The Libyan National Oil Corporation (NOC) ended on January 2 a fire that raged for days among tanks in Libya’s largest oil export terminal of Es-Sider, but the militia violence fed by the implosion of governance that caused it continues. Indeed, the levels of suffering, civilian casualties, refugees, and those internally displaced have increased steadily. The talks between Libya’s rival warring governments slated for today have been postponed. Meanwhile, extremist elements are taking greater advantage of the ongoing maelstrom.
The NOC managed to put the fire out, but three days of normal Libyan oil exports were destroyed. Of course, with Libyan crude exports already down to less than 400,000 barrels per day (only 1/3 of normal output), the fire’s impact on global markets was minimal.
Libya’s low exports since mid-2013 pose serious fiscal challenges for the country. The internationally recognized, relatively moderate House of Representatives (HOR), elected in June 2014, headed by Prime Minister Abdullah al-Thinni, and driven to take refuge in the small eastern city of Tobruk, is in fiscal crisis. The Libyan Central Bank, so far neutral between rival governments, has drawn down Libya’s currency reserves to cover spending. With two hostile governments, there is also no budget for the allotment of funds in 2015.
One might think government spending and a budget would be the least of Libya’s concerns. But beneath the government standoff and rule of local or extremist armed elements around the country, much of the Qadhafi-era’s largely socialist economy remains. If the Central Bank fails to pay government employees, those of the National Oil Corporation, personnel keeping most ports functioning, workers struggling to maintain the electric grid, civil police, and others life would grind to a halt. Goods would stop flowing, businesses would lose customers, and people would not be able to obtain goods and services at the most basic level. Fraud-ridden and often dysfunctional, presently there is an economy just the same.
Tripoli’s Power
Credit: NASA image by Jeff Schmaltz
The Es-Sider inferno was triggered by a rocket fired by Islamic Dawn (LD), the robust Islamist militia comprised of fighters from Libya’s third largest city of Misrata, near Tripoli. LD is the muscle behind the rival Tripoli government.
Since last August when it propped up the Islamist portion of the former parliament, the General National Council (GNC) as a “government,” LD has been gaining ground. Its ability to push nearly 400 miles eastward, to menace Libya’s twin oil ports of Es-Sider and Ras Lanuf plus their supporting oil fields to the south illustrates LD’s rising power at the expense of the HOR and its loyalist allies.
Likewise, 500 miles to the west, LD has been driving toward Libya’s other major oil and gas terminal of Mellitah, near the Tunisian border. Thinni has been struggling to halt this other LD drive using local tribal militias and air strikes. A NOC statement from late December, fearing the loss of Mellitah, said Libyan hydrocarbon production would fall below the levels needed to even meet Libyan domestic demand.
Bloody Benghazi
A severe impediment for the HOR and its loyalist allies is the more extremist militia grouping continuing to dominate much of Libya’s eastern second largest city of Benghazi. Led by the formidable al-Qaeda associated Ansar al-Sharia in Libya (ASL), a militant alliance— despite see-saw fighting—has managed to hold various Libyan military units and former General Khalifa Haftar’s polyglot secular forces allied with the HOR in check.
The commitment of so many HOR military assets to the military meat-grinder in Benghazi to prevent ASL from moving eastward toward Tobruk has weakened its efforts elsewhere. Eleven more died and 63 were wounded in Benghazi on Dec. 22. In fact, most killed in clashes across Libya die in Benghazi. Eastern Libyan jihadists car bombed the HOR’s Tobruk hotel on Dec. 30 wounding 3 deputies.
Human Toll
The UN Support Mission in Libya and the UN’s High Commission for Human Rights announced on Dec. 23 that nearly 700 hundred Libyan civilians have died as collateral casualties of Libyan violence since August; many times that have been wounded. Combatant casualties would likely push fatalities over 1,000. This death toll is lower than those emerging from Syria and Iraq from the regime-rebel civil war in the former and Islamic State-related violence in both. Still, the UN warned commanders of Libyan armed groups they could be charged by the International Criminal Court (ICC) with criminal atrocities.
The refugee situation is far worse. By September, 1.8 million Libyan refugees had sought shelter in Tunisia. Added to those elsewhere, as in Egypt, refugees comprise approximately 1/3 of Libya’s entire population. Those in Tunisia have overwhelmed available humanitarian assistance, particularly now during the cold, rainy Mediterranean winter. Almost 400,000 Libyans are reportedly internally displaced.
No End in Sight
So far, diplomatic efforts seeking some sort of accommodation between Tripoli and Tobruk have been futile. Talks led by UN Envoy for Libya Bernadino Leon came to naught back in September. Leon tried to organize another round for Dec. 9, but this foundered due to more fighting triggered by a failed HOR effort to retake Tripoli. Leon reported to the UN Security Council on Dec. 23 that the two sides had agreed to meet today.
That initiative also collapsed. HOR airstrikes over the weekend against targets in Misrata (the home of the GNC’s “Libya Dawn” militia) came as a surprise. Two reportedly were wounded. An HOR military spokesman said the strikes were retaliation for renewed LD attacks against Es-Sider and Ras Lanuf where fighting has resumed. Yesterday a loyalist warplane struck a Greek tanker near the eastern port of Derna, killing two crewmen; a Libyan military spokesman claimed it was carrying militants.
Meanwhile, General David Rodriguez, head of US Africa Command, revealed on December 3 that “nascent” Islamic State (ISIS, ISIL or IS) training camps had been established in eastern Libya containing a “couple of hundred” militants. Fourteen Libyan soldiers were executed on Feb. 3 in southern Libya by a group calling itself the Islamic State of Libya. Even the more moderate Islamist GNC and LD, already hostile to ASL, condemned the killings. With Libya’s disarray and the grip of ASL and associated extremists over much of Benghazi plus areas nearby like militant-held portions of Derna, IS’s appearance at some point was inevitable.
Sudanese Foreign Minister Ali Ahmed Kharti in December chaired a meeting of his counterparts from Libya’s neighbors to express concern about the Libyan crisis’ regional impact. Weighing heavily on participants was the near conquest of Mali in 2013 by extremists, many staging out of and receiving munitions from Libya’s lawless southwest. There also has been arms smuggling from eastern Libyan militants to Egypt’s Sinai-based Ansar Bayt al-Maqdis jihadists, many of whom affiliated themselves with IS in Fall 2014.
Increasingly concerned about Libyan jihadist spillover, French President François Hollande urged the international community today to address Libya’s crisis. In a two-hour interview with France Inter radio, Hollande ruled out unilateral French intervention in Libya itself, but is establishing a base in northern Niger 60 miles from the Libyan border to help contain the menace. Last year, another French base was set up near the Malian border with Libya.
The longer Libya’s chaos remains on the global back burner, the nastier its impact will be in Libya and beyond. Crises left to fester sometimes find their own way to the front burner.
]]>by Mark N. Katz
What a difference a few months make. During much of 2014, Russian President Vladimir Putin was riding high. Russia seized Crimea from Ukraine quickly and relatively bloodlessly. Putin was also able to help pro-Russian forces in eastern Ukraine effectively secede from the rest of the country and prevent the Ukrainian government from retaking these areas. Western governments howled in protest and even imposed economic sanctions on Russia, but were unable to force Putin to back down. Putin’s unsettling actions also seemed to help keep the price of oil high, which Russia benefited from as a leading petroleum exporter. And while the West was highly critical of him, many governments elsewhere—most notably in Asia—seemed indifferent or even sympathetic toward Putin’s actions in Ukraine.
