Reprinted with permission from Gulf States Newsletter, Vol 24 Issue 647, 23 October 2000

Additional reporting by Mark Ford

As the prospect of a settled Middle East slips out of sight once again, bankers across the region are keeping open minds - or tight lips - about the impact on their business of the latest spate of violent clashes between Palestinians and Israelis.

Support from Arab states is crucial to Palestine's efforts to develop commercial activities and banks in some countries, particularly in the financial centres of Beirut and Bahrain, for example, have actively nurtured an albeit small amount of trade and investment with the fledgling Arab state by providing financial services.

But while there is a feeling that it behooves Arab businesses and banks to support Palestinian efforts to lay commercial and economic foundations, there is also a feeling that this is oftentimes a forlorn exercise. "There's a general sense of frustration that peace is not there - and the fruits of peace are flowing away," observes one Bahraini banker.

Confidence

The main casualty for the time being for those involved in trade and trade finance between Palestine and Arab countries is confidence. Nascent Palestinian enterprises that had been courting foreign investment now look less attractive to investors while traders may be inclined to strike deals outside Palestine, with buyers or suppliers in more settled commercial environments.

People have largely stopped travelling, not only to Israel and Palestine, but also to the broadly pro-Palestinian eastern-Mediterranean Levant countries, newly declared out of bounds by several international companies.

Further afield, the Gulf Cooperation Council (GCC) monarchies endeavour to simultaneously maintain pro-Palestinian and pro-US perspectives on the Arab-Israeli conflict that, inevitably, impacts on domestic Gulf politics.

GCC rulers are feeling uncomfortable. Relations with Washington - popularly seen as pro-Israeli - are difficult to manage when the Arab-Israeli conflict escalates. Raised tempers over Western support for Israel mean a heightened potential for conflict across the region - a reason why most Arabian governments hope to see the present crisis blow over as quickly as possibly.

Public opinion

The true state of public opinion in the Gulf is hard to assess. Despite demonstrations across the region, the mood has remained fairly calm and protests have involved only hundreds or a few thousand people; westerners have detected little sense of tension and do not feel they are the target of antagonism.

Most people feel sympathy with the plight of the Palestinians, but are not yet compelled to direct involvement. For now, Abu Dhabi's fundraising charity "telethon" for the Palestinians is probably more reflective of the mood among the region's middle classes than the plans of a Dubai businessman to supply West Bank protesters with truckloads of sharpened stones.

But the potential for conflicts elsewhere in the Middle East to destabilise Gulf states - and to be used for mischief by the likes of Saddam Hussein - cannot be underestimated. Incidents such as the recent Saudi airliner hijack, and the bombings in Yemen of the USS Cole and the UK embassy were perhaps planned weeks before and thus had no direct links to the new twists and turns of the Middle East crisis.

But experience tells us that Middle East turbulence buffets Gulf rulers whose subjects have only limited political rights-and who find in the Palestinians' awful plight an opportunity to express their own pent-up feelings.

Authorities across the Gulf will be watching to make sure this anger is not later channelled into political frustrations closer to home. Thus in Bahrain, the authorities may have been privately relieved to see that the protesting crowds - out on the streets just before the Emir flew off to Syria for talks with Bashar Al-Assad last week - included Sunnis as well as Shiites.

Interim steps

Only once there is real progress on the now rather forlorn hope of substantive peace negotiations between Israel and the Palestinians resuming will the Gulf states feel a little more comfortable.

In the meantime, rulers will most likely endeavour to manage the current crisis on a day-by-day basis - an approach that may be shared by members of the banking community who are giving very little away as to how the current crisis is or will affect business.

"It's not something we would want to comment about at the moment," said a trade finance specialist in a leading Kuwaiti bank while even senior executives at one of Bahrain's leading letter of credit providers suggested questions about commercial credit facilities should be "directed to the Ministry of Commerce in writing".

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.