Category Archives: Iran

Economic Impact of US Intervention in Syria

As the world awaits the decision of whether the US will intervene in Syria’s bloody civil war, the price that country is paying is growing day by day.

Hundreds of thousands of people have been slaughtered and cities that were once cultural capitals have been annihilated. Inflation is at triple digits, GDP has literally halved and the jobless rate has quintupled.

But the key question today, and the one that President Barack Obama has brought to US Congress, is whether military-led intervention will serve as an overdue punishment and warning to Bashar Al Assad and his regime, or whether it will simply deal a final blow to the country as the Syrian regime’s allies retaliate aggressively at the expense of innocent civilians.

While it is the humanitarian cost that is the number one consideration here, the economy, even in its current state, is still a lifeline for thousands of Syrians. The global economic impact of an escalation of the civil war is also a factor that is being mulled because of the ripple effect on global markets.

Based on interviews with half a dozen senior economists focused on Syria, Rebel Economy has put together a list of the key economic impacts of US military-led intervention in Syria:

Higher Oil Prices

Although Syria is not a major oil producer, many expect the oil price to spike, mainly because Western intervention in Syria is likely to lead to a bigger regional conflict involving major oil producers and two strong allies to the Assad regime, Iran and Russia.

More than two years into Syria’s civil war, Assad is settling his bills for Russian arms orders to try to shore up ties with his most powerful ally, this Reuters investigation reveals.

Oil prices have already hit an 18-month high, but if the civil war escalates with military strikes the oil price is expected to spike further, playing havoc with global markets as the cost of production soars.

Some oil analysts are estimating that Brent Crude could rise above $120 per barrel as a result of a military strike, while some, including those at Société Générale, see prices climbing to $150 per barrel in the short-term.

A possible spillover into Iraq, OPEC’s second largest producer, would cut the volume of oil from the global market and raise prices. Iraq’s Kirkuk oil pipeline has already been targeted six times in August. This has forced Iraq to cut oil shipments from pipeline by more than half for September.

Foreign Currency Troubles

Pressure on foreign reserves will grow as energy prices rise, especially in countries dependant on imports. Some countries near to Syria are particularly vulnerable to foreign currency pressures, including Lebanon and Jordan whose currency reserves stand at near 10-year lows. This means they could have trouble covering the cost of imports if the conflict in Syria escalates.

And the lower reserves fall, the more currency depreciation is possible and the more pressure on imports.

In Syria, in the days following the US’ announcement of possible military intervention, the Syrian pound has taken a beating on the black market.

Here’s Professor Steve Hanke’s update. He’s a professor of Applied Economics at Johns Hopkins University:

The Syrian pound (SYP) has lost 24.07% of its value against the US dollar in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88%. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term.

Trade Routes Disrupted

Analysts say it’s unlikely for key ports in the Gulf or cargo traffic through the Suez Canal to be disrupted as a result of military intervention, however perception is king.

Even the threat of increased disruption could send insurance rates skyrocketing and delay the passage of goods passing through Lebanon’s Port of Beirut.

Contagion effect

Aside from the impact on the oil markets and the major oil producers tied to Syria, many other countries in the region could see an adverse impact on their economies because of Syrian strife. Turkey for example, already suffering from a hard to manage current account deficit, could see it widen as political instability weakens the lira and raises oil prices.

And of course Israel has threatened aggressive action if attacked by Hezbollah or the Syrian army, which could impact both Lebanon and other countries in the region if the conflict escalated fast.

Overstating the impact?  

Despite all the above pointing to an Armageddon scenario, some still say that an intervention will do no more than dent the Syrian regime.

Samer Abboud, a visiting scholar at the Carnegie Middle East Center and political economist, says the “regime is so boxed in economically and any major economic effects have already occurred – sanctions, the disrupting of production and trade routes, and so on – that the “limited and narrow” strikes will not be as debilitating as we may think”.

For one, though we mentioned above the impact of trade routes, in fact local reports from Lebanon suggest the Port of Beirut is doing much better than expected. The Daily Star reports:

About 2,200 such vehicles enter the port daily, twice the number at the start of the year, and the multicolored containers are stacked five high rather than three. While Lebanon’s growth has suffered during the two-and-a-half-year conflict next door in Syria, port traffic has risen as traders avoid risky overland transit. Domestic demand is also increasing as Lebanon absorbs 1.2 million Syrians fleeing their war-torn country.