At present, though, things look very different for the Russian president. Western sanctions, which initially seemed quite weak, now appear to be having an increasingly negative effect on the Russian economy. More importantly, the dramatic decrease in the price of oil over the past few months has contributed to a sharp drop in Russia’s export income as well as to the value of the ruble. Eastern Ukraine has meanwhile become an increasingly costly venture for Moscow—not least because of the mounting deaths of Russian soldiers engaged in the fighting there. Absorbing Crimea is also proving costly for an increasingly cash-strapped Moscow. As Western disapproval and even fear of Russia have grown, the ranks of European political and economic leaders calling for accommodating Moscow and cooperating with Putin have thinned. Finally, those non-Western governments that earlier seemed indifferent or sympathetic to Putin’s policy toward Ukraine now seem either indifferent or eager to take advantage of Russia’s increasing economic difficulties.
Putin, in short, now seems to be facing something of a dilemma. Continuing his current policies toward eastern Ukraine will probably not bring about an end to what is becoming a quagmire there for Moscow, and will mean that Western economic sanctions on Russia remain in place or even worsen. Yet withdrawing from Ukraine could weaken Putin domestically since the Russian public has supported his forward policy on Ukraine and would not be happy to see it reversed.
So what will Putin do now? Many fear that he will lash out at the West by supporting Russian secessionists in the Baltics or elsewhere. Putin himself has contributed to this fear by talking about how a cornered rat will attack its pursuers. But despite the deteriorating situation that he now faces, the Russian president need not become that rat in the corner. Indeed, he can be expected to ensure that he does not.
This is because Putin is basically a pragmatist. While he can support Russian secessionists in the Baltics, Belarus, northern Kazakhstan, or elsewhere in Ukraine—as he did with those in Crimea and eastern Ukraine—Putin cannot now be certain that he can gain control over these territories quickly and easily like he did with Crimea. Instead, supporting such groups or intervening directly may only result in more drawn-out conflicts such as the one now taking place in eastern Ukraine. If it is increasingly costly for Russia to be involved in just one such conflict, it will be even costlier still for it to become involved in more of them. If he thought he could replicate what happened in Crimea, Putin might be tempted to do this. Indeed, his quick victory in Crimea may have persuaded him that he could also win in eastern Ukraine. But now that eastern Ukraine has proven to be so problematic, Putin must be aware that similar adventures elsewhere could prove similarly risky—and that Russian forces could only get more thinly spread if they become involved in more such conflicts.
Some fear that Putin might lash out in some other manner by, for example, ending Russian support for the ongoing negotiations with Iran over its nuclear program. But this also seems unlikely because: 1) Russia does not want Iran to acquire nuclear weapons, either and 2) the United States and its Western allies could still reach an agreement with Tehran on this matter without Russian help—which would only serve to demonstrate Russian impotence.
Russia stepping up its support for the Assad regime in Syria is another possibility. Doing so, though, would make Russia more of a target for Islamic State (ISIS or IS). Nor does it seem plausible that Putin would want Russia to become more involved in Syria when Moscow is far more concerned about what is happening in Ukraine and other former Soviet states.
Some fear, though, that reported Russian submarine deployments in Swedish waters, military overflights over several countries, and claims in the Arctic are all signs that Putin is preparing something even worse. However, while hardly reassuring, these moves seem aimed more at showing the Russian public how strong Putin is than as precursors to Russian initiation of conflict.
What all this suggests is that while Putin is aggressive, he is not reckless, and he demonstrated this during a Dec. 18 press conference. Indeed, while insisting that any Russian troops in eastern Ukraine are “volunteers,” he seemed also to hold open the door to cooperation with Kiev—and with Georgia, too (which Russia won a brief war against in 2008).
Returning to the rodentine analogy that Putin himself has used: if a cornered rat lashes out, one that is not cornered is more likely to find a safe place to run to instead. What this means for the West is that while it should assist Ukraine in resisting Russian incursions, it should reassure Putin that if he compromises on Ukraine, the West will not use this as an opportunity to rout him altogether. By continuing to cooperate with Russia on problems of common concern (such as Afghanistan, the Iranian nuclear issue, and terrorism) and by reiterating how Western sanctions would be lifted if Russia modifies its policy toward Ukraine, we can help Putin achieve his own goal of not ending up in a corner.
]]>The country that could ultimately suffer the most damage from a sustained depression in the world price of oil could be one that is not a major producer: Egypt.
Unable to sustain itself, Egypt is being propped up by big infusions of cash from Saudi Arabia and the United Arab Emirates (UAE). Those two oil states, closely aligned with the Cairo government headed by Abdel Fattah al-Sisi, could afford to be generous in their commitments when they were taking in $100 a barrel, just a few months ago.
With the price now down to about $60 and unlikely to rise much over the next year at least, it becomes an open question how long it will take for the two Gulf states’ domestic needs to overtake their support for Egypt.
The Saudis and the Emiratis understand that Egypt is an economic “bottomless pit,” according to Gregory Gause, a specialist in the Gulf monarchies at Texas A&M University. There have been no indications so far that they are contemplating a pullback from Egypt, but it becomes more likely the longer lower prices squeeze their oil revenue, Gause said.
Saudi Arabia’s equanimity so far in the face of the plunging price of the commodity that supports most of its public spending reflects multiple policy interests. If the falling price discourages further development of high-cost new oil sources such as shale in the United States, deep-sea wells off Brazil’s coast, or new fields in the Russian Arctic, that helps Saudi Arabia maintain its market share, a declared objective.
And the Saudis seem quite content as the price contraction inflicts economic damage on damage on Iran, their great regional rival, and on Russia, which has incurred Riyadh’s displeasure by supporting the regime of Syrian President Bashar al-Assad, to whose ouster the Saudis are committed. Egypt, however, is another matter because Sisi has become a major ally of Saudi Arabia and the Emirates in the regional struggle against the Islamic State and other extremist groups.
In a paper distributed last week, Fahad Alturki, head of research at Jadwa Investment Group in Riyadh, predicted that Saudi Arabia will maintain its current levels of spending at least for a while because it has “foreign reserves of more than 95 percent of GDP and a public debt of less than 2 percent of GDP.” Even at today’s prices, he said, the kingdom is likely to show a balance of payments surplus next year and fall into deficit only in 2016.
If the Saudi government did decide to cut spending, however, external aid would probably be one of the first targets, Alturki said.
Oil prices were already descending rapidly because of declining global demand and inventory surpluses when the members of the Organization of Petroleum Exporting Countries decided last month not to reduce their production to stabilize the price. That decision sent the price down still further to the apparent satisfaction of Saudi Arabia and the UAE, which have very deep pockets. Platts Oilgram, a trade journal, reported that “Saudi oil minister Ali Naimi left the summit all smiles, telling reporters that rolling over the 30 million b/d production ceiling was ‘a great decision.’”
The most immediate losers from the price decline are the large producing countries that need the cash to sustain their current operations. According to Alturki’s paper, these include Russia, which needs a price of $107 a barrel to support its budget; Venezuela, which needs $120; and Iran, which needs $127. Alturki’s “baseline” price projection for the next two years is $83 to $85 per barrel. Oil prices are notoriously hard to predict, but his figures are in line with several other analyses that have been published in the past few weeks.
