STRATFOR REPORT

Apr 16, 2019 | 19:25 GMT

Egypt: Constitutional Changes Enshrine the Military’s Hold on Power

The political role of the military is currently playing out in several North African countries. In both Sudan and Algeria, the military apparatus is asserting its power in a bid to influence chaotic leadership transitions. In Egypt, where the military already has enormous sway over the country’s politics, the army is enshrining its authority even further.

What Happened

On April 16, the Egyptian parliament approved a raft of amendments to the country’s constitution that, among other things, would extend presidential terms to six years, meaning that President Abdel Fattah al-Sisi’s current term would end in 2024. He could then run for reelection and hold office until 2030. Other amendments would reestablish the Shura Council, a consultative body that functions as an upper parliamentary house; create the office of vice president; and enact quotas for the representation of women and minorities in the lower house.

But of all the amendments, which must win approval in a popular referendum before they can enter the constitution, perhaps the most important ones address the political mandate handed to the already powerful Egyptian armed forces. Those measures would give the Supreme Council of the Armed Forces (SCAF) the final say on the appointment of the defense minister in Egypt’s civil government. And most notably, the language of the mandate assigned to the country’s army has undergone a subtle, but significant, adjustment, with the service branch now defined as “an institution of the people tasked with safeguarding the land, the constitution, democratic and personal rights, the state, civilian rule, and the gains of the people.”

Based on the wording of the amendment outlining the army’s powers, the service can realistically argue that any action it takes can be justified as a move to “safeguard” Egypt.

Why It Matters

The importance of the amendments does not lie in how likely the parliament will pass them or how likely the Egyptian public will approve them. Rather, it lies in how they will deepen the ability of a single president to direct Egypt’s policies, and more than that, how the military’s political power over the civilian government is being enshrined into law. Based on the wording of the amendment outlining the army’s powers, the service can realistically argue that any action it takes can be justified as a move to “safeguard” Egypt, even if the civilian government does not approve. This adjustment to Article 200 of the constitution appears to remove some of the civilian state’s oversight of army actions.

Background

For most of its history, the Egyptian parliament has functioned as a rubber stamp for the Egyptian president’s policies, and this role has only deepened since the 2013 coup that overthrew the government of then-President Mohammed Morsi. Moreover, the Egyptian presidency has always been a strong institution, with the executive branch exercising much of the country’s centralized power.

Egypt’s current civilian government operates in close coordination with the army, which is led by the SCAF. After the aftermath of the Arab Spring ushered in a unique period of free and fair elections that gave opposition parties parliamentary power and catapulted Morsi, a Muslim Brotherhood leader, into the presidency, the SCAF reasserted control in 2013, ousting Morsi and overseeing the drafting of a new constitution and new presidential elections in 2014.

Apr 16, 2019 | 10:30 GMT

An Escalation in Tripoli Pushes Libya to the Brink of Open War

    By launching a military offensive on Tripoli, Khalifa Hifter has made it clear that he views himself as the sole solution to Libya’s political crisis, and that any negotiations to weaken his control of the Libyan National Army (LNA) are unacceptable.
    Hifter’s staunch commitment to these tenets will continue to prove problematic for outside efforts to unify Libya’s competing governments, and will make it difficult for him to agree to a cease-fire. 
    France, the United Arab Emirates, Egypt and Russia will continue to support Hifter militarily and politically — not wanting to lose their investments in him as a leader over the past five years. 
    The offensive has also likely ended the possibility of any political negotiations between the LNA and the Government of National Accord for the time being by hardening Western opposition to Hifter. 

Libya is, once again, teetering on the edge of full-scale civil war. On April 4, Field Marshal Khalifa Hifter and his Libyan National Army (LNA) launched an offensive against Tripoli, likely as a ploy to gain an unassailable position before his rivals with the Government of National Accord (GNA) could respond. But it appears Hifter may have underestimated his enemy, as his attack was quickly met with a fierce and unified resistance. 

Since then, the commander of the GNA’s southern forces has reportedly seized control of Sebha in the Fezzan region — taking advantage of the LNA’s reduced presence there after the fighting in Tripoli broke out. Meanwhile, the Islamic State has already claimed two attacks, on April 9 and April 11, in central Libya. 

The Big Picture

Libya has devolved into another round of violent conflict between the internationally backed Government of National Accord and the Libyan National Army. The fighting upends an ongoing peace process and cease-fire that had largely remained in effect over the past four years — raising the question of whether a negotiated settlement is possible in the country, or if renewed open warfare is inevitable. 

The best case scenario at present for the prevention of further escalation and the resurgence of the Islamic State is a cease-fire between Hifter’s LNA and the pro-GNA militias. Otherwise, the conflict in Tripoli will likely remain a stalemate as the civil war risks spreading to other parts of the country. But getting Hifter to accept a cease-fire — even one backed by his loyal foreign supporters — will be easier said than done, given the doctrine he has committed himself to. 

Prospects of a Prolonged Civil War

From both the perspective of the pro-GNA militias and the LNA, it makes tactical sense to broaden the fight beyond Tripoli. Hifter likely thought he would be able to gain a foothold in the capital through a surprise attack, but the opportunity for such an ambush seems to have passed. As a result, Hifter must now prepare for a longer fight in Tripoli, which means protecting the LNA’s long supply chains to the city by opening up an offensive around Sirte. 

The GNA militias Hifter is facing in Tripoli, however, are better organized, trained and equipped compared with those he fought previously in Fezzan, Darnah and Benghazi. And it appears that Misratan militias — which are some of the most powerful forces currently backing the GNA — have already set their sights on severing the LNA’s supply chains. In addition to sending forces to reinforce GNA efforts in Tripoli, the Misratans have bolstered their presence in central Libya in preparation for a potential LNA attack, and have launched airstrikes against Hifter’s supply chains that run south of Sirte. They might also try to take advantage of Hifter’s overextended forces to seize valuable oil terminals east of Sirte — forcing Hifter to retreat in order to retake them.

The International Response  

Hifter’s foreign backers have been crucial to his rise and continued dominance over the past five years. Russia, Egypt and the United Arab Emirates and France have all invested heavily in Hifter’s future since his offensive in Libya was first announced in 2014 — viewing Hifter as a strong military commander who could help stabilize a country rife with security threats. And while it’s not clear whether these four countries have backed his latest offensive, Hifter’s recent trips to Moscow, Cairo and Abu Dhabi — along with his meeting with Saudi King Salman in March — signify that they will continue to support him as a leader, both militarily and politically. 

There’s a good chance that Egypt and the United Arab Emirates, in particular, could intervene to bolster the LNA’s efforts in Tripoli. In addition to being backed by their regional rivals Turkey and Qatar, Tripolitanian and Misratan forces that have united against Hifter also include members of the jihadist and Islamist-linked Benghazi Defense Brigades — further motivating Abu Dhabi and Cairo to join the fight. France, on the other hand, may not be as willing to step in directly through airstrikes and equipment, but will likely push for a diplomatic settlement that rebuilds Hifter’s political capital and keeps it intact.

Compared with Hifter’s loyal foreign backers, the countries backing the GNA will likely not step in as readily or substantially in Tripoli. While Turkey and Qatar do have ties to some of its allied militias, their overall ties to the GNA remain weak. It’s unlikely that Italy — the strongest pro-GNA voice in Europe — would intervene militarily either. But Rome might instead push for the European Union to respond with sanctions pressure, and could even call for a no-fly-zone or an increased EU presence along the Libyan coast to prevent a naval attack by the LNA. 

The United States, meanwhile, will likely continue its hands-off approach to the Libyan conflict, which has been a politically toxic issue since the 2012 attack in Benghazi that left four Americans dead. The administration of U.S. President Donald Trump has tacitly approved of Hifter’s gaining strength in recent years, but has also called for increased dialogue between the LNA and GNA. Washington has pragmatically worked with both LNA and GNA forces in its effort to counter terrorism in the Middle East. But should its access to Libyan oil get cut off amid the chaos, the United States could threaten to impose sanctions against Hifter, like it did in 2018 to get him to back down on withholding oil exports.

Hifter’s Credo

Regardless of whose side they’re on, the potential for renewed civil war is a significant concern for all outside powers. Hifter’s foreign supporters will try to convince him to enter into a cease-fire with the GNA to prevent another war, but it is unclear whether he will be willing to do so. 

Over the years, Hifter has dabbled in peace initiatives: He flirted with the U.N.-led peace process in 2015, agreed to a cease-fire during the civil war in 2017 and has even met with the GNA Prime Minister Fayez al-Sarraj on several occasions. But Hifter has yet to fully back any peace initiative or offer any significant concession, in large part because they haven’t aligned with his doctrine about how the Libyan conflict should evolve. 

Two tenets define Hifter’s doctrine: First, the only way to solve Libya’s challenges is through a unified military that is answerable to no one and has a strong leader at its helm. And second, Libya’s Muslim Brotherhood, as well as other jihadist and politically motivated Islamist elements, must be defeated. 

As evidenced by the attack on Tripoli, it is increasingly clear that Hifter views himself and the LNA as the legitimate savior from Libya’s woes. The offensive also underlines that he views the Muslim Brotherhood, Islamic State and al Qaeda-linked groups (such as the Benghazi Defense Brigades) — as well as their allies — with equal levels of staunch disdain, which has made it all the more difficult for Hifter to find consensus with moderate Islamist lawmakers in Tripoli.

The Slim Chance of a Cease-fire

His commitment to these tenets has been problematic for outside players trying to unify Libya’s competing governments over the years. In 2016, for example, the United States and Europe tried to get Hifter to form a united front with Misratan forces in the assault on the Islamic State stronghold of Sirte. But Hifter was unwilling to work with the Misratans — who he had previously been fighting in Benghazi — instead sitting out the fight entirely.

The longer the conflict rages, the greater the likelihood that efforts to unify Libya and keep its oil exports open will collapse.

