase Saudi dependence on other Sunni military allies, eg, Egypt, Sudan.

Subject Outlook for Pakistan-Gulf relations. Significance Pakistan's parliament last month voted against joining the Saudi-led military intervention in Yemen. Since then Pakistan's Prime Minister Nawaz Sharif and Chief of Army Staff Raheel Sharif have visited Riyadh to clarify the decision, reassuring Saudi Arabia of Pakistan's support in case of any external aggression against the kingdom. The Yemen intervention has exposed some faultlines in the relationship between the two allies, as well as in Pakistan's ties with other members of the Gulf Cooperation Council (GCC), some of whom -- most notably the United Arab Emirates (UAE) -- described Pakistan's decision as "dangerous and unexpected". Impacts Pakistan will lose leverage in GCC states as the latter opt to provide aid via multilateral, international mechanisms. Islamabad will be reluctant to share nuclear technology with GCC states -- primarily for fear of provoking Washington. China will increasingly become Pakistan's preferred diplomatic and economic partner, despite a degree of mutual suspicion.


Significance Oman has historically maintained strong business and diplomatic links with Iran, cutting across the anti-Iranian political agenda pressed by Saudi Arabia on the other Gulf Cooperation Council (GCC) countries. Economic relations are now more important for Muscat than Tehran, while the political ties are most useful for Iranian foreign policy. However, Oman in January 2017 joined the Saudi-led Islamic Military Alliance to Fight Terrorism, comprising 40 countries excluding Iran and Iraq. Impacts Oman’s urgent need for economic diversification will broaden its search for economic partners. If the Iran-Saudi Arabia regional confrontation worsens, Oman’s midway stance could be tilted by financial benefits from either side. In case of a serious Washington-Tehran showdown, Muscat would maintain quiet links with Iran, but ultimately prioritise US relations.


Significance The deal was one of a number of key agreements that Prime Minister Narendra Modi signed during his visit to Tehran on May 23. The visit aimed to advance relations following the lifting of sanctions on Iran in January, and a decade of missed opportunities and rising suspicion in relations between Tehran and Delhi. Impacts Expanding energy and trade ties will support Iran's efforts to diversify its economy and trade relationships. Building economic ties with India will help the normalisation of Tehran's international relations. India will limit security and defence cooperation with Iran in order to avoid alienating Israel, Gulf states and the United States.


Significance The Pakistan Muslim League-Nawaz (PML-N)’s five-year term ended on May 31. PML-N President Shehbaz Sharif faces a tough fight to become prime minister, with the main challenge set to come from Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) and further opposition provided by Bilawal Bhutto Zardari’s Pakistan Peoples Party (PPP). Impacts With Khan as prime minister, the military would likely have free rein to pursue an anti-India foreign policy. Khan would step up his criticisms of the war in Afghanistan and likely have a difficult relationship with US President Donald Trump. Pakistan under any government will pursue balanced diplomacy in the Middle East, seeking good ties with both Saudi Arabia and Iran.


Subject Chinese and Indian interest in Nepal. Significance China’s Belt and Road Initiative (BRI) is dominating Nepal’s agenda. Until a decade ago, Nepal was clearly within India’s sphere of influence. Nepali Prime Minister KP Oli in April made a three-day state visit to Delhi and in June made a six-day state visit to Beijing. Impacts The governing Nepal Communist Party will be at risk of a split, especially during negotiations over a new chair in two years’ time. Campaigning in nearby Bhutan’s elections later this year is likely to be dominated by debate over the country's ties with India and China. India and China may seek mutual easing of trade barriers as part of efforts to improve bilateral economic ties.


Subject Impact of COVID-19 on Sri Lanka's debt situation. Significance Sri Lanka depends heavily for its foreign exchange on remittances and tourism, both of which have been hit hard by the COVID-19 crisis. Even before the pandemic, the country was struggling with debt and reliant on IMF support to shore up its economy. Impacts President Gotabaya Rajapaksa’s government will pursue balanced diplomacy, seeking strong ties with both Beijing and Delhi. Prime Minister Mahinda Rajapaksa will likely secure a mandate for a full term as premier in a parliamentary election scheduled for June. Colombo will struggle to cast aside its dependence on short-term borrowing.


Significance Manama is seeking multiple means to adjust to the impact of the pandemic, publishing a two-year budget in November that targets a steady decline in the fiscal deficit. Although Bahrain secured improved terms for its most recent bond issue in September, its debt-to-GDP ratio is climbing, to almost 130% this year. Impacts The new premier may incline to a more rigorous approach towards subsidies, benefits and taxation, but is likely to proceed with caution. The death of the veteran prime minister, Khalifa bin Salman Al Khalifa, who was close to key donor Riyadh, could introduce a new variable. Investors’ future interest in Bahraini bonds will depend on their perceptions of Saudi Arabia as an effective guarantor.


Significance The Pakistani armed forces are reportedly already involved in the campaign: some troops have been deployed in Saudi Arabia and a naval ship is stationed off the Yemeni coast. However, Prime Minister Nawaz Sharif's government is facing strong public criticism for jumping into this conflict, and has been forced to seek parliamentary support. Parliament's decision will have serious repercussions for Pakistan's Shia-Sunni dynamic and key regional relations. Impacts Sharif's handling of Riyadh will be key to securing future aid, especially for the energy sector. Islamabad will not wish to alienate Tehran over Yemen, even though Yemen is relatively peripheral to Iranian interests. Pakistan's long-standing security ties with Gulf countries will not be fundamentally altered by its decision on Yemen.


Subject The prospects for Australian foreign policy in the next 18 months. Significance Australia sits among a number of international circles: it has been a partner in global alliances operating in Afghanistan and Iraq; a junior partner within the US-led Asia-Pacific security community; and a lead nation among South-east Asia and Pacific island security issues. Australia's conservative Coalition government, led by vulnerable Prime Minister Tony Abbott, has prioritised domestic issues thus far in its term, but may increasingly turn abroad as it anticipates a difficult election in late 2016. Impacts Threats against Australia from ISG will not deter participation in campaigns in Iraq. Closer economic ties with India will be pursued as a way to balance the slowdown in the Chinese economy. Foreign investment in the Australian housing market may attract government attention.


Significance He arrived in Malaysia on February 26 and Indonesia on March 1. The tour also includes the Maldives, Brunei and China, and is intended to increase Saudi religious, political and economic influence in the region. Impacts Saudi Arabia-South-east Asia trade will likely diversify. The transnational crime MOU with Indonesia could accelerate Jakarta's drafting of new anti-terrorism laws proposed in 2016. Improved Indonesia-Saudi ties will somewhat insulate Jakarta from tensions over Pertamina’s Iranian oil field investments. Closer Malaysia-Saudi ties could help Malaysia’s Prime Minister Najib Razak politically ahead of the next election.


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