Egypt’s problem is different, and harder to solve. The country produces about 700,000 barrels of oil a day, and its output has declined steadily from a peak of 900,000 barrels in the 1990s, according to the US Energy Information Administration. (Worldwide production is about 92 million barrels.) Almost all of Egypt’s output is consumed domestically by its population of about 80 million.
Because it is not an oil exporter, Egypt depends on other sources of hard-currency revenue to support itself; mostly Suez Canal tolls, cotton exports, and tourism. The tourist trade, however, has dwindled to a trickle over the past few years because of the country’s political upheavals, leaving the country short of cash to pay for imported food and other necessities.
According to Arabian Business magazine, the United Arab Emirates and Saudi Arabia committed aid with more than $12 billion in cash grants, no-interest loans, and refined petroleum products in 2014 alone. Kuwait, another major Gulf oil exporter with a small population, kicked in another $4 billion, the magazine reported.
Saudi Arabia pledged to support Sisi almost immediately after he ousted the former president, Mohamed Morsi, in 2013. Morsi had been elected as the candidate of the Muslim Brotherhood, which both Egypt and Saudi Arabia have since outlawed. In June, Saudi Arabia’s King Abdullah reportedly declared that any country that did not join in supporting Egypt would “have no future place among us.” But the king is also doling out tens of billions of dollars in salary increases, new social benefits and housing programs that he extended to his own citizens during the regional uprisings of 2011. He is also paying for massive infrastructure projects such as a new metro rail network for Riyadh and a mammoth new port on the Red Sea. Even Saudi Arabia can’t keep it up indefinitely at $60 a barrel.
]]>Erbil—After a period of frostiness, Iraq’s Kurdistan Regional Government (KRG) and Turkey seem intent on mending the ties, as each of the parties show signs of needing the other.
But the Kurds appear more cautious this time around, leery of moving too close to Ankara lest they alienate the new Iraqi government in Baghdad with which they signed a breakthrough oil deal Tuesday.
The agreement, which will give Baghdad greater control over oil produced in Kurdistan and Kurdish-occupied Kirkuk in exchange for the KRG’s receipt of a bigger share of the central government’s budget, may signal an effort to reduce Erbil’s heavy reliance on Turkey.
The warmth between Iraqi Kurds and Turkey was a rather strange affair to begin with. It emerged unexpectedly and evolved dramatically since the 2003 US invasion of Iraq.
Whereas Turkey is a major player in the Middle East and Eurasia regions, Iraqi Kurdistan is not even an independent state. The imbalance of power between the two parties made their development of a “strategic” relationship particularly remarkable.
Given the deep historical animosity in Ankara towards all things Kurdish, the change of heart on its leaders’ part also seemed almost miraculous, even if highly lucrative to Turkish construction companies in particular.
But those ties suffered a major blow in August when the forces of the Islamic State (ISIS or IS) marched toward Kurdish-held territories in Iraq.
With IS threatening Kurdistan’s capital city, Erbil, Turkey did little to assist the Kurds. Many in Kurdistan and beyond were baffled; it was a case of “a friend in need is a friend indeed” gone wrong.
The overwhelming sense in Erbil was that Turkey had abandoned Iraqi Kurds in the middle of a life-and-death crisis. KRG President Masoud Barzani, Ankara’s closest ally, felt moved to publicly thank Iran, Turkey’s regional rival, for rushing arms and other supplies to Kurdish peshmerga fighters in their hour of need.
In their efforts to simultaneously develop an understanding and save face, some senior KRG officials defended Ankara, insisting that its hands were tied by the fact that more than 40 staff members in its consulate in the Iraqi city of Mosul, including the consul, had been taken hostage by IS. Other officials were more critical, slamming Ankara for not having acted decisively in KRG’s support.
The that the country was experiencing elections where the ambitious then-Prime Minister Recep Tayyip Erdogan was running for the newly enhanced office of president was also invoked as a reason for his reluctance to enter into war with such a ruthless group.
It also appeared to observers here that Erdogan did not want to do anything that could strengthen his archenemy, Syrian President Bashar al-Assad, even if that meant effectively siding with the Sunni jihadists.
But last month’s visit to Iraq by Turkish Prime Minister Ahmet Davutoglu appears to have helped repair the relationship with the Kurds in the north. Davutoglu turned on his personal charm to reassure his hosts, even visiting a mountainous area where Turkish special forces are now training members of the Kurdish peshmerga.
The question of how long it takes for the relationship to bounce back to the point where it was six months ago is anyone’s guess.
It’s clear, however, that despite the recent slide in relations, both sides need each other.
As a land-locked territory, Kurds will be looking for an alternative that they can use to counter pressure from the central Iraqi government.
Focused on laying the foundation for a high degree of economic and political autonomy—if not independence—from Baghdad, the Kurds’ strategic ambition is to be able to control and ideally sell their oil and gas to international clients. And geography also dictates that the most obvious and economically efficient route runs through Turkey, with or without Baghdad’s blessing.
As for Ankara, Iraqi Kurdistan is now its only friend in an otherwise hostile region.
Once upon a time, not long ago, politicians in Ankara boasted of the success of their “zero-problems-with-neighbors” policy that had reshuffled regional politics and turned some of Turkey’s long-standing foes in the region, including Syria, into friends. But that era is now gone.
Ankara has come to see Iraqi Kurdistan as a potential major supplier of its own energy needs and has generally sided with the KRG in its disputes with Baghdad.
Kurdish leaders have been criticized for putting most of their eggs in Ankara’s basket.
The last time Kurds invested so much of their trust in a neighboring country was during the 1960s and 1970s when they were supported by the Shah of Iran who used them to exert pressure on Baghdad. This produced disastrous results when the Shah abruptly abandoned Kurds in return for territorial concessions by the Iraqi government in the Shatt al-Arab River separating southern Iran from Iraq.
Turkey’s indifference and passivity in August when all of Iraqi Kurdistan came under existential threat by the IS jihadists reminded many here of the consequences of placing too much trust in their neighbors. The hoary proverb that “Kurds have no friends but the mountains” suddenly regained its currency.
IS’s siege of the Syrian Kurdish town of Kobani—just one kilometre from the Turkish frontier—compounded that distrust, not only for Iraqi Kurds, but for Kurds throughout the region, including in Turkey itself.
Indeed, Turkey’s refusal to assist Kurdish fighters against IS’s brutal onslaught has made it harder for the KRG to initiate a reconciliation.
Although Ankara has now changed its position—under heavy US pressure—and is now permitting peshmerga forces to provide limited assistance and re-inforcements for Kobani’s defenders, the process of mending fences is still moving rather slowly.
While that process has now begun, it remains unclear how far both sides will go.
Will it be again a case of Ankara and Erbil jointly versus Baghdad, or will Erbil play the game differently this time, aiming for balance between the two capitals?
Indeed, the much-lauded oil deal struck Tuesday between Baghdad and the KRG may indicate a preference for the latter strategy, particularly in light of their mutual interest in both confronting the IS and compensating for losses in revenue resulting from the steep plunge in oil prices.
Still, given the history of deals sealed and then broken that have long characterized relations between the Kurds and Baghdad, nothing can be taken for granted.
Photo: KRG President Masoud Barzani at the official opening of the Erbil International Airport and Turkish Consulate in 2011. Credit: Official KRG Photo
Mohammed A. Salih is a journalist based in Erbil, Iraqi Kurdistan. He has written for almost a decade about Kurdish and Iraqi affairs for local and international media.