Unlike Libya, which had little to no foreign support, Syria has the powers of Iran and Russia behind it arming it and financing the regime. The West’s reluctance and delay to intervene is also ultimately buying more time for the Syrian regime to replenish stocks, move somewhere new and high military assets.

It has also weakened the West against Syria, allowing the regime and its allies to calculate that any intervention will be short and not a major long-term threat, according to Abboud:

Regime allies are unlikely to cease financial and material support in the aftermath of intervention, regardless of whether the regime is perceived to be losing ground on the battlefield. Intervention will only strengthen the commitment and resolve of regime allies and supporters, particularly Iran and Hezbollah. If they can withstand the intervention, then the West’s only major military option will have been confronted.

What is clear is that even though the question of intervention is complicated and mired with complexities, the longer the West waits to decide, the more time the Syrian regime has to retaliate with strength.



Why The Oil Market Is Wrong On Egypt

This guest post is by Robin Mills, energy strategist and economist. He is the author of “The Myth of the Oil Crisis” and “Capturing Carbon”. 

An unlikely pairing has made it to the headlines this week: international oil markets and Egypt.

The price of US light crude oil has risen above $100 a barrel for the first time since September 2012 while Brent crude oil, the European benchmark, has risen to about $105, apparently on concerns over political turmoil in Egypt.

Energy analysts left, right and centre say there’s risk the unrest in Egypt could spread to other parts of the Middle East impacting oil supply.

But there is no truth in this.  Oil markets are usually jumpy over perceived geopolitical risk, even when there is no logical connection to any realistic supply disruption. 

Most importantly, Egypt is not a major oil exporter – in fact, it is a net importer of about 90,000 barrels per day (bpd). Fears that Egyptian turmoil will spread to neighbouring countries could only be rooted in an ignorance of the region and a lack of awareness of the past two and a half years.

Some of the increase in oil prices may be driven by fears for the Suez Canal.  But this is actually not such a vital waterway for oil – nothing like the celebrated Strait of Hormuz, which carries some 17 million bpd of crude oil.

In contrast, the Suez Canal transited a measly net of about 100,000 bpd (see the table below for details) in the first three months of this year.

robinoil

What’s more, the Suez Canal is even less significant for oil transport than Egypt’s Sumed pipeline, which runs from Ain Soukhna on the Red Sea, crosses the Nile south of Cairo and terminates at Sidi Kerir near Alexandria on the Mediterranean.

It carries crude oil from south to north, and transported 1.7 million bpd of oil in 2011, up from 1.1 Mpbd in 2010.

If anything, liquefied natural gas (LNG) transit through Suez is more significant on a net basis, mostly running south-north (probably largely representing Qatari supplies to Europe).

A disruption in Suez, which seems unlikely, would have much more significant implications for world trade generally, than for oil specifically.

The bottom line is that more worrying for oil markets should be the disruption of Libyan production, now below 1 million bpd due to strikes and protests, and the continuing crisis in Iraq, a major oil producer. Yesterday, in continuing insecurity, two cars bombs exploded in the southern oil city of Basra, which had been relatively secure.

Iraqi oil exports in June were at a 15-month low due to pipeline sabotage, technical problems and bad weather at southern loading ports.

The real reason there has been a relative gain of US oil prices over European prices is clearly not because of Middle Eastern events, but due to other domestic developments including new pipelines that will open up once landlocked crude supplies in Oklahoma.

On the other hand, negative factors seem to be overlooked – the reduced probability of conflict with Iran after the election of pragmatist president Hassan Rouhani, and weak Chinese economic data.

As often happens, with a collection of data pointing in opposite directions, the oil market has chosen the most dramatic, if the least relevant, to respond to.



The Arabian Dream: Abu Dhabi’s Mercenaries

Late one night in November 2010, a plane carrying dozens of Colombian men touched down in this glittering seaside capital [Abu Dhabi]. Whisked through customs by an Emirati intelligence officer, the group boarded an unmarked bus and drove roughly 20 miles to a windswept military complex in the desert sand.

The Colombians had entered the United Arab Emirates posing as construction workers. In fact, they were soldiers for a secret American-led mercenary army being built by Erik Prince, the billionaire founder of Blackwater Worldwide, with $529 million from the oil-soaked sheikdom.