Protecting the influence he’s been able to build among militia leaders in Libya will likely once again keep Hifter reticent to sign any cease-fire with the GNA. Although it is called a national army, the LNA is best described as a collection of militias underneath Hifter, each with its own interests. And many of them are demanding the retaking of Tripoli. Agreeing to a lengthy cease-fire could be viewed as a betrayal of that vision. Perhaps more important, a cease-fire would shatter the idea that Hifter is becoming a strongman fit to lead the nation and a unified army. 

But without a cease-fire, the renewed fighting between some of Libya’s most powerful forces is only going to entrench animosities toward one another — complicating negotiations for a peaceful resolution to Libya’s most recent full-scale civil war. Hifter’s offensive on Tripoli has likely burned any bridges in the ongoing peace process with the United Nations as well, at least for the time being. After all, why would anyone in Tripoli trust him in a political settlement after his ambush? But the longer the conflict rages, the greater the likelihood that the progress made on unifying Libya’s institutions — and keeping its oil exports open — will backslide. 

Apr 17, 2019 | 08:30 GMT

Rematch: Joko, Prabowo and Indonesia’s Democracy Experiment

On April 17, Indonesians will once again flock to the polls for presidential and legislative elections. These will be the fifth democratic elections since the fall of the authoritarian Soeharto regime in 1998. Looking back to the time when the country embarked on its democratization project, much has been achieved, yet some challenges remain.

The upcoming presidential election is a rematch of the one in 2014 in which President Joko Widodo narrowly defeated — by 4 percentage points — Prabowo Subianto, the retired army general who was implicated in human rights abuses in events that led to the fall of Soeharto. Such a narrow margin has enabled the formation of a political divide within the Indonesian electorate and created two camps: supporters of Joko and of Prabowo. The latter has since been able to transform himself into a more confident candidate than he was in 2014.

Against this backdrop, what can we expect in general terms to happen in 2019 and beyond? Looking at three key political trends that have been discernible in the past four years might be useful in finding the answer(s) to this question.

Mass Politics 

Well into the second year of his presidency, “Jokowi” was able to gain the upper hand over the political establishment. By 2016, his approval rating had been consistently high, between 70 and 80 percent. For example, 66.5 percent of the respondents in one Center for Strategic and International Studies (CSIS) survey in August 2016 stated that they were satisfied with his performance. It was an increase of more than 15 percentage points from a CSIS survey the previous year. Joko’s win in 2014 caught many by surprise, given that he was not the leader of any of the political parties that nominated him.

In a presidential system that is combined with a fragmented multiparty system, this in fact spells trouble. Yet, Joko was able to help the Indonesian Democratic Party of Struggle (PDIP) and its coalition tip the balance in the House of Representatives (DPR), from being the minority to becoming the majority. Two opposition parties, Golkar and the National Mandate Party (PAN), switched camps and joined the governing coalition. Joko had tamed the recalcitrant DPR, leaving only the Prabowo-led Gerindra Party and the Islamic Prosperous Justice Party (PKS) in opposition. As a result, Joko rightly had two reasons to be confident about his power throughout the second year of his presidency: a consistently high level of public support, as confirmed by various opinion polls, and the changing command of seats in the DPR that now favored him.

However, this atmosphere of confidence changed in the last two months of 2016. The cause of this change were two massive demonstrations that took place in central Jakarta on Nov. 4 and Dec. 2, known as the 411 and 212 movements, respectively. These two large-scale demonstrations, with hundreds of thousands of people marching, proved to be politically and constitutionally challenging for Indonesia’s fledgling democracy. The two events indicated that two sensitive issues remained to be solved: the relationship between the state and religion, and the question of the place of ethnic/religious minorities within the Indonesian political landscape.

A blasphemy accusation against Basuki “Ahok” Tjahaja Purnama, the ethnic Chinese Christian governor of Jakarta, had triggered the two rallies. They occurred a few months before the 2017 Jakarta gubernatorial election and eventually ruined Purnama’s re-election bid. Purnama was considered a “double minority,” being Christian and Indonesian-Chinese. Shortly after his election defeat, he was convicted and sentenced to two years in prison.

The issue could have been confined to the Jakarta gubernatorial election, or it could have been limited to a political challenge for Joko, given that Purnama was among a small circle that the president trusted. But the rallies turned out to involve too many political players and interests. While on the surface they looked like mass organization-based demonstrations, the involvement of different members of the elite who were willing to play the religion and ethnicity cards for political benefit cannot be discounted. Prabowo, his party, Gerindra, and the PKS have been actively courting the political groups that played a leading role in mobilizing the demonstrators in 2016.

The issue becomes more complicated because of the debates that followed the rallies, pitting Muslims against non-Muslims, the effect of which was felt beyond Jakarta. The masses demanded that Purnama not be allowed to run in the February 2017 Jakarta gubernatorial election. In other words, trial by the masses was effectively at work. It also has brought fresh debate over the relationship between the state and religion, and more specifically whether or not Indonesia’s non-Muslims can be elected leaders. The Indonesian Constitution, as the main reference point, clearly states that the country was founded as a pluralist society where freedom is guaranteed regardless of religion or ethnicity. 

Interestingly, electoral data from national and regional legislative elections in 1999, 2004, 2009 and 2014 show that the share of votes garnered by Indonesia’s Islamic-based parties has been stagnating, if not declining. On the other hand, various opinion surveys in the past five years found an upward trend for conservatism in Indonesia, which probably peaked with the two massive demonstrations in late 2016.

Why do we see these two opposing trends? It is a symptom of failed political institutionalization. Indonesian Islamic parties have failed to capture the energy of this relative conservatism. The politics are yet to be mainstreamed in parliament and are still prone to spilling over into the streets, where mass mobilization, not discourse, is the norm. And not only the Islamic parties — all parties seem unable to earn the trust of the electorate, the result of which is that they are seeking leadership support from non-party individuals.

The Return of Identity Politics 

In retrospect, the 2017 Jakarta gubernatorial election was certainly a political event that will haunt the country for some time. It was the first election of any kind in which, according to the approval ratings up until polling day, voters thought that the incumbent, Purnama, performed well in governing the capital, but said “no thanks” to his re-election bid.

He was accused of something unrelated to his governing skills: blaspheming Islam by inadvertently misinterpreting a verse from the Koran. From then on, Purnama became a punching bag for his political opponents. There are deeper consequences of the 2017 Jakarta gubernatorial election. The election was ugly in the sense that Purnama’s right to be elected was in essence denied by various calls, through banners, sermons and other means including massive demonstrations and through social media, not to vote a non-Muslim Indonesian into high office. The other candidates in the election were not brave enough to confront their supporters who subscribed to those calls and remind them that it was not a fair way to win an election.

In early December 2018, a mass rally took place under the pretext of it being a “big reunion” of those who attended the rally in December 2016. Prabowo and his party coalition denied any direct involvement. Prabowo, however, made it clear that he was certainly trying to capitalize on the “reunion event” for his political benefit by attending. Jakarta Governor Anies Baswedan, who defeated Purnama in 2017, was also present.

Trial by the masses has been effectively at work — bringing fresh debate over the relationship between the state and religion, and more specifically whether or not Indonesia’s non-Muslims can be elected leaders.

The impact of the 2017 Jakarta gubernatorial election cannot be downplayed. CSIS national opinion polls in October 2017 and September 2018 tried to measure the effect of the Jakarta election at the national level, among Indonesian voters who live outside Jakarta. One question that was asked was, “If you were eligible to vote in the runoff of the 2017 Jakarta gubernatorial election, would you have voted for Ahok or Anies?” To this question, the response consistently favored Anies Baswedan, at around 60 percent. The unusually long campaign period leading up to the forthcoming presidential election has witnessed rhetoric that uses religious and political identity against the incumbent, Joko. Throughout the campaign, the opposition camp has tried to portray the president as “less Islamic” than Prabowo, who has been portrayed as representing true Islamic voters. One whisper campaign went as far as baselessly accusing the president of being a member of the banned Indonesian Communist Party, blamed for a failed coup in 1965.

The question that is worth pondering out of these events since 2016 is: what do we make of the so-called moderate Muslims, and is this a conservative Islamic turn in Indonesia? Answering this difficult question requires a thorough rethinking of what we mean by “moderates.”

My hypothesis is that if we use a scale of one to 10 for Islam-based groups, with one being the most conservative, such as groups like the Islamic Defenders Front that were actively involved in orchestrating the 2016 rallies, and 10 being the most liberal, such as the Islamic Liberal Network, by definition the moderates should be in the middle of the scale, at five. However, it seems that many people have wrongly equated the moderates with those groups at number 10, who in the sociological context of Islam in Indonesia are in fact the most liberal and the polar opposite of the most conservative groups at number one on the scale. 

I would assume that during election cycles as competitive as the ones in 2014 and 2019, most Indonesian Muslims are at three, four and five on the scale, meaning that they are more open to the narratives of the conservatives than of the liberals. This, however, does not necessarily mean that they are in agreement with the conservatives. At other times, most Indonesian Muslims will probably be at five, six or seven on the scale. The pendulum keeps swinging. It must be noted that in February 2017, at the same time as the Jakarta gubernatorial election, 100 other regional elections simultaneously took place across Indonesia at the provincial, district and city level. These 100 other elections took place peacefully with no mass mobilizations, and the same Islamic parties that called on their supporters in Jakarta not to vote for a non-Muslim even nominated non-Muslims in elections in some regions.