]]>by Djavad Salehi-Isfahani
The decision announced last Monday in Vienna to extend the talks aimed at a compressive agreement on Iran’s nuclear program for an additional seven months has resulted in Iran’s currency taking dive. In one week, the rial lost more than 5% of its value in the unofficial market. The devaluation has clear political and economic implications: it will revive inflation, slow or stop economic growth, and increase the pressure on Iranian President Hassan Rouhani as his government tries to make good on the election promises he made 18 months ago.
But will this soften Iran’s negotiating position? To answer this question, we need to look at the basis of this phase of the rial’s devaluation and what it means for ordinary Iranians.
The drop in the value of the rial after the extension was announced on Nov. 24 indicates that expectations in Iran for a final deal were high before the deal failed to materialize. This optimism had kept the rial’s value above what the economics of the situation warranted. In other words, rather than being in “free fall,” as several reports in the press have suggested, the rial is actually adjusting to a new equilibrium.
Two major factors have been putting pressure on the rial in the last few months, neither of which is related to the negotiations or the sanctions. The first is the decline of the price of oil, by more than 30% since this summer, which has reduced the already strained supply of foreign currency to the Iranian economy. As I noted in my previous post, prior to Nov. 24, the rial had remained surprisingly stable despite the falling price of oil.
The rial was also under pressure because Iran’s inflation exceeded that of its major trading partners, making Iranian producers less competitive. Prices in Iran have increased by 23% since Rouhani’s election in June 2013 when the rial traded around 31,000 per dollar. All else the same, the rial would have to fall by 23% to keep Iranian production competitive. That would mean an exchange rate of over 38,000 rials per dollar in the unofficial market and 32,500 in the official market. Presently, these rates are at 34,000 and 26,500.
Of course, all else is not the same. The price of oil is lower, Iran has started receiving around $700 million a month of its unfrozen assets, and there have been changes in economic policy. Some of these changes, like the lower price of oil, would require the rial to devalue further, while others would have the opposite effect.
At the same time, although the rial could continue to decline, currently it’s certainly not in free fall.
An overlooked fact in Western press reports on this issue is that the Rouhani government, populated in part by economists focused on the competitiveness of Iranian producers, had signaled its intention to officially devalue the rial before the Nov. 24 extension was announced. Indeed, officials spoke publicly last month about a (modest) 7.5% increase in the official exchange rate to be used in the 1394 (2015/2016) budget to 28,500 rials to the dollar.
Now on to that burning question: How long will this crisis last?
The pace of devaluation in the free market has quickly slowed down—the rial even rose against the dollar on Dec. 1—but as I mentioned earlier, further drops in the value of the rial are still possible as the reality of the lower price of oil sinks in.
Devaluation is a sign of an underlying imbalance in the economy, so when it happens, people are naturally alarmed. But it is also part of the solution to the same imbalances that need correcting. Consider, for example, that a cheaper rial is good for production and employment, even in a poor business environment hampered by international sanctions and domestic impediments to production, which business people refer to as “internal sanctions.”
Devaluations also redistribute income. In the short-run, inflation, which dropped last year below 20%, will rise as prices for goods bought and sold at the unofficial rate increase. The burden of the higher inflation will fall primarily on people living on fixed incomes, on the public payroll, and those who travel abroad or send money to their children abroad—all of whom compose the better part of the middle class.
Unlike former President Mahmoud Ahmadinejad, Rouhani does not believe in directly paying the poor, so what happens to this segment—about 10-20%— of the Iranian population is less certain. Wages of unskilled workers usually increase with inflation, though not always in tandem. They also rise with demand for labor, which could get a boost from devaluation. However, the 30% increase in the price of bread that was quietly implemented earlier this week, on Dec. 1, will hurt the poor disproportionately, as it was put through without any compensatory mechanism.
Of course, if the Rouhani government is forced to reduce the country’s much larger energy subsidies to balance its budget in the face of falling oil revenues, it may ultimately have to swallow its pride and take up the Ahmadinejad cash transfer mechanism, which Rouhani strongly criticized during his presidential campaign.
Ultimately, the drop in the price of oil will result in lower economic growth and loss of income across the country. But there is no policy that can fully compensate for a large decline in the terms of trade, which the recent decline in the price of oil represents—there are only good and bad policy responses. Allowing the rial to devalue is a good start, but not enough. The government should also be planning policies to help domestic producers rise to the occasion and measures required to protect the poor as prices for basic goods such as bread and energy rise.
]]>by Sara Vakhshouri
In the past several days—despite the conflicts affecting Iraq, Syria, Iran and Russia—oil prices have been on a downward trend, hitting their lowest number in the past four years. As of October 2014, oil prices are more than 20 percent lower than June. This trend started with Saudi Arabia reducing its crude oil prices without cutting its production—the result of a strategic shift in Saudi policy. Previously, the swing producer in the market would maintain a general higher price range. Now it has shifted to increasing market shares by offering lower prices to its customers. Iran, the United Arab Emirates (UAE) and Iraq also followed the kingdom’s lead and offered discounts on their crude oil in order to maintain their market share.
This raises a number of interesting points. On the one hand, the acceleration of higher energy efficiency, combined with higher energy prices, the economic crisis in Europe and lower economic growth in China have all put pressure on overall energy demand growth. On the other hand, the global energy supply has had a bullish growth mainly because of the shale oil boom in North America and Iraqi oil output. Yet the lower growth of demand and the higher rate of supply growth have both altered concerns over energy security paradigms, shifting from the security of supply to concerns about the security of demand and the profitability of oil production (in the case of unconventional oil). Keen competition among producers to maintain market share, concerns over the unconventional oil production’s profitability, and the effect of lower oil prices on oil dependent economies are all consequences of this broader change in the balance between supply and demand in global energy markets.
Stabilizing the Demand
Although it might take longer to see the real effects of lower oil prices on global oil demand growth, lower oil prices will have a positive effect on the demand side. Lower prices could particularly strengthen the demand in countries that lack fuel subsidy regimes as price fluctuations may have a more tangible effect on consumers.
Oil Dependent Economies
The economies of conventional oil producing countries (particularly OPEC producers such as Bahrain, Kuwait, Saudi Arabia, Iran and Iraq) are highly dependent on oil for around 80 percent of their national budgets. There is a close correlation between oil prices and their fiscal maneuverability. For example, Russia, Nigeria, Bahrain, Venezuela and Iran have national budgets that work under a scenario of $100 per barrel of oil. Saudi Arabia’s budget for 2014 is meanwhile based on oil at $90 per barrel, and remaining OPEC members have set their 2014 budgets according to a $70 per barrel range. The current drop in prices has the potential to negatively affect some of these countries’ economies. But on the flip side, it could also encourage them to reduce their dependency on oil revenue in the medium to long-term. Lower oil prices also reduce the gap between global market prices and local prices, decreasing the amount of subsidies these countries have to pay for domestic fuel consumption.
Unconventional Oil Production
The extraction of unconventional resources does not only require a high level of technological proficiency, it is also very costly compared to conventional production. For most of the United States’ tight oil resources to be economically developed and produced, oil prices should remain at least around $70 per barrel in the long-term. With current costs, it is expected that the overall tight oil production will drop to about 20 percent with a downturn of oil prices below $70 per barrel. If oil prices drop below the range of economically profitable production, the drilling of new wells, for maintaining production levels, will mostly stop and tight oil production will reduce significantly within a period of between three to six months. The more recent price drops have reduced the profit margin of investment in US unconventional oil resources and have reduced the gap between current global oil prices to shale oil production costs to about only $20 per barrel. This has raised concerns for investors and could affect the likelihood of their further investment in unconventional oil extraction.
