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Investing in Qatar

Qatar, a tiny country situated on a small, thumb-shaped neck of land off the eastern side of the Arabian Peninsula, looks on the surface like a country with great economic promise. The nation is rich with cash and natural resources, and it's been making small but sure strides toward economic and social reform. But is that enough to make it a place for your investing dollars?

The good news
The economic data surrounding Qatar appears to indicate the potential for good investing opportunities. Profits from the petroleum industry have made it one of the highest per-capita-income countries in the world and have fueled one of the fastest GDP growth rates anywhere in the past few years. Qatar also sits near the planet's largest natural gas field and will likely become the top liquefied natural gas (LNG) exporter in the near future. No wonder several U.S. companies, among them Chevron (NYSE: CVX  ) , ExxonMobil (NYSE: XOM  ) , Occidental Petroleum (NYSE: OXY  ) , and Conoco Phillips (NYSE: COP  ) , have joint development projects going on in the country.

What's more, political signs likewise point toward apparent stability in Qatar. Although it remains a conservative Muslim country, it does not, unlike its neighbor Saudi Arabia, allow religious fanatics to enforce adherence to dress codes or prayer attendance. In fact, Qatar's emir, Sheikh Hamad bin Khalifa al-Thani, has pursued a path of cautious social and economic liberalization that has thus far met with success. He subsidizes the first truly free media in the Middle East, Al Jazeera, whose popularity has ignited a revolution in Middle Eastern journalism. And he is thinking about opening the Qatari stock market to outside investors, after having already allowed limited foreign investment in Qtel, the country's telecommunications monopoly.

Clearly, the emir envisions Qatar competing with Dubai and the other members of the United Arab Emirates for future foreign business investment. And he just might succeed. In the wake of recent militant violence and beheadings of foreigners in Saudi Arabia, many Western companies have fled to Qatar and the Emirates.

The presence of two major United States military bases -- Camp as-Sayliyah and al-Udeid Air Force Base -- further ensures Qatar's military stability. The U.S. military maintains an excellent relationship with the Qatari government. As-Sayliyah is home to U.S. Central Command in the region, where U.S. troops keep a low profile -- a fact that sits well with the locals.

And now, the bad news
So this is a sound place to put your money, right? Well, here's what the numbers don't tell.

Like most other petroleum-rich Persian Gulf countries, Qatar is run by a very small group of men, the sheikhs, who own almost everything in the nation. As a result, any foreign company that wishes to do business in Qatar will likely have to have a sheikh sponsor it. These roughly 50 men are fabulously wealthy, and extremely powerful. They form a fraternity that you and I will never join. Not ever. At best, we can hope to become this group's faithful courtiers -- or, perhaps, its small-f fools -- accepting whatever handouts come our way.

The rest of Qatar's wealth is spread among its roughly 250,000 citizens, who receive monthly government stipends and other favors. That leaves about 630,000 other people who do not hold Qatari passports but still live and work in the country and ultimately depend on the largesse of a sponsoring sheikh for their employ. Many of these people are Palestinians, Lebanese, Egyptians, Iraqis, and various other Arabs from less fortunate nearby countries, but the vast majority come from India and the Philippines. And their jobs and pay scales are all subject to a racism that places Gulf Arabs at the top, other Arabs in the middle, and Indians and Filipinos at the bottom.

It's not likely to get better. The chasm separating rich and poor in Qatar will likely grow as the economy grows. And the problems it generates will remain a turbulent force churning beneath the surface of Qatari society. Already, the resentment between differing national communities is easy to see, for those who take the time to look.

Despite the emir's laudable efforts to end Qatar's historical economic protectionism, starting a business in Qatar still requires navigating a bureaucracy that would make any former Soviet nostalgic. Ultimately, the sheikhs can arbitrarily enforce or waive the often ridiculous or downright insulting regulations, leading one to wonder at their purpose in the first place. And the sheikhs' monopoly is unlikely to break anytime soon.

Another annoying aspect of Qatar's business climate remains the tender -- a publicly offered job on which different companies may bid. This type of system encourages companies to grossly underestimate the costs of any given job and, once the tender is offered, a scramble to cut as many corners as possible so they can maximize profits. The result typically is shoddy or unfinished work, or work that costs nearly triple what it should because of inevitable delays.

Infrastructure is another embarrassment. Certainly any rapidly developing city is going to experience, for example, traffic problems. However, Doha's roads are a terrestrial form of purgatory. And the roads themselves are often uneven or dotted with potholes. What about those billions of dollars in surplus?

Lastly, the presence of U.S. military in Qatar is a mixed blessing. By aligning themselves with the U.S., the Qataris make themselves anathema to the clandestine militant groups who seek the downfall of America and its purported puppets in the region. Because Qatar has more than 37 miles of unprotected borders with Saudi Arabia, and almost 350 miles of unguarded coastline, it's easy to infiltrate. A few well-placed explosives on an oil production facility, or an LNG station, would send the "collaborationist" Qatari petroleum industry into a panic. The ramifications of such an attack for world energy markets are frightening. Qatar remains doubly vulnerable to such attacks because the Qataris believe they are immune from them.

The verdict
Qatar is a small country with a small-country mentality. Its insularity tends to blind its citizens to the problems lurking right outside their borders. That means that although the nation may be secure in economic terms, it still remains subject to too much volatility on nearly every other level.

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If you're looking to expand your portfolio beyond your own nation's stocks, try out our international-investing report,Around the World in 80 Minutes.

Fool contributor Adam Gaiser is a professor of religious studies. He does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.

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