Day: April 25, 2020
The Arab world is vulnerable
The Arab world is facing a global coronavirus recession and the associated oil demand shock. On April 22, the Arab Center Washington DC hosted a panel discussion on “The Oil Market and the Economic Impact of COVID-19 in the Arab World.” The discussion featured three speakers:
Garbis Iradian: Chief Economist for Middle East and North Africa, Institute of International Finance
Bessma Momani: Interim Assistant Vice-President of International Relations and Professor of Political Science, University of Waterloo
Khalil E. Jahshan: Executive Director, Arab Center Washington DC, moderated
The oil market and Arab states
Iradian stated that Russia and Saudi Arabia have reached an agreement to cut crude oil production by 9.7 million barrels, but this agreement will not be enacted until May. West Texas Intermediate has crashed into negative territory. More than sufficient oil supply and limited storage capacity is causing oil companies to give out oil for free. Iradian expected oil prices for the second quarter of this year to bottom around $30. The prices for the second half of this year will depend on recovery of global economy, especially from the COVID-19 pandemic. But prices will remain low in the long-term.
Iradian mentioned that Saudi Arabia, the UAE, and Kuwait could cope with low oil prices for at least 2-3 years because their ratio of public debt to GDP is modest. These countries have large financial buffers, including official reserves and sovereign wealth funds that can finance their current deficits.
Algeria, Oman, Bahrain, and Iraq, however, are encountering greater risks. Oman’s and Bahrain’s ratio of public debt to their GDP is high. Neither has sufficient official reserves and sovereign wealth funds, so they are cutting spending and diversifying their economies. Low oil prices will create more incentives for some oil exporters to reform. Both Algeria and Iraq have provided stimulus packages to lend to SMEs at concessional terms.
Oil importers, such as Egypt, Morocco, Tunisia, Jordan, Lebanon, and Sudan could benefit a little from low oil prices. The economic contraction, however, will have a negative impact on them due to the decrease in tourism, remittances from the GCC, and investment.
A grim outlook
Momani is pessimistic about the current global liquidity crisis. The Middle East depends on multilateral organizations and official development assistance from the West. The West, however, doesn’t have the incentive to give financial resources to the Middle East. Although the Arab states have reserves, they will slowly dry up because the global economy will not recover in the short-term.
Momani believes that this is a semi-permanent situation that will induce restructuring in every sector. The decline in oil prices is problematic to many Arab states as they are dependent on oil exports. In Iraq, the cost production of crude oil is $5/barrel, and in Saudi Arabia the cost production is $10-15/ barrel. If low oil prices persist, it will lead to revenue shortfalls. Some Gulf states intend to diversify their economies, but tourism, airlines, and big sports events are all at a standstill.
Momani listed several more economic challenges that the Gulf faces:
- Most states without enormous reserves have low tax bases.
- The lack of social safety net means public health services are inequitably distributed between the rich and the masses.
- Guest workers in the Gulf face both unemployment and discrimination.
- The intergenerational family structure prevents Middle Eastern families from combating COVID-19 effectively.
- Universities in the Gulf, most of which are subsidized by Gulf states, are facing difficulties.
- The UAE, which depends on port infrastructure, will come to a standstill as the movement of goods and services between China and the Middle East halts.
- Oil exporters depend on US dollars but cannot print them, they are hostage to the US Federal Reserve and the Trump administration.
- The crisis could induce the collapse of small entrepreneurial sectors.
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CCP’s challenges in COVID-19
The Chinese Communist Party (CCP) is using the COVID-19 pandemic as an opportunity to expand its influence around the world. On April 17, Hudson Institute hosted a panel discussion on “Meeting the Challenge of the Chinese Communist Party During and After COVID-19.” The discussion featured four speakers:
Eric Brown: Senior Fellow, Hudson Institute
Patrick Cronin: Asia-Pacific Security Chair and Senior Fellow, Hudson Institute
John Lee: Senior Fellow, Hudson Institute
Lewis Libby: Senior Vice President, Hudson Institute, moderated
Current Context
Lee said that the CCP is promoting its decisive and effective response in contrast to America’s chaotic efforts. The masks, ventilators, and doctors that China has sent around the world are meant to show that China is saving the world, while democracy in the US is floundering. He believes that China will return to a powerful position because of its strong national capabilities.