Back to Iran?
As I mentioned earlier, the costs of unconventional oil extraction are much higher than conventional oil production, particularly in the Persian Gulf region. Lower profit margins due to lower oil market prices could divert investor attention and interest back to conventional oil production in the Persian Gulf. Sanctions aside, Iran could possibly benefit from this situation due to the political and security crisis in Iraq. Indeed, due to the ongoing attacks by Daesh (ISIS or ISIL) in Iraq, most international investors have left the country. Iran, with its new investment regulations, could accordingly attract foreign investors to its energy industry once again. However, lower oil prices and high competition among the major oil producers to maintain and increase market shares could increase the stakes in maintaining the limitations on Iran’s oil exports and prevent this country from increasing its production.
]]>Shortly after President Obama’s startling telephone conversation with Iran’s new president, Hassan Rouhani, a Saudi Arabian journalist wrote that “The phone call between Obama and Rouhani shocked the Gulf states, Jordan, Turkey, Israel, and other countries.” No matter which president initiated the call, he wrote, “What is important to know is what stands [...]]]>
Shortly after President Obama’s startling telephone conversation with Iran’s new president, Hassan Rouhani, a Saudi Arabian journalist wrote that “The phone call between Obama and Rouhani shocked the Gulf states, Jordan, Turkey, Israel, and other countries.” No matter which president initiated the call, he wrote, “What is important to know is what stands behind the conversation and how deep the ties are between America and Iran.”
Never mind that there are no “ties” between Washington and Tehran, let alone “deep” ones. His article reflected concern among Saudis that the United States might negotiate some wide-ranging settlement of its issues with Iran and that any such deal would automatically be detrimental to Saudi interests.
Such anxiety has surfaced in Riyadh many times over the past two decades, dating to Madeleine Albright’s unsuccessful efforts to reach out to Iran when she was secretary of state in Bill Clinton’s second term. No doubt many prominent Saudis share the journalist’s sentiment, not just in the ruling family but in the Sunni religious establishment. In their short-sighted view, regional security is a zero-sum game: if it benefits Iran, it must be bad for Saudi Arabia. To this group, as the authors of a major RAND Corp. study noted in 2009, “the prospect of U.S.-Iranian rapprochement (or even near-term coordination on Iraq) would appear to jeopardize the privileged position Riyadh has long enjoyed in Gulf affairs.”
Since that study appeared, Saudi antipathy to Iran has only increased. Iran’s growing influence in Iraq, its all-out support for the regime of Bashar al-Assad in Syria and for Hezbollah in Lebanon, and its perceived instigation of civil unrest in Bahrain have exacerbated Saudi anxieties and reinforced the kingdom’s determination to keep Iran isolated and economically constrained. At the same time, the Saudi perception that the United States abandoned Egypt’s Hosni Mubarak, a longtime ally, and might do the same to them if regional circumstances changed, has led some Saudis to doubt the long-term reliability of the United States as anchor of the kingdom’s security. Their doubts were not alleviated when panelists at a Gulf security conference in Washington earlier this year projected a reversal of the regional alignment over the coming decade, with Iran emerging as more friendly to the United States and Saudi Arabia less so.
The Saudis have also been peeved about the inability of the United States to deliver on its commitment to a two-state solution that would end the Arab-Israeli conflict. That diplomatic stalemate has allowed Iran, which refuses to acknowledge Israel’s existence and openly supports Hezbollah, to present itself to the Arab world as the true champion of justice for the Palestinians, as opposed to the Saudis, who have offered a comprehensive plan for peace with Israel.
Furthermore, the Saudis went all-in to try to engineer the ouster of Assad, believing that they were in tune with U.S. policy. Now they may be feeling exposed as the United States and Russia appear to be pursuing a different course.
And it is certainly true that many of Saudi Arabia’s leading officials, including some diplomats in the foreign ministry, harbor a deep loathing for, and suspicion of, all things Shia. A softer U.S. line on Iran would not make those Saudis more comfortable in the bilateral relationship.
Moreover, the Rouhani initiative, assuming it is genuine rather than cosmetic, coincides with a growing realization in Saudi Arabia that the United States is becoming steadily less dependent on Gulf oil. Could the Obama administration’s announced shift of strategic resources to Asia presage a reduction of U.S. commitments in the Gulf? Senior U.S. officials say no: Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said a few months ago that “You can take it to the bank” that the U.S. will maintain its posture in the Gulf for the foreseeable future.
Thus, recent reports of anxiety in Riyadh about a possible shift in relations between Washington and Tehran were predictable, and may well have some basis in fact.
But there are also Saudis who understand that a better relationship between Washington and Tehran might actually benefit the kingdom. After all, the two countries shared a strategic alignment with the United States before the Iranian revolution. In that era, Iran was far more powerful than Saudi Arabia militarily and economically, but the Saudis did not perceive it as a strategic threat, partly because it was influenced by the United States and partly because Saddam Hussein’s Iraq provided a protective buffer — a buffer that the United States dismantled with its invasion of Iraq a decade ago.
Even during the past decade, when tensions were high over Lebanon, Bahrain, Iraq and other issues, the Saudis and Iranians found ways to work cooperatively when it was in the interests of both countries. “Such calculations often take place independently of U.S. pressure or encouragement,” the RAND report noted, adding that in past times of tension with Washington the Saudis have been more flexible, rather than less so, in their regional rivalries.
“With the ‘moderation’ discourse strengthened during the presidency of recently elected Hassan Rouhani, pragmatism will be enhanced in Iran’s regional policy,” the columnist Kayhan Barzegar, an experienced analyst of Gulf affairs, predicted in the online magazine al-Monitor after Rouhani was inaugurated. “This development will weaken the existing ‘mutual threat’ perception between Iran and Saudi Arabia that is rooted primarily in the policies of both countries in response to regional issues. Such a development will also consequently strengthen relations between the two. Iran and Saudi Arabia are not interested in an intensification of sectarian or geostrategic regional rivalries. They are well aware that such rivalries will eventually be instrumentalized and used politically, draining energy from both sides. The result will be increased instability and growth of extremist trends in their backyard. Conflict between the two also provides an opportunity for other rival actors, such as Turkey and Qatar, to play an active role in regional issues at their expense, such as happened with the Syrian crisis, which is not currently welcomed by the Iranians or the Saudis.”
In fact, there are several ways in which a lessening of tensions between Iran and the United States could actually benefit Saudi Arabia. To achieve some form of rapprochement with the United States now, Iran would be required to forgo definitively any attempt to build or acquire nuclear weapons — a development that could hardly be depicted as detrimental to Saudi interests. The United States would also press Iran to curtail the aggressive policies that have destabilized the region for years. If Iran’s leaders truly want relief from international economic sanctions, they will have to persuade the countries that imposed them that they will be good neighbors to Iraq, Saudi Arabia and the smaller Gulf states. Would that not assuage some of the security concerns that have prompted Saudi Arabia to spend tens of billions of dollars on new U.S. weapons?
If Iran were to curtail its support for Hezbollah in order to improve relations with Washington and the West, it might forfeit its position as “more Arab than the Arabs” on the issue of Israel, another development that could be to Saudi Arabia’s advantage.
