A NEW SECURITY PARADIGM FOR BUSINESS IN BAHRAIN

By Nyresa Cama, Intelligence Analyst

Nine months ago, violent anti-government protests forced the organisers of the Formula 1 Grand Prix to cancel the annual race at the Bahrain International Circuit, striking a blow to one of the most tangible symbols of the country’s economic development and ambition.

The decision to call off the 2011 Grand Prix encapsulated a growing sense of insecurity for international companies who were first attracted to the island kingdom’s business-friendly atmosphere. In Tunisia and Egypt, the Arab Spring brought down two governments. In Bahrain, the movement never grew strong enough to truly threaten the viability of the monarchy, but it did – and does – threaten Bahrain’s place as a key financial services centre.

With considerable financial and security support from its neighbours, the Bahraini government has been able to contain the protests in its capital. Now it hopes the announcement that the 2012 Grand Prix will be reinstated will help re-establish the country’s image as an attractive destination for foreign businesses and tourism, both vital parts of one of the most diversified economies in the Gulf.

However, the relative calm in Manama since April masks a deep seated public frustration with Bahrain’s prevailing political framework. Small, but violent protests that were largely confined to Shia areas outside the capital for most of last year are now breaking out again in the capital. As the one year anniversary of the first demonstrations approaches on 14 February, activist groups promise more to mark the event.

As unrest has re-emerged, foreign businesses in Bahrain have had to contend with the prospect that the security environment in this once stable commercial hub is undergoing a fundamental, and potentially long-term, shift.

Businesses hit by Arab Spring

The Bahraini protestors’ demands are deeply rooted in the country’s history: the Shia majority has long claimed political, economic and social marginalisation at the hands of the Al-Khalifa royal family and its policies, which have cultivated a ruling elite from its own Sunni sect. The Arab Spring ultimately came to Bahrain in February 2011 when peaceful Shia demonstrators took to the streets of Manama calling for political and social equality, and were met with a brutal government crackdown that led to dozens of deaths.

As demonstrations rolled on and the death toll mounted, the uprising began to present a major political and fiscal challenge to the monarchy. Bahrain’s diversified economy is a direct result of the years of marketing and lobbying by the government to woo foreign businesses to its shores and away from other regional financial centres, namely Dubai and Doha. Although oil revenue forms a significant part of the economy, the net result of the government’s efforts are that Bahrain’s financial services industry holds assets in excess of $200 billion, making it a vital part of the economy.

With increasingly violent protests last spring, foreign banks began shutting down branches, the Bahrain stock exchange closed, and multinationals with offices in Manama, or those that were considering expanding their operations there, began to question whether Bahrain really was as ‘business friendly’ as it had long claimed to be. At the same time, the international media was rife with speculation about whether America could continue to harbour a major naval force, the Fifth Fleet, in the waters around the island.

Between reform and repression

To protect its economic assets and strategic alliances, Bahrain had to end the unrest while maintaining a positive relationship with the West, which had eventually broken with its former allies in Tunisia and Egypt.

Some members of the monarchy, most notably Crown Prince Salman, advocated negotiations with the Shia political opposition and activists in an attempt to address the grievances of the country’s sidelined majority. In the end, however, hardline members of the ruling family, led by army commander Sheikh Khalifa bin Ahmed and the royal court minister Sheikh Khalid bin Ahmed, won the day and government security forces – with the help of troops from neighbouring Saudi Arabia – launched a clampdown that brought street protests in Manama to an abrupt, albeit violent, end.

The government’s subsequent efforts to prove it was engaging with the Shia opposition were applauded by international allies such as the US and UK, which see Bahrain as a strategic ally in the Gulf. These efforts included a national dialogue and the decision to set up an independent commission to investigate alleged human rights abuses by its security apparatus. But Shia political parties and activist groups pointed to the fact that the government was talking about reform and yet concurrently carrying out military trials of hospital workers who had treated wounded demonstrators and jailing and exiling activists. Unsurprisingly, activists continued to organise demonstrations, although the strength of the security forces meant that these were largely confined to Shia towns and villages around the country.

Now however, an increasingly organised activist movement – inflamed by one year of what it terms ‘cosmetic’ reform efforts – is again beginning to stage protests in Manama. Although their numbers have been small compared to the tens of thousands of demonstrators who rallied in the capital last year, violence has broken out on a number of occasions and security forces have moved harshly to disperse crowds.

A changed security environment

It seems that the Bahraini government has faced no real imperative to engage in political reform. Neighbouring Saudi Arabia, fearful of a Shia uprising within its own borders, was willing to provide significant troop support to help crush the protests. Although the US Congress has made a multi-million dollar arms sale to Bahrain contingent on the government’s reform efforts, the Obama administration has found legal loopholes to go ahead with the sale without congressional approval. Moreover, the Gulf Cooperation Council decided in March to pour some $10 billion into Bahrain to be spent on housing and infrastructure over the next ten years. In addition, Saudi Arabia will most likely step in financially to help ease any further pressure on the Bahraini economy.

So even though GDP shrank by 1.3% in the first quarter of last year and the real estate and hotel and restaurant sectors remain down by 5.6% and 8.7% respectively, financial, regional and international support has meant that Bahrain has been able to absorb the economic shortfall, put down protests and stave off surrendering any political power to the Shia opposition.

For foreign businesses operating in Bahrain however, the situation is more complex. Although the combined strength of Bahraini and Saudi security forces means that protests are unlikely to reach the numbers they did last year, there is also little question that demonstrators, frustrated by the government’s intransigence, will continue to organise rallies. For the Bahraini government, a security environment prone to unrest seems a price worth paying for holding onto power – whether the same is true for foreign companies in the country remains an open question.