One of the challenges that China is encountering, however, is the lockdown in neighboring states, which prevents them from absorbing China’s excess supplies. In the long term, China needs continued access to external markets, capital, and innovation. Lee points out that Europe is considering toughening its industrial polices against China.
Brown indicated that the US thought cooperation with China throughout the 1990s would let the CCP relinquish some control. The CCP, however, was not prepared for further liberalization. After the 2008 financial crisis, the party re-asserted more control over economic, political, and ideological discussions. President Xi attempted to turn China against the US, causing deterioration in US-China relations and leading to limited market access.
Adding that the pandemic could trigger a change in CCP tactics because the criticism of the one-party system has deepened, Brown noted that people have been thinking about a fundamental change in the CCP regime. The regime, hence, could redouble its police state buildup and become more aggressive.
Is China winning?
Cronin believes that the pandemic crisis should neither lead us to count America out, nor assume China’s peaceful rise, for three reasons:
- US retrenchment from the Pacific is not irreparable. It will, however, accelerate the disentanglement of US supply chains and high-tech innovation sources. Meanwhile, China is not filling the gap due to its internal troubles and its poor track record of trust and transparency.
- The CCP is adaptable and agile, characteristics the US has underestimated. The Covid-19 crisis, nevertheless, could be a Chernobyl moment for Xi’s leadership.
- The US and its allies are in a competition with China. Their strategies can include both preventing the rise of the hegemon and finding cooperation based on reciprocity in contrast to China’s narratives.
What can the US do?
Lee and Brown both agreed that the US can either restrict China’s access to the international market or block its transactions in US dollars. The US also needs to coordinate with Europe. Additionally, American universities should restrict Chinese students’ participation in joint projects with strategic implications. Brown added that the pandemic forces US political leaders to face the choice between national security and international financial markets. The best arrangement should cover both national security concerns and economic concerns.
Here’s the video for this panel discussion:
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Stevenson’s army, April 25
– Here in the United States the picture is historically grim.
– But don’t forget the millions abroad who depend on remittances.
-It doesn’t help when cronyism matters so much.
-GOP operatives say go after China.
-Meanwhile, CNAS has an excellent analysis of comparative US & Chinese economic tools and vulnerabilities. I’ve never seen anything as clear and helpful as the charts on pp 20-21 and 33-34.
Take care; it’s not just the Social Security crowd in danger.
My SAIS colleague Charlie Stevenson distributes this almost daily news digest of foreign/defense/national security policy to “Stevenson’s army” via Googlegroups. I plan to republish here. To get Stevenson’s army by email, send a blank email (no subject or text in the body) to stevensons-army+subscribe@googlegroups.com. You’ll get an email confirming your join request. Click “Join This Group” and follow the instructions to join. Once you have joined, you can adjust your email delivery preferences (if you want every email or a digest of the emails).
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Slower can be better
Drilon S. Gashi* writes:
It does not look like my call for a pause and reset will be heeded in Kosovo. President Thaci, US Special Envoy Richard Grenell, and the Democratic League of Kosova (LDK) look intent on moving ahead to replace Albin Kurti as prime minister. That would mean the formation of a new coalition agreement, removal of reciprocity on Serbian goods, and a sprint towards a hazily understood, Kosovo-Serbia “normalization” agreement.
The deal likely encompasses a land swap, extraterritoriality for Serb Orthodox Churches, and possibly a supra-institutional status for an Association of Serb Municipalities. It is unlikely to include UN membership or even Serbian recognition. Any combination of these components would mean a bad deal for Kosovo but a good one for Serbia. A new, even-handed deal based on economic cooperation and joint EU accession could be mutually beneficial.
False paradigm
For years, Kosovo has pursued a false paradigm: additional concessions to Serbia may further Kosovo’s international subjectivity and possibly even achieve UN membership. The truth is Kosovo’s international fate relies more on it reforming its own institutions and democracy, prospering economically, strengthening its military, garnering new recognitions of its independence, and convincing Russia and China to accept its existence. Some of these it can achieve on its own. For others, it will surely continue to need EU and US support.
