Factbox: Key political risks to watch in Bahrain

DUBAI Thu Jun 28, 2012 11:16am EDT

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DUBAI (Reuters) - A political standoff is festering in Bahrain with no reconciliation in sight as street protests and clashes with police persist more than a year after an Arab Spring uprising.

Following is a look at political risk factors in Bahrain:

INTERNAL CONFLICT

Bahrain's government was shocked to find the revolt, led by members of the restive Shi'ite Muslim majority, the focus of foreign media attention during the running of the Grand Prix Formula One race in the Gulf country in April.

Since then it has pursued a legal crackdown on the protest movement, re-arresting and prosecuting rights activist Nabeel Rajab, raiding homes of some suspected protesters and threatening clerics with legal action.

In June, police fired tear gas and rubber bullets at a group of opposition leaders, including Sheikh Ali Salman, head of Wefaq, the largest party in the Shi'ite Muslim opposition arrayed against the Sunni Muslim ruling family.

Sheikh Salman criticized the army at a rally, saying it had "wronged" Bahrainis during last year's martial law and would fail to suppress demands for reforms.

King Hamad has hinted at legal action against those "disrespecting" the military. "The executive agencies must take the necessary legal measures to deter these violations," he said in comments carried on the state news agency BNA.

Opposition parties and a network of protesters known as the February 14 Youth Coalition stepped up protests and clashes with police worsened in the run-up to the April 20-22 Formula One race, which Bahraini authorities had cancelled in 2011 due to unrest in the early stages of the pro-democracy movement

After the Grand Prix, the government warned clerics against criticizing institutions of the state, a message apparently aimed at Sheikh Isa Qassim, the most revered figure among the Shi'ite majority and an unofficial spiritual guide for Wefaq.

In June, the Justice Ministry began steps to ban the small opposition Amal (Islamist Action) party, saying that a radical Shi'ite cleric based abroad was its spiritual leader.

The government has accused Amal of administrative violations including holding meetings inside Shi'ite houses of worship and "following a religious source of emulation who calls openly for violence and hatred".

Activist Rajab was arrested after sending a series of tweets criticizing the prime minister, Sheikh Khalifa bin Salman. He was freed on bail on June 27 pending trial based on a complaint that he had insulted residents of a Sunni Muslim district by suggesting they had only come out to the street to cheer Sheikh Khalifa in return for financial benefits.

Rajab and other activists on social media appeared to have been emboldened by the life sentence passed Hosni Mubarak, the former Egyptian president toppled in an uprising in early 2011.

In June, a Bahraini court reduced sentences against nine medics who were arrested during martial law, and acquitted nine others. But it did not strike down the original convictions, disappointing the visiting U.S. Assistant Secretary of State for Democracy, Human Rights and Labor, Michael Posner.

"These convictions appear to be based, at least in part, on the defendants' criticisms of government actions and policies," Posner said. He said Bahrain needed to urgently start a political dialogue amid continuing violence. Government feelers to Wefaq in recent months appear to have gone nowhere.

The doctors and nurses, who are all Shi'ite, said they were victimized for treating protesters and helping bring world attention to deaths caused by security forces.

Official and public opinion among many Sunnis ran against the medics, who were alleged to have deliberately worsened patient injuries for the cameras and caused deaths of protesters in order to discredit security personnel.

Security policy remains to lock protesters down in their neighborhoods and prevent a critical mass forming again like last year. The Pearl Roundabout traffic intersection in Manama that became the epicenter of last year's protests remains sealed off and inaccessible to traffic.

Unrest in Bahrain - whose population is 1.3 million, about half of whom are foreign workers - is driven by Shi'ite complaints of unequal access to state jobs, housing and health care. The government denies such discrimination exists.

Shi'ites say the al Khalifa family is now trying to change the demographic balance to its advantage by granting citizenship and jobs in the security apparatus to Sunnis from elsewhere.

A new constitution and parliamentary elections a decade ago reduced Shi'ite discontent somewhat. But the lower assembly's powers were offset by an upper council appointed by the king, reviving tension in the youthful population, half aged under 30.