Beginning in 2017, Indonesia adopted a system of simultaneous regional elections. The largest one was in 2018, in 171 regions involving approximately 160 million eligible voters at the provincial, district and city level. Among the provinces that had gubernatorial elections in 2018, five of them are among the country’s largest provinces and are considered important for the 2019 election, given their geography and number of voters. They are North Sumatra, West Java, Central Java, East Java and South Sulawesi. Of the 575 seats at the DPR, 91 seats will be allocated to West Java, 77 to Central Java, 87 to East Java, 30 to North Sumatra and 24 to South Sulawesi. For political parties and would-be presidential candidates, these provinces are too important not to be won. In addition, more than 60 percent of eligible voters live in these provinces, especially those in Java. If anything, the 2018 regional elections were the window through which we can also think about what is likely to happen in the 2019 elections and beyond. The next section of this essay will ponder this issue. 

The Rise of Urban Leadership 

One of the ambitious democratization projects that Indonesia has decided to conduct since the reform era started in 1998 is the decentralization/regional autonomy program. This program has altered the structure of governance. Power was decentralized to more than 500 districts, cities and provinces across Indonesia. Indonesia went even further in 2004, beginning direct presidential elections, and then in 2005 by introducing direct local elections. Voters in the regions now directly elect their governors, district chiefs and mayors. As a result, the distance between rulers and the ruled was substantially shortened. In the past, local leaders were appointed by the central government in Jakarta; voters had no say whatsoever. 

Slowly but surely, good local leaders who experimented with principles of good governance, transparency, good local budgeting and public participation have emerged in some areas. They understand that health care, education and local infrastructure are the top priorities of their voters. 

President Joko is a member of the first batch of this new generation of directly elected local leaders. He was elected for the first time as the mayor of Solo, in Central Java, in 2005. Voters across Indonesia are learning too. They are starting to compare and contrast their local leaders with successful leaders in other regions. Some “benchmarking effects” have occurred lately. Voters want their local leaders to share similar characteristics with successful leaders in neighboring provinces, districts or cities. Local leaders themselves have started to realize that they are no longer being observed by passive voters, but rather by critical ones who demand that leaders be able to solve urban problems such as flooding, traffic, ineffective local bureaucracies, environmental challenges, quality of education and public health facilities.

Indonesia’s regions — and not Jakarta — are the new reservoir and training ground for national leadership.

The trend of the rise of urban leadership, in my opinion, emerged in the 2014 presidential election that elevated Joko from Jakarta governor to the presidency. 

The results of the 2018 simultaneous regional elections indicated that the trend is continuing, that Indonesian voters want different qualities in their leaders. In four of the five largest provinces (West Java, Central Java, East Java and South Sulawesi) that had gubernatorial elections in 2018, candidates with technocratic backgrounds won. Ridwan Kamil, an accomplished architect and mayor of Bandung, in West Java, won its gubernatorial poll. Ganjar Pranowo, the incumbent in Central Java, was re-elected; Khofifah Indar Parawansa, a former cabinet minister, won in East Java; and Nurdin Abdullah, an academic-cum-engineer and district chief of Bantaeng, South Sulawesi, won the gubernatorial election in that province. They defeated rivals who were backed by well-entrenched political patronage networks, family political dynasties and old-school political parties in their respective provinces.

What is politically interesting is that these new governors have announced they will fully support President Joko in the 2019 presidential election. Other governors, mayors and district chiefs have followed suit. One plausible political explanation for this is that many local leaders understand the trend started by Joko, that Indonesia’s regions — and not Jakarta — are the new reservoir and training ground for national leadership, because there is also a new generation of voters. This new generation cares about the delivery of public services. For this reason, the new generation of leaders wants to maintain this momentum, and perhaps run for the presidency themselves in 2024 or beyond. For this to happen, the presence of an incumbent in 2024 is the last thing they want. The re-election of Joko is therefore their preferred scenario, because of Indonesia’s two-term constitutional limit. If there is no incumbent in 2024 (i.e., Prabowo), the political arena will be wide open for them to run. That would be a truly generational change and a massive political transformation for Indonesia, continuing what was started in 1998.

While Prabowo’s flirtation with Islamic conservatives during the past two years may bring him some electoral benefit, the other undercurrent and significant trend involving the emergence of urban-like voters who could care less about the rhetoric of identity politics and are more interested in public service delivery, and also the rise of urban leadership, cannot be discounted. The latter seems, so far, to work in favor of Joko. That said, the jury is still out. This essay does not intend to predict who will win, but rather lay out in broad strokes the general electoral trends in a democratizing Indonesia. Rest assured that whoever comes out on top, it will be interesting times ahead for Indonesia.

Apr 12, 2019 | 05:15 GMT

In Libya, A New Offensive Could Disrupt the Oil Industry’s Status Quo

    Over the last three years, Khalifa Hifter and his Libyan National Army have gained a stranglehold over Libya’s oil infrastructure.
    However, Hifter does not control the flow of oil revenue, which is managed through the Central Bank of Libya in Tripoli. Hifter will take steps to try to gain that control.
    Much of the central bank’s oil revenue is distributed in the form of civil salaries throughout the country, which sometimes pay militias fighting Hifter.
    The longer the Libyan civil war continues, the more likely it is that Hifter’s forces will consider cutting off oil production to limit financial support for his adversaries.

The decision by Libyan National Army (LNA) Field Marshal Khalifa Hifter to launch an offensive on Tripoli has sent shockwaves through the Libyan political system. The operation started just a week before a scheduled UN-backed National Conference that aimed to facilitate national elections in the divided country, which had previously been under a nearly two-year cease-fire. Already, militias supporting the Tripoli-based Government of National Accord (GNA) have stopped Hifter’s offensive. But the LNA’s continued efforts may evolve into a prolonged conflict and a renewed civil war.

The Big Picture

Currently, control of Libya is divided between two rival governments: the House of Representatives, which is functionally based in Tobruk but also controls Benghazi, and the Government of National Accord, based in Tripoli. Remarkably, despite these divisions, the country’s oil production has recovered over the last two years amid a nationwide cease-fire and political negotiations. The decision by the Libyan National Army (aligned with the House of Representatives) to launch an offensive on Tripoli, however, risks completely changing the conditions that led to that recovery.

For now, the latest fighting has not resulted in any parties preventing oil production or exports in Libya, and that may remain the case if the situation quickly ends in a new cease-fire. But the longer fighting goes on, the more likely it is that the Libyan oil industry will be used as leverage in some way. And even if there is a cease-fire, Hifter’s offensive has short-circuited any attempts at a political resolution in the near term. Either outcome could halt the recovery of Libya’s oil sector, and the pragmatism shown by Libya’s sparring governments could run dry.

The Expansion of Hifter’s Oil Holdings

To say that Libya’s oil sector has been a pawn in the country’s political crisis since the fall of Moammar Gadhafi in 2011 would be an understatement. Libya’s oil production, which sat at 1.1 million barrels per day (bpd) in March, has consistently been taken offline as factions fight for political and financial leverage over one another. And the swings in production have been dramatic: In August 2016, oil production fell to just 270,000 bpd when Ibrahim Jadhran, commander of the Petroleum Facilities Guard that was protecting the export terminals in Libya’s east, withheld exports in hopes of securing more local revenue and better salaries for his clan.

Hifter, whose LNA aligns with the House of Representatives (which currently rejects the authority of the GNA), has certainly taken notes. His power consolidation strategy since the start of 2016 has been to prioritize gaining a stranglehold on the country’s oil industry. In September 2016, his forces seized three oil terminals in the so-called Oil Crescent — Zueitina, Ras Lanuf and Es Sider — and restarted oil exports in hopes of building up his image as a liberator and gaining support among Libyans. He even allowed the oil exports to be managed by the National Oil Corporation (NOC), which is based in Tripoli. Since that operation’s conclusion, Hifter’s forces have controlled all of the oil terminals and oil fields in Eastern Libya, which account for roughly two-thirds of Libya’s total production. The only exceptions to this have been brief periods when former guards launched attacks on the facilities.

In January, Hifter launched an offensive on the Fezzan region ostensibly to bring stability to one of Libya’s most remote areas, which is rife with smuggling, human trafficking and jihadist activity. But the real prize was Libya’s largest oil field, El Sharara. That field had been offline for several months as local guards demanded local investment. But Hifter’s offensive kicked the guards out and he once again allowed the NOC to export oil from the terminals.

By controlling Fezzan in the southwest and Cyrenaica in the east, Hifter now controls virtually all of Libya’s onshore oil production, giving him economic and political leverage.

The Fezzan offensive could arguably be considered the last piece of Hifter’s oil puzzle. By controlling Fezzan in the southwest and Cyrenaica in the east, Hifter now controls virtually all of Libya’s onshore oil production, providing economic and political leverage. The only meaningful oil fields out of his grasp are a couple of small offshore fields in Western Libya in the Mediterranean. And beyond oil fields, only one major refinery and one major oil export terminal — in Zawiya, which is to the west of Tripoli — is outside of his control. (A few small export terminals are also beyond his reach). By and large, despite working with the Tripoli-based NOC, Hifter controls virtually the only economic resource of value in Libya.

Zawiya is a key prize that Hifter likely wants to secure as a part of his Tripoli offensive. The question now is: Will he continue to pragmatically allow the Tripoli-based NOC to access the oil under his control while fighting pro-GNA militias in Tripoli? The head of the NOC, Mustafa Sanalla, has called upon his institution to remain apolitical despite its location. But the NOC’s previous pragmatism in deftly navigating the dispute between Hifter and his Tripoli-based rivals occurred during a cease-fire, not during active hostilities. The breakdown of that cease-fire demands a new way of thinking.

The Battle for the Central Bank and the National Oil Corporation

A key cause of Libya’s broader ongoing geopolitical dilemma is the division between the regions of Cyrenaica in the east, where the House of Representatives is located, and Tripolitania in the west, where the GNA is based. This divide has become more pronounced over the last century: Before then, neither region belonged in any meaningful way to the same political entity. During his rule from 1969-2011, Gadhafi tried to paper over the regions’ differences by centralizing control of Libya’s oil sector. His policies allowed a handful of key institutions to control oil revenue, none of which became more important than the Central Bank of Libya (CBL) and the NOC. Functionally, the NOC oversaw oil production and oil sales under Gadhafi, but revenue flowed through the central bank, which worked with Libya’s finance ministry to help pay salaries for public workers. That system remains in place today.