And Saudi Arabia’s Gulf neighbors such as Qatar might no longer feel the need to hedge their bets by keeping some distance between themselves and Saudi Arabia and maintaining correct relations with Iran, thus facilitating Saudi Arabia’s desire to exert the regional leadership to which it feels entitled.
On a visit to South Asia when she was secretary of state, Albright chided the Pakistanis for opposing a U.S. initiative to expand economic ties with India. The initiative was not aimed at undermining Pakistan, she said, and might actually be helpful if an expanding Indian economy brought greater cross-border trade.
The Pakistanis didn’t buy it, but that did not diminish the validity of her message. It might be useful now for Obama and Secretary of State John F. Kerry to explain to the Saudis that any deal with Iran will be a long time in the making and will not damage U.S. ties with Riyadh unless the Saudis want it that way.
– Thomas W. Lippman is an adjunct scholar at the Middle East Institute and author of Saudi Arabia on the Edge.
Lobe Log contributor Emile Nakhleh, an expert on political Islam and Middle Eastern society, recently provided a fascinating primer on Bahrain to the Bahrain Mirror (Arabic version), an e-newspaper run by Bahraini dissidents. As discussed in the Mirror’s introduction, prior to becoming the CIA’s former chief regional analyst, Dr. [...]]]>
Lobe Log contributor Emile Nakhleh, an expert on political Islam and Middle Eastern society, recently provided a fascinating primer on Bahrain to the Bahrain Mirror (Arabic version), an e-newspaper run by Bahraini dissidents. As discussed in the Mirror’s introduction, prior to becoming the CIA’s former chief regional analyst, Dr. Nakhleh conducted field research in Bahrain from 1972-73 as the first US scholar to do so, with complete access to the country’s societal benchmarks. This ultimately resulted in Nakhleh’s book, Bahrain: Political Development in a Modernizing Society, one of the most important references on Bahrain to date. Following is the unedited interview, which has been translated into English from Arabic by the Mirror.
Bahrain Mirror: Does the “Urban Tribalism” model that you discussed in your Bahrain book in the 1970s still
apply today?
Dr. Emile Nakhleh: Despite the passage of 40 years since I researched and wrote my book on Bahrain, the tribal model, unfortunately, still applies to the rule of Al Khalifa family in the country. The hopes that Bahraini citizens—Shia and Sunni—had pinned on the elections of the Constituent Assembly and the National Assembly in 1972-73 and on the constitution which the late Amir Shaykh Issa bin Salman Al Khalifa promulgated in 1974, were dashed two years later. By 1975, the Al Khalifa reverted to its autocratic rule of the country without any input from the citizens. After 1975, when the National Assembly was dissolved and the constitution was frozen, the ruling family continued to view the country and its people as part of Al Khalifa domain.
In fact, many of the key posts—including in the Royal Diwan, the Ministry of Defense, the Ministry of Foreign Affairs, the Prime Minister’s Office, the Ministry of Justice, etc—are currently held by children and grand children of the early founders of Al Khalifa rule. Bahrainis have generally expressed loyalty and allegiance to the head of the Al Khalifa tribe because of at least four reasons. First, Bahrainis generally liked and respected Shaykh ‘Issa. Second, the people were committed to the nationalist idea of an independent Bahrain. Third, many human rights activists in the 1970s, both Shia and Sunnis, remained hopeful that Shaykh ‘Issa would resurrect the National Assembly and re-instate the constitution. Fourth, most human rights activists and a majority of Bahrainis did not view calls for political reform and government accountability as a reflection of a sectarian divide in the country. On the contrary, most activists called for freedoms of speech and assembly and an accountable and transparent government for all Bahrainis. My field research at the time showed that many Bahraini business people resented the pervasive political and financial control that Shaykh Khalifa, the Prime Minister and brother of the Amir, exercised over contracts, dealerships, and projects—from hotel construction to land reclamation and development.
Many of them privately described him as “Mr. 10 percent, 40 percent, or 50 percent” depending on the perceived percentage they thought he got from specific contracts. Pro-reform dissidents maintained the Al Khalifa tribe ran Bahrain as a fiefdom without accountability to the public. After the Iranian Revolution in 1978-79, Shaykh Khalifa and his security forces justified their control as a way to thwart what they perceived as Iran’s support of Shia activism on the Arab side of the Gulf.
Mirror: How will the Arab Spring touch the Gulf Arab states? The 2001 National Charter promised a new reformist constitution, but unfortunately, the people were disappointed because the Amir (renamed King after 2002) reneged on the reform promises he made to the people in 1999. What trajectory will the pro-reform movement take and what impact will it have on the country?
Dr. Emile Nakhleh: Despite the tribal and dynastic nature of rule in Bahrain, the Arab Spring has touched the country, whether the ruling family likes it or not. Demands for dignity, respect, equality, and freedom of expression know no national boundaries. In a sense, the ruling family has been fortunate in that the key demands of the Bahraini opposition initially did not call for regime change. They focused on establishing a nationally elected parliament with full legislative powers, re-instating the 1974 constitution, replacing the Prime Minister, an independent judiciary, a transparent and accountable government, and an end to discriminatory practices against the Shia majority, especially in employment in the security services, the armed forces, hospitals, universities, and government-controlled corporations and financial institutions.
Those demands were neither sectarian nor driven by Iran. Continued regime repression and unlawful arrests of demonstrators have caused some protesters to raise the slogan of “regime change.” Whereas popular upheavals in Tunisia, Egypt, Yemen, Libya, and now in Syria from day one called for regime change, in Bahrain the regime change demand is very recent. If wise heads and pro-reform leaders within the ruling family do not prevail, and if the King and the Crown Prince remain marginalized, Al Khalifa rule would become much more tenuous, violence would spread, more Bahraini blood would be shed, and radical elements would become a stronger voice within the pro-reform opposition. What is more troubling is that the authority of the King and his son the Crown Prince is slowly eroding and the anti-reform faction within the ruling family, whether the older generation represented by the Prime Minister or some of the younger senior ministers represented by the so-called “al-Khawalid,” are becoming more rabidly anti-Shia and more influential.
This faction is following the Saudi guidelines on how to oppose democratic reforms. Once Saudi troops entered Bahrain under the guise of the GCC security agreement, Bahrain for all intents and purposes fell under Saudi suzerainty. While the Al Khalifa old guard has welcomed this intervention, pro-reform elements within and outside the ruling family resented the Saudi military presence and accused the Prime Minister of engineering it. Although the Saudi military presence might serve Saudi Arabia’s anti-Iran and anti-Shia policy, in the long run it will bring immense harm to Bahraini stability, society, and government. Egypt’s more powerful military and security services failed to silence the youthful awakening at Tahrir Square. Bahraini security forces would equally fail to silence the opposition. The window for genuine dialogue between the King and the opposition over meaningful political reform is rapidly closing. Once the window closes, Bahrain will find itself in real economic and political trouble, and Al Khalifa leadership would lose the bay’ah of its people–Sunni and Shia.
Mirror: How do you assess US-Saudi troubled relations over democracy and reform in the region and how do you
envision the relationship to evolve?