By Mark Mazzetti and Emily B. Hager for The New York Times, Secret Desert Force Set Up by Blackwater, May 2011

For any expatriate who has spent time in the United Arab Emirates, the luxury lifestyle soon gives way to a seedy underworld, which is only a paradise for fugitives on the run.

[caption id="attachment_1280" align="alignright" width="223"]Times News Service Erik Prince[/caption]

The UAE, after all, is “an autocracy with the sheen of a progressive, modern state”, according to the New York Times’ reporters who exposed Erik Prince, the founder of Blackwater, and his secret army.

But for the Colombians he recruited for the battalion intended to beef up the UAE’s military presence, Abu Dhabi is the “Arabian Dream” offering a better quality of life. 

Prince, who had already been a driving force in the boom in wartime contracting that began after the September 11, 2001, attacks, was hired by the crown prince of Abu Dhabi, Sheikh Mohamed bin Zayed al-Nahyan, to put together a squad of foreign troops for the UAE.

He outsourced critical parts of the UAE’s defense to mercenaries from countries including Colombia and South Africa, in a plan said to have been drafted months before the so-called Arab Spring revolts that many experts believe are unlikely to spread to the UAE. But Iran was a particular concern.

The mercenaries live in a training camp, located on an Emirati base called Zayed Military City:

It is hidden behind concrete walls laced with barbed wire. Photographs show rows of identical yellow temporary buildings, used for barracks and mess halls, and a motor pool, which houses Humvees and fuel trucks.

Secret Desert Force Set Up by Blackwater, May 2011

It does not sound like much, but for these imported soldiers, joining the operation was an opportunity to earn a lot of money and see a new part of the world.

This week, Columbia’s daily newspaper EL TIEMPO, gained exclusive access to some of the Colombian paramilitaries who spoke of the “Arabian Dream” in the UAE. 

For the 1,400 Colombian troops in Abu Dhabi, the UAE offers “not just a medal, but a proper paycheck”, according to a translation of the Spanish article.

“Why did we decide to leave? That’s what people ask us. The response is easy: Quality of life,” they [the troops] say.

One officer describes the stark difference in quality of life. In Columbia, he received a bonus of 800,000 pesos ($448.8). In Abu Dhabi, he has a salary of $3,000, receives housing, food and healthcare free. He has also learnt English, and in the evenings, he and his colleagues travel in buses into the city centre, where they can buy food and supplies. They get weekends off.

The long weeks of combat, sleepless nights, patrolling and watching for landmines were left behind, the officers told EL TIEMPO.

[caption id="attachment_1290" align="alignleft" width="580"]UAE training camp where foreign troops are stationed, courtesy of New York Times UAE training camp where foreign troops are stationed, courtesy of New York Times[/caption]

Reflex Responses, a company known as R2 and contracted by the UAE government to train and recruit the troops, spends roughly $9 million per month maintaining the battalion, which includes expenditures for employee salaries, ammunition and wages for dozens of domestic workers who cook meals, wash clothes and clean the camp,  according to the NYT report.

The Colombians “never wanted for anything”, said Calixto Rincón, a 13-year veteran of Colombia’s National Police force who is now back in Colombia after serving as a mercenary in the UAE.

The UAE and American leaders even arranged to have a chef travel from Colombia to make traditional soups.

Unsurprisingly, the secrecy of the project and the clash of cultures between the Catholic Colombians and the Muslim Emiratis has made some things uncomfortable:
“Here, you can’t look at the women like in Colombia, because you can end up in jail,” one officer told EL TIEMPO. “A wrong glance can create offense, which gets reported to the police”.
Meanwhile another told the New York Times: “We didn’t have permission to even look through the door. We were only allowed outside for our morning jog, and all we could see was sand everywhere.”

But even this grievance was addressed by the American trainers.

One evening, the NYT reporters wrote, “after months stationed in the desert, [the troops] boarded an unmarked bus and were driven to hotels in central Dubai. There, some R2 executives had arranged for them to spend the evening with prostitutes.”



The real WMD nightmare is Syria

In light of the news from US government sources that signal Washington has information that Syria was making preparations to use its chemical arsenal, read this March piece from the Bulletin of Atomic Scientists, “The Real WMD nightmare is Syria”, on why international concern should be focused on Bashar al-Assad’s weapons of mass destruction not Iran’s suspected nuclear weapons programme. 

