By Andrew Torchia and Martin Dokoupil
DUBAI (Reuters) - A diplomatic split between Qatar and its wealthy Gulf neighbors may disrupt billions of dollars of investment in the region and slow efforts to make economies more efficient through trade and transport reforms.
Qatar's vast natural gas wealth means the tiny country, with a population of about 2.1 million, could probably continue operating indefinitely despite the displeasure of Saudi Arabia, the United Arab Emirates and Bahrain.
But its growth may slow if its trade and investment ties with the big Gulf Arab economies are scaled back. All the economies in the region could suffer in the long term if diplomatic tensions stall projects such as construction of a Gulf railway network and development of a free-trade area.
That could also deprive foreign companies of billions of dollars worth of construction projects.
Saudi Arabia, the UAE and Bahrain said on Wednesday they were withdrawing their ambassadors from Qatar because Doha had failed to implement an agreement among Gulf Arab countries not to interfere in each others' internal affairs.
John Sfakianakis, chief investment strategist at MASIC, a Riyadh-based investment firm, said the diplomatic dispute would not immediately affect business in the Gulf but there would be an impact in the coming months and years if tensions did not ease.
"Less investments, less capital transfers, fewer joint ventures, more negativity about Qatar" may be the result if the country becomes isolated from the region, he said.
The Gulf countries' decision to withdraw their ambassadors was unprecedented in the three-decade history of the six-nation Gulf Cooperation Council (GCC), and stemmed from deep resentment among Qatar's neighbors about policies such as Doha's support of Islamist movement the Muslim Brotherhood.
There was no sign of any economic sanctions being imposed, and some officials and businessmen in the region predicted governments would keep business separate from politics.
"The countries in our region do not involve politics and business," Akbar Al Baker, chief executive of state-owned Qatar Airways, told reporters in Berlin.
Economics does tend to be shaped by politics in the Middle East, however, partly because many top companies are state-controlled and Gulf governments have become used to using their oil wealth as a diplomatic tool.
Egypt has experienced this in the last few years; it was shunned by Saudi and UAE businesses under Islamist President Mohamed Mursi, but those states have given billions of dollars of aid to Cairo since Mursi was deposed last year, causing investment to resume.
As the world's top exporter of liquefied natural gas, Qatar is so rich that it does not need trade and investment from the rest of the Gulf for its economic wellbeing, as long as it can continue selling its gas to international markets.
The government's budget surplus was $27.3 billion, or a huge 14.2 percent of gross domestic product, in the fiscal year to last March. That means it can import the food, technology and labor it needs from south Asia, Europe and elsewhere.
Because Gulf countries are focused on energy exports, they have relatively few economic links between them, noted Farouk Soussa, chief economist for the region at Citigroup. He said non-energy trade between Qatar and the three other countries was only about 1 percent of total Qatari trade.
But there would be some financial consequences from a prolonged period of diplomatic tensions. Citizens of the Gulf Arab countries are active investors in each other's stock markets; these fund flows could start to pull back.
Analysts estimate non-Qatari GCC nationals may own 5 to 10 percent of Qatar's stock market, which has a capitalization of about $175 billion. The main Qatar stock index fell 2.1 percent on Wednesday as news of the diplomatic dispute emerged.
Nasser Saidi, president of Dubai consulting firm Nasser Saidi & Associates, noted that Qatar was a large investor in the UAE's booming real estate market, which could lose that source of funds if the dispute were prolonged.
Some big Qatari firms such as Qatar National Bank are keen to expand in the Gulf, escaping the limitations of their small home market, and they could find that more difficult in future.
Qatar Airways is set to start flying domestic routes in Saudi Arabia in the third quarter of this year, after being one of just two foreign carriers awarded rights to service the Saudi market of about 30 million people.
If tensions eventually escalate into economic sanctions, the single biggest point of vulnerability for the Gulf would probably be the Dolphin Energy pipeline carrying about 2 billion cubic feet of gas per day from Qatar to the UAE and Oman.
Soussa at Citigroup said he did not expect the gas supply to be used as an economic weapon, but it was a potentially major one. Analysts estimate the gas flow represents about 5 percent of total Qatari exports and some 30 percent of the UAE's gas needs.
"If anything were to happen to the pipeline, it would be a difficult situation to manage on both sides but mainly on the UAE side," Soussa said.
Qatar also has energy ties to the rest of the Gulf through OPEC, where it has traditionally supported Saudi Arabia's policies as the dominant producer in the oil cartel.
Self-interest may well prevent energy policy from becoming embroiled in the diplomatic dispute. "All gas projects and OPEC oil-related relations with the GCC will not be affected," a source at state energy giant Qatar Petroleum said.
Other joint initiatives between Qatar and its Gulf neighbors - some of them important for the countries' efforts to create more private sector jobs and diversify their economies beyond oil - could stall, however. This could deprive foreign firms of billions of dollars worth of construction contracts.
Bahrain and Qatar have for years been discussing the possibility of building a 40-km (25-mile) causeway between them; it is hard to imagine that going ahead in the current climate. A project worth at least $15 billion to connect Gulf states' planned railway networks in coming years might also stall.
Even before the diplomatic dispute erupted, a proposal for a GCC currency union appeared dead, since Gulf officials became suspicious of it after seeing the euro zone's difficulties.
Other economic initiatives looked more likely but have now become less so. In 2003, the GCC launched a free-trade area with a common external tariff; this has largely removed overt trade barriers within the bloc, but its full functioning has been delayed by disagreements over how to share customs revenues.
A GCC customs union authority is trying to resolve the problems but may now find that harder. Adoption of a proposal to introduce a sales tax across the GCC - a key economic reform to cut governments' dependence on oil revenue - also looks remote.
(Additional reporting by Amena Bakr in Doha, Daniel Fineren, Mirna Sleiman and Nadia Saleem in Dubai, Reem Shamsedinne in Khobar and Victoria Bryan in Berlin; Editing by Susan Fenton)