Dr. Emile Nakhleh: Saudi-American relations over Arab Spring uprisings upheavals and democratic transitions
became soured since the US President endorsed the pro-democracy movement in Egypt and urged the Egyptian dictator to abdicate. Because of their close relations with Mubarak, the Saudis were angered by the US position and claimed the President was too quick to “throw Mubarak under the bus.” President Obama’s position was that the US would support a leader as long as he enjoys the confidence of his people. Once he loses that, he should go. That was the case with Mubarak in Egypt, Saleh in Yemen, Ben Ali in Tunisia, Qadhaffi in Libya, and now Assad in Syria. The Saudis find it difficult to accept any meaningful role for the people in determining what type of government they should have and who the country’s leader should be. Despite the decades-old strategic relationship between Washington and Riyadh, the Saudi leadership has yet to get over what happened to Mubarak.
This strategic relationship is grounded in a shared American-Saudi view about regional stability, strong military cooperation, oil exports, and Iran’s perceived hegemonic posture in the Gulf region. The US and Saudi Arabia work closely in the military-to military area, coordinate regularly on Iran, and generally see eye to eye on Syria. They disagree on government response to unrest in Bahrain and on the harsh crackdown by Al Khalifa against the Shia majority. Washington did not support the Saudi military intervention in Bahrain and believed such a step would inflame the situation further and would foment sectarianism. Riyadh has not shown any willingness to start a genuine dialogue between Al Khalifa and the opposition, nor does it to envision any meaningful role for the Shia majority in government. Because of concern over Iran’s nuclear program, the horrendous violence in Syria, the presence of the US Fifth Fleet in Bahrain, and the 2012 presidential election campaign in the US, the uprising in Bahrain was put on the backburner, at least for the time being. Washington, however, has consistently pushed the Bahraini government, albeit ever so gently, toward a dialogue with the pro-democracy movement and has encouraged the Crown Prince to play a more active role in promoting such dialogue. On the other hand, the US maintains a robust military presence throughout the Gulf and coordinates with Gulf governments in fighting terrorism in the Arabian Peninsula and the Horn of Africa, and in countering potential destabilizing actions by Iran.
The US so far has not used its considerable leverage with Al Khalifa to force a dialogue with the opposition. As many analysts had anticipated, the Saudi military intervention has failed to quash the uprising despite the virulent attitude toward the Shia community. On the contrary, it has energized the opposition despite continued regime repression, has empowered the anti-Shia hardliners within the Al Khalifa family, and has indirectly marginalized the King and his son the Crown Prince.
Mirror: Has Saudi Arabia used US dependence on Saudi oil and the huge US arms sales to the Kingdom to blackmail the US into taking a seemingly more tolerant attitude toward the Al Khalifa harsh tactics against pro-democracy activists? Is it possible to divorce US-Bahraini relations from Saudi-American relations?
Dr. Emile Nakhleh: Saudi Arabia has not attempted to influence US foreign policy toward the Bahraini uprising through blackmail. Such an attempt, if ever done, would be futile and will certainly backfire. As the US becomes self-sufficient in energy, as the war in Afghanistan winds down, and as Iran searches for a negotiated compromise with the international community over its nuclear program, the US would begin to explore strategies to reduce its military presence in the region.
Budgetary and fiscal decisions within the US government could also reduce US American military presence in the Gulf, to include the Fifth Fleet. According to some reports, in a decade and a half from now Saudi Arabia is expected to need between 6-8 million barrels of oil a day for domestic consumption, mainly in power generation and desalination. Consequently, the Kingdom would have less oil to export and less oil revenues. Within the same timeframe, the Saudi government would need more money to provide for the welfare of its citizens, especially in unemployment assistance, education, and health. With less money to spend and a potentially more peaceful relationship with Iran, The Saudi government would be less inclined to spend on massive arms purchases from the US or anywhere else. The government also would be unable to spend billions of dollars on pacifying the restive segments of its population, as King Abdallah did in response to the Arab Spring in 2011. If these projections materialize, the Saudi government would be forced to minimize its support for Sunni hardliners in Bahrain.
Al Khalifa would then be forced to respond to their people’s calls for democracy and justice without Saudi support. Currently, US-Bahraini relations seem to be tied closely to US-Saudi relations because of the pervasive Saudi economic and security influence in Bahrain. As the balance of power changes in the region over the next decade, and as the US reviews its strategic interests and commitments in the region, Al Khalifa would need to explore strategies for genuine reform and economic and social justice. The main challenge would be whether Al Khalifa would have the luxury of time to wait until then. The window of dialogue might close much sooner. If that happens, calls for regime change would trump calls for dialogue. Bahrain has assumed more significance than its size in the past two years because of the power struggle between Iran and Saudi Arabia; once, this struggle abates, Bahrain would again revert to being a small player in regional power configurations.
Mirror: How do you assess the pro-democracy forces and the democracy movement in Bahrain?
Dr. Emile Nakhleh: Like every Arab protest movement in the past two years, Bahrain’s pro-democracy uprising started peacefully demanding genuine political reform and government accountability. Like every regime where protests occurred, Al Khalifa resorted to violence and repression. As the government crackdown turned harsher and bloodier, and as the Al Khalifa Sunni government began to whip up the flames of anti-Shia sectarianism and shoot and beat peaceful protesters and torture prisoners, some in the pro-democracy movement began to question whether the ruling family was at all interested in reaching a compromise with the opposition. Calls for justice and dignity in Duwwar al-Lu’lu’ in Manama were not different from those in Tahrir Square in Cairo.
The responses of the Egyptian dictator and the Al Khalifa, however, differed significantly. Mubarak was convinced to abdicate before much blood was shed , while Al Khalifa, especially the Prime Minister, continue to cling to power. Although the Bahraini pro-democracy movement is indigenous and genuine, it is not monolithic. It consists of numerous Shia and Sunni religious and secular groups ranging from al-Wifaq to al-Wa’ad, al-Minbar, and al-Haqq, among others. As confrontations with government became more violent, some within the opposition began to opt for violence as a justified response to government repression. Others rejected violence and responded positively to some government calls for dialogue. There is also a generational divide within the uprising, with the youthful generation becoming more supportive of violence and opposed to dialogue. Al-Wifaq seems to have lost some of its influence, and the Sunni secular movements are becoming more marginalized.
The democracy movement is divided ideologically and generationally. Some factions still hope for a democratically reformed Bahrain under the umbrella of a “constitutional” Al Khalifa monarchy but without the current Prime Minister. Others, who consider the establishment of a constitutional monarchy as highly improbable, have come out for regime change. Despite the deep disagreements within the democracy movement over which strategies to pursue, most factions agree the current situation in Bahrain is unsustainable. The Al Khalifa dynasty can no longer maintain its grip on power as it did before February 2011.
Mirror: How do you assess the regime use of Iran as a scare tactic to gain Western support for its crackdown against the opposition?
Dr. Emile Nakhleh: The democracy and human rights movement in Bahrain has never been about Shia or about Iran despite regime claims to the contrary. Calls for political reform and labor rights started decades ago while Iran was still under the Shah. Most Bahraini Shia do not turn to Iranian Grand ayatollahs as their marja’. In fact, Bahraini Shia for the most part have followed Iraqi religious leaders in Najaf and Karbala as their source of emulation. Since the advent of the Arab Spring, the Al Khalifa government has parroted the argument of their Saudi benefactors that Iran was behind the protest movement in the Gulf Cooperation Council states. The West believes human rights advocates in Bahrain, Saudi Arabia, Kuwait, Oman, Abu Dhabi, and elsewhere are indigenous groups and not necessarily directed or controlled by Tehran. While continued unrest on the Arab side of the Gulf could benefit Iran’s short-term interests, the current Iranian regime is wary of pro-democracy protests lest they spread to Iran.