It should be no surprise that behind the scenes, the Eastern and Western Libyan rivals have fought for control over both the CBL and the NOC. Both are technically based in Tripoli, making it difficult for the House of Representatives and Hifter to exert any control over the institutions — even when their government was internationally recognized between August 2014 and March 2016. In fact, the Tobruk-based House of Representatives has set up parallel versions of both institutions: a Benghazi-based National Oil Company and a Benghazi-based Central Bank. Hifter’s allies have tried multiple times to gain international recognition for these institutions, but they have failed each time.

Thus far, control of the Central Bank of Libya has eluded Hifter and his allies. During the cease-fire of the past two years, Hifter has tried to leverage control of oil terminals to gain more influence over the CBL. In June 2018, after Hifter seized the oil terminals back from Jadhran’s guards, he declared he would only reopen the terminals if the House of Representatives’ appointed central bank governor replaced the CBL’s longtime governor Sadiq al-Kabir. He also demanded an audit to identify where the bank’s oil revenue was spent. Hifter has accused the central bank of funding the Islamist militias that attack him, and while this may not have been entirely accurate, the bank has indeed financed groups on both sides of the war in the past, including Islamist militias; al-Kabir himself has been associated with Islamists.

A Civil War Changes the Cease-Fire Circumstances

Therein lies Hifter’s dilemma if the new fighting in Libya does break out into a full-blown civil war. The GNA administers the central bank, which controls oil revenue. Fighters in several of the main militias protecting Tripoli, such as the Special Deterrence Forces, as well as many of the Misratan brigades that were involved in the offensive on Sirte, receive salaries from the CBL as public servants.

In short, this Gadhafi-era system means that when Hifter’s forces allow oil to be exported from their areas of control, they are helping fund and finance the militias fighting them — as well as helping them secure crucial fuel for warfare efforts. During the cease-fire, this consequence was worth accepting so that Hifter could ensure continued civil payments throughout the country and build up popular support. But during an active conflict, the sacrifices to the LNA may be too great.

The Gadhafi-era system of exporting oil means that when Hifter’s forces allow oil to be exported from their areas of control, they help fund, finance and fuel the very militias fighting against them.

One factor may drive Hifter to continue allowing oil exports, however, which is that some of the civil payments go to his own soldiers and civil servants in Cyrenaica. Like the NOC, Libya’s central bank has tried to be pragmatic and apolitical when possible. This means maintaining government salaries in the east, including arrangements for some LNA members. If Hifter cuts oil exports, he would halt those payments, and though outside backers could augment the LNA fighters’ salaries, government workers and civil servants in Cyrenaica would experience major salary reductions.

An Alternative Export System?

Realistically, if Hifter were to cut oil exports through the Tripoli-based NOC, he would likely try to continue exporting through a different vehicle: the House of Representatives-supported, Benghazi-based National Oil Company, which has struggled to get off the ground. The Benghazi-based National Oil Company would likely send any oil revenue it earns through the rival Central Bank that Tobruk has also set up, giving Hifter control of not only the oil flowing through Libya but also the key part he is currently missing: the country’s oil revenue.

But it is not clear that this plan will work. There is an outstanding United Nations Security Council (UNSC) resolution barring oil sales involving anything but the Tripoli-based institutions; many different groups since 2011 have tried to export eastern Libyan oil independent of Tripoli, but they have always failed. It’s entirely possible that in the heat of a civil war, Egypt and the United Arab Emirates would facilitate these oil exports in order to maintain Hifter’s strength. The United States, however, is still staunchly aligned with the UNSC and in 2018 threatened to sanction Hifter if he did not resume oil flows through the official Tripoli-based institutions. Under the Obama administration, the U.S. Navy even physically intervened to prevent independent oil exports from Libya.

Nevertheless, continued oil flow out of Libya is the United States’ primary interest, particularly as it seeks to sanction Iranian and Venezuelan oil exports. If Hifter cuts off oil through the Tripoli-based NOC — and the only way oil exports from Libya can remain at a relatively high level is if Hifter uses the Benghazi-based National Oil Company — the United States may cave. In any case, the longer the active fighting in Libya’s civil war continues, the more likely it is that Hifter will take advantage of the leverage over the oil sector he has built up, putting Libyan oil exports in a fragile position.

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Apr 11, 2019 | 19:06 GMT

Sudan: Who Wins After the Military Removes the President From Office

Protests have rocked Sudan since December, and the Sudanese military has now apparently decided the country’s long-time leader Omar al Bashir is too much of a liability to itself and the country to allow him to remain in office. His removal presents Saudi Arabia and the United Arab Emirates with an opportunity to draw Khartoum closer to their orbit, and to lessen the influence of Iran, Turkey and Qatar in Sudan.

What Happened

For the second time in as many weeks, an Arab leader has been ousted following widespread demonstrations. After nearly four months of protests, Sudanese Defense Minister Awad Mohammed Ibn Ouf announced on April 11 that President Omar al Bashir had been removed from power and placed under arrest. Ibn Ouf announced that the Sudanese Armed Forces, National Intelligence and Security Service and the Rapid Support Forces would form a two-year transitional military government. Ibn Ouf also announced that the 2005 constitution would be suspended, a three-month state of emergency would be introduced and most of the country’s political institutions — its governors, Cabinet and National Assembly — would be dissolved.

The Reaction at Home and Abroad

Ibn Ouf and the military leadership now face the challenge of satisfying the protesters, some of whom — like the Sudanese Professional Association, a primary organizer of the protests — have already rejected the military’s palace coup as insufficient. In addition to al Bashir’s removal, they have called for political and economic reforms. Political reforms are likely out of the question, but Ibn Ouf implied that the economy would be addressed in a televised statement, in which he complained that the previous government had concentrated too much on security-related issues in lieu of solving the country’s economic crisis.

The lack of political reforms and improvements to the economy make it likely that the protests will continue.

But actually solving the economic crisis will be easier said than done. Many of Sudan’s economic problems are structural and will require long-term reforms and investment to remedy. The lack of political reforms and improvements to the economy make it likely the protests will continue.

Farther afield, whether the West will accept the coup and the two-year transition remains unclear. For its part, the United Kingdom has rejected the coup, and British Foreign Secretary Jeremy Hunt said that “a military council ruling for two years is not the answer.” The U.S. response will be complicated by the involvement of Ibn Ouf, whom the U.S. Treasury Department has leveled sanctions against because of his role in the Darfur conflict, when numerous human rights violations occurred.

An Islamist Purge, and an Opportunity for the Gulf

The military coup has also been accompanied by a purge of the country’s Islamists, a key political component of the ruling National Congress Party. Sudan Tribune has reported that Ibn Ouf and the military led the coup against al Bashir to head off another coup that disgruntled Islamist officers were preparing to mount. Soldiers have now raided the headquarters of the Islamic Movement — the country’s leading Islamist group, and which is closely associated with the ruling party — and a number of high-profile Muslim Brotherhood and Islamist figures including former Vice President Ali Osman Taha have reportedly been detained. Should this purge continue, the post-Sudanese Islamic revolutionary era would definitively begin.

Egyptian statements thus far have been supportive of the situation in Sudan, though no official remarks have come from the Gulf. The coup and the crackdown against the Islamists represent a potentially ideal outcome and a significant opportunity for Egypt, Saudi Arabia and the United Arab Emirates. While al Bashir already had been distancing his country from Iran, he had also been courting support from Saudi and Emirati rivals Turkey and Qatar over the past few years.

Sudan’s cozying up to Turkey and Qatar had prompted the Saudis and the Emiratis to withhold investment packages during Sudan’s economic crisis. Now, Saudi Arabia and/or the United Arab Emirates might have directly facilitated and/or encouraged the military’s coup and subsequent Islamist purge via aid now or promises of economic aid down the road. The Saudi and UAE reaction to the coup will indicate whether Khartoum is in fact moving more into Abu Dhabi and Riyadh’s orbit.

Apr 10, 2019 | 22:07 GMT

U.S., Egypt: Washington Threatens Sanctions Over Russian Arms Deal

The United States often deploys sanctions to assert its dominance on the world stage, which includes ensuring its rivals — such as Russia and China — don’t undercut Washington’s influence by fostering ties with its allies. Egypt is the latest country to find itself caught in the crosshairs of U.S. sanctions pressure for attempting to diversify its arm supplies to Russia, which could set a precedent for other U.S. allies engaging in similar strategies.

What Happened

During a Senate budget hearing on April 9, U.S. Secretary of State Mike Pompeo announced that the United States would penalize Egypt under the Countering America’s Adversaries Through Sanctions Act (CAATSA) should Egypt buy Russian Su-35 fighter jets. A bipartisan group of U.S. senators sent a letter to Pompeo before the hearing, urging him to pressure Egypt to avoid the arms deal while Egyptian President Abdel Fattah al-Sisi was in Washington. Pompeo responded to the senators’ concerns by saying he believed Egypt understood the warning, and he said he was hopeful it would not go through with any such deal.

Why It Matters

The United States has so far been hesitant to use CAATSA-related sanctions against friendly countries for fear of irking its allies. As a result, there are signs countries have ignored the 2017 law, as evidenced by Turkey’s current arms deal with Russia. But now, Washington is using CAATSA to threaten one of its strongest allies in the Middle East. In doing so, the United States is likely looking to boost CAATSA’s credibility — using Egypt as an example to warn others that just because it’s provided waivers in the past, doesn’t mean it will do so in the future.

The United States’ threat of imposing CAATSA-related sanctions against Egypt could be the start of a more robust U.S. push to combat Russia’s global influence.