The article, by Charles P. Blair of the Federation of American Scientists, remains an informed and up-to-date piece, albeit slightly scare-mongering.

Some highlights below:

Blair tells us what Syria’s WMDs programme looks like.

Syria likely has one of the largest and most sophisticated chemical weapon programs in the world.  

Syria has a chemical arsenal that includes several hundred tons of blistering agents along with likely large stockpiles of deadly nerve agents, including VX, the most toxic of all chemical weapons. At leastfour large chemical weapon production facilitiesexist. Additionally, Syria likely stores its deadly chemical weapons at dozens of facilities throughout the fractious country.

And the risk of Syria using these weapons.

Should Syria devolve into full-blown civil-war, the security of its WMD should be of profound concern, as sectarian insurgents and Islamist terrorist groups may stand poised to seize chemical and perhaps even biological weapons.

Given its robust chemical weapons arsenal and its perceived need to deter Israel, Syria has long been suspected of having an active biological weapons program. Despite signing the Biological Weapons and Toxins Convention in 1972 (the treaty prohibits the development, production, and stockpiling of biological and toxin weapons), Syria never ratified the treaty.

Blair also discusses the chance of weapons spillover into neighbouring countries, and how regional leaders must come together to avert a crisis.

With Syria’s government distracted by internal revolt and US forces now fully out of Iraq, it is plausible that stolen chemical or biological weapons could find their way across the Syrian border into Iraq. Similarly, Syrian WMD could be smuggled into southern Turkey, Jordan, Lebanon, the West Bank, Israel, and, potentially, the United States and Europe.

If chaos ensues in Syria, the United States cannot go it alone in securing hundreds of tons of Syrian WMD. Regional leaders — including some, such as Sunni Saudi Arabia and Shiite Iran, that are now backing the insurgency and the regime, respectively — must come together and begin planning to avert a dispersion of Syrian chemical or biological weapons that would threaten everyone, of any political or religious persuasion, in the Middle East and around the world.



Interlude

I’m off to sample cuisine typical of the US Midwest (think corn dogs, turkey and assorted berries).

Rebel Economy will be back in early December. If you feel like it, send a brief guest post to rebeleconomy@gmail.com or to me personally at fhalime@gmail.com.

Perhaps you have an axe to grind about President Morsi and his economic plan (or any other Arab leader/government for that matter)? Perhaps you want to write about Sudan’s underreported economic malaise, or the real reason behind Iran’s currency crisis? Maybe the uphill struggle for Bahrain’s labour movement against the authoritarian government may be more up your alley?

Consider Rebel Economy your soapbox.

Till next time,

Farah

 

 



Breakfast Wrap: Gulf Arms Sales, James Bond’s Villain, Fire EFG CEOs?

The ugly military power of the Gulf, including the United Arab Emirates, Saudi Arabia, Qatar and Bahrain was exposed during the “Arab Spring”.

It wasn’t a huge surprise that this oil-rich area was well-equipped with arms, but it did show that “it is presidents and colonels, not kings and princes, who have proven most vulnerable to social upheaval,” a note from Foreign Policy Research Institute sums up.

This subject, worth a post of its own, is one worth keeping an eye on if only for the United States’ (and the United Kingdom in some cases) involvement in supporting these autocracies for their own benefit.

Just two days ago Boeing Co secured a contract valued at $4 billion to modernize the Royal Saudi Arabian Air Force’s fighter jet fleet

The work, which will be done at the Robins Air Force Base in Georgia, offers a glimpse into the long-standing ties between the US and Saudi Arabia.

And with most deals, it’s win-win.  For the US, Saudi Arabia’s military power helps protect it against Iran, while for Saudi it is about maintaining rule.

Saudi Arabia used F-15s and Apache helicopters in late 2009 to fight Muslim Shiite rebels who crossed the border from Yemen and seized territory inside the kingdom.

Despite sporadic demonstrations, little opposition has mobilised against ruling families in the Gulf, aside from Bahrain, where the threat to monarchical rule was countered with local security forces helped by the Gulf Cooperation Council troops.

Order is maintained, for now.

 

◊ ◊ ◊

Finally some real work on energy subsidy reform from Egypt.  The North African nation Egypt has taken a first step to getting expensive energy subsidies under control, a key component of an economic reform programme the cash-strapped government is presenting to the IMF to obtain a loan, Reuters reported.

