Egypt, Saudi Arabia and the UAE: The End of an Alliance

Saudi Arabia and Egypt: Disgruntlement owing to island dispute and withheld economic aid

Following the change of ruler in Riyadh at the beginning of 2015, the Saudi leader­ship’s view of Egypt altered somewhat. The new King Salman and his son, the current Crown Prince Muhammad Bin Salman, opted not to simply continue the unconditional financial aid that had been granted to Cairo after the military takeover in 2013. While, in July 2015, the two countries signed the Cairo Declaration, in which they agreed to form a stronger economic and secu­rity partnership, it quickly became clear that Riyadh was demanding something in return for new aid.

On the occasion of the state visit by the Saudi king in April 2016, the Sisi adminis­tration announced that it would transfer two islands in the Red Sea – Sanafir and Tiran – to the Kingdom. Saudi Arabia had laid claim to these territories, which had always been seen and controlled by Egypt as its own national territory. The decision caused considerable resentment among the Egyptian population. While the initial protests were suppressed by police violence, the relinquishment of territorial control meant a considerable loss of image for the Sisi administration, as well as for parts of the country’s security establishment. This is one explanation why the islands have not yet been “returned”. However, the real reason is probably the Egyptian government’s concern that Saudi Arabia could significantly reduce its financial support once it has control over the islands.

Indeed, there has been ever more criti­cism from the Saudi side in recent years about Egypt’s development deficits. At the same time, journalists close to the royal family have criticised the role of the Egyp­tian military in the economy. At the begin­ning of 2023, Saudi and Egyptian commentators with close ties to their respective political leaderships exchanged verbal blows. And it did not stop with such ex­changes. Earlier, in 2022, the Kingdom had transferred US$5 billion to Cairo in the form of central bank deposits and thereby initially supported the introduction of a new International Monetary Fund (IMF) aid programme for Egypt. But so far, further investment pledges worth US$10 billion, which the IMF described as “critical” for the financing strategy of the programme, have been fulfilled only to a small degree.

Egypt and the UAE: Conflict of interest in regional conflicts

As far as the extension of loans is con­cerned, the UAE has been more important for Egypt over the past two years or so than has Saudi Arabia. According to Egyptian cen­tral bank statistics, Abu Dhabi now holds around 9 per cent of foreign debt and Riyadh 7 per cent. With regard to direct investment, the Emirates are also in first place. While Saudi Arabia has publicly criticized the Egyptian government’s eco­nomic policy in recent years, the same criticism has not yet been heard from the UAE. Nevertheless, the Emirates, too, are increasingly dissatisfied with the economic course being pursued by Cairo and have apparently been pushing behind the scenes for the IMF to adopt a tougher stance.

However, it is, above all, divergences of interest in regional policy between the two states that have come to light in the past two years. In Libya, the UAE continued to maintain friendly relations with the head of the unity government, Abdel Hamid al‑Dabeiba, in the spring of 2022, while the Egyptian leadership rejected his legitimacy and supported Interior Minister Fathi Bashagha for the office of prime minister.

And the interests of the two countries have diverged even more sharply in Sudan, where the army and the paramilitary Rapid Support Forces (RSF) have been facing each other in an armed conflict since April 2023. For years now, Egypt has been supporting its southern neighbour’s regular forces, led by General Abdel Fattah al-Burhan. Small Egyptian troop units were even stationed at Sudanese army bases, at least when the fighting erupted initially. The UAE, in turn, maintains close relations with the head of the RSF, Mohamed Hamdan Dagalo (known as Hemedti). He controls significant parts of the Sudanese economy, including the coun­try’s all-important gold trade, which in the past was handled through Dubai. Neither Cairo nor Abu Dhabi is likely to have any interest in the armed conflicts between their respective Sudanese partners. But it is obvious that they have not been able to coordinate their actions vis-à-vis this on­going military struggle.

In addition, the regional conflict over the use of water from the Nile has increasingly put a strain on Egyptian-Emirati relations. Since 2011 Ethiopia has been pushing ahead with a large dam construction proj­ect on the upper reaches of the Nile, which Egypt sees as endangering its water supply. The UAE, which is striving for neutrality in this water dispute, has not adopted the Egyptian position. Instead, to the annoyance of Cairo, it is supporting the Ethiopian gov­ern­ment with extensive financial aid and even supplied it with combat drones during the civil war in Tigray.