This is also the first time the United States has attempted to block an arms deal between Russia and Egypt in recent years, and could indicate the start of a more robust U.S. push to stem Moscow’s global influence. In which case, Washington could begin coming down on other allies that are seeking to purchase military weapons from Russia, such as Saudi Arabia, India, Serbia and Algeria. The move also signals that the United States believes its relationship with Egypt is strong enough to withstand CAATSA-related sanctions, underlining the closeness displayed during al-Sisi’s recent visit with U.S. President Donald Trump.

Background

CAATSA was initially passed into law to impose sanctions on Iran, North Korea and Russia in an effort to combat these countries’ global influences. The first CAATSA-related sanctions were applied to punish China for importing Russian arms in September 2018. The act is currently being used against Turkey as it attempts to finish an arms deal with Russia to buy the S-400 missile system. Over the past two years, other U.S. allies have repeatedly received waivers protect them from coming under CAATSA-related sanctions.

In their letter, the U.S. senators also urged Pompeo to press al-Sisi on Egypt’s human rights record and the detention of American citizens. Pompeo deflected these concerns at the Senate hearing, saying he did not want to characterize the Egyptian leader as a “tyrant.”

Apr 9, 2019 | 13:54 GMT

By Targeting Iran’s IRGC, Trump Goes Where No Other Administration Has

    The designation of the IRGC as a foreign terrorist organization will complicate any future talks between Iran and the United States.
    It also sets an important international precedent that could lead to the spread of the practice of labeling foreign military branches as terrorist groups.
    The impact on the IRGC itself, however, might be limited given the extent to which existing U.S. sanctions already covered Iran and the IRGC.
    Iran’s response is likely to remain proportional and not escalate into military reprisals.

Following two years of debate, the administration of U.S. President Donald Trump opted on April 8 to designate Iran’s Islamic Revolutionary Guard Corps (IRGC) a “Foreign Terrorist Organization.” This is the first time that the U.S. State Department has listed a branch of a foreign military as a terrorist organization, setting an important international precedent. Iran responded in kind the same day, designating the United States a supporter of terrorism and U.S. Central Command (CENTCOM) a terrorist group.

The Big Picture

The U.S. strategy of pushing Iran into a corner continues, with Washington now labeling Iran’s Islamic Revolutionary Guard Corps a foreign terrorist organization ahead of a looming decision on whether to expand sanctions on Iranian oil exports. This is the first time that the United States has issued such a designation for a foreign military unit, creating an important international precedent and escalating U.S.-Iran tensions yet again. 

Designating the IRGC as a foreign terrorist organization is a provocative new component of an ongoing U.S.-led process of widening and tightening the sanctions net on Iran. Washington hopes eventually to force Tehran to negotiate a comprehensive agreement curtailing its support for Iranian allies in the region and its ballistic missile program.

The new sanctions step will, however, complicate any future negotiations between the United States and Iran, even after Trump has left office. Iran will almost certainly demand a reduction in sanctions pressure on the IRGC in talks over a comprehensive deal with the United States. But the United States will be more willing to provide relief on other types of sanctions, such as those related to Iran’s nuclear or ballistic missile activities, given the political difficulty that any U.S. president will encounter in attempting to delist the IRGC in the absence of a substantial change in Iranian regional strategy and policies toward Israel, the United States and the West.

An Important International Precedent

The United States maintains four different kinds of “terrorist lists” it can use to target different individuals, groups and countries. It designated Iran a state sponsor of terrorism in 1984. In 2007, it labeled the Quds Force of the IRGC, which handles overseas IRGC operations, a specially designated global terrorist (SDGT) under Executive Order 13224. And in 2017, it designated the IRGC itself an SDGT under the Countering America’s Adversaries Through Sanctions Act. The U.S. foreign terrorist organization designation — the only one of the four terrorism lists the United States reserves for organizations — under the Immigration and Nationality Act previously had only been used to target non-state actors including al Qaeda, Hezbollah and the Revolutionary Armed Forces of Colombia.

The new designation may not have much additional impact on the IRGC’s ability to finance itself and move money around to support its allies.

The April 8 designation of the IRGC is thus the first time the United States has labeled an entire unit of a foreign military a foreign terrorist organization. The United States had previously avoided taking such action because it did not want to set a precedent that could be used against it. By keeping the foreign terrorist organization designation squarely focused on non-state actors, it could also avoid the thorny debate of what state actions could provoke such a direct designation. Now, the United States has broken a taboo in international relations, and other countries could soon pass similar designations about their adversaries.
Limited Effects on the IRGC

The IRGC and its subunits such as the Basij, Quds Force and Aerospace Force are already subject to numerous overlapping U.S. sanctions, so the new designation may not have much additional impact on the group’s ability to finance itself and move money around to support its allies. Moreover, the IRGC and Iran itself have already proved creative at skirting U.S. sanctions.

In some ways, the foreign terrorist organization designation is not even as strong as the other three types of U.S. designations. For example, the SDGT designation provides broader powers for sanctioning foreign individuals and entities that support groups on the SDGT list. Nevertheless, the new designation will pose some new challenges for the IRGC. Just being a member of the IRGC will now incur more pervasive sanctions, and its officials will face broader travel bans. Whether current or former IRGC officials will now reduce their travel to Western countries for fear of U.S. extradition, however, remains to be seen.

Either way, the new sanctions do not fundamentally alter the reality of existing sanctions. As before, the nature of the sanctions against the IRGC means foreign companies must conduct thorough checks when working with Iranian companies to ensure the latter have no ties with the IRGC lest the foreign companies incur U.S. financial penalties.

Iran’s Likely Pragmatic Response

Iran’s immediate response to the new U.S. designation — counterdesignations of its own — has been proportionate. The difference is that Iran’s counterdesignations of CENTCOM and the United States are largely symbolic. At least rhetorically, however, some Iranian officials — including IRGC commander Mohammad Ali Jafari — have hinted at stronger actions against the United States, such as attacks on U.S. military forces in the region by the IRGC, or by Iranian-trained militias in places like Iraq.

There are very good reasons, however, for Iran not to act on such threats — namely, the significant U.S. response such attacks would incite, including on military targets in Iran. The tit-for-tat legal designations simply do not change the dynamic that keeps simmering Iran-U.S. tensions from bubbling over into open conflict. Instead, Iran is likely to continue with a more subtle response, such as cyberattacks against U.S. companies and allies in the region.

Apr 5, 2019 | 18:41 GMT

What Iraq Has to Gain, and Lose, by Resurrecting a Border Deal With Iran

    Iraq’s recent agreement to share the Shatt al-Arab waterway with Iran stands as a testament to the new level of political closeness between the historically hostile neighbors. 
    But in addition to the diplomatic symbolism, Iraq knows it needs Iran’s help to develop and clean the river and, in turn, help mitigate the blowback from its water crisis and ongoing unrest in Basra.
    However, by deepening ties with its controversial neighbor, Baghdad risks further complicating its delicate relations with Iran’s regional and Western enemies.

In early March, Iranian President Hassan Rouhani visited Iraq for his first-ever official state visit. The trip seemed to underline a newfangled closeness between the two countries, with Iraqi Prime Minister Adel Abdul-Mahdi’s announcement that he and Rouhani had signed several agreements to cooperate on issues such as border security and economic development. But the two sides’ decision to return to a 44-year-old border demarcation deal garnered the most attention in Iraq because of its immense historical and cultural significance.

The Big Picture

After a century punctuated by periods of hostility and bloody conflict, relations between Iran and Iraq seem to be on the mend — with Tehran seeking to deepen its political and economic ties amid increasing sanctions pressure from the West, while Baghdad looks to Iran to help quell its continued agricultural woes and security threats. The countries’ recent decision to revive a 1975 border agreement has symbolically cemented this new chapter of increased cooperation and friendliness between the two neighbors.

Iran and Iraq have decided to change their maritime and land borders based on the original terms laid out in their Algiers accord signed in 1975. For Iraq, this means giving up land and maritime waters that it has controlled for decades — the most important of which being the Shatt al-Arab waterway, which has long served as the dividing line between the Persian and Arab worlds.

Understandably, the signing has rubbed some Iraqis the wrong way — fearing that they got the “short end of the stick” compared with their Iranian neighbors. But despite its citizens’ concerns, Iraq actually stands to benefit more from returning to the agreement than it stands to lose, at least in the short term — though not without the risk of ruffling the feathers of Iran’s enemies.

A Symbol of a Bloody History

The revival of the 1975 Algiers Agreement acknowledges that Iraq and Iran are on the same page regarding one of the most historically contentious issues between them: the delimitations of the Shatt al-Arab waterway. Arguing over access to the waterway, which is where the Tigris and Euphrates rivers meet, predates the formation of modern-day Iraq and Iran — with the Ottoman Empire exporting dates from palm farms that stretched for miles along the river in the 19th century.

But disputes over Shatt al-Arab became particularly contentious after oil was discovered in Iraq in the 1920s, with Baghdad wanting to preserve its freedom of navigation on the river in order to build up its oil sector. In 1975, the countries signed the Algiers accord to demarcate their various maritime and land border disagreements. Iran offered to withdraw military assistance to the Iraqi Kurds, who had been engaged in a violent dispute with the federal government in Baghdad. And in exchange, Iran would get half of the Shatt al-Arab waterway — granting it access to key ports as Tehran developed its own oil export industry.

For several years, the agreement alleviated hostilities between Iraq and Iran, until Iran’s 1979 revolution ushered in a new government and shifted power dynamics again. This led to the suspension of the Algiers accord shortly thereafter (where it had remained until this year’s revival). As a result, the Shatt al-Arab waterway became the site of a violent war between Baghdad and Tehran throughout the 1980s, with Iran seeking to gain full control of the waterway. Today, the river is now a graveyard of sunken Iraqi and Iranian ships and vessels and serves as a painful reminder of the bloody history the two countries share.