The cabinet received on Thursday the preliminary results of a pilot programme to use ration cards to distribute cooking gas to the needy instead of selling it on demand, Petroleum Minister Osama Kamal is quoted as saying.

The government spent 96 billion Egyptian pounds, or 20% of all expenditure, on subsidising petroleum products, including cooking gas, in the financial year that ended on June 30.

The ration system, where gas cylinders are only given out to those with the correct cards, has only been tested in four governorates (there are just under 30), but a start is better than nothing.

◊ ◊ ◊

Egyptian investment bank EFG Hermes aims to expand into Turkey, Iraq and Libya and plans to grow its asset management arm by 50% after the completion of its joint venture with Qatar’s QInvest, it said on Friday.

Ok, the ambitions sound reasonable enough, especially considering EFG Hermes is one of just a handful of investment banks that is plying to become more of a regional power.

However there is a big glitch to this plan.  EFG’s top two chief executives, Yasser El Mallawany and Hassan Heikal are currently under investigation for alleged insider trading.  The controversial case, which also implicates the once untouchable Mubarak sons, has been dragging on since the beginning of this year.

In a post-revolutionary climate, where transparency and accountability are King, will EFG’s reputation hold up, even with Qatar’s influence?

Perhaps it’s time to let go of the weakest link? Yes, EFG has so far protected Heikal and El Mallawany, but the damage has been done and the bank is effectively being taken over by the Qatari firm.  There’s nothing to it now but to fire the CEOs. 

◊ ◊ ◊

The latest James Bond blockbuster has the villain, not as a giant with metal teeth, or a Japanese man adept at throwing a steel-rimmed bowler hat, but as a super cyber hacker.

This is today’s national security risk and the US and some countries in the Middle East have become the main targets.

The National’s Tony Glover sets out the US defence secretary’s main fears and new strategy against cyber crime.  Leon Panetta, has warned that America is facing the prospect of a highly targeted and orchestrated attack by adversaries of the United States, which officials identified as China, Russia, Iran and militant groups.

Mr Panetta outlined a nightmare scenario in which the US suffers a string of disasters such as derailed passenger trains loaded with lethal chemicals, simultaneous contamination of the water supply in major cities and a shutdown of the power grid across large parts of the country.



Holiday Reading: China Backdoor For Iran, Mubarak’s Corruption, US policy on Egypt

Happy holidays everyone. (It is the Islamic holiday of Eid Al-Adha, for those that don’t follow the Middle East too closely).

Here are some interesting reads.

Iranian sanctions 

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Breakfast Wrap: Egypt Must Stop Crying Wolf, Hussein Salem’s Seedy World

I was on a conference call with several Arab (some of them Egyptian) economists and analysts based in New York yesterday, and they told what their biggest concern is regarding Egypt’s transition to democracy.

It wasn’t the confusion over writing a constitution, nor the risk of violence from protests. It wasn’t even nationwide subsidies that have bled the country dry for the past few years.

The analysts’ biggest worry was the credibility of news announcements that come out of Egypt almost on a daily basis.  For example, do we believe the government’s statement that they will secure an IMF loan by November when they’ve been repeating this statement for months?

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Breakfast Wrap: Egyptian Pipe Dreams? Final, Final Draft of Economic Plan

Another fanciful pipe dream or is this a realistic ambition?

Egypt, the world’s biggest wheat importer, will be able to cease importing wheat for the production of state-subsidised bread if it builds enough silos to store locally-produced grain, Agriculture Minister Salah Abdel Momen told Reuters on Sunday.

To put this idea into context, of the 18.8 million tonnes of wheat consumed in Egypt each year, around half is grown locally, Reuters reports.

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Gulf Insider Fraud

Fraud is down globally and the proportion of companies that suffered an incident slid to 61%, from 75%, according to a report published today from Kroll Advisory Solutions that was prepared with the Economist Intelligence Unit.

“But the biggest threat is from within,” the report says, with two-thirds of the firms hit by fraud in the company’s survey citing an “insider” as a key perpetrator.

Things start getting interesting in the Middle East section of the report, which is mainly focused on the Gulf states, including Saudi Arabia.   Though Gulf state respondents reported a lower prevalance of fraud than the global average, the “main perpetrators of fraud in the Gulf differ in some ways from the norm.”

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