Finally, the increasingly close partner­ship between the UAE and Israel is a pow­der keg for future bilateral relations. For one thing, Cairo presumably fears losing more regional influence, not least given its long-standing role as “Israel’s most impor­tant Arab interlocutor”. Further, this part­nership could lead to new transport routes and pipelines between the Gulf states and the Mediterranean, which would have a negative impact on Egyptian revenues from transit traffic through the Suez Canal.

Saudi Arabia and the UAE: Growing economic competition

Riyadh and Abu Dhabi began coordinating their regional policies immediately after the start of the so-called Arab Spring. That much was evident as early as 2011 during the violent suppression of protests in neigh­bouring Bahrain – that is, two full years before the two states supported the Egyp­tian military’s takeover of Cairo. But it was not until the change of throne in Riyadh that the two ruling houses became closer. Initially, what appeared to be the good personal relations between Muhammad Bin Salman and the then Crown Prince of Abu Dhabi, on the one hand, and the de facto ruler of the UAE, Muhammad Bin Zayed, on the other, led to the close coordination of the two countries’ regional policies. How­ever, this did not last long.

From 2019 onwards, it became increasingly evident that there were coordination problems over the Yemen conflict that could be explained by the different interests of the two countries. For Saudi Arabia, the fight against the Houthi militia, which was seen as Tehran’s proxy in the neighbouring country, had top priority. But the UAE wanted, above all, to gain control of the southern coastal region, which was impor­tant for its port policy, and to weaken the Yemeni branch of the Muslim Brotherhood. Moreover, there were also differences be­tween the two partners that quickly became apparent during the Qatar blockade. At an early stage, Riyadh wanted to resolve the conflict with the small neighbouring coun­try, while Abu Dhabi was intent on its com­plete isolation. The decisive factor here was that the latter ultimately considered Qatar’s support for the Islamist Muslim Brother­hood to be much more threatening than did the former.

However, the main conflict of interest between the two Gulf monarchies is prob­ably rooted in their economic policies. Both states are pursuing an ambitious development model aimed at preparing their econo­mies for the post-oil era. Through gigantic infrastructure projects and targeted state investments in strategic economic sectors, the two countries want to increase their attractiveness as investment locations. The UAE, which took the first steps in this direction as early as in the 1990s, has, for example, developed Dubai into an inter­national financial and trading centre, where­as a similar transformation process got under way in Saudi Arabia only when Muhammad Bin Salman de facto assumed power in 2015. The Saudi ruler is now doing his utmost to make up for the coun­try’s lagging development and is thereby acting at times against the interests of the smaller neighbour.

For example, in 2021 the first-ever ulti­matum was given to foreign companies to relocate their regional headquarters to the Kingdom or be excluded from public tenders. Since most international com­panies operating in the Gulf region are headquartered in Dubai, the Regional Headquarters Programme is directed pri­marily against the UAE. In addition, there is the Saudi side’s selective annulment of existing customs exemptions in interstate trade and its sectoral development pro­grammes, which are creating regional com­petition, including in the tourism and trans­port industries. In spring 2023, for instance, the Saudi sovereign wealth fund announced the establishment of a new air­line that would provide serious competition in the future for the already well establish­ed airlines in Dubai and Abu Dhabi.

But it is, above all, in the oil policy of the two states that conflicts are becoming increasingly evident. Saudi Arabia, as the largest oil exporter both worldwide and within the Organisation of the Petroleum Exporting Countries (OPEC), is striving to ensure the market price for crude oil remains as high as possible, a stance that requires the organisation to make production cuts. By contrast, Abu Dhabi is focused on expanding its production infrastructure and thus on increasing its exports. As a result, it has not only become ever more difficult in recent years to reach agreement on a common production policy within OPEC; it is also extremely unlikely that players on the international oil market could be convinced of the credibility of any such agreement.

Escalation potential

Egypt, Saudi Arabia and the UAE are home to more than one third of the Arab world’s population, and the three countries gener­ate well over half of the region’s gross domestic product. Fundamentally, there is a not insignificant potential for escalation owing to the divergences of interest be­tween the three states. And escalation could have repercussions far beyond the region.