What to watch:

- Government bans on protests organized by Wefaq

- An escalation in arrests of opposition activists

- Legal moves to crack down on social media

FRAUGHT RELATIONS WITH IRAN

Friction with Iran rose in May after a Gulf summit that discussed a possible political union among Gulf Arab states, starting with Bahrain and Saudi Arabia. Iran and Bahraini opposition groups denounced the plan.

The summit in Riyadh did not reach a decision on the issue after questions were raised by Kuwait, Oman and the United Arab Emirates, but it is expected to come up again in December.

Fears of a Gulf war rose in January as the United States and Iran sparred over sanctions and access to regional oil as Tehran threatened to close the Strait of Hormuz in response to Western measures to choke off its oil exports and gas imports.

Tensions eased after talks between world powers and Iran on its disputed nuclear work resumed in April. But diplomacy was suspended in mid-June with the two sides still far apart and Israel hinting anew at last-ditch military action against Iran.

The United States and Saudi Arabia, the world's biggest oil exporter, regard Bahrain as an ally in the stand-off with Iran given that Manama is the base for the U.S. Fifth Fleet.

Many Bahraini Shi'ites visit Iran as pilgrims or religious students. Some look to Iranian Supreme Leader Ali Khamenei as a spiritual guide. Khamenei's followers may send alms to his office - donations viewed with suspicion by Bahraini authorities - but Shi'ites say they are entirely disconnected from politics.

Shi'ites maintain that many Sunnis also look to clerics outside Bahrain, as well as to Saudi political leaders.

Some Bahrainis known as Ajam are Shi'ite Iranians in origin but they are traditionally close to the government.

What to watch:

- Status of nuclear talks between Iran and the West

IMPACT ON ECONOMY

Bahrain, long a banking and tourism hub, has become a shadow of its former self since the social unrest broke out. Hotels and office space have low occupancy and fewer Saudi weekend visitors frequent Bahraini bars, restaurants and malls. Few foreign media have correspondents based in the small oil-exporting state.

The International Monetary Fund has said that Bahrain should come up with policies that resolve public grievances and restore confidence in its economy. On Wednesday, Bahrain launched an offer of a $1.5 billion, 10-year bond --its first conventional issues since 2010 -- at the tighter end of earlier price guidance, indicating strong demand for the issue.

Bahrain's economic growth slowed to 2.2 percent in 2011 from 4.5 percent in the previous year after some businesses closed and investors withdrew from Bahraini mutual funds.

"Further measures to diversify the economy, improve the investment climate and strengthen the labor market are essential for sustained growth and employment," the IMF executive board said in an annual assessment.

Total investment in Bahrain mutual funds dropped nearly $800 million last year to $8.4 billion, central bank data show. Its banks hold assets of about $211 billion.

Bankers say the unrest damaged Bahrain's main advantages as a convenient, stable, liberal business location, as some banks moved out to Dubai. Some Indian banks have since moved in.

Bahrain has seen a rapid rise in natural gas consumption as its economy has grown, but tension with regional producers Qatar and Iran has hampered plans for gas imports, threatening growth.

Bahrain is in talks to import an average 400 million cubic feet per day gas from Russia's Gazprom through an LNG terminal expected to open in 2015, the oil minister said in March.

It consumed 1.3 billion cubic feet of gas per day (cfd) in 2007 and expects consumption to rise to 2 billion cfd in less than a decade. It produces about 1.7 billion cfd.

Bahrain's economy relies on oil it sells from a field it shares with Saudi Arabia but which is in Saudi hands.

Plans to diversify the economy, developed under the crown prince's sponsorship over the past decade, aim to help Bahrain move beyond reliance on oil receipts and therefore on Saudi influence. This would encourage democratic change.

But plans for reform on both fronts have gone into reverse in the past year. Hardliners in the ruling family have replaced figures heading economic bodies with their allies and weakened the remit of entities such as the Economic Development Board.

What to watch:

- Bahrain's sovereign rating, banks returning or leaving

- Capital outflows, state of tourism and real estate market

- Plans for LNG facility, output from shared Abu Saafa field

(Writing by Andrew Hammond; Editing by Sami Aboudi and Mark Heinrich)

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