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Qatar Faces World Cup Risks on Multiple Fronts; Investors Wary

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Qatar has made lots of headlines recently. Charges of bribery and a major gas deal in exchange for a win in the vote to host the 2022 World Cup may end up instead costing the country the event, which is only part of Qatar’s diversification program intended to secure the country’s well-being once oil and gas reserves run out.

While the bribery controversy could be a danger to the country’s economy, another and perhaps broader danger looms. It’s made headlines too, and is tied in many ways to the World Cup hosting, but its fallout could be greater—and for investors who may have no direct exposure to Qatar. Here are those two dangers, and what they might mean for investors as they play out.

First, London bookmakers have stopped accepting bets on whether Qatar will lose the 2022 hosting, saying that fresh revelations have made it more likely. However, while this would be a blow to the country’s prestige, it will likely do little to slow construction in Qatar’s overall plan.

Qatar seeks a greater goal than a single sporting event, even though the World Cup has loomed large in its overall economic diversification plan, as well as in its goal to become known as a world-class sports hub.

But sports aren’t everything. In February Qatar announced a tourism initiative designed to almost double that segment of its GDP by 2030. To that end, while the country is spending $200 billion on infrastructure, stadiums, hotels and transport as a runup to the World Cup, its greater aim is to attract visitors from far beyond other Gulf nations and for far longer than 2022. The Qatar National Tourism Sector Strategy 2030 is focused on bringing 7 million visitors to the country by 2030 to generate $10.7 billion in spending. In fact, the country is building a whole new city—Lusail—anticipated to cost $45 billion.

Although Qatari stocks and bonds tumbled after bribery allegations hit the news, John Blank, chief equity strategist for Zacks, believes that the likelihood of Qatar losing the World Cup is low. It makes sense for the Middle East to have the World Cup, he said, particularly since the smaller countries in the Middle East seem to be making the most progress in modernization and hosting the World Cup would further drive such change.

“Rolled-up” countries like Iraq and Syria, said Blank, are made up of smaller groups that were not traditionally united into a single country, but became so relatively recently. And the friction among those artificially united groups is erupting—whereas the “little pieces left to the side are the ones moving forward.” While Syria and Iraq are in turmoil, Qatar and its neighbor Dubai have been chugging along in relative quietude.

A World Cup competition would be “very positive,” Blank said. With Syria, Iran and Iraq among the countries sending teams to the World Cup, the award would function “the same as the Olympics, with rivalries on the [sports] field, not on the battlefield.”

Blank also said it made little sense to “unwind investments and deals when the merits of the decisions [are] sound but the process is corrupt. [They should] reform the process, not the decisions.” And that’s what he believes will happen.

Even if it doesn’t, said Blank, “[2022] is eight years away. I doubt they’re going to lose much.” If this were to happen only three to four years from the World Cup, the fallout from a change in venue might be greater, but this far in advance, effects would be felt more in “plans, architectural designs—things like that.” A growing Qatar economy has already spurred considerable development that would not stop if the World Cup goes elsewhere.

It’s possible that sponsor pressure could compel FIFA, soccer’s governing body, to revoke the award and change the venue. However, while five of the event’s six major sponsors—Sony, Visa, Adidas, Coca-Cola and Hyundai—have spoken out about their concerns over the bribery allegations, their statements have fallen short of serious pressure on FIFA to take action. The sixth sponsor, Emirates Airlines, has failed to join the conversation.

Secondly, outrage over mistreatment of migrant workers. Allegations surfaced toward the end of 2013 that far outstrip bribery allegations. Charges range from worker abuse to outright slavery as the country imports workers to build everything from its new airport, just opened, and a Doha shipping port to hotels, metro and rail systems and of course stadiums.

There are 1.4 million migrant workers in Qatar. Conditions for the workers—who are building the facilities for the World Cup venue and for Qatar’s vision of itself in the future—are abysmal, according to reports from Amnesty International and media exposés in U.K., German and other newspapers.

Investigations found workers living in squalid conditions, crammed into crowded, dirty rooms. Passports are held by their sponsors, preventing them from leaving or even moving freely around the country. Wages are less than promised, when paid at all. Workers are often starved, and denied water even when working in the desert heat. And working conditions are so dangerous that they have died in the hundreds on the job.

But the companies who hire them and bring them from Nepal, India and other countries have denied any wrongdoing; each company in the chain points at another link—though all claim zero tolerance for such things and promise to investigate.

Therein lurks another danger for investors, who might have exposure to companies like Siemens, which has a contract for $8.2 billion to build a new metro system; Bechtel Group Inc., which built the new airport; or other German companies working in Qatar on various projects. French construction companies—Qatar has spent $20.3 billion there—and British construction firms and consultants are also among the firms whose reputations could be at stake.

Even FIFA has come in for criticism for not doing enough to secure better conditions for workers, and is said to be considering adding human rights records to the requirements for future awards—and for a re-award if 2022 is taken away from Qatar.

The irony, for FIFA, is that there is sufficient concern over the well-being of soccer players playing in the desert in June heat, when temperatures in Qatar can rise above 120 degrees, that officials are considering moving the 2022 competition to December, when temperatures are cooler. Yet FIFA has not yet threatened comparable action on behalf of the workers laboring on facilities designed for the athletes and sports fans. For that matter, neither have the sponsors.

Investors should be wary, lest the public take out its outrage on sponsors and contractors, the way consumers did in calling for boycotts on companies using Bangladesh factories after the horrific building collapse in 2013.