Understanding Iraq’s Rationale

When the Algiers Agreement was signed in 1975 to equally share the waterway, it provided mutual benefits to both countries. But today, the Shatt al-Arab seemingly holds more strategic importance for Iraq than it does for Iran. While there are a couple of oil ports along the waterway, Iran’s most important terminals are further out along the Persian Gulf. But for Iraq, the Shatt al-Arab remains one of its only waterways to the Persian Gulf, and provides fresh water to farms and factories up and down the river — begging the question as to why Baghdad would willingly give up any access to such a vital river by reaffirming the Algiers Agreement.

But upon a closer look, officially ceding some right of passage to the waterway doesn’t actually endanger any of Iraq’s baseline economic interests. For one, sharing more of the river with Iran won’t limit any of Iraq’s activity in its most important sector, oil production, considering the vast majority of Iraqi oil is shipped via pipelines to terminals just off Faw in the Persian Gulf. It also won’t harm Iraq’s ability to import other shipments, since most food and other goods are shipped to the Iraqi port city of Umm Qasr, located on its border with Kuwait. In fact, sharing more of the Shatt al-Arab could ultimately yield more advantageous trade deals for Iraq by helping generate goodwill with Iran.

But perhaps more importantly, Iraq also knows it needs to pursue development projects along the Shatt al-Arab to help contain the separatist-fueled unrest in Basra, which is threatening Baghdad’s grip on the oil wealth it so heavily depends on. And for that to happen, Iraq knows it needs to be on good terms with Iran — and specifically, Iranian businesses.

A chart showing Iraq’s trade with Iran.

Iraq’s salinated water is also threatening the region’s rich vegetable and fruit farms. And the country’s continued drought has made water management even tougher for local and federal Iraqi authorities. To help make up for its developing agricultural sector, Iraq has thus become even more been dependent on crucial food imports from Iran — especially in areas near Iraq’s southern border, such as Basra. And although Iraq has taken steps to become more food-independent, Baghdad still has a long way to go before it could even begin to think about decreasing its dependence on Iranian agricultural imports.

Creating a clean slate for cooperation in the Shatt al-Arab region also makes it easier for Iranian companies to help with cleaning out the heavily silted and polluted waterway, which could improve the salty water currently harming Iraq’s agricultural production. And indeed, the first concrete step Iran and Iraq have taken since recommitting themselves to the Algiers Agreement has been setting up a committee to clean some of the waterway by dredging portions of the canal and eventually developing some of it.

New Friends, New Problems 

Regardless of the shorter-term economic potential of the waterway, however, reaffirming the 1975 Algiers Agreement in 2019, in and of itself, stands as a testament to the current level of closeness between Iran and Iraq — which could pose long-term geopolitical implications for Baghdad.

Reaffirming the Algiers Agreement highlights Iraq’s willingness to concede to Iran for its own economic benefit — and likewise, the leverage Iran still holds over Iraq.

The United States, for one, will likely not take kindly to Iraq cozying up with its chief rival in the region. This could place Baghdad in an even stickier situation, as it attempts to balance increasing U.S. sanctions pressure against Iran while maintaining access to one of its major providers of food and manufactured goods.

In the long run, the renewal of the 1975 agreement could also create problems for Iraq’s relationship with its other Persian Gulf neighbor, Kuwait. Kuwait and Iraq have long argued over the joint development of port facilities in Faw, as well as the undetermined maritime border between the two fairweather friends. And Iraq’s willingness to agree with Iran over its maritime border could stir anxiety in Kuwait and other Iran-opposed states in the Arab Gulf fueled by Baghdad’s apparent new level of comfort with Iran.

On the grander scale, the signing of the agreement thus highlights Iraq’s willingness to concede politically to Iran on a contentious issue for its own economic benefit — and likewise, Iran’s ability to pressure Iraq because of Baghdad’s dependency on Tehran for economic and security support. As a result, Iraq will find that its budding relationship with its controversial neighbor may come at the cost of complicating Baghdad’s already tricky political position with its regional neighbors and Western allies.

Apr 4, 2019 | 21:07 GMT

Iraq: Basra Pushes for Autonomy

Although Iraq is a fairly diverse country with three broad groupings – Shiites, Sunnis and Kurds – the country’s Shiite contingent is easily the largest. But Iraqi Shiites are deeply internally divided. Currently, many in the Shiite-dominated province of Basra are pushing for increased autonomy and calling for more local investment and development due to the province’s energy wealth. But the Iraqi government — also predominantly Shiite — is unlikely to support this goal, since its economic health relies on Basra’s resources.

The Iraqi province of Basra produces roughly the same amount of oil as the entirety of the neighboring country of Kuwait. But it has little control over its own revenue, since the Iraqi federal government, which pulls the country’s purse strings, is located in Baghdad. This economic reality has on multiple occasions prompted Basrawis to push for increased autonomy and greater control over their region’s oil wealth. And on April 1 the Basra Provincial Council launched another significant attempt to do so by voting, unanimously, to become an autonomous region of Iraq under the country’s constitution. The move could trigger a clause in the Iraqi Constitution that would allow the province to become a region through a referendum. If the council’s efforts are successful, Iraq’s economic capital would obtain a status similar to the Kurdistan Region of Iraq. But Baghdad won’t accept Basra’s push easily.

Basra: Iraq’s Restive Economic Capital

Basra is home to about two-thirds of Iraq’s oil production and an even higher amount of the country’s proven oil reserves. But it has been in near-constant disputes with Baghdad over oil revenue and local investment since former leader Saddam Hussein was toppled more than 15 years ago. Some Basra council members in the past have claimed that Baghdad owes the province some $45 billion in unpaid oil and gas revenues from previous agreements — although that figure is certainly inflated.

The Difference between a Region and a Province Matters

If Basra became its own region, its constitutionally enshrined powers would increase dramatically. Although Baghdad would technically retain the rights to all oil fields that are currently producing oil, Basra could — like the Kurdistan Regional Government — claim that it controls the rights to any oil and gas fields not currently producing, and it could then auction them off. If an autonomous Basra pursues this option, it would open up the door for increased local revenue to the local government as well as opportunities for Basrawi companies to gain local contracts in the oil and gas sector. Basra would also gain more control over its domestic economy and broader economic management decisions.

If Abdul-Mahdi’s government eventually moves to prevent the Basra Provincial Council’s referendum push, Basra could be in for another restive period marked by increasing protests and violence.

What to Watch For

Iraqi politicians in Baghdad will likely try to prevent a referendum. And there will almost certainly be calls from figures like Shiite leader Muqtada al-Sadr and Grand Ayatollah Ali al-Sistani against such an action. Iran, which would not want to see the Shiite camp in Iraq divided further, would also try to stop pro-Iranian parties and Iranian-back militias in Iraq from supporting Basra’s push for autonomy.

Basra’s push for an independence referendum will put Iraqi Prime Minister Adel Abdul-Mahdi in a difficult position. Abdul-Mahdi is trying to manage a chaotic government and has struggled to appoint critical interior and defense minister Cabinet positions. To contain instability, he will likely try to negotiate with Basra. The question is: To what extent can he be successful? His predecessor, Haider al-Abadi, struggled to find money and revenue to appease protesters in 2018, and Baghdad’s financial position has not improved since then. If Abdul-Mahdi’s government eventually moves to prevent the Basra Provincial Council’s referendum push, Basra could be in for another restive period marked by increasing protests and violence.

Apr 3, 2019 | 21:34 GMT

Iran: The West Turns Up the Sanctions Heat

With its current strategy failing to produce results, the United States is upping its sanctions pressure on Iran. Washington has spent months trying to persuade its European allies to take a more aggressive stance against its chief rival in the Middle East. And while the United States has so far failed to get France, Germany and the United Kingdom to follow its lead and leave the Joint Comprehensive Plan of Action, the European powers have begun to subtly increase pressure on Iran’s ballistic missile program as evidenced by their recent letter to the United Nations.

What Happened

A top official with the U.S. State Department warned April 2 that the White House was not planning to issue new waivers — which allow certain countries to purchase Iranian oil without coming under U.S. sanctions — once the current round expires May 5. According to an April 1 Reuters report, an official within U.S. President Donald Trump’s administration also allegedly said that the United States was also considering imposing new secondary sanctions in May that would target additional areas of the Iranian economy, without providing further detail as to which.

Meanwhile, the United Nations released a letter April 3 that the United Kingdom, France and Germany had written to the U.N. secretary-general criticizing Iran’s recent attempt to launch a satellite into orbit via its Simorgh launch vehicle. In the letter, the European powers alleged that because the Simorgh vehicle shared some technologies with ballistic missiles, the launch violated U.N. Security Council Resolution 2231, which bans Iran from engaging in “any activity related to ballistic missiles designed to be capable of delivering nuclear weapons, including launches using such ballistic missile technology.” 

Why It Matters

The strong words shared by the United Kingdom, France and Germany in the U.N. letter could prompt the European Union to consider additional sanctions related to Iran’s ballistic missile program. Unlike the United States, however, the primary EU security concern with Iran remains nuclear proliferation in the Middle East. Brussels will thus continue to reserve its most powerful sanctions to deter activity related to Iran’s nuclear program. This means that any new EU sanctions related to Tehran’s ballistic missile program would be limited to asset and travel freezes — and so not include the kind of broader sanctions that would cut off Europe’s economic ties with Iran as the United States has pushed for. 

U.S. threats to impose new sanctions against other business sectors in Iran have the potential to be a much bigger blow to Tehran’s economy.

U.S. threats to impose new sanctions against other business sectors in Iran, however, have the potential to be a much bigger blow to Tehran’s economy. Secondary sanctions imposed by the United States — which are sanctions that target non-U.S. companies to try to prevent them from trading with Iran — currently impact Tehran’s energy sector, among several other sectors. The Trump administration’s desire to expand the scope of secondary sanctions could include a broader set of industrial sectors, such as the aviation, automotive and electronics sectors. Such sanctions could hurt Iran’s domestic industrial base, which would be felt most acutely by the country’s politically powerful middle- and upper-middle classes. 

