Stuck in the middle

Bahrain tips West Asia's delicate balance

Bahrain is caught in the middle of a high-stakes game between its larger neighbours, Saudi Arabia and Iran. What's at stake is economic and political dominance of the West Asia. The tiny kingdom's Sunni monarchy depends on the support it receives from Riyadh and other oil-rich sheikhdoms in the Gulf for its survival but in return has become a proxy for their pan-regional feud with Iran.

Bahrain stripped citizenship from the spiritual leader of its majority Shi'ite Muslim population. That is a risky strategy. The public defenestration of Ayatollah Isa Qassim may have turned a mostly harmless thorn in the side of the ruling Khalifa family - which is concerned by alleged growing Iranian interference in the archipelago - into a serious political crisis by inflaming sectarian tension. In 2011, the government was forced to crush an uprising of its Shi'ite citizenry with the help of Saudi Arabia.

Instability is bad for business in a tiny kingdom with dwindling resources and many regional competitors for foreign investment. Ratings agency Moody's downgraded Bahrain to junk in March and warned that its rating could be cut further due to political upheaval in the region. According to the International Monetary Fund, gross domestic product growth slowed by a percentage point to 3.2 per cent last year, while Bahrain's fiscal deficit hit 15 per cent.

A big fear for the government will be the loss of appeal to investors. The capital Manama may have lost its title as the Gulf's financial centre to less troubled cities such as Dubai and Doha, but foreign direct investment has increased since riots five years ago, according to UN figures. The presence of the US Fifth Fleet - which uses the country as its regional base - and its causeway linking the country with Saudi's main oil producing region in addition to investment-friendly laws have kept Bahrain afloat.

Saudi's attempts to diversify its economy away from oil, and Iran's re-emergence into the global financial system as sanctions are lifted, will create tensions that draw in neighbours like Bahrain. That is inevitable. Instead of taking sides in a messy proxy war though, the small Gulf trading enclave might be wiser to appease its own people and remain neutral - otherwise no matter which of side comes out on top, Bahrain could be a loser.