The Islamic Republic would not want to see a repeat of the June 2009 massive protests that followed the elections. Iran has already lost much of its influence in the Arab world because of its support of the Assad regime in Syria. Even Shia Hezbollah has lost much of its luster in the Arab street that was built following the 2006 Lebanon war because of its support of Assad. The Bahraini government’s argument that Iran is behind the unrest has not gotten any traction among policymakers in Washington, London, and other Western capitals. The West’s disagreements with Iran and international sanctions against that country are driven by Iran’s nuclear program, not by its perceived support of domestic unrest in Sunni Arab countries. The specter of the so-called Shia Crescent that was raised by Saudi Arabia, Mubarak’s Egypt, and Jordan a few years back has all but faded. In fact, many analysts in the West t now argue that a “Sunni Crescent” is on the ascendancy in the Arab world, and that Iran is becoming more isolated in the region.
]]>About 32 percent of all stock trades in the US stock markets are being done “off market” in “dark pools” and other confidential “trading platforms”. Trading on well-known markets such as the New York Stock Exchange and NASDAQ has been dropping precipitously.
The “dark pools” have taken over some increasing [...]]]>
About 32 percent of all stock trades in the US stock markets are being done “off market” in “dark pools” and other confidential “trading platforms”. Trading on well-known markets such as the New York Stock Exchange and NASDAQ has been dropping precipitously.
The “dark pools” have taken over some increasing chunks of the market shares that used to go to these and other major exchanges. Also, as the article from Business Week points out, massive amounts of money have fled the normal stock and other equity markets due to a lack of confidence and trust in those markets.
This video from the Wall Street Jounal explains what “dark pools” are. Most people are likely very much in the dark about them.
To put it simply, “dark pools” are pools of liquidity and financial capital that are flowing from one trader to another. One customer of a broker might need to move a large amount of a certain security, stock, derivative, bond or bill without it being noticed on the public markets. ”Dark pools” are confidential, secret and certainly not registered with the SEC or on any public notice boards of the trades.
If the large trade were to flow into the data banks of the algorithms of the high frequency traders — who really run the market to a very big extent — then the price of the security the trader wants to move can drop rather quickly. So, it is thought by these surreptitious security traders that one can retain more value by keeping the trades secret. “Dark pools” have been developing in China, the EU, and even in places like Indonesia, the Philippines, and all across the world.
Increasing development of the dozens of confidential platforms is in part a response to the development of high speed trading. High speed trading has a huge influence on the stock markets in the US and in many other countries. As the risks to trading have increased with the faster diffusion into the marketplace of high speed trading, so too have the “dark pools” and other surreptitious trading platforms developed.
There have been many instances of obvious mispricing of securities by some of these black box algorithms, such as sending the price of many well capitalized companies heading towards penny stocks in the matter of seconds during “flash crashes”, as happened in May 2010. One of the biggest energy companies in the world, Exelon, was deemed almost worthless on the markets for a moment. Proctor and Gamble became a penny stock.
One of the main reasons behind this flash crash was the high frequency trading companies’ algorithms (hyper complex mathematical stock and derivative trading models) kicking in to react to an order to sell 75,000 E-Mini Standard & Poor’s 500 futures contracts. If this seems somewhat to very obscure to you do not get worried that you are out of the loop on what is really going on in the stock, futures and derivatives markets. My guess is 99 percent of the people in the US, if not the world, are pretty much clueless about what is happening and who is doing what.
It is not just the existence of “dark pools” or of high speed trading that lends to huge potential volatility — even worse is the combination of the two. There is an increasing opacity to securities markets while at the same time an increasing dominance of very complex, black box mathematical algorithms that trade at velocities that are beyond the comprehension of just about everyone, including some of the people who are at the top of these trading companies.
One of my biggest concerns about high frequency trading is that the models, the algorithms used for trades, may not be built to handle major commodity price shocks, such as what may occur with an invasion of Iran and the response and counter-response that may happen after that.
One only has to consider the 1998 collapse of Long Term Capital Management (LTCM) that was sparked by the combination of the East Asian Financial Crises in 1997-1998, the default of Russia and the collapse of the ruble, as well as other complex factors, to see how this may happen again.
Please note LTCM was established by a bunch of Nobel Laureates and had some of the best and brightest “rocket scientists” of algorithm development on their staff. This article from CATO also discusses the government sponsored and constructed bailout of LTCM. Sound familiar? This was in 1998.
I find the potential robustness of these models in times of even moderate stress to be suspect.
We can now add in the problems that could result from the “dark pools” to the “high frequency trading” to those of the shadow banks that I mentioned in a previous article.
Indeed, the risks to the toppling of asset values and economies via oil and other commodity shocks are looming if there are any serious military shocks, most particularly if significant oil facilities such as Ab Qaiq are seriously damaged in the medium to long runs.
It is not just an attack of Iran that would shock the markets, but what follows after that. Iran is unlikely to back down and cower. It will counter attack. The Iranians have stated this quite clearly.
The effects of these shocks could also be magnified due to the fragility of the global economy. That volatility can be further magnified by the fall of the assets that back the shadow banking systems of securities and derivatives. This could be made even worse via high frequency trading and the increasing opacity of markets via “dark pools”.
One might expect large investors to initially flock to the “dark pools” to dump their securities. This may be kept quiet for a short while. However, sooner rather than later, the expected huge movements of assets that will be attempted to be dumped to preserve value will be noticed and talked about. Then the high frequency trades kick in full force. Add to this the fall in assets backing up the hundreds of trillions of dollars in derivatives and you have quite a problem.
Can you imagine the “flash crash” developing into a “smash crash” from a spreading conflict in the Gulf?
I really wonder how those black box computer programs would respond when the price of oil goes beyond the outer boundaries of their assumptions – and stays there.
Many markets have become too fast, too incomprehensible, and too opaque for the average investor and even for most governments. Some of these markets may be heading toward a dangerous tipping point on some issues not far in the future anyway.
A war in an area with 70 percent of all known commercially available conventional oil reserves and all of the excess oil capacity in the world may help that tipping point to arrive faster and in a more furious way.
Very few know what is really happening in the “dark pools”. Very few know what is really happening inside those black box algorithms of the high frequency traders. Shadow banking remains in the shadows.
Policy recommendation: governments and others need to look more into these dark regions to fully analyze certain strategic economic, political and other decisions. The world economy has changed vastly even in the last few years with massive liquidity traps and small reactions to monetary and fiscal policy than in the past and the existence of many great unknowns that contain massive amounts of assets within them. These policy responses need to be global as well as national given the massive international flows of money each day, often in the trillions of dollars if one also adds in foreign exchange transactions.
This odd amalgam of the old and new financial systems may be resilient to normal shocks and small shocks, but big shocks could make things rather bad indeed.
Governments and others need to understand and navigate in the dark corners of finance — and there are many of them — in order to understand what might happen next.
]]>“The Saudis typically make decisions based on what’s in their own best interest,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington. “Their second priority is to do what’s best for global economic conditions. The Saudis probably like seeing the price of Brent between $90 and $100, more than at either $75 or $125.”
This could change, but as shown by this event and Ali’s report, sometimes (and much more often than we think) economic interests win over political ones.
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