Asia House’s research report, The Middle East Pivot to Asia 2022, explores key economic trends emerging between the Gulf and Asia. As part of the research, Freddie Neve, Senior Middle East Associate at Asia House, spoke to Waleed Rasromani, Corporate M&A Partner, Dubai and Riyadh, Linklaters, about how stronger Gulf-Asia ties are shaping trade and investment.
The Middle East Pivot to Asia report identifies and projects significant growth in GCC-Asia trade over the next decade, and particularly the GCC’s trade with emerging Asian economies, such as China, India, and many of the ASEAN nations. What opportunities exist to further develop trade and commercial ties between these two regions?
There has been a clear shift eastward in the GCC’s trade partners. Asia, over the course of the past decade, has overtaken the US and Europe as the GCC’s main trading partner. It started as an energy relationship and, while energy continues to be a big component of this trade, there is now growing cooperation in other areas.
The BRI is a good example. There was a period when the Middle East, the Gulf in particular, was not on the map for the BRI. But China is now increasingly paying attention to trade routes through the GCC and the wider MENA region. Hence, we see Chinese logistic companies increasingly involved in UAE and Saudi ports, and Chinese construction companies playing a greater role in Middle Eastern infrastructure projects.
“We’re seeing more cooperation on energy innovation,
such as the development of hydrogen.”
Since sustainability and the push for net-zero have grown in importance to business leaders and governments, we see more cooperation on energy innovation such as the development of hydrogen. There is also greater cooperation within the overall technology sphere, whether in terms of R&D in hydrocarbons or exploring other areas like e-commerce, fintech and payment services. In short, while GCC-Asian ties were initially based around energy, we are now seeing a wider relationship develop across a broad range of non-oil economic sectors between Asia and MENA.
You touched on some non-oil sectors during your answer. Which non-oil sectors have the biggest growth potential over the next five years in terms of encouraging the Middle East Pivot to Asia?
There will be greater engagement in developing greener energy, with the Middle East exploring alternative energy sources, such as ammonia, hydrogen and nuclear energy. For nuclear energy, it is yet to be seen whether they partner with China or turn to their more traditional trading partners, the US and Europe, but China will certainly have an interest in developing Gulf nuclear energy capabilities.
Logistics will also become more important going forward, given China’s global trade ambitions, and there will be greater technology collaboration as well. Food security has always been an important topic in the MENA region, but recent geopolitical events have increased the importance of agriculture and food for the Gulf. The Gulf will not only explore increasing trade with China in these sectors, but also with trade partners across Asia and Southeast Asia. We can expect more trade and technology transfers between the two regions to shore up their respective domestic food security situations.
Will this result in greater Asian investment in the Gulf’s capacity to grow their own food, for example through vertical farms, or will this cooperation occur through greater trade in foodstuffs?
GCC governments are very focused on diversifying supply for basic foodstuffs. They are investing in basic food infrastructure and brokering arrangements to purchase food across Asia. There is also a desire across the GCC to onshore certain value and production chains related to food, to enable local production of food as much as possible.
We are seeing a number of economic and social reforms emerging from Saudi Arabia, which will encourage greater foreign investment and commerce into the kingdom. Most recently we have seen the introduction of a new Companies Law. What will the impact of this new law be? And do you think it will encourage greater commerce and business from Asia into Saudi Arabia?
The new Companies Law will take effect in January 2023 and it is part of a broader shift from a historically paternalistic approach to regulating commerce, to an approach that respects the free market, while regulating it at the same time. This new approach seeks to allow commercial parties to agree and undertake private arrangements as they see fit within the limits of the law. There are several areas of the Companies Law that are helpful to foreign investors and even for domestic shareholders.
Firstly, the Companies Law will offer greater flexibility and legal certainty to all investors. Saudi Arabia has, for some time, had a stable regime for regulating foreign investment into both listed and unlisted companies.
The changes enacted in the Companies Law are aimed more at addressing corporate structuring issues, rather than solely attracting foreign investment. For example, the new law introduces a new type of company called the simple joint stock company, which provides the benefits associated with a joint stock company, such as having distinct shares and a clear governance structure, while reducing the regulatory burden that applies to joint stock companies.