The U.S. desire to reduce Iran’s oil exports to zero by letting its waivers expire in May, on the other hand, will be far more difficult to accomplish. Of the eight countries with U.S. waivers, only three have so far completely cut off their imports of Iranian oil. And it’s unlikely that the others — namely, China, India and Turkey — will be able to significantly reduce their consumption any time soon. The price of oil has also risen in recent weeks, and any moves to completely cut Iran’s oil exports from the market risk increasing prices even more. As a result, despite the recent statement from the U.S. State Department official, Washington will likely end up keeping some level of waivers to avoid spooking the market, at least in the short term.  

Apr 3, 2019 | 10:00 GMT

Ethiopia Comes to a Crossroads on Economic Reform

    Ethiopia is unlikely to totally abandon its developmental state economic model, which gives the state a leading role in fostering development but has also burdened local banks, led to increases in foreign debt levels and suppressed the private sector.
    While Prime Minister Abiy Ahmed is likely to make some progress toward liberalizing the economy, he and his allies will encounter resistance from a bureaucracy that favors growth fueled by the state rather than the private sector.
    If Addis Ababa fails in its gamble to switch to an economy driven by more private sector growth and consumption, it might not be able to capitalize on a wave of investment interest in East Africa to make the leap to the next level of economic development.

For the past decade, Ethiopia’s economy has expanded rapidly, largely thanks to public spending on massive investment projects like the multibillion-dollar Grand Ethiopian Renaissance Dam, roads, industrial parks and other projects. It has all come as part of Addis Ababa’s “democratic developmental state” model, the brainchild of late Prime Minister Meles Zenawi, who championed a state-led path to growth after witnessing the policies of Asian states like South Korea, China and Singapore. Using this model, Meles tried to prevent foreign companies from stripping Ethiopia of the resources Addis Ababa needed to construct a solid base of infrastructure to develop and grow the economy.

The Big Picture

After a year in office, Ethiopia’s ambitious Prime Minister Abiy Ahmed has made considerable progress on multiple fronts by striking a peace deal with Eritrea, ousting entrenched elites, reforming the security sector and opening up the political system. But after promising to open up several key economic sectors, foreign investors are eager to see more progress. Nevertheless, Abiy and his allies are taking a careful approach to easing state control over key sectors as part of a larger bid to move the economy away from state-controlled growth to one of private sector-led growth.

But while many in Ethiopia have hailed the developmental state model as an overall economic success, it has not come without its costs. For starters, government spending has kept inflation rates high. At the same time, authorities have effectively turned domestic lenders into piggy banks by obliging them to contribute portions of their deposits to the Development Bank of Ethiopia, often through mandatory bonds. Efficiency in the vital telecommunications and logistics sectors, for example, is poor, as the industries are dominated by state-owned monopolies. Complicating matters, a notoriously complex and risk-averse bureaucracy coupled with a lack of access to technology has depressed productivity and discouraged entrepreneurship. As a result, the state has crowded out Ethiopia’s private sector. But if the country is going to truly benefit from the rush of investment to East Africa and promote development, Abiy will have no choice but to pry open an economy that remains firmly in the hands of the state.

Finding a Foundation for Growth

To fund its large infrastructure projects, Ethiopia has had to assume a sizable amount of foreign debt. Addis Ababa’s biggest creditor has been Beijing, which has loaned between $13 billion and $17 billion in recent years to build big-ticket projects like the recently completed Addis Ababa-Djibouti railway and install the electrical distribution grids for the Grand Ethiopian Renaissance Dam. Ethiopia’s government argues that the rail project was crucial to its infrastructure goals, but reports indicate that Addis Ababa has missed over $1 billion in debt repayments to Chinese lenders in recent months, underscoring Abiy’s difficult task as his country seeks to balance its debt obligations and its desire to build its infrastructure base. In seeking to construct an economic foundation and pay off investments, Ethiopia’s leaders ultimately want to foster more organic economic growth as well as a domestic middle class. As it stands, Abiy appears to have put the brakes on new large-scale projects until Ethiopia completes those it is currently constructing.

At the moment, Ethiopia’s fast-growing population — particularly its ever-growing cohort of recent university graduates — is expressing increased frustration at the lack of job opportunities or even the freedom to create opportunities for themselves. In fact, the overwhelming focus of growth among Abiy’s predecessors resulted in the forceful expansion of Addis Ababa (to the detriment of neighboring regions) in 2016, sparking destabilizing protests that ultimately forced out the government at the end of 2017.

Flirting With the Free Market

Shortly after assuming office in April 2018, Abiy announced that the country planned to privatize — either fully or partially — large state-owned enterprises, including giants such as Ethio telecom, a telecommunications monopoly that boasts more than 60 million subscribers and functions as a local cash cow. The list also included the Ethiopian Shipping & Logistics Services Enterprise and Ethiopian Airlines, the last of which is a key generator of foreign currency for the government. Naturally, Abiy’s announcements sparked considerable international interest from foreign investors.

But while splashy privatization signals have captured the attention of Western and other investors, other quiet changes are occurring that may have an even bigger impact on Ethiopia’s economy, such as Abiy’s appointment of Yinager Dessie as the new governor of the National Bank of Ethiopia. Yinager’s predecessor took up his post over two decades ago, and had long implemented policies that adhered to the ruling party’s Marxist ideology, leaving private banks partially incapacitated due to over-regulation. Indeed, the new governor has already instituted some sweeping changes, including a move to cool down inflation. Most crucially, perhaps, he has eliminated the requirement that borrowers possess fixed asset collateral to acquire private bank loans. This change will allow entrepreneurs to obtain loans based on their ability to grow or repay (as determined by the banks), removing a hefty impediment to private sector growth. Yinager further granted members of the large Ethiopian diaspora (estimated at over 3 million) the right to hold stakes in the financial sector and eliminated the limit on the amount of money they can deposit in their Ethiopian-based foreign exchange accounts.

There is also the case of the long-awaited stock market. The country remains perhaps the largest in the world yet to establish a bourse, because its leaders were afraid that its introduction would complicate their efforts to maintain tight regulations. This reticence, however, appears likely to end in line with the new regulatory atmosphere. Ultimately, a stock market will provide the private sector with another means of acquiring finances and create additional transparency for listed firms, since going public will force them to report their financial statements to investors and the government alike — something that does not currently occur with state-owned enterprises.

Amid the push for targeted reform, Addis Ababa is sticking to its developmental state model while adding some new tools to its toolbox.

Old Habits Die Hard

Since coming to power a year ago, Abiy has undoubtedly instituted significant changes. Nevertheless, his power is limited, as he operates in a political system whose guiding light remains a Marxist ethos, as well as the developmental state model promoted by Meles. In such a situation, Abiy can proceed with liberalization on some fronts, like the full or partial privatization of indebted state-owned companies like Ethiopian Airlines or Ethio telecom, but the status quo is likely to reign in other areas. For one, given that high public spending is a key component of the developmental state model, the government is unlikely to reduce its expenditures any time soon, especially as such action has helped lift millions out of extreme poverty. Additionally, there has been no talk of changing the country’s land policy, in which the state owns all land and only permits its distribution at the discretion of officials, thereby giving such civil servants vast power. By maintaining state ownership over land, the government has been able to find locations for large investment projects at inexpensive rates. That policy is unlikely to change, as Addis Ababa intends to provide cheap land and low taxes for the construction of even more industrial parks, huge housing projects, large-scale farms and other undertakings.

Amid the push for targeted reform, Addis Ababa is sticking to its developmental state model while adding some new tools to its toolbox. As it is, the imminent privatization of state-owned enterprises like Ethio telecom and Ethiopian Airlines, the ongoing restraint in taking on more debt for big infrastructure projects and the overtures to the diaspora indicate that the government is trying to shift the engine of high gross domestic product growth to the private sector at a time when investment interest in East Africa is at a high. Should Ethiopia succeed in riding this success by luring more investment thanks to its liberalizing economy, it could leap to another level of economic development and avoid falling into the trap of other developing nations that continue to rack up debt as they fail to find a sustainable economic model. While this may be a gamble, it’s one that Ethiopia’s leaders have to take: The country’s future prosperity depends upon it.

Apr 1, 2019 | 21:24 GMT

Turkey’s Opposition Takes the Shine off Erdogan’s Victory

Turkey’s government and political institutions are heavily controlled by Turkey’s powerful ruling party, the Justice and Development Party of President Recep Tayyip Erdogan. In March 31 local elections, the largest opposition party challenged some of that dominance in Turkey’s largest cities when it won mayoral races in Ankara, Izmir and Istanbul, according to preliminary data. The close races in Turkey’s biggest cities show that Turkish voters worried by the country’s unstable economic conditions are divided over whether the ruling party or the opposition can best help Turkey emerge from a nascent recession. To maintain its dominance over the next several years before the next elections, the ruling party will have to adjust its messaging and reassess its alliances.

What Happened

Turkish President Recep Tayyip Erdogan won yet another election on March 31, but few victories have been as pyrrhic as this. Twelve parties competed for thousands of local government posts at the municipal and provincial level. According to preliminary results (official results might not be available for many weeks) the Justice and Development Party (AKP), an Islamist and populist party that has governed Turkey since 2002, gained 44.3 percent of the votes in mayoral contests, ahead of the main opposition Republican People’s Party (CHP), a secularist party, with 30.1 percent. Trailing behind was the AKP’s right-wing ally, the National Movement Party (MHP) at 7.31 percent; the CHP’s nationalist ally, the Good Party, at 7.45 percent; as well as the pro-Kurdish Peoples’ Democratic Party (HDP) at 4.24 percent. The AKP also won 41.61 percent of the overall vote for the provincial assemblies across the country, far ahead of the MHP, which garnered 18 percent.