For example, Egypt could be driven into insolvency if the Gulf monarchies were to suspend their financial aid; and the result­ing socio-economic upheavals in the most populous Arab country (around 110 million inhabitants) could impact on the stability of the political system or at least put massive pressure on the current leadership under President Abdel Fattah al-Sisi. It is also con­ceivable that Egypt might use direct mili­tary intervention in order to try to change the balance of power in Sudan in favour of the regular armed forces, which are allied with Cairo. Such a step would severely strain relations between Cairo and Abu Dhabi. Finally, competition between Saudi Arabia and the UAE could weaken the economic area of the Arabian Peninsula – through the establishment of tariff and non-tariff trade barriers or even border closures, among other things – while a UAE withdrawal from OPEC would plunge the oil cartel into an existential crisis.

Assuming that the three countries’ deci­sion-makers will behave rationally, such escalation scenarios are unlikely. The costs would be too high for all three states, which are closely linked through economic and financial ties. And, despite diverging inter­ests, they are likely to continue to coordi­nate on individual issues. Their differences in oil policy notwithstanding, the two Gulf monarchies have been seen as acting deci­sively as brakes at the international climate negotiations when it comes to phasing out fossil fuels; and it is likely they will also coordinate their positions at the United Nations Climate Change Conference in Dubai in December (COP 28). Nevertheless, escalation scenarios in bilateral relations cannot be ruled out entirely. In the highly personalised authoritarian systems of rule in each of the three states, decisions have not always been taken based on rational considerations of interests, as illustrated, for example, by the blockade of the Emirate of Qatar.

Conclusions for German and European policy

Germany and the EU should see the diver­gence of interests between Egypt, Saudi Arabia and the UAE as an opportunity to exercise their own influence on developments in the region. Owing to the authori­tarian systems of rule of the three Arab states, there are fundamental differences between those countries and the Europeans, especially with regard to human rights issues. In other contexts, however, there are convergences of interest between Germany and its European partners and one or more of the three governments; and it is on this basis that the possibility for targeted co­operation should be explored or existing cooperation expanded. This can be illus­trated by two examples.

First, the Europeans and the two Gulf monarchies share an interest in reforms as a means of stabilising Egypt’s reeling econo­my. In the event of Egypt’s being driven into insolvency, Saudi Arabia and the UAE, as the country’s largest state credi­tors, would suffer considerable economic damage. For the Europeans, the state bank­ruptcy of the most populous Arab country would be disastrous, not least because of the social upheaval and the accompanying migration pressure. It is therefore impor­tant for both sides to press Cairo to imple­ment reforms – for example, in the con­text of the IMF agreement. A prerequisite would be withdrawing the military from the Egyptian economy, something that the Sisi administration has so far been un­willing to do but which the Gulf monar­chies have now recognised as necessary, too. Through a joint, coordinated approach with Riyadh and Abu Dhabi, the EU could exert much more pressure on Cairo than has been the case so far.

Second, the Europeans have similar inter­ests to those of Saudi Arabia with regard to conflict resolution in Sudan. For Riyadh, stability and security in the Red Sea region is essential, not only as regards ship­ping but also for the implementation of its ambitious development plans, especially the expansion of coastal tourism. Moreover, it is important to safeguard investments already made in the Sudanese economy. Unlike Cairo and Abu Dhabi, whose inter­ests are associated with one or the other of the two parties to the conflict, Saudi Arabia maintains good relations with both the Sudanese armed forces and the RSF. Given the bilateral tensions described above, it is unlikely that Riyadh would have any inter­est in Egypt or the UAE expanding their influence in Sudan in the event of their respective allies making military gains on the ground. From the EU’s point of view, too, the military superiority of one or the other of the two conflict parties would not be a positive development, since mili­tary stalemate offers the opportunity to strength­en the role of the civilian forces as a mediator between the two sides. So far, Saudi mediation efforts have not been suc­cessful, but the Europeans should none­theless continue to support such initiatives. And in doing so, they should lobby Riyadh to ensure that a resolution to the Sudan con­flict reached with the participation of Cairo and Abu Dhabi is given higher for­eign-policy priority than seems to have been the case so far.