“The Companies Law will offer greater flexibility
and legal certainty to all investors.”
Joint stock companies are increasingly being used in joint ventures, because they provide a strong governance framework, but many investors have been reluctant to use them due to concerns of additional regulatory costs. The introduction of simple joint stock companies will address this concern. The new law also expressly recognises shareholder agreements, which is critically important. Previously, the legal status of shareholder agreements was ambiguous. The new law recognises that, apart from the constitutional documents of the company, the shareholders may agree on their own arrangements in a separate agreement, and the law will respect that. So that is a very helpful area when it comes to private investments where you have multiple investors in a company.
Finally, the law also permits multiple classes of shares, which will offer greater flexibility on shareholding arrangements. This allows companies to issue different types of shares with varying rights. Overall, the law brings corporate legislation in Saudi Arabia closer to best practice in international markets and is a welcome overhaul to the previous regime.
So, in general, this will enable Saudi companies to engage with foreign companies in raising capital in new ways?
Yes, with increased flexibility and increased legal certainty.
The China-Saudi partnership is a key relationship within the Middle East Pivot to Asia. What do you think accounts for China’s interest in the Saudi market and vice versa?
China and Saudi Arabia have shared interests across geopolitical, technological and economic spheres. China has a desire to expand its global reach in commerce and it is not possible to do that without including the Middle East, and Saudi Arabia in particular. That is why Chinese companies are especially interested in ports and logistics services in the Middle East, and along the Red Sea.
Saudi Arabia and China have a shared interest in exploring new forms of energy, whether that’s nuclear, hydrogen or ammonia, to satisfy Asia’s growing energy needs. Sovereign wealth funds in Saudi Arabia, and the and GCC more generally, are searching for investment opportunities beyond their traditional target markets in North America and Europe. This is all coupled with a growing sense of trust and reliance in Saudi companies, as they increasingly invest in China, and as Chinese companies reciprocate by investing in Saudi Arabia.
Oil still remains a large part of the picture in terms of Asian-Gulf trade. With oil prices currently as high as they are, can we expect trade in value terms to expand? And will we see Asia increase investment in Gulf oil installations to increase supply, or will we see an acceleration in Asia-Gulf deals relating to renewables and alternative energy sources?
We will see both. There will continue to be a need for hydrocarbons, and their derivatives like fertilisers, for the foreseeable future. The challenge will be to find methods to use those products in more sustainable ways that are less harmful to the environment. So, Asia and Saudi Arabia will benefit from exchanging knowledge in this area to find new and more sustainable ways to produce energy and to produce hydrocarbon derivatives. At the same time, with the growing energy demand in both the GCC and across Asia, there will be a need to accelerate investments in renewables and that will include solar and nuclear energy.
On the point of nuclear energy, this is a sensitive technology and we have seen signs of US frustration towards Gulf-China cooperation in other technologies. How much of a problem will it be for the Gulf states to balance between East and West, particularly in sensitive technologies?
I do not see the relationship between the Middle East and the West, on the one hand, and the relationship between Middle East and China, on the other, to be mutually exclusive. On both fronts, there are common strategic and economic interests. We operate within a global, integrated world, and there are some areas which are trickier to navigate than others. Where there is a natural common interest, in areas like logistics and food security, the Middle East is well placed to be a key partner of Asia. In more sensitive areas like telecommunications, certain aspects of technology and nuclear energy, balancing between East and West will be more challenging.
The relationship that Gulf countries have with the US and its allies in the West will continue to be fundamentally important, while they pursue growing commercial ties with Asia. GCC governments will, no doubt, continue to be mindful of the strategic and diplomatic concerns of their allies in this respect, but this need not cause a reduction in cooperation with China in other spheres.
Waleed is a partner at the international law firm Linklaters. He leads the firm’s Corporate/M&A practice in Saudi Arabia, advising regional and international clients on a range of transactions including inbound and outbound investments and joint ventures.
This interview is taken from The Middle East Pivot to Asia 2022 report, which highlights key trends emerging in Gulf-Asia trade. Read the report here.
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