Crucially, however, the AKP lost the capital, Ankara, and appears to have come second in the country’s largest city, Istanbul. Indeed, the AKP’s candidate in Istanbul, former Prime Minister Binali Yildirim, said early April 1 that his CHP challenger, Ekrem Imamoglu, received 25,000 more votes than he did but that election clerks declared 216,000 votes invalid. As a result, both parties are calling for a recount.

Why It Matters

The results are mixed for the government. The AKP has won an overall victory in terms of votes, especially the provincial assembly vote. But in the mayoral races in several key cities, including Ankara and Istanbul, as well as the CHP stronghold of Izmir, the main opposition beat the AKP, according to the Supreme Election Board. If the results in Ankara and Istanbul are confirmed, it would deal a highly symbolic blow to the AKP. The party (or one of its predecessors) has ruled each since 1994. Moreover, Erdogan launched his political career as mayor of Istanbul in the mid-1990s, while Ankara has long been a bastion of AKP support.

Losing the popular vote in Turkey’s major cities highlights the AKP’s tough balancing act: It needs to court popular support at a time when the fragile economy demands that the AKP do the exact opposite by implementing structural reforms.

What We’re Looking for Next

How will the government deal with citizens’ economic stress? The shift in Turkey’s urban centers, the first in a quarter century, stemmed in part from the deep economic strain which many Turkish citizens are feeling — and which more and more are blaming on the government. On the day after the election, Erdogan promised to enact better economic policies, while his son-in-law and finance minister, Berat Albayrak, promised to double down on the government’s economic rebalancing program, which envisions a reduction in fiscal spending on government programs. But losing the popular vote in Turkey’s major cities highlights the AKP’s tough balancing act: It needs to court popular support, which it has typically done through economic stimulus, at a time when the fragile economy demands that the AKP do the exact opposite by implementing structural reforms, including austerity measures.

What does this say about Turkey’s demographics? This is the first local election in five years, and Turkey’s population is younger than ever. Young citizens might have tuned out the AKP and its populist and Islamist values in favor of the CHP, which is stronger in urban secular areas. This is one reason why the AKP will have to reassess its platform. Whatever the case, the close margins highlight Turkey’s intense polarization over social and economic issues, which suggests that authorities will encounter more difficulties making policy and implementing reforms in the years to come.

What does this mean for the AKP’s alliance strategy? The AKP will also reassess its alliance strategy, in which the party has recently relied on working closely with nationalist allies like the MHP. That alliance might have worked against the AKP by splitting some of the votes it could have garnered. The AKP will recalibrate its platform and message after these races, even though there are still four years to go until more important general and presidential races.

What does this say about the opposition? Turkey’s typically fragmented opposition finally figured out a way to work together and support a single candidate in many key races. The HDP, for example, did not field candidates in Turkey’s five largest cities, and encouraged its followers in those cities to vote for the CHP candidate, thereby tipping the balance. Mansur Yavas of the CHP won the Ankara mayoral race by uniting a combination of nationalists, leftists, secularists and conservatives on a platform to restore Ankara’s prestige and improve the city’s overall conditions. Yavas’ victory in Ankara sets him up to be a prominent future opposition figure in the often unwieldy CHP. Meanwhile, Imamoglu is a young (he was born in 1970) businessman who was formerly the mayor of the western Istanbul district of Beylikduzu. If he survives the coming recount, Imamoglu will have the chance to use Istanbul — which, at more than 15 million people, is almost as large as neighboring Greece and Bulgaria combined — to build a national platform and become a potentially major player in the CHP and the opposition in general.

Turkey’s typically fragmented opposition finally figured out a way to work together and support a single candidate in many key races.

What does this say about the government’s relationship with Turkey’s Kurds? In addition to acting as kingmaker in major races in western Turkey, the HDP also won most of its key races in the Kurdish-dominated southeast, particularly Diyarbakir. In the latter, the party scored more than double the figure of its main rival, an AKP candidate who had been running the city for more than two years as a government-appointed trustee after authorities removed the erstwhile HDP co-mayors for alleged ties to terrorists. The HDP’s success in the southeast and strategic support for the CHP in the west highlight how the AKP has lost some of its ability to court Kurds, who make up roughly 20 percent of Turkey’s population. This was the first local election in five years, during which time the AKP moved more aggressively against Kurdish politicians in an attempt to damage their appeal to the Kurdish voter base. Already, Erdogan has extended an olive branch of sorts, referring to Turkey’s “Kurdish brothers” in an indication that he might need to appeal to the oft-maligned community, even as he works to contain Kurdish militants in the southeast and in Iraq and Syria.

What happens next? Both the government and the opposition will continue to trade accusations of election fraud; at present, the Istanbul race will come down to the electoral board’s decision. The opposition doesn’t trust the electoral board, which has frequently sided with the government in past elections. The AKP is well-positioned to challenge the results — as appears likely to happen. The election board has already conceded that the CHP has more votes than the AKP in Istanbul, but each will push for a recount before either one can claim ultimate victory in Turkey’s most important municipal race.

Mar 29, 2019 | 05:30 GMT

Gulf States Help Defuse South Asia Tensions and Protect Their Economic Interests

A February 14 attack on an Indian paramilitary convoy in Kashmir by a Pakistan-based militant group led to retaliatory Indian airstrikes and a captured Indian pilot, marking the most serious South Asian military conflict in over a decade. Following an easing of India-Pakistan tensions, U.S. and Pakistani officials praised Saudi Arabia and the United Arab Emirates for their roles in mitigating the crisis between two South Asian nuclear rivals. Saudi Crown Prince Mohammed bin Salman and Abu Dhabi Crown Prince Mohammed bin Zayed Al Nahyan have much to gain from the astute utilization of diplomatic clout: whether helping to avoid a catastrophic military conflict in the Gulf’s backyard or garnering international credibility by demonstrating statesmanship. However, the primary lever of Gulf Arab influence in South Asia remains fundamentally economic. Three processes of interregional engagement — labor dynamics, energy cooperation and strategic investments — are crucial for understanding how Gulf Arab states will exercise economic power in South Asia over the coming years.

Labor Dynamics

Labor-related immigration from South Asian countries to Gulf Arab states is the most visible and long-standing of the processes of interregional engagement. South Asians accounted for an estimated 59.4 percent of UAE residents in 2015; Indians represented the largest segment of this demographic group with 38.2 percent of the total. Official population figures from Saudi Arabia rarely reveal the nationality of expatriate residents. Yet Indians, Pakistanis and Bangladeshis consistently rank as the three largest expatriate resident groupings in the kingdom. South Asian residents constitute between 14.6 and 24.5 percent of the total population of Saudi Arabia, which, at nearly three times the size of the UAE’s population, makes for a roughly comparable number of South Asians living in Saudi Arabia and the United Arab Emirates.

Balancing the commercial advantages of immigration against the socioeconomic concerns of Gulf Arab citizens poses a persistent challenge for Gulf states. Government efforts to generate employment opportunities for citizens have increasingly relied on policies that reduce the number of foreign residents in a given country. For example, a campaign launched by the Saudi Ministry of Interior in November 2017 led to 1.3 million expatriate arrests and the deportation of several thousand foreign residents from the kingdom. These policies have the potential to profoundly impact South Asian economies that depend heavily upon remittances. In 2018, around $80 billion in remittances flowed into India, 38.5 percent of which originated in the United Arab Emirates and Saudi Arabia. Moreover, the largest sources of remittances to Pakistan after the United States and United Kingdom are from Saudi Arabia and the UAE.

In addition to systemic pressures, governments are keen to prevent the latest South Asian tensions from affecting relations between Indians and Pakistanis in Gulf workforces. Labor-related unrest among expatriates is treated seriously; Gulf Arab governments tend to outlaw protests and strikes. During prior tensions in South Asia, Gulf employers warned expatriate laborers that any individuals engaged in politically oriented protests would be abruptly deported. Expatriate-led protests in the Gulf today, though rare, mainly focus on wages and labor conditions and usually disperse quickly.

Energy Cooperation

Gulf Arab states also view South Asian countries as a means of deepening energy cooperation beyond the exportation of crude oil to the region. Gulf Arab states supply approximately 42 percent of India’s oil imports, and Saudi Arabia is India’s largest trade partner for crude oil. This level of commercial cooperation places both the UAE and Saudi Arabia in a strong position to provide India with additional crude oil exports if the United States does not renew sanctions waivers allowing India to import Iranian crude oil. However, the chief executive officer of Abu Dhabi National Oil Company, Sultan Ahmed Al Jaber, considers India an arena for “expanding [the] investment portfolio in the downstream sectors, especially in oil refining and petrochemicals.” ADNOC and Saudi Aramco are the primary strategic partners in a proposed $44 billion mega-refinery in Maharashtra, the west-central Indian state whose capital is Mumbai.

Saudi Arabia’s energy-related interest in Pakistan revolves around plans to develop a $10 billion refinery and petrochemical facility at Gwadar Port, a Chinese-funded, deepwater port in the southwest of the country. Officials estimate that the project will save Islamabad nearly $3 billion in reduced crude oil imports each year. Abu Dhabi is considering setting up oil storage facilities at Gwadar Port as part of a $1 billion investment by the UAE’s state-run investment company Mubadala. Moreover, Mubadala’s petroleum and petrochemical division is mulling a $6 billion investment related to the planned Pak Arab Refinery in the city of Hub near Karachi; a final investment decision is expected by the end of 2019.

Strategic Investments

Underlying labor, commodity and capital flows between the two regions is infrastructure connectivity, another important area of Saudi and Emirati investment in South Asia. Saudi Arabia is exploring investment opportunities associated with India’s National Investment and Infrastructure Fund, a state-run investment vehicle charged with building ports and highways. Abu Dhabi’s sovereign wealth fund already committed $1 billion to the fund in 2017 as the first institutional investor. In February, Dubai’s DP World launched a hyperloop project in India with the aim of revolutionizing the movement of people and goods in the country of 1.3 billion people.