It will also require greater competence and activism in Kosovo’s institutions and among its political parties, whose negotiating positions on normalization with Belgrade are consistently weakening. Yet this is the same Kosovo that achieved the 2010 ICJ verdict concluding “the declaration of independence of the 17th of February 2008 did not violate general international law.” So, Kosovo can do better.
Serbia continues to pursue a long game in which it strips away Kosovo’s gains since independence in 2008. A land swap deal would be a coup for Serbia, and a means to continue undermining Kosovo’s independence. Belgrade’s goal is to further isolate Kosovo and assure it remains far from universal recognition. Serbia has plastered posters all across Belgrade thanking President Xi Jinping for his COVID-19 support. It should be no surprise to learn Serbia seeks China’s support to make Kosovo further resemble Taiwan.
The “normalization” process should lead to mutual recognition between Kosovo and Serbia, border demarcation along their internationally recognized borders, and an exchange of Ambassadors. It is not moving in that direction. In fact, this normalization process “abnormalizes” Kosovo.
New government? The Constitution’s call
The Kosovo Constitutional Court has in the past struck down a Kosovo-Serbia agreement that contravened Kosovo’s Constitution. The Constitutional Court should step in again, but this time to settle the matter of how Kosovo should determine its new government.
Kosovo is currently in a constitutional crisis. President Thaci believes the LDK, the second place party in the October 2019 elections, should try its turn at forming a government. Vetevendosje (VV), the election winner, believes the recent vote of no confidence should lead to the President disbanding the parliament and calling post-COVID elections. VV believes it should not have to respond to requests to form a government based on the October 2019 election.
LDK now plans to circumvent VV, as well as its own Parliament Speaker—and previous candidate for Prime Minister—Vjosa Osmani, in forming a government. There’s a struggle inside the LDK between its old guard, and a new guard led by Osmani. The new guard brought in a significant portion of the LDK vote last election. But the old guard has remained in charge. It’s actions may also be circumventing the Constitution.
Acting Prime Minister Kurti and Speaker Osmani are popular. Their success in the recent election brought hope to Kosovo. They are well-educated, relatively young politicians, and committed to good governance and economic development. Kosovo’s voters have too often been let down by their establishment parties. And now the country faces a potential government of the losers of the last election.
Moves to replace a popular government managing the pandemic may lead to alarm and protest. While extraordinary in times of a pandemic, thousands gathered in Israel recently to protest government corruption. Nobody wants that for Kosovo. There’s still time for a constitutional solution, or a compromise unity government, instead of a contentious government.
Hope for a new deal
A rushed Kosovo-Serbia deal led by an unpopular—and potentially unconstitutional—Kosovo government, during a pandemic, spells trouble. What both sides need, and EU and US mediators should support, is a new deal for a sustainable peace. One that does not detract from Kosovo’s independence and territorial integrity, but rather is based on a formula for Kosovo and Serbia to accept one another as independent countries.
This deal could focus on economic and trade cooperation, significant EU support, and joint EU accession. A new trade deal could help settle disagreements over tariff and non-tariff barriers. The Serbian and Kosovo Chambers of Commerce have a working relationship. As recently as two years ago Serbian business associations took part in a Prishtina trade fair, emphasizing they’re creating jobs, products, and making a profit with their Kosovar counterparts. Together, they can work to solve their mutual long lists of trade grievances. The US administration, Richard Grenell and Matt Palmer, have been right to focus here and can work to show real progress.
For its part, the EU, and Special Envoy Lajcak, can prove to the sides, and others, that EU accession is still a powerful tool for progress. Whether it be through achieving multi-country infrastructure projects, joint legislative and rule of law reform, joint economic sector reform, or greater linkages for both sides to EU markets. The EU can also do a great deal by conditioning EU accession for both countries as part of the same process, with them simultaneously acceding. That way, it does not import problematic relations, but improves those relations, and encourages the accession of the countries as new EU partners.
The EU and US have all the carrots and sticks needed to put this process back on track. Fast-forwarding now to an unpopular deal will do much more harm than good, lead to failure for Kosovo, and ultimately for all. A new deal where both sides are winners, is not only better, it can last.
*Drilon S. Gashi is an international development specialist based in Washington, D.C. He has spent three years working in Kosovo’s public and non-for-profit sectors, and holds a Master of International Affairs from Columbia University.
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